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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8611
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U S WEST, INC.
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A DELAWARE CORPORATION I.R.S. EMPLOYER IDENTIFICATION
NO. 84-0926774
7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111
TELEPHONE NUMBER (303) 793-6500
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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U S WEST Communications Group Common Stock New York Stock Exchange
($0.01 per share, par value) Pacific Stock Exchange
U S WEST Media Group Common Stock New York Stock Exchange
($0.01 per share, par value) Pacific Stock Exchange
7.96% Trust Originated Preferred Securities New York Stock Exchange
(Liquidation Amount $25 per Preferred Security)
8.25% Trust Originated Preferred Securities New York Stock Exchange
(Liquidation Amount $25 per Preferred Security)
U S WEST Series D Convertible Preferred Stock New York Stock Exchange
($1.00 per share, par value)
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Securities registered pursuant to Section 12(g) of the Act::
None
At January 30, 1998, 485,060,950 shares of U S WEST Communications Group
common stock and 608,143,720 shares of U S WEST Media Group common stock were
outstanding.
At January 30, 1998, the aggregate market value of the U S WEST
Communications Group voting stock held by non-affiliates was approximately
$23,325,202,237, and the aggregate market value of the U S WEST Media Group
voting stock held by non-affiliates was approximately $18,000,905,734.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ____
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's definitive Proxy Statement to be issued in
connection with the 1998 Annual Meeting of Shareholders are incorporated by
reference into Parts II and III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
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TABLE OF CONTENTS
PART I
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ITEM PAGE
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1. Business.................................................................. 1
2. Properties................................................................ 8
3. Legal Proceedings......................................................... 9
4. Submission of Matters to a Vote of Security Holders....................... 9
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 10
6. Selected Financial Data................................................... 10
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 10
7A. Quantitative and Qualitative Disclosures About Market Risk................ 10
8. Consolidated Financial Statements and Supplementary Data.................. 10
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 10
PART III
10. Directors and Executive Officers of the Registrant........................ 10
11. Executive Compensation.................................................... 10
12. Security Ownership of Certain Beneficial Owners and Management............ 10
13. Certain Relationships and Related Transactions............................ 10
PART IV
14. Financial Statement Schedules, Reports on Form 8-K and Exhibits........... 11
Reports of Independent Public Accountants................................. 15
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PART I
ITEM 1. BUSINESS
GENERAL
U S WEST, Inc. ("U S WEST" or the "Company") is incorporated under the laws
of the State of Delaware and has its principal executive offices at 7800 East
Orchard Road, Englewood, Colorado 80111, telephone number (303) 793-6500. U S
WEST is a diversified global communications company, and conducts its operations
through U S WEST Communications Group ("Communications Group") and U S WEST
Media Group ("Media Group"). (Financial information concerning U S WEST's
operations is set forth in the Consolidated Financial Statements and Notes
thereto, which begin on page 60.) U S WEST and its subsidiaries had 67,461
employees at December 31, 1997.
U S WEST has two classes of common stock: U S WEST Communications Group
Common Stock (the "Communications Stock"), which is intended to reflect
separately the performance of the Communications Group, and U S WEST Media Group
Common Stock (the "Media Stock"), which is intended to reflect separately the
performance of the Media Group.
COMMUNICATIONS GROUP. The major component of the Communications Group is U
S WEST Communications, Inc. ("U S WEST Communications"), which provides
telecommunications services to more than 25 million residential and business
customers in the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming (collectively, the "Region"). U S WEST Communications serves
approximately 80 percent of the Region's population and approximately 40 percent
of its geographic area.
MEDIA GROUP. The Media Group has operations and investments in three
principal areas: (i) domestic and international cable and broadband
communications, (ii) domestic and international wireless communications, and
(iii) domestic and international directory and information services.
RECENT DEVELOPMENTS
PROPOSED SEPARATION OF U S WEST. In October 1997, U S WEST announced a
proposal to separate itself into two independent companies (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." 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. The Company believes 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 the conflicts that result from
a single corporate structure.
As part of the Separation, the Company is proposing to align U S WEST Dex,
Inc. ("Dex"), the domestic directories business of the Media Group, with the
Communications Group (the "Dex Alignment"). In consultation with U S WEST's
management and its financial advisors, the Board of Directors of U S WEST 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"), a newly formed indirect
subsidiary of U S WEST. 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 that
will be refinanced by New U S WEST in connection with the Separation.
In order to complete the Separation, the Company will contribute the
businesses of the Communications Group and Dex to New U S WEST and then
distribute all of the New U S WEST Common Stock to
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the holders of the Communications Stock, other than the $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."
AIRTOUCH TRANSACTION. 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 (subject to certain closing
adjustments) in a tax-efficient transaction (the "AirTouch Transaction"). The
Media Group's domestic wireless business is currently conducted by U S WEST
NewVector Group, Inc. ("NewVector"), which conducts the Media Group's domestic
cellular business, and by U S WEST PCS Holdings, Inc. ("PCS Holdings"), which
holds the Media Group's interest in PrimeCo Personal Communications, L.P.
("PrimeCo"), a provider of personal communications services. Pursuant to the
agreement with AirTouch, NewVector and PCS Holdings will merge with and into
AirTouch and, as a result, AirTouch will acquire the businesses of NewVector and
PCS Holdings.
COMMUNICATIONS GROUP
OPERATIONS. The principal types of telecommunications services offered by
the Communications Group are: (i) local exchange telephone services, (ii)
exchange access services (which connects customers to facilities of carriers,
including long-distance providers and wireless operators), and (iii)
long-distance network services within Local Access and Transport Areas ("LATAs")
in the Region. For the year ended December 31, 1997, local service, exchange
access service and intraLATA long distance network service accounted for 33%,
22% and 6%, respectively, of the sales and other revenues of U S WEST. At
December 31, 1997, U S WEST Communications had approximately 16,033,000
telephone network access lines in service, a 3.9% increase over year-end 1996.
Excluding the effect of the sales of approximately 74,000 rural telephone access
lines during 1997, access lines increased 4.4% over year-end 1996. In 1997,
revenues from a single customer, AT&T Corp., accounted for approximately 9% of
the sales and other revenues of the Communications Group.
U S WEST Communications incurred capital expenditures of approximately $2.6
billion in 1997 and expects to incur approximately $2.6 billion in 1998. The
1997 capital expenditures of U S WEST Communications were substantially devoted
to the continued modernization of telephone plant, to improve customer services,
to accommodate additional line capability in several states, and to enter the
personal communications services ("PCS") market.
REGULATION. U S WEST Communications is subject to varying degrees of
regulation by state commissions with respect to intrastate rates and service,
and access charge tariffs. U S WEST is also subject to the jurisdiction of the
Federal Communications Commission (the "FCC") with respect to interstate access
tariffs (that specify the charges for the origination and termination of
interstate communications) and other matters. The Telecommunications Act of 1996
(the "Telecommunications Act") has introduced new regulations affecting the
Communications Group's businesses in many areas.
U S WEST Communications is currently working with state regulators to gain
approval of various initiatives, including efforts to rebalance prices, achieve
accelerated capital recovery and eliminate subsidies.
State and local regulatory authorities may also regulate certain terms and
conditions of the offering of wireless services, such as the siting and
construction of transmitter towers, antennas and equipment shelters and zoning
and building permit approvals. See "Communications Group--Regulatory
Environment" under Management's Discussion and Analysis of Financial Condition
and Results of Operations on p. 50.
COMPETITION. The Communications Group faces competition in the local
exchange business, exchange access and intraLATA long-distance markets,
primarily from interexchange carriers ("IXCs"),
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competitive access providers ("CAPs") and competitive local exchange carriers
("CLECs"). CAPs and CLECs compete with the Communications Group by providing
customers with network services that connect to carrier facilities or other
business locations within a serving LATA. IXCs compete with the Communications
Group by providing intraLATA long-distance services. Such competition is eroding
U S WEST Communications' market share of intra-LATA 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 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 the Communications
Group's markets who will offer services similar to those offered by the
Communications Group, including local exchange services. The Communications
Group 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 the Communications Group's operations. Court and state regulatory
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 the Communications
Group 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 the
Communications Group face competition from local exchange carriers ("LECs"),
IXCs, Internet service providers ("ISPs") and other providers of data services
in the Communications Group's markets.
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.
The Communications Group expects to counter the competition by expanding
services to include new retail as well as wholesale markets. Recently introduced
service offerings include PCS, high-speed data and Internet services, and
interconnection services provided for competing providers of local services.
Planned future service offerings include interLATA long-distance services as the
regulatory environment permits, while interconnection services will be expanded.
The Company believes that the Communications Group's ability to bundle local,
long-distance, PCS and other services will provide a significant opportunity to
compete by offering one-stop shopping with a package of services similar to
those that can be offered by IXCs and CLECs.
MEDIA GROUP
OPERATIONS
The Media Group is the third largest cable television system operator in the
United States. The Media Group 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, the Media Group holds a 25.51% interest in Time Warner
Entertainment Company, L.P. ("TWE"), a provider of cable programming, filmed
entertainment and broadband communications services that is the second largest
cable television system operator in the United States. Primarily through Dex,
the Media Group is also engaged in the directory and information services
business. Dex is to be transferred to the Communications Group in connection
with the Separation.
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DOMESTIC BROADBAND COMMUNICATIONS--MEDIAONE NETWORKS. As of December 31,
1997, the Media Group's cable television systems passed approximately 8.4
million homes and provided service to approximately 4.9 million basic cable
subscribers. The Media Group'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 December 31, 1997, approximately 90% of the Media Group's total
basic subscribers were located in clusters with a population greater than
100,000 (after giving effect to announced swaps). The Media Group 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.
The Media Group's cable services are marketed under the "MediaOne" brand.
The Media Group'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, televisions 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). The Media
Group'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 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. The Media Group also offers pay-per-view programming of
movies and special events for an additional per-program charge.
The Media Group's systems have channel capacity and addressability that are
among the highest in the cable industry. The Media Group'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. The Media Group 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.
The Media Group believes that the geographic diversity of its system clusters
reduces its exposure to economic, competitive or regulatory factors of any
particular region.
The Media Group is upgrading its cable systems to create broadband hybrid
fiber-coax ("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. The Media Group
is selectively upgrading its systems and expects that it will have more than 70%
of its systems upgraded by the end of 1998. The Media Group has already begun to
offer additional services over upgraded HFC networks in certain markets. For
example, the Media Group currently offers MediaOne Express, and Internet access
service, over its HFC networks in Los Angeles, Boston, Detroit, Atlanta,
Jacksonville, Richmond and Southern Florida. In late 1997, the Media Group 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, the Media Group 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, the Media Group has
entered into a letter of intent with Tele-Communications, Inc. ("TCI") to
exchange (the "TCI Exchange") certain cable television systems serving
approximately 500,000 subscribers. Consummation of the TCI Exchange is expected
to occur in late 1998, subject to the receipt of certain franchise and other
approvals.
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In May 1997, the Media Group 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 $600 million. As of December 31, 1997, the Minnesota System
served approximately 300,000 subscribers. The Minnesota System was acquired by
the Media Group as of part of its acquisition of Continental Cablevision, Inc.
("Continental") in 1996. Under current FCC cross-ownership rules, the Media
Group 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, the Media Group was mandated
by the FCC to sell the Minnesota System in connection with the acquisition of
Continental in order to comply with the cross-ownership rules. As a result of
the Separation, U S WEST Communications and the Media Group will be independent
companies and the Media Group will no longer be prohibited by federal law from
owning the Minnesota System. In February 1998, in response to U S WEST's
petition, the FCC granted to U S WEST a waiver which would permit the Media
Group to retain the Minnesota System so long as the Separation is consummated by
July 31, 1998. The Media Group has the right to terminate the Minnesota Sale
Agreement at any time upon the payment to Charter of a $30 million termination
fee. On February 26, 1998, the Media Group terminated the Minnesota Sale
Agreement.
DOMESTIC BROADBAND COMMUNICATIONS--TIME WARNER CABLE. The Media Group owns
a 25.51% priority capital and residual equity interest in TWE. The remaining
interests in TWE are owned by TWX. TWE is engaged in the cable programming,
filmed entertainment and broadband communications businesses. TWE, through Time
Warner Cable, its cable division, 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 December 31,
1997, Time Warner Cable owned cable television systems that passed approximately
15.4 million homes and provided service to approximately 9.7 million basic cable
subscribers. Of these systems, systems passing approximately 7.1 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 December 31, 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 the Media Group under the MediaOne
brand. Like the Media Group, Time Warner Cable is upgrading its cable systems to
provide increased channel capacity and to facilitate the delivery of additional
services.
In February 1998, TWX contributed cable systems serving approximately
675,000 subscribers to TWE-A/N, subject to approximately $1 billion in debt, in
exchange for approximately $300 million of common and preferred interests. In
connection with the transaction, A/N will make equity contributions to TWE-A/N
to maintain its 33.3% interest therein. As a result, TWE-A/N is owned
approximately 65.3% by TWE, 33.3% by A/N and 1.4% by TWX.
INTERNATIONAL BROADBAND COMMUNICATIONS. The Media Group owns interests in
various providers of broadband communications services in international markets
in continental Europe, the United Kingdom and Asia. As of December 31, 1997,
these interests represented approximately 2 million proportionate homes passed
and 900,000 proportionate subscribers.
Among its international broadband interests, the Media Group holds a 26.8%
interest in Telewest Communications plc ("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 December 31, 1997,
Telewest had approximately 687,000 cable subscribers and 1,040,000 telephony
lines. TCI also owns a 26.8% interest in Telewest. The Media
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Group also holds interests in other providers of cable and broadband
communications services in international markets, including a 94% interest in
Cable Plus, a provider of cable and telephony services in the Czech Republic; a
50% interest in A2000 (KTA), a provider of cable and telephony services in the
Netherlands; a 25% interest in Telenet Flanders, a provider of cable and
telephony services over an HFC network in portions of Belgium; a 35% interest in
Aria WEST, a provider of telecommunications services in portions of Indonesia; a
25% interest in Singapore Cablevision Pte 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. TWX
also holds a 25% interest in Titus and a 19% interest in Chofu.
INTERNATIONAL WIRELESS COMMUNICATIONS. The Media Group owns interests in
various providers of wireless communications services in international markets
in continental Europe, the United Kingdom and Asia. As of December 31, 1997,
these interests represented 76.9 million proportionate potential customers and
approximately 1,018,000 proportionate subscribers.
Among its international wireless interests, Media Group owns a 50% interest
in Mercury Personal Communications ("One 2 One"), which provides PCS services in
the United Kingdom under the brand "One 2 One." The remaining 50% of One 2 One
is owned by Cable & Wireless plc. One 2 One was the first PCS service in the
world to commence operations in 1993. As of December 31, 1997, One 2 One's
networks served approximately 1,014,000 subscribers and provided coverage to
approximately 95% of Great Britain's population. The Media Group 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 Radiotelefon, providers of cellular service 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
Polska Telefonia Cyfrowa, a provider of Global Systems for Mobile Communications
("GSM") cellular services in Poland; a 49% interest in U S WEST BPL Cellular
Telecommunications, a provider of GSM cellular services in certain regions of
India; a 19% interest in Binariang, a provider of wireless, wireline, 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.
AIRTOUCH TRANSACTION. Pursuant to the AirTouch Transaction, AirTouch will
pay to the Media Group 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, (ii) the issuance to the Media Group of $1.6 billion in liquidation
preference of AirTouch preferred stock, and (iii) approximately $2.7 billion in
value of AirTouch common stock. The number of shares of AirTouch common stock to
be received by the Media Group 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, the Media Group will receive
67.1 million shares of AirTouch common stock. If the AirTouch Determination
Price is greater than or equal to $45, the Media Group 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 the
Media Group will decrease from 67.1 million to 60.8 million on a proportionate
basis.
The Media Group 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.
The Media Group 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 the consummation of the AirTouch Transaction, the Media Group
intends to take appropriate actions to monetize the shares of the AirTouch
preferred stock and AirTouch common stock that it
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receives in the AirTouch Transaction. In connection with the AirTouch
Transaction, the Media Group and AirTouch will enter into an Investment
Agreement, pursuant to which AirTouch will agree to provide to the Media Group
registration rights with respect to the shares of AirTouch preferred stock and
AirTouch common stock that it receives in the AirTouch Transaction and to assist
the Media Group in the monetization of such shares.
DIRECTORY AND INFORMATION SERVICES. The Media Group's directory and
information services businesses develop and package content and information
services, including telephone directories, database marketing, electronic
directory and other interactive services in domestic and international markets.
Dex publishes approximately 320 White and Yellow Pages directories in the
Region. The Media Group also owns an interest in a Brazilian directory
operation. During 1997, the Media Group sold Thomson Directories and U S WEST
Polska, its directory operations in the United Kingdom and Poland, respectively.
Upon the consummation of the Separation, Dex will be aligned with the
Communications Group.
REGULATION. The products and services of the Media Group 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
multipoint multichannel distribution services ("MMDS") operations, (ii) removes
barriers to competition with LECs, and (iii) eliminates restrictions that
previously applied to the Media Group 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. Continentals's social contract with the FCC was adopted by the FCC
on August 3, 1995 and amended on August 21, 1996 and July 3, 1997 to include
certain systems acquired by Continental. The social contract is a six-year
agreement covering most of Continental's franchises, including those that were
unregulated, and settled Continental's cost of service rate cases and benchmark
cable programming service tier rate cases for the covered systems. Benchmark
basic service tier rate cases in the covered systems are subject to review by
local franchise authorities. 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. At December 31, 1997, the investment commitment
had been substantially met. Under the social contract, Continental also reduced
its basic service tier rates for most of the subscribers covered by the social
contract. These reductions were offset by a revenue neutral increase in cable
programming service tier rates. The social contract allows for the funding of
system rebuilds and upgrades by increasing cable programming service tier rates
annually by one dollar per subscriber from 1997 through 1999 in most franchises,
and from 1996 through 1999 for the systems incorporated under the 1996 amendment
to the social contract. Rate adjustments are also allowed for inflation and
external costs such as programming. 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, the Media Group 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.
The Media Group 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
7
<PAGE>
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.
COMPETITION. The Media Group's cable television systems generally compete
for viewer attention with other providers of video programming, including direct
broadcast satellite ("DBS") systems, MMDS systems, local multipoint distribution
services systems, satellite master antenna television ("SMATV") systems and
other cable companies providing services in areas where the Media Group
operates. In addition, certain LECs, including regional bell operating companies
("RBOCs"), are beginning to offer video programming in competition with the
Media Group'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 the Media
Group. 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 the Media Group 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 the Media Group's cable systems
may increase in the future with the development and growth of new technologies.
As the Media Group begins to offer additional services over its HFC
networks, the Media Group will face additional competition. Telephony services
offered by the Media Group 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 the Media Group compete with other providers
of such services, including LECs, IXCs, ISPs and other on-line service
providers.
The Media Group'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
communications services compete with domestic telephone companies in the United
Kingdom, such as British Telecommunications plc. One 2 One competes with two
cellular operators and one PCS operator in the United Kingdom. Competition is
based upon price, geographic coverage and quality of the services offered.
Dex competes with various other providers of directory services, including
providers of electronic directory services.
ITEM 2. PROPERTIES.
The properties of U S WEST do not lend themselves to description by
character and location of principal units. At December 31, 1997, the majority of
U S WEST 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.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
U S WEST and its subsidiaries are subject to claims and proceedings arising
in the ordinary course of business. 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Contingencies," on p. 47.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF U S WEST, INC.
Pursuant to General Instructions G(3), the following information is included
as an additional item in Part I:
<TABLE>
<CAPTION>
DATE ASSUMED
PRESENT
POSITION AGE POSITION
------------------------------------------------------ --- ---------------
<S> <C> <C> <C>
James T. Anderson Vice President & Treasurer 58 1984
Michael P. Glinsky Executive Vice President and Chief Financial Officer 53 1996(1)
Charles M. Lillis Executive Vice President, and President & Chief 56 1987(2)
Executive Officer, U S WEST Media Group
Richard D. McCormick Chairman of the Board, Chief Executive Officer & 57 1991(3)
President
Charles P. Russ, III Executive Vice President-Law, Public Policy and Human 53 1992
Resources, General Counsel & Secretary
Solomon D. Trujillo Executive Vice President, and President & Chief 46 1995(4)
Executive Officer, U S WEST Communications Group
</TABLE>
- ------------------------
(1) Mr. Glinsky was elected Executive Vice President and Chief Financial Officer
effective April 15, 1996.
(2) Mr. Lillis was elected President and Chief Executive Officer, U S WEST Media
Group effective August 22, 1995.
(3) Mr. McCormick was elected Chairman of the Board effective May 1, 1992.
(4) Mr. Trujillo was elected President and Chief Executive Officer of U S WEST
Communications Group effective July 1, 1995, and Executive Vice President, U
S WEST effective October 6, 1995. Previously, Mr. Trujillo was President and
Chief Executive Officer of U S WEST Dex, Inc.
Executive Officers are not elected for a fixed term of office, but serve at
the discretion of the Board of Directors.
Each of the above executive officers has held a managerial position with U S
WEST or an affiliate of U S WEST since 1993, except for Mr. Glinsky. Mr. Glinsky
was a managing partner of Coopers & Lybrand L.L.P., from 1967 to April 1996.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in Note 24, Quarterly
Financial Data, on page 112. The U. S. markets for trading in U S WEST common
stock are the New York Stock Exchange and the Pacific Stock Exchange. As of
January 30, 1998, U S WEST Communications Group common stock was held by
approximately 669,060 shareholders of record and U S WEST Media Group common
stock was held by approximately 643,770 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA.
Reference is made to the information set forth on pages 17 through 18.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to the information set forth on pages 19 through 56.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Reference is made to the information set forth on pages 46 and 47.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the information set forth on pages 60 through 114.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to executive officers is
set forth in Part I, page [8], under the caption "Executive Officers of U S
WEST."
The information required by this item with respect to Directors is included
in the U S WEST definitive Proxy Statement ("Proxy Statement") under "Election
of Directors" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Proxy Statement
under "Compensation of Executive Officers" and "Director Compensation" and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Proxy Statement
under "Security Ownership of Management" and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
10
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS.
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
PAGE
-----------------
<S> <C> <C>
(1) Reports of Independent Accountants............................................... 57 through 58
(2) Consolidated Financial Statements:
Consolidated Statements of Operations--for the years ended December 31, 1997,
1996 and 1995.................................................................. 60 through 61
Consolidated Balance Sheets as of December 31, 1997 and 1996..................... 62 through 63
Consolidated Statements of Cash Flows--for the years ended December 31, 1997,
1996 and 1995.................................................................. 64
Notes to Consolidated Financial Statements and supplementary data................ 65 through 114
(3) Consolidated Financial Statement Schedule:
Reports of Independent Accountants............................................... 15
II--Valuation and Qualifying Accounts............................................ 16
</TABLE>
Financial statement schedules other than those listed above have been omitted
because the required information is contained in the financial statements and
notes thereto, or because such schedules are not required or applicable.
(b) Reports on Form 8-K:
U S WEST filed the following reports on Form 8-K during the fourth
quarter of 1997:
(i) report dated October 27, 1997 notification of a press release regarding
U S WEST. Inc's plan to split U S WEST Media Group and U S WEST
Communications Group into separate public companies; notification of a
press release by U S WEST Media Group regarding the sale of its interest
in Video Cable Communications, an Argentinean joint venture; and
notification of the release of third quarter earnings results by U S
WEST Communications Group and U S WEST Media Group.
11
<PAGE>
(c) Exhibits:
Exhibits identified in parentheses below are on file with the Securities and
Exchange Commission ("SEC") and are incorporated herein by reference. All other
exhibits are provided as part of this electronic submission.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<C> <S>
2-A --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.")
2-B --Form of Employee Matters Agreement between U S WEST, Inc. (to be renamed "MediaOne Group, Inc.")
and USW-C, Inc. (to be renamed "U S WEST, Inc.").
2-C --Form of Tax Sharing 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. (Annex II to Registration
Statement No. 33-59315).
3-B --Form of Amended Bylaws of U S WEST, Inc.
(4-A) --Form of Amended and Restated Rights Agreement between U S WEST, Inc. and State Street Bank and
Trust Company, as Rights Agent (Exhibit 4-A to Registration Statement No. 33-59315).
4-B --No instrument which defines the rights of holders of long and intermediate term debt of U S
WEST, Inc. and all of its subsidiaries is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees to furnish a copy
of any such instrument to the SEC upon request.
(10-A) --U S WEST, Inc. Short-Term Incentive Plan (Exhibit 10i to Form 10-K, date of report March 19,
1993, File No. 1-8611).
(10-B) --U S WEST Executive Financial Counseling Plan (Exhibit 10j to Form 10-K, date of report March 28,
1997, File No. 1-8611).
(10-C) --U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration
Statement No. 2-87861).
(10-D) --Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance
(Exhibit 10-gg to Registration Statement No. 2-87861).
(10-E) --Extract from the U S WEST Management Pension Plan regarding limitations on and 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).
(10-F) --U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March
29, 1989, File No. 1-8611).
(10-G) --Amended U S WEST Deferred Compensation Plan (Annex X to Registration Statement No. 33-59315).
(10-H) --Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March
5, 1992, File No. 1-8611).
(10-I) --Amended U S WEST 1994 Stock Plan (Annex IX to Registration Statement No. 33-59315).
(10-J) --U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to
Registration Statement No. 2-87861).
(10-K) --Form of U S WEST, Inc. Non-Qualified Stock Option Agreement (Exhibit 10u to Form 10-K, date of
report March 28, 1996, File No. 1-8611).
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<C> <S>
(10-L) --Form of U S WEST, Inc. Restricted Stock Agreement (Exhibit 10v to Form 10-K, date of report
March 28, 1996, File No. 1-8611).
(10-M) --Employment letter from Richard D. McCormick to Charles P. Russ, III dated January 31, 1997
(Exhibit 10w to Form 10-K, date of report March 28, 1997, File No. 1-8611).
(10-N) --Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and
U S WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993, File No. 1-8611).
(10-O) --Form of U S WEST, Inc. Executive Change of Control Agreement, Exhibit 10y to Form 10-K, date of
report March 28, 1997, File No. 1-8611).
(10-P) --Form of Change of Control Agreement for Chief Executive Officer (Exhibit 10-g to Form 10-K, date
of report March 28, 1997, File, No. 1-8611).
(10-Q) --Form of Group Executive Change of Control Agreement (Exhibit 10aa to Form 10-K, date of report
March 28, 1997, File No. 1-8611).
(10-R) --Form of Executive Severance Agreement (Exhibit 10ab to Form 10-K, date of report March 28, 1996,
File No. 1-8611).
(10-S) --U S WEST, Inc. Executive Short-Term Incentive Plan (Exhibit 10ae to Form 10-K, date of report
March 7, 1995, File No. 1-8611).
(10-T) --Amended U S WEST Communications Group Long-Term Incentive Plan.
(10-U) --Employment letters from Richard D. McCormick to Michael P. Glinsky dated April 2, 1996 and
January 31, 1997.
(10-W) --364-Day and Five-Year Credit Agreements dated as of November 1, 996, among U S WEST Capital
Funding, Inc., U S WEST, Inc. and the Banks listed therein.
10-X --Agreement and Plan of Merger, dated as of January 29, 1998, among U S WEST, Inc., U S WEST Media
Group, Inc., U S WEST NewVector Group, Inc., U S WEST PCS Holdings, Inc. and AirTouch
Communications, Inc.
12 --Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial
Services, Inc.
21 --Subsidiaries of U S WEST, Inc.
23 --Consent of Independent Accountants.
24 --Powers of Attorney.
27 --Financial Data Schedule.
99 --Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31,
1997, to be filed by amendment.
</TABLE>
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Englewood, State of Colorado, on March 25, 1998.
<TABLE>
<S> <C> <C>
U S WEST, Inc.
By: /s/ MICHAEL P. GLINSKY
-----------------------------------------
Michael P. Glinsky
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
PRINCIPAL EXECUTIVE OFFICER
/s/ Richard D. McCormick* Chairman of the Board,
President and Chief
Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ Michael P. Glinsky Executive Vice President
and Chief Financial
Officer
DIRECTORS:
/s/ Robert L. Crandall*
/s/ Grant A. Dove*
/s/ Allan D. Gilmour*
/s/ Pierson M. Grieve*
/s/ George J. Harad*
/s/ Allen F. Jacobson*
/s/ Charles M. Lillis*
/s/ Richard D. McCormick*
/s/ Marilyn Carlson Nelson*
/s/ Frank Popoff*
/s/ Charles P. Russ*
/s/ Louis A. Simpson*
/s/ John "Jack" Slevin*
/s/ Solomon D. Trujillo*
/s/ Jerry O. Williams*
*By /s/ MICHAEL P. GLINSKY
-------------------------
Michael P. Glinsky
(FOR HIMSELF AND AS
ATTORNEY-IN-FACT)
Dated March 25, 1998
14
<PAGE>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in U S WEST, Inc.'s (the
"Company") Annual Report on Form 10-K for the years ended December 31, 1997 and
1996, and have issued our reports thereon dated February 12, 1998 appearing on
page 57. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The schedule appearing on page 16 of this Form 10-K
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. The information for the years 1997 and 1996
on this schedule has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1998.
To the Board of Directors and Shareowners of U S WEST, Inc.:
Our report on the consolidated financial statements of U S WEST, Inc. is
included on page 58 of this Form 10-K. In connection with our audit of such
consolidated financial statements, we have also audited the related consolidated
financial statement schedule listed in the index on page 16 of this Form 10-K
for the year ended December 31, 1995.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic information statements taken as
a whole, presents fairly, in all material respects, the information required to
be included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
15
<PAGE>
U S WEST, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF CHARGED TO OTHER BALANCE AT
PERIOD EXPENSE ACCOUNTS DEDUCTIONS END OF PERIOD
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
1997.............................................. $ 125 $ 199(a) $ 20 $ 208(b) $ 136
1996.............................................. 88 160(a) 25 148(b) 125
1995.............................................. 62 122(a) 13 109(b) 88
RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING,
INCLUDING WORKFORCE AND FACILITY CONSOLIDATION
1997.............................................. 126 -- -- 70 56
1996.............................................. 368 -- -- 242 126
1995.............................................. 702 -- -- 334 368
CAPITAL ASSETS SEGMENT:
REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR
LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT (after
tax)
1997.............................................. 100 -- -- (16) 116
1996.............................................. 56 -- -- (44) 100
1995.............................................. 77 -- -- 21 56
</TABLE>
- ------------------------------
(a) Does not include amounts charged directly to expense. These amounts were $8,
$7 and $6 for 1997, 1996 and 1995, respectively.
(b) Represents credit losses written off during the period, less collection of
amounts previously written off.
16
<PAGE>
U S WEST, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED OR AS OF DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Sales and other revenues(1)......................................... $ 15,235 $ 12,911 $ 11,746 $ 10,953 $ 10,294
Income before extraordinary items and cumulative
effect of change in accounting principles(2)....................... 700 1,144 1,329 1,426 476
Net income (loss)(3)................................................ 697 1,178 1,317 1,426 (2,806)
Total assets........................................................ 39,740 40,855 25,071 23,204 20,680
Total debt(4)....................................................... 14,678 15,351 8,855 7,938 7,199
Mandatorily redeemable preferred stock and Preferred
Securities(5)...................................................... 1,180 1,131 651 51 --
Shareowners' equity................................................. 11,324 11,549 7,948 7,382 5,861
Percentage of debt to total capital(4).............................. 54.0% 54.8% 50.7% 51.6% 55.1%
Capital expenditures(4)............................................. $ 4,174 $ 3,474 $ 3,140 $ 2,820 $ 2,441
Employees........................................................... 67,461 69,286 61,047 61,505 60,778
COMMUNICATIONS GROUP INFORMATION:(2, 3, 6, 7)
Basic earnings per common share................................... $ 2.43 $ 2.62 $ 2.50
Diluted earnings per common share................................. 2.41 2.58 2.46
Basic average common shares outstanding (thousands)............... 482,751 477,549 470,716
Diluted average common shares outstanding (thousands)............. 491,232 488,591 481,933
Dividends per common share........................................ $ 2.14 $ 2.14 $ 2.14
Number of common shareowners of record............................ 672,517 725,560 775,125
MEDIA GROUP INFORMATION:(2, 3, 6, 7)
Basic and diluted earnings (loss) per common share................ $ (0.88) $ (0.16) $ 0.29
Basic average common shares outstanding (thousands)............... 606,749 491,924 470,549
Diluted average common shares outstanding (thousands)............. 606,749 491,924 471,612
Number of common shareowners of record............................ 648,077 705,341 770,346
U S WEST, INC. INFORMATION:(2, 3, 6, 7)
Basic earnings per common share before extraordinary items and
cumulative effect of change in accounting principle............. $ 3.14 $ 1.13
Basic earnings (loss) per common share............................ 3.14 (6.69)
Diluted earnings (loss) per common share.......................... 3.12 (6.68)
Basic weighted average common shares outstanding (thousands)...... 453,316 419,365
Diluted weighted average common shares outstanding (thousands).... 463,801 419,776
Dividends per common share........................................ $ 2.14 $ 2.14
Number of common shareowners of record............................ 816,099 836,328
</TABLE>
- ------------------------------
(1) 1997 and 1996 sales and other revenues include $2,070 and $252,
respectively, related to the acquisition by U S WEST, Inc. ("U S WEST" or
the "Company") of Continental Cablevision, Inc. ("Continental"), which was
consummated on November 15, 1996 (the "Continental Acquisition" or the
"Acquisition").
(2) 1997 income is before an extraordinary item and includes a $152 regulatory
charge ($0.31 per share of Communications Stock) related primarily to the
1997 Washington State Supreme Court ruling that upheld a Washington State
Utilities and Transportation Commission 1996 rate order, a gain of $32
($0.07 per share of Communications Stock) on the sale of U S WEST
Communications, Inc.'s ("U S WEST Communications") interest in Bell
Communications Research, Inc. ("Bellcore") and a gain of $48 ($0.10 per
share of Communications Stock) on the sales of certain rural telephone
exchanges. Also included are net gains of $249 ($0.41 per share of Media
Stock) on the sales of domestic and international investments, and net
losses of $356 ($0.59 per share of Media Stock) related to the Continental
Acquisition. 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 rural telephone exchanges and
the current effect of $15 ($0.03 per share of Communications Stock) from
adopting Statement of Financial Accounting Standards ("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 in Norway,
Sweden and Hungary. 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 6 below. 1994 income includes a gain
of $105 ($0.23 per share) on the partial sale of U S WEST's joint venture
interest
17
<PAGE>
U S WEST, INC.
FINANCIAL HIGHLIGHTS
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 income is
from continuing operations.
(3) 1997 net income was reduced by an extraordinary charge of $3 ($0.01 per
share of Communications Stock and no Media Stock impact) for the early
extinguishment of debt. 1996 net income 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.
Discontinued operations provided net income of $38 ($0.09 per share) in
1993.
(4) Debt at December 31, 1997 and 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
trust holding solely Company-guaranteed debentures ("Preferred Securities")
and mandatorily redeemable preferred stock as a component of total capital.
(5) Includes Preferred Securities of $1,080 at December 31, 1997 and 1996, and
$600 at December 31, 1995, and preferred stock subject to mandatory
redemption of $100 at December 31, 1997, and $51 at December 31, 1996, 1995
and 1994.
(6) 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 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 have been presented on a pro forma basis
to reflect the two classes of stock as if they had been outstanding since
January 1, 1995. 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 U S WEST common stock outstanding for such
periods.
(7) In 1997, U S WEST adopted SFAS No. 128 "Earnings Per Share" which specifies
new computation, presentation and disclosure requirements for earnings per
share to be applied retroactively. SFAS No. 128 requires, among other
things, presentation of basic and diluted earnings per share. See Note
16--Earnings Per Share--to the U S WEST, Inc. Consolidated Financial
Statements.
18
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company 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 local exchange, intraLATA
toll, cable, wireless, data and directories markets, (ii) changes in demand for
the Company's products and services, including optional custom calling features,
(iii) higher than anticipated employee levels, capital expenditures, and
operating expenses (such as costs associated with year 2000 remediation), (iv)
the loss of significant customers, (v) pending regulatory actions in state
jurisdictions, (vi) regulatory changes affecting the cable and
telecommunications industries, 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 the Company's operations,
including international markets, that could adversely affect the level of demand
for cable, telephone, wireless, directories or other services offered by the
Company, (viii) greater than anticipated competitive activity requiring new
pricing for services, (ix) higher than anticipated start-up costs associated
with new business opportunities, (x) increases in fraudulent activity with
respect to broadband and wireless services, (xi) delays in the Company's ability
to begin offering interLATA long-distance services, (xii) consumer acceptance of
broadband services, including telephony and data services, and wireless
services, (xiii) competition from new providers of wireless services in the
Company's wireless markets, or (xiv) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
THE RECAPITALIZATION PLAN
In 1995, 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 the 1995
Recapitalization. One class of stock, U S WEST Communications Group Common Stock
(the "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,
19
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, and 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.
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 Common Stock to holders
of Media Stock (the "Dex Dividend") 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").
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 Internal Revenue
Service ("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. Based on
the number of shares of Communications Stock outstanding and market price as of
February 20, 1998, the gain (net of Separation costs) is estimated at
approximately $25.2 billion. The Company will incur total Separation costs
during 1998 of approximately $150, which includes severance, financial advisory,
legal, registration fee, printing and mailing costs. Separation costs also
include a one-time payment to terminate the sale of the Media Group cable
systems in Minnesota.
The transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the IRS. The Separation is expected to be complete sometime after mid-1998.
THE COMMUNICATIONS GROUP
The Communications Group provides telecommunications services to more than
25 million residential and business customers in the Communications Group 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 exchange 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.
THE MEDIA GROUP
The Media Group has operations and investments in three principal areas: (i)
cable and broadband network businesses primarily outside of the Region and
internationally, (ii) domestic and international wireless communications network
businesses and (iii) domestic and international directory and information
services businesses.
20
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CABLE AND BROADBAND. Media Group is the third-largest cable operator in the
United States serving 4.9 million customers and passing 8.4 million homes. Media
Group's cable 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. The
cable systems offer customers various levels of cable programming services,
including premium programming services such as HBO, Cinemax, Showtime, The Movie
Channel and Encore, as well as pay-per-view movies and special events.
On November 15, 1996, U S WEST acquired Continental. The aggregate
consideration paid by U S WEST to shareowners of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock (the "Series D Preferred Stock") with a market
value of $920 and $1.15 billion in cash. In connection with the Acquisition, U S
WEST also assumed all of Continental's outstanding indebtedness and other
liabilities as of November 15, 1996, which approximated $7.1 billion for a total
purchase price of $11.8 billion. The Acquisition was accounted for by the
purchase method of accounting. Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on their
estimated fair values. In 1997 Continental was renamed MediaOne of Delaware,
Inc. ("MediaOne Delaware").
In addition to its cable operations, Media Group also holds significant
domestic cable and broadband investments including an investment in Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment"), the second
largest provider of cable television services in the United States, a 10.4
percent interest in PrimeStar Partners, L.P. ("PrimeStar"), a provider of direct
broadcast satellite ("DBS") services, telephone access businesses in Florida and
Virginia, and interests in programming that include E! Entertainment Television.
Internationally, Media Group holds an investment in Telewest, the second-largest
provider of combined cable and broadband communications services in the United
Kingdom. The Media Group also holds interests in cable and broadband properties
in Singapore, the Netherlands, Belgium, the Czech Republic, Malaysia, Indonesia
and Japan.
WIRELESS COMMUNICATIONS. On January 29, 1998, U S WEST entered into an
agreement and plan of merger (the "AirTouch Merger Agreement") pursuant to which
U S WEST agreed to sell its domestic wireless business to AirTouch
Communications, Inc. ("AirTouch") in a tax-efficient transaction (the "AirTouch
Transaction"). The domestic wireless business includes cellular communication
services provided to 2.6 million customers in 12 western and midwestern states
and a 25 percent interest in PrimeCo Personal Communications, L.P. ("PrimeCo"),
a provider of PCS services. Pursuant to the AirTouch Merger Agreement, AirTouch
will acquire these cellular and PCS interests. Consideration under the AirTouch
Transaction totals approximately $5.7 billion (subject to certain closing
adjustments) and consists of (i) debt reduction of $1.4 billion, (ii) the
issuance to U S WEST of $1.6 billion in liquidation preference of dividend
bearing AirTouch preferred stock (fair value of approximately $1.45 billion),
and (iii) approximately $2.7 billion in value of AirTouch common stock. The
number of shares of AirTouch common stock to be received by U S WEST will vary
based upon the terms of the AirTouch Merger Agreement.
U S WEST 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. Consummation of the transaction will result
in the disposition of Media Group's domestic wireless businesses. If the
AirTouch Transaction had been consummated as of February 20, 1998, it would have
resulted in a gain of approximately $2.2 billion, net of
21
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
deferred taxes of $1.6 billion, calculated in accordance with the provisions of
the AirTouch Merger Agreement.
Media Group will retain its international wireless interests which include a
50 percent joint venture interest in Mercury Personal Communications ("One 2
One"), a provider of PCS services in the United Kingdom. Additionally, Media
Group owns interests in wireless properties in Hungary, the Czech and Slovak
Republics, Russia, Malaysia, India and Poland.
DIRECTORY AND INFORMATION SERVICES. The Media Group's directory and
information services businesses develop and package content and information
services, including telephone directories, database marketing, electronic
directory and other interactive services in domestic and international markets.
Dex publishes approximately 320 White and Yellow Pages directories in the Region
and will be aligned with the Communications Group as part of the Separation.
Media Group also owns an interest in a Brazilian directory operation. During
1997, Media Group sold Thomson Directories and U S WEST Polska, its directory
operations in the United Kingdom and Poland, respectively.
The following discussion is based on the U S WEST, Inc. Consolidated
Financial Statements prepared in accordance with generally accepted accounting
principles ("GAAP").
RESULTS OF OPERATIONS--1997 COMPARED WITH 1996
NET INCOME (LOSS)
<TABLE>
<CAPTION>
NET INCOME (LOSS) BASIC EARNINGS (LOSS) PER SHARE(1)
------------------------------------------ ------------------------------------------
DECREASE DECREASE
-------------------- --------------------
1997 1996 $ % 1997 1996 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Communications Group...................... $ 1,177 $ 1,249 $ (72) (5.8) $ 2.43 $ 2.62 $ (0.19) (7.3)
Media Group............................... (480) (71) (409) -- (0.88) (0.16) (0.72) --
--------- --------- --------- ---------
Total net income.......................... $ 697 $ 1,178 $ (481) (40.8)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) In 1997, U S WEST adopted SFAS No. 128, "Earnings Per Share," which
specifies new computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 requires, among other things, presentation
of basic and diluted earnings per share on the face of the income statement.
The following discussion and analysis of operations is based upon basic
weighted average common shares outstanding. For the calculation of diluted
earnings (loss) per share see Note 16--Earnings Per Share-- to the U S WEST,
Inc. Consolidated Financial Statements.
22
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMMUNICATIONS GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME BASIC EARNINGS PER SHARE
------------------------------------------ -------------------------------
INCREASE (DECREASE) INCREASE
(DECREASE)
-------------------- ---------
1997 1996 $ % 1997(1) 1996 $(1)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Reported net income.............................. $ 1,177 $ 1,249 $ (72) (5.8) $ 2.43 $ 2.62 $ (0.19)
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.... (48) (36) (12) 33.3 (0.10) (0.08) (0.02)
Gain on sale of investment in Bellcore......... (32) -- (32) -- (0.07) -- (0.07)
Cumulative effect of change in accounting
principle(2)................................. -- (34) 34 -- -- (0.07) 0.07
Current year effect of change in accounting
principle(2)................................. -- (15) 15 -- -- (0.03) 0.03
Early extinguishment of debt(3)................ 3 -- 3 -- 0.01 -- 0.01
--------- --------- --- --------- --------- --------- ---------
Normalized income................................ $ 1,100 $ 1,164 $ (64) (5.5) $ 2.28 $ 2.44 $ (0.16)
--------- --------- --- --------- --------- --------- ---------
--------- --------- --- --------- --------- --------- ---------
<CAPTION>
%
---------
<S> <C>
Reported net income.............................. (7.3)
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.... 25.0
Gain on sale of investment in Bellcore......... --
Cumulative effect of change in accounting
principle(2)................................. --
Current year effect of change in accounting
principle(2)................................. --
Early extinguishment of debt(3)................ --
---------
Normalized income................................ (6.6)
---------
---------
</TABLE>
- ------------------------------
(1) Column does not add due to rounding of individual components.
(2) Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" which, among other things, requires that companies no longer record
depreciation expense on assets held for sale.
(3) Reflects a third-quarter 1997 charge of $3 (net of income tax benefits of
$2) related to the early extinguishment of debt.
In 1997, normalized income decreased $64, or 5.5 percent, to $1,100 as
compared with $1,164 in 1996. Normalized earnings per share of Communications
Stock were $2.28, a decrease of $0.16, or 6.6 percent, as compared to 1996. The
decrease is primarily due to a $152 after-tax regulatory charge ($250 pretax),
or $0.31 per share of Communications Stock, in the fourth quarter of 1997. The
charge primarily relates to a liability for revenues that were collected subject
to refund (with interest) in the state of Washington from May 1, 1996 through
December 31, 1997. The liability was recognized in light of the Washington State
Supreme Court's ruling on December 24, 1997 that upheld a Washington State
Utilities Transportation Commission ("WUTC") 1996 rate order (the "Washington
Rate Order"). Absent the effects of the charge, Communications Group's adjusted
earnings per share were $2.59, an increase of 6.1 percent as compared to 1996.
The prospective revenue reduction as a result of the Washington Rate Order
approximates $115 annually. In a separate action in January 1998 the WUTC
authorized a rate increase of approximately $60 annually. Tariffs implementing
both orders became effective February 1, 1998. See "Contingencies."
Income in 1997 was favorably impacted by strong demand for services.
Partially offsetting the effects of increased demand were higher expenses
related to interconnection, provisions for estimated regulatory liabilities
other than Washington, and start-up costs associated with growth initiatives,
including PCS.
23
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
MEDIA GROUP NET LOSS
<TABLE>
<CAPTION>
NET LOSS BASIC LOSS PER SHARE
--------------------------------- ---------------------------------
DECREASE DECREASE
----------- -----------
1997 1996 $ 1997 1996 $
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Reported net loss........................................ $ (480) $ (71) $ (409) $ (0.88) $ (0.16) $ (0.72)
Adjustments to reported net loss:
Gains on sales of investments.......................... (249) -- (249) (0.41) -- (0.41)
--------- --- ----- --------- --------- -----------
Normalized loss.......................................... $ (729) $ (71) $ (658) $ (1.29) $ (0.16) $ (1.13)
--------- --- ----- --------- --------- -----------
--------- --- ----- --------- --------- -----------
</TABLE>
During 1997, the Media Group reported a normalized net loss of $729 ($1.29
per share of Media Stock), compared with a net loss of $71, ($0.16 per share of
Media Stock) in 1996. The Continental Acquisition contributed approximately $356
($0.59 per share of Media Stock) of the increase. The Continental Acquisition
resulted in significant increases in interest and depreciation and amortization
charges. The remaining increase in net loss is primarily due to greater losses
from unconsolidated ventures, partially offset by increased earnings from
domestic cellular and directories operations.
During June 1997, Media Group incurred an extraordinary gain of $3 (net of
income tax expenses of $2) related to the early extinguishment of debt of
MediaOne Delaware. During August 1997, Media Group incurred an extraordinary
loss of $3 (net of income tax benefits of $2) related to the early
extinguishment of debt.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1997 1996 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group....................................................... $ 10,319 $ 10,079 $ 240 2.4
Media Group................................................................ 5,043 2,955 2,088 70.7
Intergroup eliminations.................................................... (127) (123) (4) 3.2
--------- --------- --------- ---
Total sales and other revenues............................................. $ 15,235 $ 12,911 $ 2,324 18.0
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
24
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMMUNICATIONS GROUP OPERATING REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1997 1996 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Local service.............................................................. $ 5,016 $ 4,770 $ 246 5.2
Interstate access service.................................................. 2,666 2,507 159 6.3
Intrastate access service.................................................. 761 770 (9) (1.2)
Long-distance network services............................................. 885 1,100 (215) (19.5)
Other services............................................................. 991 932 59 6.3
--------- --------- --------- ---------
Total...................................................................... $ 10,319 $ 10,079 $ 240 2.4
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Approximately 97 percent of the Communications Group's revenues are
attributable to the operations of U S WEST Communications, of which
approximately 67 percent are derived from the states of Arizona, Colorado,
Minnesota, Oregon and Washington. The primary factors that influence changes in
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 at December 31, 1997 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 1997, business access
lines grew 5.8 percent while residential access lines increased 3.9 percent,
when adjusted for the 1997 sales of rural telephone access lines.
During 1997, the Communications Group's operating revenues increased 2.4
percent, to $10,319. Revenue growth was impacted by the $250 regulatory charge
in the fourth quarter of 1997. The regulatory charge was allocated among local
service revenues, interstate and intrastate access services revenues, long-
distance network service revenues and interest expense. Absent the effects of
the charge, revenues were $10,549, an increase of 4.7 percent as compared with
1996.
LOCAL SERVICE REVENUES. Local service revenues include local telephone
exchange, local private line and public telephone services. During 1997, local
service revenues increased 5.2 percent, or $246, as compared with 1996. Local
service revenue growth of 5.2 percent declined from 9.8 percent in 1996 due to
the effects of an $86 accrual recognized during fourth-quarter 1997 as part of
the Washington Rate Order and additional provisions of approximately $95 during
the year for other estimated state regulatory liabilities. See "Contingencies."
Lower wireless interconnection access prices mandated by the Telecommunications
Act of 1996 (the "Telecommunications Act") and the effects of rural exchange
sales also impacted local service revenue growth in 1997.
The 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 609,000
during 1997, or 3.9 percent, of which 294,000 is attributed to second lines.
Second line installations increased 28.2 percent compared with 1996. Access
lines grew 683,000, or 4.4 percent, when adjusted for sales of approximately
74,000 rural telephone access lines during 1997. Also contributing to the
revenues increase were rate increases of $37 in various states and interim
compensation revenues from interexchange carriers ("IXCs") as a result of the
Federal Communications Commission ("FCC") payphone orders which took effect in
April 1997.
INTERSTATE 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
25
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
telephone customers. Approximately 28 percent of access revenues and 9 percent
of total revenues are derived from providing access services to AT&T Corp.
("AT&T").
During 1997, interstate access service revenues increased $159, or 6.3
percent, to $2,666. The increase in interstate access service revenues resulted
primarily from greater demand for private line services, access line growth and
an increase of 6.4 percent in billed interstate access minutes of use. Also
contributing to the increase were the effects of higher accruals for refunds to
IXCs in 1996. Lower prices under the FCC's current price cap plan and a $25
charge during fourth-quarter 1997 for an FCC-ordered refund to IXCs for access
revenues collected during the last half of 1997 partially offset the effects of
greater demand for interstate access services. The Communications Group reduced
prices for interstate access services, effective July 1, 1997, as a result of
the FCC's current price cap plan. The access rate reductions, which are being
reflected through lower interstate rates over twelve months beginning July 1,
1997, have an on-going annual revenue impact of approximately $160. The rate of
growth in interstate access service revenues could decline in 1998 as a result
of the FCC's May 1997 decisions to establish rules to restructure the access
charge system (the "Access Reform Order") and the current price cap plan (the
"Price Cap Order"). See "Communications Group--Regulatory Environment."
INTRASTATE ACCESS SERVICE REVENUES. The decrease of $9, or 1.2 percent, in
intrastate access service revenues is primarily due to the effects of a $68
accrual recognized during fourth-quarter 1997 as part of the Washington Rate
Order. A 12.2 percent increase in billed intrastate minutes of use, higher
demand for private line services and $7 of rate increases in local jurisdictions
largely offset the effects of the Washington Rate Order.
LONG-DISTANCE NETWORK SERVICES REVENUES. Long-distance network services
revenues are derived from calls which both originate and terminate within the
LATA boundaries of the Region. In 1997, long-distance network services revenues
decreased $215, or 19.5 percent, as compared with 1996. The decline is partially
due to the effects of a $51 accrual recognized during fourth-quarter 1997 as
part of the Washington Rate Order. The decrease in long-distance network
services revenues is also due to the effects of competition and the
implementation of multiple toll carrier plans ("MTCPs") in various jurisdictions
in 1997 and 1996. 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 service revenues and
lower access expense. Rate decreases of $20 in local jurisdictions also
contributed to the decrease in long-distance network services revenues.
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. The Communications Group believes that erosion of long-distance
network services revenues will continue due to the loss of exclusivity of 1+
dialing in Minnesota and Arizona in February and April of 1996, respectively,
and in New Mexico and Wyoming in September and December of 1997, respectively,
and the effects of continued competitive dial-around activity in other states
within the Region. The Communications Group is responding to competition through
competitive pricing of intraLATA long-distance network 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, and the provision of customer premises
equipment ("CPE"). Other services revenues increased $59, or 6.3 percent, as
compared with 1996, primarily as a result of continued market penetration of
voice messaging services and
26
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
greater sales of inside wire maintenance and certain other unregulated products
and services. Also contributing to the increase were revenues from the launch of
PCS services. Partially offsetting these increases was a reduction in contract
revenues due to the completion of a large federal government telephony project
in 1996.
MEDIA GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE) PRO INCREASE (DECREASE)
FORMA(1)
-------------------- ----------- --------------------
1997 1996 $ % 1996 $ %
--------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CABLE AND BROADBAND:
Domestic....................................... $ 2,323 $ 488 $ 1,835 -- $ 2,125 $ 198 9.3
International.................................. 18 6 12 -- 6 12 --
--------- --------- --------- --------- ----------- --------- ---------
2,341 494 1,847 -- 2,131 210 9.9
--------- --------- --------- --------- ----------- --------- ---------
WIRELESS COMMUNICATIONS:
Domestic:
Cellular service............................. 1,276 1,078 198 18.4 1,078 198 18.4
Cellular equipment........................... 152 105 47 44.8 105 47 44.8
--------- --------- --------- --------- ----------- --------- ---------
1,428 1,183 245 20.7 1,183 245 20.7
--------- --------- --------- --------- ----------- --------- ---------
DIRECTORY AND INFORMATION SERVICES:
Domestic....................................... 1,197 1,120 77 6.9 1,120 77 6.9
International.................................. 48 139 (91) (65.5) 139 (91) (65.5)
--------- --------- --------- --------- ----------- --------- ---------
1,245 1,259 (14) (1.1) 1,259 (14) (1.1)
--------- --------- --------- --------- ----------- --------- ---------
Other............................................ 29 19 10 52.6 19 10 52.6
--------- --------- --------- --------- ----------- --------- ---------
Total............................................ $ 5,043 $ 2,955 $ 2,088 70.7 $ 4,592 $ 451 9.8
--------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- ----------- --------- ---------
</TABLE>
- ------------------------------
(1) Gives effect to the Continental Acquisition as though it had occurred on
January 1, 1996.
The pro forma increase in Media Group sales and other revenues was primarily
due to growth in domestic cable and broadband and cellular service revenues.
CABLE AND BROADBAND. Cable and broadband revenues consist primarily of
basic cable programming and premium cable television services, the rental of
converters and remote control devices, cable installation fees, advertising and
PrimeStar DBS services.
On a pro forma basis, domestic cable and broadband revenues increased 9.3
percent, to $2,323, in 1997. Basic cable programming services revenues increased
$146, or 10.6 percent, to $1,518, primarily a result of rate increases. Rate
increases averaged approximately 6 to 8 percent and were primarily related to an
increase in programming costs and the addition of channels. This contributed to
the 4.7 percent increase in core cable revenue per average cable subscriber to
$37.76 in 1997, from $36.06 in 1996. Basic subscriber growth of 1.6 percent,
adjusted for dispositions and an acquisition, also contributed to the increase
in revenues along with growth in equipment rental and installation revenues.
Partially offsetting the increase in revenues was a decline in premium services
revenues as a result of moving the Disney Channel to the basic service tier in
several markets and discounting of premium service packages. PrimeStar DBS
services contributed $40 to the increase in domestic cable and broadband
revenues principally as a result of a 31 percent increase in DBS customers to
181,000 at December 31, 1997. Media
27
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Group has entered into an agreement to contribute its DBS customers and certain
assets to a newly formed company to be called "PrimeStar, Inc." ("New
PrimeStar"). In exchange, the Media Group will receive a combination of cash and
stock in New PrimeStar. The transaction is subject to various approvals and is
expected to close in 1998.
International cable and broadband revenues reflect the consolidation of
Cable Plus a.s. ("Cable Plus"), a cable operator in the Czech Republic, in
fourth-quarter 1996. The consolidation of Cable Plus is associated with a
restructuring in 1996 whereby Media Group's ownership interest increased to 94
percent.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 18.4 percent,
to $1,276 in 1997, due to a 27 percent increase in subscribers during the year,
partially offset by a 12 percent drop in average revenue per subscriber to
$46.42 per month. The increase in subscribers relates to continued growth in
demand for wireless services, as well as the 1997 introduction of digital
wireless services in several major markets. Media Group believes that increasing
competition in its wireless markets, including new market entrants offering PCS
technology, will result in continued decreases in revenue per subscriber and
slowing subscriber growth.
Cellular equipment revenues increased 44.8 percent, to $152 in 1997, as a
result of a 14 percent increase in gross customer additions and the introduction
of digital handsets. These volume increases were partially offset by decreased
selling prices for analog handsets. Media Group believes that growth in
equipment revenue could decline in 1998 as a result of pricing pressures
associated with increased competition.
Media Group expects to sell its domestic wireless business to AirTouch by
mid-1998 pursuant to the AirTouch Transaction.
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising, which represents 99 percent of domestic directory and
information services revenues, increased 7.2 percent, to $1,181 in 1997. The
increases are largely a result of a 7.3 percent increase in revenue per local
advertiser, primarily resulting from price increases of 4.6 percent and an
increase in volume and complexity of advertisements sold. These increases were
offset slightly by decreased revenues associated with exited product lines which
were nonstrategic to the directory business. Interactive and other services,
which comprise the remaining domestic directory and information services
revenues, totaled $16 and $18 for the years ended December 31, 1997 and 1996,
respectively.
In conjunction with the proposed Separation, the domestic directory business
will be aligned with New U S WEST.
During 1997, Media Group sold its wholly owned international directory and
information services operations.
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1997 1996 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group........................................................ $ 2,210 $ 2,340 $ (130) (5.6)
Media Group................................................................. 596 515 81 15.7
--------- --------- --------- ---
Total operating income...................................................... $ 2,806 $ 2,855 $ (49) (1.7)
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
28
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMMUNICATIONS GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1997 1996 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues.......................................................... $ 10,319 $ 10,079 $ 240 2.4
Operating expenses:
Employee-related expenses................................................. 3,697 3,594 103 2.9
Other operating expenses.................................................. 1,870 1,634 236 14.4
Taxes other than income taxes............................................. 416 389 27 6.9
Depreciation and amortization............................................. 2,126 2,122 4 0.2
--------- --------- --------- ---
Total operating expenses................................................ 8,109 7,739 370 4.8
--------- --------- --------- ---
Operating income............................................................ $ 2,210 $ 2,340 $ (130) (5.6)
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
Operating income declined $130, or 5.6 percent, to $2,210 in 1997. Revenue
growth of $240, or 2.4 percent, was more than offset by an increase of $370, or
4.8 percent, in operating costs, including approximately $150 of expenses
related to interconnection. See "Communications Group--Regulatory Environment."
In addition, revenue growth was negatively impacted by the fourth-quarter 1997
regulatory charge. See "Sales and Other Revenues." Absent the effects of the
regulatory charge, operating income was $2,440, an increase of 4.3 percent, as
compared with 1996.
Operating expense growth was primarily due to increases in employee-related
and other operating expenses. Employee-related expenses include salaries and
wages (including both basic and performance-based pay), overtime, benefits
(including pension, postretirement and health care), payroll taxes and contract
labor. During 1997, total employee-related expenses increased $103, or 2.9
percent, to $3,697, primarily due to higher contract labor costs. The contract
labor costs were predominately a result of increased systems development work
(which includes expenses related to interconnection and year 2000 costs) and
marketing and sales efforts. Increases in certain employee-related benefit costs
also contributed to the growth in total employee-related expenses. Partially
offsetting these increases were lower salaries and wages related to headcount
reductions, lower conference and travel expenses and decreases in overtime
costs.
Other operating expenses include access charges paid to independent local
exchange carriers ("LECs") (incurred for the routing of long-distance traffic
through their facilities), network software expenses and other general and
administrative costs, including allocated costs from U S WEST. During 1997,
other operating expenses increased $236, or 14.4 percent, to $1,870, primarily
due to a $92 increase in advertising costs and approximately $90 of
interconnection expenses. Costs associated with strategic and growth initiatives
(primarily PCS) and increased equipment rentals also contributed to the
increase. Partially offsetting these cost increases were reduced access expenses
(primarily related to the implementation of the MTCPs in 1997 and 1996), the
completion of a large federal government telephony project in 1996 and lower
material and supplies expense. A 1996 charge of $11 to discontinue the Omaha
broadband video service trial also partially offset the increase in other
operating expenses.
At December 31, 1997, approximately 69 percent of the Communications Group's
employees were represented by unions. The Communications Group's principal
collective bargaining agreements expire in August 1998. Negotiations with
respect to future collective bargaining agreements are underway.
29
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Taxes other than income taxes, which consist primarily of property taxes,
increased $27, or 6.9 percent, to $416, primarily due to the effects of property
tax adjustments in 1996 and increased 1997 use taxes. Partially offsetting the
increases were the effects of favorable tax valuations and mill levies on 1997
property taxes as compared with 1996.
MEDIA GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE PRO INCREASE
(DECREASE) FORMA(1) (DECREASE)
----------- -------- -----------
1997 1996 $ % 1996 $ %
----- ----- ----- ---- -------- ---- -----
<C> <C> <C> <C> <C> <C> <C>
CABLE
AND
BROADBAND:
Domestic... $(111) $ (13) $ (98) -- $ (73) $(38) 52.1
International... (15) (7) (8) -- (7) (8) --
----- ----- ----- ---- -------- ---- -----
(126) (20) (106) -- (80) (46) 57.5
----- ----- ----- ---- -------- ---- -----
WIRELESS
COMMUNICATIONS:
Domestic... 353 243 110 45.3 243 110 45.3
International... (13) (3) (10) -- (3) (10) --
----- ----- ----- ---- -------- ---- -----
340 240 100 41.7 240 100 41.7
----- ----- ----- ---- -------- ---- -----
DIRECTORY
AND
INFORMATION
SERVICES:
Domestic... 548 452 96 21.2 452 96 21.2
International... (11) 2 (13) -- 2 (13) --
----- ----- ----- ---- -------- ---- -----
537 454 83 18.3 454 83 18.3
----- ----- ----- ---- -------- ---- -----
Other(2)... (155) (159) 4 (2.5) (159) 4 (2.5)
----- ----- ----- ---- -------- ---- -----
Operating
income... $ 596 $ 515 $ 81 15.7 $ 455 $141 31.0
----- ----- ----- ---- -------- ---- -----
----- ----- ----- ---- -------- ---- -----
</TABLE>
- ------------------------------
(1) Gives effect to the Continental Acquisition as though it had occurred on
January 1, 1996.
(2) Primarily includes headquarters expenses for shared services and divisional
expenses associated with equity investments.
The Media Group pro forma operating income increases were due primarily to
growth in domestic wireless and domestic directory operations, partially offset
by higher domestic cable operating losses.
CABLE AND BROADBAND. Domestic cable and broadband operating losses
increased 52.1 percent, or $38, to $111, as compared with pro forma 1996.
Revenue growth of $198, or 9.3 percent, to $2,323, was more than offset by
increases in programming costs, including programming for PrimeStar DBS
services, of $71, or 15.6 percent, to $525, increases in operating, marketing
and advertising, and general and administrative costs of $89, or 11.4 percent,
to $868, and increases in depreciation and amortization expense of $76, or 7.9
percent, to $1,041.
Programming cost increases are primarily a result of rate increases and
subscriber growth. Increases in operating, marketing and advertising, and
general and administrative costs are primarily a function of customer service
initiatives, costs associated with deployment of new services such as high-speed
data, advertising costs to implement the "MediaOne" brand and increased
professional fees. A reduction in the estimated remaining useful lives of
certain assets in accordance with planned re-build activities resulted in a
depreciation adjustment of $61 which accounts for the majority of the increase
in depreciation and amortization expense during 1997.
30
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The domestic cable and broadband business will continue to generate
operating losses for the foreseeable future due to the amortization of
intangible assets associated with the Continental Acquisition and depreciation
associated with network upgrades.
WIRELESS COMMUNICATIONS. Domestic cellular operating income increased 45.3
percent, to $353, in 1997. The increase in operating income is a result of
revenue increases associated with the expanding subscriber base combined with
efficiency gains. These increases were somewhat offset by a decline in revenue
per subscriber, caused primarily by promotional pricing to retain subscribers
and remain competitive with other wireless service providers. On a per
subscriber basis, the 1997 decline in revenue of 11.6 percent has been more than
offset by a combined decrease of 19.4 percent in the costs incurred to acquire
and support customers. Customer acquisition costs include sales commissions,
advertising, other selling costs and equipment costs. Customer support costs
include charges for access and usage of land-line telecommunications networks,
subscriber billing, customer service and general support costs, as well as costs
associated with roaming, toll calls within LATA boundaries, and fraud. Support
costs per subscriber declined 17.6 percent in 1997. The decline is generally a
result of the efficiencies gained from an expanding customer base without
corresponding increases in headcount and infrastructure.
Competitive activity increased in U S WEST's domestic cellular markets in
the second half of the year, particularly with the introduction of new PCS
wireless services in several markets. In many cases, discounted cellular service
price plans were offered in response to competition. This resulted in slowing
operating income growth during the fourth quarter of 1997. Management believes
such competitive impacts will continue in 1998.
Domestic cellular depreciation and amortization increased 22.4 percent, to
$180, largely as a result of network upgrades.
DIRECTORY AND INFORMATION SERVICES. During 1997, operating income related
to domestic Yellow Pages directory advertising increased 14 percent to $582.
Revenue increases of 7.2 percent were partially offset by an 11 percent increase
in paper and printing costs, and a 7 percent increase in sales support costs.
These cost increases were associated with an increase in the volume and
complexity of advertisements sold. Additionally, 1996 results include a charge
of $25 incurred to reorganize and reduce management headcount. During 1997, the
Yellow Pages operation completed its reorganization. Centralized operating
management was divided into three regions to establish greater accountability
and to move decision making closer to the customers.
Operating losses associated with ongoing product development activities,
which include development costs for Internet content services, are included in
domestic directory and information services operating income. Such losses
reduced domestic directory and information services operating income by $34 in
1997, compared with a reduction of $59 in 1996. The decrease in losses is
primarily the result of cost containment efforts in 1997 and discontinuing
various product development activities in 1996.
At December 31, 1997, approximately 64 percent of the directory and
information services segment employees were represented by unions. The principal
collective bargaining agreements expire in May and October 1998. Negotiations
with respect to future collective bargaining agreements are underway.
OTHER. Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning, and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations. The
1997 results include a $30
31
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
charge for management changes and moving costs related to relocating MediaOne
Delaware's operations from Boston to Denver. This charge was partially offset by
savings associated with lower international staff levels in 1997, combined with
a 1996 charge of $10 related to the staff reductions at international
headquarters.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1997 1996 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense......................................................... $ (1,083) $ (612) $ 471 77.0
Equity losses in unconsolidated ventures................................. (909) (346) 563 --
Gains on sales of investments............................................ 474 -- 474 --
Gains on sales of rural telephone exchanges.............................. 77 59 18 30.5
Guaranteed minority interest expense..................................... (87) (55) 32 58.2
Other expense--net....................................................... (56) (61) (5) (8.2)
</TABLE>
INTEREST EXPENSE. Interest expense increased $471, or 77.0 percent,
primarily as a result of assuming, at market value, $6.5 billion of debt related
to the Continental Acquisition. Partially offsetting the increase were lower
average debt levels at the Communications Group in 1997. U S WEST's weighted
average borrowing cost was 7.0 percent in 1997, compared with 6.85 percent in
1996. See "Liquidity and Capital Resources."
EQUITY LOSSES IN UNCONSOLIDATED VENTURES. Equity losses increased $563 in
1997, predominantly a result of greater losses generated from international
ventures and the domestic investment in PrimeCo. PrimeCo launched service in
November 1996, and losses associated with this venture have increased $68 as a
result of start-up and other costs.
International equity losses increased $455 in 1997. Ventures located in
Asia, which includes Indonesia, India, Malaysia, Japan and Singapore,
contributed $397 to the increase. During late 1997, the value of Asian
currencies as compared with the U. S. dollar declined significantly,
particularly in Indonesia. These declines, coupled with political uncertainties,
led to a fourth-quarter 1997 pretax charge of $200. This charge combined with a
significant increase in foreign exchange losses at the Asian ventures related to
U. S. dollar denominated debt and increased amortization of license fees led to
the increase in equity losses.
GAINS ON SALES OF INVESTMENTS. During 1997, Media Group sold: (i) its 90
percent interest in Fintelco, S.A. ("Fintelco"), a cable and telecommunications
venture located in Argentina, for a pretax gain of $135 ($80 after tax), (ii)
its shares of Teleport Communications Group, Inc. ("TCG"), acquired in the
Continental Acquisition, for a pretax gain of $162 ($96 after tax), (iii) its
shares of Time Warner Inc. ("TWX" or "Time Warner"), acquired in the Continental
Acquisition, for a pretax gain of $44 ($25 after tax), (iv) its five percent
interest in a French wireless venture, for a pretax gain of $51 ($31 after tax),
and (v) U S WEST Polska, its wholly owned directory operation in Poland, for a
pretax gain of $29 ($17 after tax).
Additionally, U S WEST Communications and the other Regional Bell Operating
Companies ("RBOCs") sold their equity interests in Bellcore. As a result of the
sale, U S WEST Communications recorded a pretax gain of $53 ($32 after tax).
32
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GAINS ON SALES OF RURAL TELEPHONE EXCHANGES. During 1997, the
Communications Group 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, South Dakota, Idaho and New
Mexico.
GUARANTEED MINORITY INTEREST EXPENSE. Guaranteed minority interest expense
reflects an increase of $32 related to the October 29, 1996 issuance of
Preferred Securities totaling $480.
OTHER EXPENSE--NET. Other expense decreased $5 in 1997, due primarily to a
1996 pretax charge of $31 associated with the sale of the Media Group's cable
television interests in Norway, Sweden and Hungary. Largely offsetting this
decrease was additional interest expense associated with the Communications
Group's state regulatory and interstate sharing liabilities, and increased
foreign exchange transaction losses associated with loans to international
ventures.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
--------------------
1997 1996 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes.................................................... $ 522 $ 696 $ (174) (25.0)
Effective tax rate............................................................ 42.7% 37.8% -- --
</TABLE>
The increase in the effective tax rate is primarily a result of the effects
of goodwill amortization associated with the Continental Acquisition.
RESTRUCTURING CHARGE
In 1993, U S WEST incurred a $1 billion restructuring charge (pretax). The
related restructuring plan was designed to provide faster, more responsive
customer services, while reducing the costs of providing these services. During
1997, the restructuring reserve decreased $70, to $56. Reserve usage was
primarily a result of 645 employee separations and systems development costs
during 1997. The restructuring plan is substantially complete as of December 31,
1997.
RESULTS OF OPERATIONS--1996 COMPARED WITH 1995
NET INCOME (LOSS)
<TABLE>
<CAPTION>
NET INCOME (LOSS) BASIC EARNINGS (LOSS) PER SHARE
------------------------------------------ ---------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- ---------
1996 1995 $ % 1996 1995(1) $
--------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Communications Group....................... $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12
Media Group................................ (71) 141 (212) -- (0.16) 0.29 (0.45)
--------- --------- --------- ---------
Total net income........................... $ 1,178 $ 1,317 $ (139) (10.6)
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
%
---
<S> <C>
Communications Group....................... 4.8
Media Group................................ --
Total net income...........................
</TABLE>
- ------------------------------
(1) As a result of the 1995 Recapitalization, basic earnings (loss) per share
have been presented on a pro forma basis as if the Communications Stock and
Media Stock had been outstanding since January 1, 1995. For periods prior to
the 1995 Recapitalization, the average common shares outstanding are assumed
to be equal to the average common shares outstanding for U S WEST.
33
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMMUNICATIONS GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME BASIC EARNINGS PER SHARE(1)
------------------------------------------ ------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- --------------------
1996 1995 $ % 1996 1995(1) $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income....................... $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12 4.8
Adjustments to reported net income:
Gains on sales of rural telephone
exchanges............................. (36) (85) 49 (57.6) (0.08) (0.18) 0.10 (55.6)
Cumulative effect of change in
accounting principle(2)............... (34) -- (34) -- (0.07) -- (0.07) --
Current year effect of change in
accounting principle(2)............... (15) -- (15) -- (0.03) -- (0.03) --
Recapitalization costs.................. -- 8 (8) -- -- 0.01 (0.01) --
Early extinguishment of debt(3)......... -- 8 (8) -- -- 0.02 (0.02) --
--------- --------- --- --------- --------- --------- --------- ---------
Normalized income......................... $ 1,164 $ 1,107 $ 57 5.1 $ 2.44 $ 2.35 $ 0.09 3.8
--------- --------- --- --------- --------- --------- --------- ---------
--------- --------- --- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) As a result of the 1995 Recapitalization, basic earnings per share have been
presented on a pro forma basis as if the Communications Stock had been
outstanding since January 1, 1995. For periods prior to the 1995
Recapitalization, the average common shares outstanding are assumed to be
equal to the average common shares outstanding for U S WEST.
(2) Effective January 1, 1996, U S WEST adopted SFAS No. 121 which, among other
things, requires that companies no longer record depreciation expense on
assets held for sale.
(3) Represents an extraordinary charge of $8 (net of income tax benefits of $5)
related to the refinancing of $145 of long-term debt.
The Communications Group's 1996 normalized income was $1,164, an increase of
$57, or 5.1 percent, compared with $1,107 in 1995. Normalized earnings per share
of Communications Stock were $2.44, an increase of $0.09, or 3.8 percent, as
compared to 1995. The increase in normalized income is primarily attributable to
increased demand for services. Partially offsetting the increased revenues were
higher costs incurred to address business growth, service-improvement
initiatives and costs related to new business opportunities.
34
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
MEDIA GROUP NET INCOME (LOSS)
<TABLE>
<CAPTION>
BASIC EARNINGS (LOSS) PER
NET INCOME (LOSS) SHARE(1)
--------------------------------- ---------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
----------- -----------
1996 1995 $ 1996 1995(1) $
--------- --------- ----------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Reported net income (loss)............................. $ (71) $ 141 $ (212) $ (0.16) $ 0.29 $ (0.45)
Adjustments to reported net income (loss):
Merger of joint venture(2)........................... -- (95) 95 -- (0.20) 0.20
Recapitalization costs............................... -- 9 (9) -- 0.02 (0.02)
Early extinguishment of debt(3)...................... -- 4 (4) -- 0.01 (0.01)
--- --------- ----- --------- --------- -----------
Normalized income (loss)............................... $ (71) $ 59 $ (130) $ (0.16) $ 0.12 (0.28)
--- --------- ----- --------- --------- -----------
--- --------- ----- --------- --------- -----------
</TABLE>
- ------------------------------
(1) As a result of the 1995 Recapitalization, basic earnings (loss) per share
have been presented on a pro forma basis as if the Media Stock had been
outstanding since January 1, 1995. For periods prior to the 1995
Recapitalization, the average common shares outstanding are assumed to be
equal to the average common shares outstanding for U S WEST.
(2) Relates to the merger of Telewest with SBC CableComms (UK).
(3) Media Group incurred an extraordinary loss of $4 (net of income tax benefits
of $2) related to the early retirement of debt by TWE.
During 1996, the Media Group recorded a net loss of $71 compared to
normalized income of $59 in 1995. Excluding the effects of the Continental
Acquisition, the Media Group would have been break-even in 1996. The decline in
1996 normalized income (loss), excluding Continental, is primarily due to higher
equity losses related to international and domestic growth initiatives,
partially offset by improvement in domestic cellular operations.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group...................................................... $ 10,079 $ 9,484 $ 595 6.3
Media Group............................................................... 2,955 2,374 581 24.5
Intergroup eliminations................................................... (123) (112) (11) 9.8
--------- --------- --------- ---------
Total sales and other revenues............................................ $ 12,911 $ 11,746 $ 1,165 9.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
35
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMMUNICATIONS GROUP OPERATING REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---
Total......................................................................... $ 10,079 $ 9,484 $ 595 6.3
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
LOCAL SERVICE REVENUES. Local service revenues increased principally as a
result of 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 was attributed
to second lines. Second line installations increased 30.5 percent compared with
1995. Access line growth was 5.0 percent when adjusted for sales of 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. Intrastate access service revenues increased
primarily due to higher demand partially offset by the effects of price
reductions.
LONG-DISTANCE NETWORK SERVICES REVENUES. Long-distance network services
revenues decreased primarily due to the effects of competition and the
implementation of MTCPs in 1996. The 1996 impact of the MTCPs was a $27
reduction in long-distance network services revenues, partially offset by an
increase in intrastate access service revenues of $5 and a decrease in other
operating expenses (primarily access expense) of $21.
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 federal government telephony project and CPE sales.
36
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
MEDIA GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CABLE AND BROADBAND:
Domestic.................................................................... $ 488 $ 215 $ 273 --
International............................................................... 6 -- 6 --
--------- --------- --------- ---------
494 215 279 --
--------- --------- --------- ---------
WIRELESS COMMUNICATIONS:
Domestic:
Cellular service.......................................................... 1,078 845 233 27.6
Cellular equipment........................................................ 105 96 9 9.4
--------- --------- --------- ---------
1,183 941 242 25.7
--------- --------- --------- ---------
DIRECTORY AND INFORMATION SERVICES:
Domestic.................................................................... 1,120 1,058 62 5.9
International............................................................... 139 122 17 13.9
--------- --------- --------- ---------
1,259 1,180 79 6.7
--------- --------- --------- ---------
Other......................................................................... 19 38 (19) (50.0)
--------- --------- --------- ---------
Total......................................................................... $ 2,955 $ 2,374 $ 581 24.5
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Media Group sales and other revenues increased 24.5 percent, to $2,955 in
1996 due primarily to the Continental Acquisition and to strong growth in
cellular service revenue. Excluding the effects of the Continental Acquisition,
sales and other revenues increased 13.9 percent.
CABLE AND BROADBAND. Domestic cable and broadband revenues increased $273,
to $488 in 1996, due primarily to the Continental Acquisition. Excluding the
effects of the Continental Acquisition, domestic cable and broadband revenues
increased $21, or 9.8 percent, to $236. The normalized increase was due to
higher revenues from the Media Group's cable systems in Atlanta, as a result of
a 3.9 percent increase in revenue per subscriber to $39.36 per month and a basic
subscriber increase of 4.5 percent. The increase in revenue per subscriber was
primarily a result of price increases of 6 to 7 percent.
International cable and broadband revenues reflect the consolidation in the
fourth quarter of 1996 of Cable Plus.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 27.6 percent,
to $1,078 in 1996, due to a 40 percent increase in subscribers during the year.
The increase in subscribers was partially offset by a 12 percent drop in average
revenue per subscriber to $53.00 per month. The increase in subscribers relates
to continued growth in demand for wireless services, especially among consumers.
Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a
result of a 61 percent increase in units sold which was somewhat offset by lower
equipment prices. A 30 percent increase in customers added during the year and
the implementation of a phone exchange program for existing customers led to the
increase in units sold.
37
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising, which represents 98 percent of the domestic directory and
information services revenue, increased 7.4 percent, to $1,102 in 1996. The
increases are 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 in local advertisers during the year.
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group.......................................................... $ 2,340 $ 2,178 $ 162 7.4
Media Group................................................................... 515 467 48 10.3
--------- --------- --------- ---------
Total operating income........................................................ $ 2,855 $ 2,645 $ 210 7.9
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
COMMUNICATIONS GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues........................................................... $ 10,079 $ 9,484 $ 595 6.3
Operating expenses:
Employee-related expenses.................................................. 3,594 3,341 253 7.6
Other operating expenses................................................... 1,634 1,543 91 5.9
Taxes other than income taxes.............................................. 389 380 9 2.4
Depreciation and amortization.............................................. 2,122 2,042 80 3.9
--------- --------- --------- ---------
Total operating expenses................................................. 7,739 7,306 433 5.9
--------- --------- --------- ---------
Operating income............................................................. $ 2,340 $ 2,178 $ 162 7.4
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Communications Group operating income increased $162, or 7.4 percent, to
$2,340 in 1996. Revenues increased $595, or 6.3 percent, and were partially
offset by an increase of $433, or 5.9 percent, in operating costs. Total
operating expense growth was primarily due to increases in employee-related
costs, other operating expenses and depreciation expense.
Total employee-related expenses increased $253 primarily due to continued
efforts to address increased business growth, service-improvement initiatives
and new business opportunities. Salaries and wages increased primarily due to
inflation-driven and contractual wage increases. Contract labor costs increased
to support business growth and additional marketing organization costs related
to the launch of new products and services. Employee-related expenses also
included approximately $15 for contract labor and overtime as a result of
flooding in Washington and Oregon in first-quarter 1996. Partially offsetting
these increases were a reduction in postretirement benefit costs due to changes
in actuarial assumptions and favorable cost 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 increased $91, or 5.9 percent, 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 an $11 charge
related to the discontinuance of the Omaha broadband video service trial.
Reduced access expense (a
38
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
portion of which relates to the 1996 implementation of MTCPs) and a reduction in
allocated costs from U S WEST partially offset these increases. Allocated costs
from U S WEST were $88 and $116 in 1996 and 1995, respectively.
Taxes other than income taxes were relatively flat as compared with 1995. In
fourth-quarter 1996, taxes other than income taxes increased by $24, or 32.4
percent, due to favorable property tax valuations and mill levies recognized
during fourth-quarter 1995.
Depreciation and amortization expense increased $80, or 3.9 percent, due 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.
MEDIA GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CABLE AND BROADBAND:
Domestic...................................................................... $ (13) $ 23 $ (36) --
International................................................................. (7) -- (7) --
--------- --------- --------- ---------
(20) 23 (43) --
--------- --------- --------- ---------
WIRELESS COMMUNICATIONS:
Domestic...................................................................... 243 147 96 65.3
International................................................................. (3) -- (3) --
--------- --------- --------- ---------
240 147 93 63.3
--------- --------- --------- ---------
DIRECTORY AND INFORMATION SERVICES:
Domestic...................................................................... 452 399 53 13.3
International................................................................. 2 (1) 3 --
--------- --------- --------- ---------
454 398 56 14.1
--------- --------- --------- ---------
Other(1)........................................................................ (159) (101) (58) 57.4
--------- --------- --------- ---------
Operating income................................................................ $ 515 $ 467 $ 48 10.3
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Primarily includes headquarters expenses for shared services and divisional
expenses associated with equity investments.
During 1996, Media Group operating income increased 10.3 percent, to $515,
due primarily to strong subscriber growth in wireless operations. Excluding the
effects of the Continental Acquisition, Media Group operating income increased
$73, or 15.6 percent.
CABLE AND BROADBAND. Domestic cable and broadband operating income
decreased $36, to a loss of $13, in 1996 due primarily to the Continental
Acquisition. Continental contributed losses of $25 since the date of the
Continental Acquisition. The Atlanta cable systems contributed operating income
of $12 in 1996, compared with $23 in 1995. An increase in depreciation expense
related to system upgrade activity at the Atlanta cable systems contributed to
the decrease in operating income.
International cable and broadband operating losses reflect the
fourth-quarter 1996 consolidation of Cable Plus.
39
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
WIRELESS COMMUNICATIONS. Cellular operating income increased 65.3 percent,
to $243 in 1996. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has
been more than offset by a combined decrease of 18 percent in the costs incurred
to acquire and support customers.
DIRECTORY AND INFORMATION SERVICES. During 1996, operating income related
to domestic Yellow Pages directory advertising increased 1.6 percent to $511.
Revenue increases of 7.4 percent were offset by an approximate 10 percent
increase in paper, printing, delivery and distribution costs and a charge of $25
to reorganize and reduce headcount in 1996. Operating losses associated with
on-going product development activities reduced domestic directory and
information services operating income by $59 in 1996, compared with a reduction
of $104 in 1995. The decrease in operating losses is primarily the result of
exiting various product development activities in 1995.
OTHER. Other operating losses increased in 1996 primarily as a result of a
change in cost allocation policy. Beginning in 1996, other operating losses
include costs that are not specifically identifiable with an operating company.
Previously such costs were allocated to the operating companies. Other operating
losses also include a charge of $10 related to staff reductions at international
headquarters in 1996.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense.............................................................. $ (612) $ (527) $ 85 16.1
Equity losses in unconsolidated ventures...................................... (346) (207) 139 67.1
Gains on sales of rural telephone exchanges................................... 59 136 (77) (56.6)
Gain on merger of joint venture interest...................................... - 157 (157) -
Guaranteed minority interest expense.......................................... (55) (14) 41 -
Other expense--net............................................................ (61) (36) 25 69.4
</TABLE>
INTEREST EXPENSE. Interest expense increased primarily as a result of
assuming, at market value, $6.5 billion of debt related to the Continental
Acquisition. Also contributing to the increase was a higher average debt level
at the Communications Group and a decrease in the amount of interest capitalized
resulting from a lower average balance of telecommunications plant under
construction at the Communications Group.
EQUITY LOSSES. Equity losses increased primarily due to: (1) network
expansion and additional financing costs at Telewest and One 2 One, (2) rapid
customer growth at One 2 One, (3) start-up and other costs associated with new
international investments located in Poland and Malaysia, and (4) losses related
to Continental's cable and telecommunications investments. Domestically,
improved results from the TWE partnership, related to improvements in cable and
programming operations, were more than offset by increased losses at PrimeCo
which launched service in the fourth quarter of 1996.
GAINS ON SALES OF RURAL TELEPHONE EXCHANGES. During 1996, the
Communications Group sold selected rural telephone exchanges in Utah, North
Dakota, South Dakota, Idaho and New Mexico for pretax gains of $59. The 1995
gains were a result of sales in Colorado, Washington, Oregon and Arizona.
40
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GAIN ON MERGER OF JOINT VENTURE INTEREST. During 1995, Telewest merged with
SBC CableComms (UK) resulting in a pretax gain of $157.
GUARANTEED MINORITY INTEREST EXPENSE. Guaranteed minority interest expense
reflects an increase of $34 related to the September 11, 1995 issuance of
Preferred Securities totaling $600, and an increase of $7 related to an
additional $480 issuance of Preferred Securities on October 29, 1996.
OTHER EXPENSE--NET. Other expense increased primarily as a result of a
pretax charge of $31, associated with the sale of U S WEST's cable television
interests in Norway, Sweden and Hungary, and a $13 adjustment related to U S
WEST Communications' equity investment in Bellcore. Partially offsetting the
increase in other expense were foreign currency translation gains associated
with loans to international ventures and costs incurred in 1995 associated with
the 1995 Recapitalization.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes....................................................... $ 696 $ 825 $ (129) (15.6)
Effective tax rate............................................................... 37.8% 38.3% -- --
</TABLE>
The decrease in the effective tax rate is primarily a result of a one-time
benefit associated with the leveraged lease portfolio.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Communications Group(1).............................................................. $ 3,848 $ 3,306 $ 2,719
Media Group(1)....................................................................... 1,318 724 640
Other................................................................................ -- -- 61
--------- --------- ---------
Total cash provided by operating activities.......................................... $ 5,166 $ 4,030 $ 3,420
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Individual group cash flow statements are provided in Note 23--Supplemental
Communications Group and Media Group Combined Statements--to the U S WEST,
Inc. Consolidated Financial Statements.
During 1997, the increase in the Communications Group's operating cash flow
reflects business growth, efforts to manage working capital, lower restructuring
expenditures, and a decrease in the cash funding of postretirement benefits
during 1997. Operating cash flow at Media Group increased primarily due to the
effects of the Continental Acquisition and growth in the domestic cellular and
Yellow Pages businesses. Partially offsetting the increase were higher financing
costs resulting from greater debt levels associated with the Continental
Acquisition.
During 1996, cash provided by operating activities increased $610 due
primarily to growth in Communications Group operations. The increase in
operating cash flows at the Communications Group also reflects a $157 decrease
in the cash funding of postretirement benefits and lower restructuring
41
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
expenditures. Media Group operating cash flow increased due to growth in the
cellular and Yellow Pages businesses.
Future cash needs of the Communications Group could increase with the
pursuit of new business opportunities, including PCS. Future cash needs could
also increase as the Communications Group 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
"Communications Group--Regulatory Environment." The Communications Group expects
that such cash needs will be funded through operations and, when necessary, the
issuance of debt securities.
Media Group expects that its future cash needs, primarily associated with
the domestic cable network upgrade, will exceed cash generated from operations
during the next several years. Additional financing is expected to come
primarily from a combination of new debt and, if consummated, the monetization
of the securities to be received by Media Group from AirTouch in connection with
the AirTouch Transaction.
INVESTING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Communications Group(1).............................................................. $ 2,058 $ 2,230 $ 2,268
Media Group(1)....................................................................... 1,242 818 1,238
--------- --------- ---------
Total cash used for investing activities............................................. $ 3,300 $ 3,048 $ 3,506
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Individual group cash flow statements are provided in Note 23--Supplemental
Communications Group and Media Group Combined Statements--to the U S WEST,
Inc. Consolidated Financial Statements.
Total capital expenditures, on a cash basis, were $3,690, $3,071, and $2,825
in 1997, 1996 and 1995, respectively. Communications Group capital expenditures
were $2,139, $2,419 and $2,462, and Media Group capital expenditures were
$1,551, $652 and $363 in 1997, 1996 and 1995, respectively. The majority of the
Communication Group's 1997 capital expenditures related to access line growth,
continued modernization of the telecommunications network and Telecommunications
Act requirements including interconnection and local number portability costs.
Expenditures associated with entering wireless communications markets with the
launch of PCS also impacted capital expenditures. Media Group capital
expenditures increased in 1997 associated with its domestic cable network
upgrade.
In 1998, capital expenditures are expected to approximate $4.5 billion, of
which $2.6 billion pertains to the Communications Group and $1.9 billion
pertains to the Media Group. Included in the 1998 capital expenditure estimates
are Communications Group entry costs for the launch of PCS in new markets and
additional interconnection costs. Also included are costs for Media Group to
continue upgrading its domestic cable network of $1.6 billion and its domestic
cellular network of $300. The actual domestic cellular capital requirements
could vary depending on the timing of the consummation of the AirTouch
Transaction.
Media Group has invested $213, $132 and $268 in PrimeCo in 1997, 1996 and
1995, respectively. Such funding was for network build activities in 1997 and
1996, and the purchase of PCS licenses in 11 markets in 1995. Funding
requirements in 1998 are expected to approximate $230. However, actual funding
requirements could vary depending on the timing of the consummation of the
AirTouch Transaction.
42
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Investing activities of Media Group include equity investments in
international ventures. Media Group invested $325, $243 and $681 in
international ventures in 1997, 1996 and 1995, respectively. Investments in 1997
included an additional 40 percent interest in Fintelco and capital contributions
to a wireless venture in India. Investments in 1996 included loans provided to
One 2 One, the purchase of a 23 percent interest in Polska Telefonia Cyfrowa, a
venture to provide wireless service in Poland, and the purchase of a 28 percent
interest in Telenet Flanders, a venture in Belgium to provide telephony services
on the cable network. In 1995, U S WEST invested $681 in international ventures
in Malaysia, the Netherlands, the Czech Republic and the United Kingdom. U S
WEST anticipates that investments in international ventures will approximate
$290 in 1998 to fund continued expansion in India, Japan, Belgium, and at One 2
One.
During 1997, Media Group paid the cash portion of the Continental
Acquisition consideration of $1,150 to the Continental shareowners. In addition,
the Communications Group paid $73 to purchase PCS licenses in connection with
its launch of PCS service in various markets.
Throughout 1997, Media Group pursued a plan to monetize nonstrategic assets,
including various domestic and international investments. Such asset sales
generated total proceeds of $2,058. Proceeds from sales of international
investments totaled $887, domestic investments totaled $931, assets held for
sale totaled $231, and disposals of property, plant and equipment totaled $9.
International sales consisted of: (a) a five percent interest in a French
wireless venture for proceeds of $81, (b) a 90 percent interest in Fintelco for
proceeds of $641, (c) Thomson Directories, the directory operation in the United
Kingdom, and U S WEST Polska, the directory operation in Poland, for net
proceeds of $121 and $27, respectively, and (d) other miscellaneous
international investment sales for proceeds of $17. Domestic sales were
comprised of the sale of shares of TCG, for net proceeds of $678, shares of TWX,
for net proceeds of $220, and miscellaneous asset sales, for proceeds of $33. In
addition, U S WEST Communications sold its equity interest in Bellcore for
proceeds of $65.
The Communications Group received cash proceeds of $67, $174 and $214 during
1997, 1996 and 1995, respectively, for the sales of certain rural telephone
exchanges. Since implementing its rural telephone exchange sales program, the
Communications Group has sold approximately 342,000 access lines.
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Communications Group(1)............................................................. $ (1,843) $ (1,168) $ (395)
Media Group(1)...................................................................... (13) 195 525
Other............................................................................... -- -- (61)
--------- --------- ---------
Total cash (used for) provided by financing activities.............................. $ (1,856) $ (973) $ 69
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Individual group cash flow statements are provided in Note 23--Supplemental
Communications Group and Media Group Combined Statements--to the U S WEST,
Inc. Consolidated Financial Statements.
DIVIDENDS
U S WEST paid dividends on the Communications Stock totaling $992, $939 and
$926 during 1997, 1996 and 1995, respectively.
43
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEBT ACTIVITY
Total debt at December 31, 1997 was $14,678, a decrease of $673 compared to
December 31, 1996. This decrease was due primarily to debt redemptions. During
1996, debt increased $6,496 primarily a result of assuming, at market value,
Continental debt totaling $6,525 in conjunction with the Continental
Acquisition. Concurrently, U S WEST refinanced $3,657 of Continental's debt with
U S WEST commercial paper. In January 1997, U S WEST issued medium- and
long-term debt totaling $4.1 billion, at a weighted-average interest rate of
7.47 percent. The proceeds were used to refinance the commercial paper.
Accordingly, such commercial paper is classified as long-term debt at December
31, 1996.
During 1997, U S WEST redeemed its zero coupon subordinated notes, which had
a recorded value of $571. In addition, MediaOne Delaware redeemed a 10 5/8
percent senior subordinated note with a recorded value of $110, including a
premium of $10. U S WEST financed both redemptions with floating-rate commercial
paper.
In June 1997, U S WEST acquired cable systems serving approximately 40,000
subscribers in Michigan for cash of $25 and the issuance of approximately $50 in
liquidation value of U S WEST Series E Preferred Stock (the "Series E Preferred
Stock"). The Series E Preferred Stock is redeemable at U S WEST's option
beginning five years from the date of issuance. The stockholders have the right
to elect cash upon redemption, or to convert their shares into Media Stock based
on a predetermined formula.
In 1996, U S WEST issued $254 of exchangeable notes, or Debt Exchangeable
for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each such DECS will
be exchanged by U S WEST for shares of common stock of Financial Security
Assurance Holdings Ltd. ("FSA") held by U S WEST or, at U S WEST's option,
redeemed at the cash equivalent. The capital assets segment currently holds
approximately 42.1 percent of the outstanding FSA common stock. On October 29,
1996, U S WEST refinanced commercial paper through the issuance of 8.25 percent
Preferred Securities totaling $480. The payment of interest and redemption
amounts to holders of the Preferred Securities are fully and unconditionally
guaranteed by U S WEST. In 1995, U S WEST issued $130 of DECS due December 31,
1998. Upon maturity, each such DECS will be exchanged by U S WEST for shares of
Enhance Financial Services Group, Inc. ("Enhance") or, at U S WEST's option,
redeemed at the cash equivalent. The capital assets segment currently holds
approximately 29.2 percent of the outstanding Enhance common stock.
During 1995, increases in debt were partially offset by reductions in debt
related to the Media Group's investment in TWE and a refinancing of commercial
paper by issuing $600 of 7.96 percent Preferred Securities. U S WEST refinanced
$2.6 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.
Excluding debt associated with the capital assets segment, U S WEST's
percentage of debt to total capital at December 31, 1997, was 54.0 percent
compared with 54.8 percent at December 31, 1996. Including debt associated with
the capital assets segment, Preferred Securities and mandatorily redeemable
preferred stock, U S WEST's percentage of debt to total capital was 58.9 percent
at December 31, 1997 compared with 59.5 percent at December 31, 1996. The
decrease in the percentage of debt to total capital in 1997 is primarily a
result of decreased debt levels.
U S WEST COMMUNICATIONS CREDIT RATINGS
During the first quarter of 1997, Standard & Poor's lowered U S WEST
Communications' senior unsecured debt rating from A+ to A as a result of a
modified rating criteria implemented by Standard &
44
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Poor's to reflect the increased competitive telecommunications environment.
During the second quarter of 1997, Moody's placed U S WEST Communications'
senior unsecured debt under review in connection with U S WEST Communications'
regulatory rulings, which may result in a downgrading. See "Contingencies."
U S WEST Communications' senior unsecured debt and commercial paper ratings
by Moody's, Standard & Poor's and Duff & Phelps were Aa3, A and AA-, and P1, A1
and D1+, respectively, at December 31, 1997.
In connection with U S WEST's announcement of the Separation, Standard &
Poor's placed U S WEST Communications' senior unsecured debt on credit watch
with positive implications and reaffirmed U S WEST Communications' commercial
paper ratings, and Duff & Phelps reaffirmed U S WEST Communications' senior
unsecured debt and commercial paper ratings.
U S WEST CAPITAL FUNDING, INC. AND PREFERRED SECURITIES CREDIT RATINGS
As a result of the Separation announcement, the credit ratings for U S WEST
Capital Funding, Inc. ("Capital Funding"), a wholly owned subsidiary of U S
WEST, and for the Preferred Securities of U S WEST Financing I ("Financing I")
and U S WEST Financing II ("Financing II"), wholly owned subsidiaries of U S
WEST, are under review by Standard & Poor's (with negative implications),
Moody's and Duff & Phelps. Senior debt at MediaOne Delaware was downgraded by
Moody's from Baa2 to Baa3 and subordinated debt from Baa3 to Ba1, and is under
review by Standard & Poor's, with negative implications. The MediaOne Delaware
debt remains under review for further downgrading by Moody's. For all
outstanding debt securities issued or guaranteed by U S WEST, U S WEST intends
to take appropriate steps to preserve bondholder value in connection with the
Separation.
Capital Funding's senior unsecured debt and commercial paper ratings by
Moody's, Standard & Poor's and Duff & Phelps were Baa1, BBB+ and BBB+, and P2,
A2, and D-2, respectively, at December 31, 1997. The Preferred Securities'
ratings by Moody's, Standard & Poor's, and Duff & Phelps were baa2, BBB+ and
BBB, respectively, at December 31, 1997.
OTHER ITEMS
U S WEST commitments and debt guarantees associated with Media Group
international and domestic investments totaled approximately $650 and $175,
respectively, at December 31, 1997. In addition, a Media Group subsidiary
guarantees debt, nonrecourse to U S WEST, associated with its international
investment in the principal amount of approximately $600.
U S WEST maintains a commercial paper program 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 maintains lines of credit aggregating
approximately $4.5 billion, all of which were available at December 31, 1997.
Under registration statements filed with the Securities and Exchange Commission,
as of December 31, 1997, U S WEST is permitted to issue up to approximately $900
of new debt securities.
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 interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST. There is no assurance that any such discussions will result in the
consummation of any such transaction.
45
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
EFFECTS OF THE SEPARATION
In connection with the Separation, New U S WEST and MediaOne will seek to
refinance certain indebtedness issued or guaranteed by U S WEST (the "U S WEST
Indebtedness") through a combination of tender offers, prepayments, defeasance,
consent solicitations and/or exchange offers (the "Refinancing"). At December
31, 1997, the U S WEST Indebtedness totaled approximately $7.5 billion and
included Preferred Securities of $1,080. As of February 20, 1998, the estimated
cost of the Refinancing is $346 (net of income tax benefits of $231). In
addition to refinancing costs, such costs include the difference between the
market and face value of the U S WEST Indebtedness and a charge for unamortized
debt issuance costs.
New U S WEST does not expect the Separation will adversely affect its
ability to access the capital markets or the financing terms available to it.
As a result of being a wholly owned business group of U S WEST, Media Group
has been able to borrow money using U S WEST's credit rating, which is supported
by the cash flows generated by the businesses of both Communications Group and
Media Group. Management believes the ability of Media Group to borrow money
using U S WEST's consolidated credit rating has permitted 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 the U S WEST indebtedness include few covenants and therefore have not
interfered with the operations of Media Group or limited the flexibility of
Media Group to pursue its business objectives.
Upon consummation of the Separation, MediaOne will not have access to the
cash flows generated by the businesses of New U S WEST, including cash flows
generated by Dex, to support its credit rating or otherwise. Based upon the
anticipated capitalization of MediaOne, which includes the refinancing by New U
S WEST of $3.9 billion of U S WEST debt currently allocated to Media Group, it
is expected that MediaOne's credit rating will be lower than the current credit
rating of U S WEST. This could result in higher borrowing costs and reduced
access to the commercial paper market. As a result, MediaOne 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.
EFFECTS OF THE AIRTOUCH TRANSACTION
Under the terms of the proposed AirTouch Transaction, Media Group debt will
be reduced by $1.4 billion. In addition, Media Group and AirTouch will enter
into an investment agreement, pursuant to which AirTouch will agree to provide
to Media Group 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 the Media Group in the monetization of such shares. U
S WEST believes that the consummation of the AirTouch Transaction will likely
improve the credit rating to be assigned to MediaOne in the Separation.
RISK MANAGEMENT
U S WEST is exposed to market risks arising from changes in interest rates,
foreign exchange rates and equity prices. Derivative financial instruments are
used to selectively manage these risks. U S WEST does not use derivative
financial instruments for trading purposes.
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AND RESULTS OF OPERATIONS (CONTINUED)
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
interest rate variability. This is achieved through the use of interest rate
swaps, which adjust the ratio of fixed- to variable-rate debt.
Approximately $270 of U S WEST's floating rate debt is exposed to changes in
interest rates. Such exposure is primarily linked to the 30-day commercial paper
rate. A hypothetical 10 percent change in the 30-day commercial paper rate would
not have a material effect on the annual earnings of U S WEST.
FOREIGN EXCHANGE RISK MANAGEMENT. U S WEST selectively enters into forward
and option contracts to manage the market risks associated with fluctuations in
foreign exchange rates after considering offsetting foreign exposures among
international operations. The use of forward and option contracts allows U S
WEST to fix or cap the cost of firm foreign investment commitments, the amount
of foreign currency proceeds from sales of foreign investments, the repayment of
foreign currency denominated receivables and the repatriation of dividends. The
market values of the foreign exchange positions, including the hedging
instruments, are continuously monitored and compared with predetermined levels
of acceptable risk. All foreign exchange contracts have maturities of one year
or less. The use of such contracts was limited in 1997 and as of December 31,
1997, the market value of foreign exchange contracts outstanding was not
material.
U S WEST is exposed to foreign exchange risk associated with its cash
deposits and notes receivable and payable denominated in foreign currencies. As
of December 31, 1997, Media Group has British pound-denominated notes receivable
and cash deposits in the translated amount of $245, a Czech Koruna-denominated
note receivable and cash deposits in the translated amount of $50 and a Czech
Koruna-denominated note payable in the translated amount of $17.
A hypothetical adverse change of 10 percent in the British Pound and Czech
Koruna exchange rates as compared with the U. S. dollar would reduce the market
value of the cash deposits and notes receivable and payable by $28 as of
December 31, 1997.
EQUITY-PRICE RISK MANAGEMENT. U S WEST is exposed to market risks
associated with fluctuations in equity security prices related to its
investments in marketable equity securities. On a selective basis, U S WEST
enters into option contracts to manage the market risks associated with
fluctuations in equity security prices. At December 31, 1997, U S WEST had sold
call options to complete exit strategies with regard to certain individual
marketable equity securities.
A hypothetical 10 percent decline in equity security prices related to U S
WEST's combined position in marketable equity securities and option contracts
would reduce the market value of the combined position at December 31, 1997, by
$12.
The changes in interest rates, foreign exchange rates and equity security
prices are based on hypothetical movements in future market rates and are not
necessarily indicative of actual results which may occur. Future gains and
losses will be affected by actual changes in interest rates, foreign exchange
rates and equity security prices and market exposures, and changes in derivative
financial instruments employed during the year.
CONTINGENCIES
COMMUNICATIONS GROUP
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
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WASHINGTON. In 1996, the 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.
On December 24, 1997, the Washington State Supreme Court upheld the WUTC
ruling. The Washington State Supreme Court's ruling resulted in an estimated
liability for the revenues that were collected subject to refund from May 1,
1996 through December 31, 1997, 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 Washington State Supreme Court's ruling. Tariffs
implementing both orders became effective February 1, 1998.
OREGON. 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 (the "Oregon Circuit Court") which granted U S WEST Communications'
request for a stay, pending a full review of the OPUC's order. On February 19,
1998, the Oregon Circuit Court entered a judgment 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, is not
expected to exceed $180.
UTAH. In another proceeding, the Utah Supreme Court has remanded a Utah
Public Service Commission ("UPSC") order to the UPSC for hearing, thereby
establishing two exceptions to the rule against retroactive ratemaking: 1)
unforeseen and extraordinary events, and 2) misconduct. The UPSC'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,
is not expected to exceed $160.
STATE REGULATORY ACCRUALS. U S WEST Communications has accrued $348 at
December 31, 1997, which represents its estimated liability for all state
regulatory proceedings, predominately the items discussed above. 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. U S WEST Communications will continue to
monitor and evaluate the risks associated with its local regulatory
jurisdictions, and will adjust estimates as new information becomes available.
MEDIA GROUP
Media Group and AirTouch are currently parties to a multi-phased joint
venture (the "AirTouch Joint Venture") pursuant to which they have agreed to
combine their domestic cellular businesses. In February 1997, the King County
Superior Court in Washington state ruled that a subsidiary of Media Group
violated the terms of its partnership agreement with its minority partners in
the Seattle cellular partnership by entering into the AirTouch Joint Venture.
Similar litigation was filed in other jurisdictions regarding
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AND RESULTS OF OPERATIONS (CONTINUED)
other cellular partnerships by the same minority partner that brought the
Seattle litigation. On December 1, 1997, this minority partner announced it was
selling its minority interests in the eight cellular properties where it was a
partner with a Media Group subsidiary to AirTouch. As a result of the minority
partner's actions, litigation in the states of Washington, Arizona, Colorado,
Minnesota, Idaho and Delaware has now been stayed or dismissed pending
consummation of the transfer of the minority partner's interest to AirTouch. The
AirTouch Transaction has been entered into in lieu of the AirTouch Joint
Venture.
COMPETITIVE AND REGULATORY ENVIRONMENT
COMMUNICATIONS GROUP--COMPETITIVE ENVIRONMENT
The Communications Group faces competition in the local exchange business,
exchange access and intraLATA long-distance markets, primarily from IXCs,
competitive local exchange carriers ("CLECs") and competitive access providers
("CAPs"). CLECs and CAPs compete with the Communications Group by providing
customers with network services that connect to carrier facilities or other
business locations within a serving LATA. IXCs compete with the Communications
Group 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 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 the Communications
Group's markets who will offer services similar to those offered by the
Communications Group, including local exchange services. The Communications
Group 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 the Communications Group'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 the Communications
Group 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 the
Communications Group face competition from LECs, IXCs, Internet service
providers and other providers of data services in the Communications Group's
markets.
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.
The Communications Group expects to counter the competition by expanding
services to include new retail as well as wholesale markets. Recently introduced
service offerings include PCS, high-speed data and Internet services, and
interconnection services provided for competing providers of local services.
Planned future service offerings include interLATA long-distance services as the
regulatory environment permits, while interconnection services will be expanded.
See "Communications Group--Regulatory Environment." Management believes that the
Communications Group's ability to bundle local, long-distance, PCS
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AND RESULTS OF OPERATIONS (CONTINUED)
and other services will provide a significant opportunity to compete by offering
one-stop shopping with a package of services similar to those that can be
offered by IXCs and CLECs.
COMMUNICATIONS GROUP--REGULATORY ENVIRONMENT
THE TELECOMMUNICATIONS ACT OF 1996.
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 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 requested the U. S. District Court to stay its order pending
a full review and appealed the U. S. District Court's order to the Fifth Circuit
Court of Appeals. On February 11, 1998, the U. S. District Court issued a stay
of the order while denying a separate request from IXCs to prevent the RBOCs
from preparing to sell interLATA long-distance service. As a result of the U. S.
District Court's ruling, absent reversal, U S WEST intends to offer interLATA
long-distance services in the Region in 1998.
INTERCONNECTION
The FCC issued an order (the "FCC Order") in August of 1996 establishing a
framework of rules that enable the states and the FCC to implement the local
competition provisions of the Telecommunications Act.
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 commission
arbitration proceedings. Some of the FCC's unbundling rules, as well as its
"pick and choose" provisions, were also vacated by the Eighth 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.
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AND RESULTS OF OPERATIONS (CONTINUED)
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 for
timely recovery of the full costs of providing interconnection services and that
they must not be placed at a competitive disadvantage if local and long-distance
markets are opened to competition at different times. 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 that includes 10 markets in the Region. The FCC is in the final
stages of issuing its cost recovery rules as required by the Telecommunications
Act. U S WEST Communications will seek cost recovery of expenses of providing
number portability through state rate-making proceedings and interconnection
cost recovery dockets, if necessary. U S WEST Communications expects its
estimated costs for deployment of number portability to 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 interconnection related costs will be recovered.
UNIVERSAL SERVICE, ACCESS REFORM AND PRICE CAP ORDER
On May 7, 1997, the FCC announced three decisions that established rules to
implement the Universal Service provisions of the Telecommunications Act (the
"Universal Service Order"), as well as the Access Reform Order and 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 establishing, until January 1, 1999, 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: 1) eligible schools and libraries, and 2) rural
health care providers to the global telecommunications network. These funds were
initially capped at $2.25 billion and $400, respectively. The FCC has 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.
ACCESS REFORM. In its Access Reform Order, the FCC has ordered a
substantial restructuring of interstate access pricing. A significant portion of
the services that had been charged using minutes-of-use
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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 each January 1 of 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). The Access Reform Order, coupled with the Price
Cap Order, will over time, significantly reduce the revenues U S WEST derives
from interstate access charges.
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. 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 included sharing of earnings in excess of authorized levels. The
price cap index for most services was subject to annual adjustments for
inflation, productivity level and exogenous costs. The previous 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 required LECS that were 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 that were subject to price cap regulation
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 resulting in U S WEST Communications remaining
subject to sharing requirements for the first half of 1997. On June 26, 1997,
the FCC granted U S WEST Communications' request for a waiver of the price cap
sharing rules for the first half of 1997, resulting in a one-time exogenous cost
adjustment of $22, reflected in the consolidated financial statements as a
reduction of 1997 interstate access revenues. The access rate reductions in U S
WEST Communications' 1997 interstate access tariff filing as determined under
the Price Cap Order, which have an on-going annual revenue impact of $160, 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 Court of Appeals
(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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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Due to legal and regulatory uncertainties, the impact of the
Telecommunications Act on U S WEST's future results remains unclear.
MEDIA GROUP COMPETITIVE AND REGULATORY ENVIRONMENT
CABLE AND BROADBAND. The Media Group's cable television systems generally
compete for viewer attention with other providers of video programming,
including DBS systems, multipoint multichannel distributions services ("MMDS")
systems, local multipoint distribution services ("LMDS") systems, satellite
master antenna service ("SMATV") systems and other cable companies providing
services in areas where the Media Group operates. In addition, certain LECs,
including RBOC's, are beginning to offer video programming in competition with
the Media Group's cable services. In the past, federal cross-ownership
restrictions have limited entry by LEC's into the cable television business. The
Telecommunications Act has eliminated many of these barriers, thereby enhancing
the ability of LEC's to provide video programming in competition with the Media
Group. The cable television services offered by the Media Group 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
the Media Group's cable systems may increase in the future with the development
and growth of new technologies.
As the Media Group begins to offer additional services over its hybrid
fiber-coax ("HFC") networks, the Company will face additional competition.
Telephone services offered by the Media Group will face competition from other
providers of local exchange services, including RBOC's, LEC's, 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 LEC's networks.
Competition will be based upon price, service quality and breadth of services
offered. Internet access and high-speed data services offered by MediaOne
compete with other providers of such services, including LEC's, IXCs, Internet
service providers ("ISPs") and other on-line service providers.
The products and services of the Media Group 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) removed barriers to competition with LEC's, and (iii)
eliminated restrictions that previously applied to the Media Group 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
operators. Continental's social contract with the FCC was adopted by the FCC on
August 3, 1995 and amended on August 21, 1996 and July 3, 1997 to include
certain systems acquired by Continental. The social contract is a six-year
agreement covering most of Continental's franchises, including those that were
unregulated, and settled Continental's cost of service rate cases and benchmark
cable programming service tier rate cases for the covered systems. Benchmark
basic service tier rate cases in the covered systems are subject to review by
local franchise authorities. 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
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AND RESULTS OF OPERATIONS (CONTINUED)
quality. At December 31, 1997, the investment commitment has been substantially
met. Under the social contract, Continental also reduced its basic service tier
rates for most of the subscribers covered by the social contract. These
reductions were offset by a revenue neutral increase in cable programming
service tier rates. The social contract allows for the funding of system
rebuilds and upgrades by increasing cable programming service tier rates
annually by one dollar per subscriber from 1997 through 1999 in most franchises,
and from 1996 through 1999 for the systems incorporated under the 1996 amendment
to the social contract. Rate adjustments are also allowed for inflation and
external costs such as programming. 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, Media Group 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.
WIRELESS COMMUNICATIONS. The wireless operations are subject to regulation
by federal and some state and local authorities. Pursuant to the Communications
Act of 1934, the FCC regulates the construction, transfer and operation of
cellular systems in the United States and regulates licensing and technical
standards for the provision of cellular telephone service. Pursuant to Congress'
1993 Omnibus Budget Reconciliation Act, the FCC adopted rules preempting state
and local governments from regulating wireless entry and most rates.
There are two competitive cellular licenses in each market. Media Group's
cellular networks face competition from the other provider of cellular services
in each of the markets in which it operates, as well as from providers of PCS
services in such markets which have recently commenced operations. PCS faces
competition from each of the two providers of cellular services in each of the
markets in which it operates, as well as from the other providers of PCS
services in such markets. Media Group's wireless networks also face competition
from other current or developing wireless technologies, including enhanced
specialized mobile radio networks and paging networks. Competition is based upon
price, quality of the service offered and geographic coverage.
DIRECTORY AND INFORMATION SERVICES. Information services may face emerging
competition in the provision of interactive services from cable and
entertainment companies, on-line services and other information providers.
Directory listings are being offered via electronic databases through telephone
company and third party networks. As such offerings expand and are enhanced
through interactivity and other features, the directory publishing businesses
may experience heightened competition.
INTERNATIONAL. Media Group'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, satellite master antenna service 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. One 2 One 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.
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AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 COSTS
COMMUNICATIONS GROUP
During 1997 the Communications Group conducted a comprehensive review of its
computer systems and related software to ensure systems properly recognize the
year 2000 and continue to process data. The systems evaluated include all
internal systems and those that manage the public switched network. This
evaluation includes the Communications Group's significant vendors in
determining the impact on the Communications Group if those third parties fail
to remediate their own year 2000 issues. Based on its internal assessment, the
Communications Group has determined that it will have to modify or replace
certain portions of its internal use software, whether developed by U S WEST or
provided by a third party. For public network software, there are central office
and remote switches from a variety of vendors in addition to interoffice and
loop transport equipment that also require conversion. To date, inventory is
complete for all major network elements, compliance standards have been
published and key vendors have agreed to compliance dates. Detailed plans for
the year 2000 project for all systems have been completed and conversion
activity is underway.
The estimated remaining costs of the related projects approximate $150
through 1999. Management's estimate of the costs and completion dates of the
year 2000 project are dependent on various factors including availability of
skilled resources, the ability to locate and modify all relevant software code
and vendor compliance. The Communications Group cannot provide assurance that
actual results will not differ from management's estimates. Failure to complete
the project in a timely or complete manner, or within its estimate of project
costs, could have a material impact on future results of operations.
MEDIA GROUP
Media Group uses software and related technologies throughout its businesses
that will be affected by the date change in the year 2000. Media Group has
established accountabilities and priorities for addressing the issue. Media
Group is now in the process of finalizing its assessment of the impact of the
year 2000 date change on its operations. An internal study is underway to
determine the full scope of the issue and related costs. Media Group's
assessment should be complete in mid-1998. Media Group anticipates that costs
related to year 2000 remediation will begin to be incurred in 1998.
NEW ACCOUNTING STANDARDS
In 1997, U S WEST adopted SFAS No. 128, "Earnings Per Share." This
accounting standard specifies new computation, presentation and disclosure
requirements for earnings per share to be applied retroactively. SFAS No. 128
requires, among other things, presentation of basic and diluted earnings per
common share on the face of the income statement.
In 1998, 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 and total amount of
comprehensive income be displayed in the financial statements for interim and
annual periods beginning in 1998. 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. SFAS No. 131 requires, among other things, the reporting of
detailed operating segment information of an enterprise for annual periods
beginning in 1998 and for interim periods beginning in 1999.
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AND RESULTS OF OPERATIONS (CONTINUED)
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued in March 1998. SOP
98-1, among other things, requires that certain costs of internal use software,
whether purchased or developed internally, be capitalized and amortized over the
estimated useful life of the software. Adoption of SOP 98-1 is required as of
January 1, 1999, but earlier adoption is allowed. U S WEST is currently
evaluating the impact of SOP 98-1 and believes that it could initially have a
significant impact upon results of operations.
56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Consolidated Balance Sheets of U S WEST,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related Consolidated Statements of Operations and Cash Flows for the
years then ended. These consolidated financial statements and the Supplementary
Selected Proportionate Results of Operations referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and supplementary information
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 consolidated financial position of U S WEST, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
We have also audited the Supplementary Selected Proportionate Results of
Operations for the years ended December 31, 1997 and 1996, presented on page
114. The Supplementary Selected Proportionate Results of Operations have been
prepared by management to present relevant financial information that is not
provided by the consolidated financial statements and is not intended to be a
presentation in conformity with generally accepted accounting principles. In our
opinion, the Supplementary Selected Proportionate Results of Operations referred
to above fairly states, in all material respects, the information set forth
therein on the basis of accounting described on page 114.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1998.
57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Consolidated Statements of Operations and
Cash Flows of U S WEST, Inc. for the year 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 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 consolidated results of operations of U S WEST,
Inc. and its cash flows for the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
58
<PAGE>
REPORT OF MANAGEMENT
The Consolidated Financial Statements of U S WEST have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis. The integrity and objectivity of information in these financial
statements, including estimates and judgments, are the responsibility of
management, as is all other financial information included in this report.
U S WEST maintains a system of internal accounting controls designed to
provide reasonable assurance as to the integrity and reliability of financial
statements, the safeguarding of assets and the prevention and detection of
material errors or fraudulent financial reporting. Monitoring of such systems
includes an internal audit program designed to objectively assess the
effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based upon
the recognition that the cost of the system should not exceed the benefits
derived. U S WEST believes that the Company's system does provide reasonable
assurance that transactions are executed in accordance with management's general
or specific authorizations and is adequate to accomplish the stated objectives.
The independent certified public accountants, whose reports are included
herein, were engaged to express an opinion on our Consolidated Financial
Statements. Their opinions are based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the Consolidated Financial
Statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
In an attempt to assure objectivity, the financial information contained in
this report is subject to review by the Audit Committee of the Board of
Directors. The Audit Committee is composed of outside directors who meet
regularly with management, internal auditors and independent auditors to review
financial reporting matters, the scope of audit activities and the resolution of
audit findings.
Richard D. McCormick
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Michael P. Glinsky
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
February 12, 1998
59
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues......................................................... $ 15,235 $ 12,911 $ 11,746
Operating expenses:
Employee-related expenses...................................................... 4,917 4,412 4,071
Other operating expenses....................................................... 3,617 2,671 2,323
Taxes other than income taxes.................................................. 475 429 416
Depreciation and amortization.................................................. 3,420 2,544 2,291
--------- --------- ---------
Total operating expenses..................................................... 12,429 10,056 9,101
--------- --------- ---------
Operating income................................................................. 2,806 2,855 2,645
Interest expense................................................................. (1,083) (612) (527)
Equity losses in unconsolidated ventures......................................... (909) (346) (207)
Gains on asset sales:
Investments.................................................................... 474 -- --
Rural telephone exchanges...................................................... 77 59 136
Merger of joint venture interest............................................... -- -- 157
Guaranteed minority interest expense............................................. (87) (55) (14)
Other expense--net............................................................... (56) (61) (36)
--------- --------- ---------
Income before income taxes, extraordinary items and cumulative effect of change
in accounting principle........................................................ 1,222 1,840 2,154
Provision for income taxes....................................................... (522) (696) (825)
--------- --------- ---------
Income before extraordinary items and cumulative effect of change in accounting
principle...................................................................... 700 1,144 1,329
Extraordinary items--early extinguishment of debt--net of tax.................... (3) -- (12)
--------- --------- ---------
Income before cumulative effect of change in accounting principle................ 697 1,144 1,317
Cumulative effect of change in accounting principle--net of tax.................. -- 34 --
--------- --------- ---------
NET INCOME....................................................................... $ 697 $ 1,178 $ 1,317
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock..................................................... (52) (9) (3)
--------- --------- ---------
EARNINGS AVAILABLE FOR COMMON STOCK.............................................. $ 645 $ 1,169 $ 1,314
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
60
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
IN THOUSANDS
(EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
COMMUNICATIONS GROUP BASIC EARNINGS PER COMMON SHARE: (See Note 16)
Income before extraordinary items and cumulative effect of change in accounting
principle.................................................................... $ 2.44 $ 2.55 $ 2.52
Extraordinary items--early extinguishment of debt.............................. (0.01) -- (0.02)
Cumulative effect of change in accounting principle............................ -- 0.07 --
--------- --------- ---------
COMMUNICATIONS GROUP BASIC EARNINGS PER COMMON SHARE............................. $ 2.43 $ 2.62 $ 2.50
--------- --------- ---------
--------- --------- ---------
COMMUNICATIONS GROUP BASIC AVERAGE COMMON SHARES OUTSTANDING..................... 482,751 477,549 470,716
--------- --------- ---------
--------- --------- ---------
COMMUNICATIONS GROUP DILUTED EARNINGS PER COMMON SHARE: (See Note 16)
Income before extraordinary items and cumulative effect of change in accounting
principle.................................................................... $ 2.42 $ 2.51 $ 2.48
Extraordinary items--early extinguishment of debt.............................. (0.01) -- (0.02)
Cumulative effect of change in accounting principle............................ -- 0.07 --
--------- --------- ---------
COMMUNICATIONS GROUP DILUTED EARNINGS PER COMMON SHARE........................... $ 2.41 $ 2.58 $ 2.46
--------- --------- ---------
--------- --------- ---------
COMMUNICATIONS GROUP DILUTED AVERAGE COMMON SHARES OUTSTANDING................... 491,232 488,591 481,933
--------- --------- ---------
--------- --------- ---------
MEDIA GROUP BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE: (See Note 16)
Income (loss) before extraordinary item........................................ $ (0.88) $ (0.16) $ 0.30
Extraordinary item--early extinguishment of debt............................... -- -- (0.01)
--------- --------- ---------
MEDIA GROUP BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE................... $ (0.88) $ (0.16) $ 0.29
--------- --------- ---------
--------- --------- ---------
MEDIA GROUP BASIC AVERAGE COMMON SHARES OUTSTANDING.............................. 606,749 491,924 470,549
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
61
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 211 $ 201
Accounts and notes receivable, less allowance for credit
losses of $136 and $125, respectively................................................... 2,249 2,113
Inventories and supplies.................................................................. 179 159
Deferred directory costs.................................................................. 257 259
Deferred tax asset........................................................................ 373 213
Prepaid and other......................................................................... 130 167
--------- ---------
Total current assets........................................................................ 3,399 3,112
Property, plant and equipment--net.......................................................... 18,580 18,281
Investment in Time Warner Entertainment..................................................... 2,486 2,477
Net investment in international ventures.................................................... 475 1,548
Net investment in assets held for sale...................................................... 419 409
Intangible assets--net...................................................................... 12,674 12,595
Other assets................................................................................ 1,707 2,433
--------- ---------
Total assets................................................................................ $ 39,740 $ 40,855
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
62
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
DOLLARS IN MILLIONS
(EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt........................................................................... $ 1,430 $ 1,051
Accounts payable.......................................................................... 1,751 1,316
Due to Continental Cablevision shareowners................................................ -- 1,150
Employee compensation..................................................................... 521 470
Dividends payable......................................................................... 268 263
Deferred revenues and customer deposits................................................... 444 379
Other..................................................................................... 1,901 1,445
--------- ---------
Total current liabilities................................................................... 6,315 6,074
Long-term debt.............................................................................. 13,248 14,300
Postretirement and other postemployment benefit obligations................................. 2,570 2,479
Deferred income taxes....................................................................... 4,068 4,349
Unamortized investment tax credits.......................................................... 168 173
Deferred credits and other.................................................................. 867 800
Commitments and contingencies
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures...................................................... 1,080 1,080
Preferred stock subject to mandatory redemption............................................. 100 51
Shareowners' equity:
Series D Preferred Stock--$1.00 per share par value, 20,000,000 shares authorized,
19,999,478 shares issued and outstanding................................................ 923 920
Common shares--
Communications Stock--$0.01 per share par value, 2,000,000,000 shares authorized,
484,522,015 and 480,460,536 issued, 484,515,415 and 480,457,336 outstanding,
respectively..........................................................................
Media Stock--$0.01 per share par value, 2,000,000,000 shares authorized, 626,565,410 and
624,782,710 issued, 607,807,934 and 608,863,327 outstanding, respectively............. 10,876 10,741
Retained earnings (deficit)............................................................... (334) 18
LESOP guarantee........................................................................... (46) (91)
Foreign currency translation adjustments.................................................. (95) (39)
--------- ---------
Total shareowners' equity................................................................... 11,324 11,549
--------- ---------
Total liabilities and shareowners' equity................................................... $ 39,740 $ 40,855
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
63
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 697 $ 1,178 $ 1,317
Adjustments to net income:
Depreciation and amortization................................................. 3,420 2,544 2,291
Equity losses in unconsolidated ventures...................................... 909 346 207
Gains on asset sales:
Rural telephone exchanges................................................... (77) (59) (136)
Merger of joint venture interest............................................ -- -- (157)
Investments................................................................. (474) -- --
Cumulative effect of change in accounting principle........................... -- (34) --
Deferred income taxes and amortization of investment tax credits.............. (164) 18 274
Changes in operating assets and liabilities:
Restructuring payments........................................................ (70) (242) (334)
Postretirement medical and life costs, net of cash fundings................... 90 39 (24)
Accounts and notes receivable................................................. (138) (56) (169)
Inventories, supplies and other current assets................................ (104) 31 (79)
Accounts payable and accrued liabilities...................................... 782 225 45
Other--net...................................................................... 295 40 185
--------- --------- ---------
Cash provided by operating activities........................................... 5,166 4,030 3,420
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (3,690) (3,071) (2,825)
Payment to Continental Cablevision shareowners.................................. (1,150) -- --
Investments in international ventures........................................... (325) (243) (681)
Proceeds from sales of investments.............................................. 1,883 -- --
Proceeds from disposals of property, plant and equipment........................ 98 189 201
Cash from net investment in assets held for sale................................ 231 213 --
Other--net...................................................................... (347) (136) (201)
--------- --------- ---------
Cash (used for) investing activities............................................ (3,300) (3,048) (3,506)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt............................... (4,195) 3,987 (1,281)
Repayments of long-term debt.................................................... (824) (4,699) (1,058)
Proceeds from issuance of Preferred Securities--net............................. -- 465 581
Proceeds from issuance of long-term debt........................................ 4,152 383 2,732
Proceeds from issuance of common stock.......................................... 106 136 87
Purchases of treasury stock..................................................... (53) (297) (63)
Dividends paid on common and preferred stock.................................... (1,042) (948) (929)
--------- --------- ---------
Cash (used for) provided by financing activities................................ (1,856) (973) 69
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................. 10 9 (17)
Beginning balance............................................................... 201 192 209
--------- --------- ---------
Ending balance.................................................................. $ 211 $ 201 $ 192
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
64
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
In 1995, U S WEST divided its businesses into two groups: the Communications
Group and the Media Group and created two separate classes of common stock under
the 1995 Recapitalization. One class of stock, the Communications Stock,
reflects the performance of the communications businesses comprising the
Communications Group, and the other class of 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 Communications Group is comprised of U S WEST Communications, 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 the Communications Group's 14 state
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 LATAs in the Region.
Other products and services include wireless PCS, high-speed data and Internet
access services, and certain other communications equipment sales and services
for business customers and governmental agencies.
Media Group is the third largest cable operator in the United States,
organized into six operating regions including large clusters in Atlanta,
Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit,
Michigan, and Minneapolis/St. Paul, Minnesota. Media Group is comprised of
MediaOne Delaware, formerly Continental; U S WEST Multimedia Communications,
Inc., which owns an investment in Time Warner Entertainment; Dex, which
publishes White and Yellow Pages telephone directories and provides directory
and information services; U S WEST NewVector Group, Inc., which provides
communications and information products and services over wireless networks; and
U S WEST International Holdings, Inc., which primarily owns investments in
international cable and broadband, wireless communications and directory
publishing operations.
NOTE 2: U S WEST SEPARATION
On October 25, 1997, the Board adopted a proposal to separate U S WEST into
two independent companies. 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 Dex will be aligned with New U S WEST. 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."
The Separation will be implemented pursuant to the terms of the Separation
Agreement between U S WEST and New U S WEST. Under the Separation Agreement, 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, and 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
65
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: U S WEST SEPARATION (CONTINUED)
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.
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 Common Stock 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 transaction is subject to a number of approvals, including approvals by
regulators and both shareowner groups, and receipt of a favorable ruling from
the IRS. The Separation is expected to be complete sometime after mid-1998.
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. Based on the number of shares of
Communications Stock outstanding and market price as of February 20, 1998, the
gain (net of Separation costs) is estimated at approximately $25.2 billion. The
Company will incur total Separation costs during 1998 of approximately $150,
which includes severance, financial advisory, legal, registration fee, printing
and mailing costs. Separation costs also include a one-time payment to terminate
the sale of the Media Group cable systems in Minnesota.
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 will be included in
the financial statements upon effectiveness of the Separation. Following is a
summary of the more significant items:
- STOCK INCENTIVE PLANS. Stock options, 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 and New U S WEST Common
Stock following the Separation. In the case of MediaOne, 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.
- 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 approximately $190 and $240 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 MediaOne to the MediaOne Pension Plan after the
Separation will be substantially
66
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: U S WEST SEPARATION (CONTINUED)
the same as the benefit expense and required cash contributions of the
Media 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 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 postretirement benefit obligations basis. It is
anticipated that approximately $5 and $3, respectively, will be
transferred by the U S WEST trusts to the MediaOne trusts out of the total
assets of $225 and $600, 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 that pertain
to taxable periods ending on or prior to the Separation. The tax sharing
agreement also governs 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.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Consolidated Financial Statements include the
accounts of U S WEST and its majority-owned subsidiaries, except for the capital
assets segment, which is held for sale. All significant intercompany amounts and
transactions have been eliminated. Investments in less than majority-owned
ventures are generally accounted for using the equity method.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
INDUSTRY SEGMENTS. The Communications Group operates in one industry
segment (communications and related services) and the Media Group operates in
four industry segments (cable and broadband, wireless communications, directory
and information services, and capital assets, which is held for sale) as defined
in SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise."
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.
67
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 all other U S WEST subsidiaries
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 and in certain cases, MediaOne Delaware, provide for
depreciation of property, plant and equipment using various straight-line group
methods and remaining useful (economic) lives based on industry-wide studies.
When the depreciable property, plant and equipment of U S WEST Communications
and MediaOne Delaware is retired or sold, the original cost less the net salvage
value is generally charged to accumulated depreciation. The remaining assets are
depreciated 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.
Communications Group average depreciable lives for major categories of
property, plant and equipment follow:
<TABLE>
<CAPTION>
AVERAGE LIFE
CATEGORY (YEARS)
- -------------------------------------------------------------------------- -------------------
<S> <C>
General purpose computers................................................. 6
Digital switching and circuit equipment................................... 10
Aerial and underground copper cable....................................... 15
Buried copper and fiber cable............................................. 20
Buildings................................................................. 27-49
</TABLE>
Media Group depreciates buildings between 10 to 40 years, cable distribution
systems between 3 to 15 years, cellular systems between 5 to 15 years, and
general purpose computers and other between 3 to 20 years.
Depreciation expense was $2,890, $2,411 and $2,215 in 1997, 1996 and 1995,
respectively.
Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. Amounts capitalized were $56, $67 and $72 in 1997, 1996 and
1995, respectively.
COMPUTER SOFTWARE. Communications Group capitalizes and amortizes initial
operating systems software over the life of the related hardware. Also, initial
network applications software costs are capitalized and amortized over three
years. All other computer software costs, whether purchased or developed
internally, are expensed. MediaOne Delaware capitalizes computer software,
whether purchased or developed internally. Capitalized software costs are
amortized over five years. All other Media Group computer software costs,
whether purchased or developed internally, are expensed.
Capitalized computer software of $157 and $223 at December 31, 1997 and
1996, respectively, is recorded in property, plant and equipment. The Company
amortized capitalized computer software costs of $87, $83 and $70 in 1997, 1996
and 1995, respectively.
INTANGIBLE ASSETS. Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets. The costs of
identified intangible assets and goodwill are amortized by
68
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the straight-line method over periods ranging from 5 to 40 years. These assets
are evaluated for impairment, with other related assets, using the methodology
as prescribed by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and equity securities are
classified as available for sale and are carried at fair market value with
unrealized gains and losses included in equity.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of international
subsidiaries and investments are translated at year-end exchange rates, and
income statement items are translated at average exchange rates for the year.
Resulting translation adjustments are recorded as a separate component of
equity. Gains and losses resulting from foreign currency transactions are
included in income.
FINANCIAL INSTRUMENTS. Synthetic instrument accounting is used for interest
rate swaps 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 foreign currency forward and option contracts
which qualify for and are designated as hedges of firm equity investment
commitments and for forward and option contracts which qualify as hedges of
future debt issues or investments in equity securities. 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
foreign exchange rates, interest rates or equity prices. Qualified foreign
exchange contracts and equity contracts are carried at market value with gains
and losses recorded in equity until sale of the investment. Qualified interest
rate contracts are associated 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 underlying
transaction being hedged.
Market value accounting is used for derivative contracts which do not
qualify for synthetic instrument or hedge accounting. Market value accounting is
also used for foreign exchange contracts designated as hedges of foreign
denominated receivables and payables. These contracts are carried at market
value in other assets or liabilities with gains and losses recorded as other
income (expense). U S WEST does not use derivative financial instruments for
trading purposes.
STOCK OPTIONS. The Company accounts for its stock incentive plans in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Effective January 1, 1996, U S WEST adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." See Note 17--Stock Incentive Plans--to the Consolidated Financial
Statements.
REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS. Local telephone,
wireless, cellular and cable television services are generally billed monthly in
advance, and revenues are recognized the following month when services are
provided. Revenues derived from other cable television services, including pay-
per-view and advertising, other telephone services, including exchange access
and long-distance, and wireless airtime usage are billed and recognized monthly
as services are provided.
69
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Directory advertising revenues and related directory costs of selling,
composition, printing and distribution are generally deferred and recognized
over the period during which directories are used, normally 12 months.
ADVERTISING COSTS. Costs related to advertising are expensed as incurred.
Advertising expense was $421, $190 and $135 in 1997, 1996 and 1995,
respectively.
INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods. 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.
EARNINGS PER COMMON SHARE. In 1997, U S WEST adopted SFAS No. 128,
"Earnings Per Share." This accounting standard specifies new computation,
presentation and disclosure requirements for earnings per share to be applied
retroactively. SFAS No. 128, among other things, requires presentation of basic
and diluted earnings per common share on the face of the income statement. See
Note 16--Earnings Per Share--to the Consolidated Financial Statements. Unless
otherwise indicated, all per share amounts in the notes to the Consolidated
Financial Statements are computed on basic weighted average common shares
outstanding.
For 1995, earnings per share for Communications Stock and Media Stock have
been presented on a pro forma basis to reflect the two classes of stock as if
they had been outstanding since January 1, 1995. For periods prior to the
recapitalization, the average common shares outstanding are assumed to be equal
to the average common shares outstanding for U S WEST.
NEW ACCOUNTING STANDARDS. In 1998, 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 and total amount of comprehensive income be displayed in the
financial statements for interim and annual periods beginning in 1998.
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. SFAS
No. 131 requires, among other things, the reporting of detailed operating
segment information of an enterprise for annual periods beginning in 1998 and
for interim periods beginning in 1999.
SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," was issued in March 1998. SOP 98-1, among other
things, requires that certain costs of internal use software, whether purchased
or developed internally, be capitalized and amortized over the estimated useful
life of the software. Adoption of SOP 98-1 is required as of January 1, 1999,
but earlier adoption is allowed. The Company is currently evaluating the impact
of SOP 98-1 and believes that it could initially have a significant impact upon
results of operations.
NOTE 4: CONTINENTAL ACQUISITION
On November 15, 1996, U S WEST acquired Continental, the third largest cable
operator in the United States. The aggregate consideration paid by U S WEST to
shareowners of Continental consisted of 150,615,000 shares of Media Stock valued
at $2.59 billion, 20,000,000 shares of U S WEST Series D Preferred Stock with a
market value of $920 and $1.15 billion in cash. In connection with the
Acquisition, U S WEST also assumed all of Continental's outstanding indebtedness
and other liabilities as of November 15, 1996, which approximated $7.1 billion
for a total purchase price of $11.8 billion.
70
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: CONTINENTAL ACQUISITION (CONTINUED)
The Acquisition was accounted for by the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values. Because Continental
was acquired late in 1996 and is a large and complex operation, a comprehensive
appraisal of asset values and liabilities was not completed until 1997. The
determination of the final fair value resulted in an increase to intangibles and
a decrease to property, plant and equipment. The $8.7 billion excess of purchase
price over net tangible assets acquired and goodwill related to a deferred
income tax liability of $3.0 billion are being amortized over 25 years.
Intangible amortization related to Continental's equity method investments is
recorded as a component of equity losses in unconsolidated ventures. The
intangible assets acquired consist principally of the cable television
franchises of Continental and goodwill. Continental's results of operations have
been included in the consolidated results of operations since the Acquisition
date.
Following are summarized, combined, unaudited pro forma results of
operations for U S WEST for the years ended December 31, 1996 and 1995. Amounts
are before non-recurring items directly attributable to the Acquisition and
assume that the Acquisition occurred as of the beginning of the respective
periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
SUMMARIZED RESULTS OF OPERATIONS 1996 1995
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues.................................................................... $ 14,618 $ 13,528
Income before extraordinary item and cumulative effect of change in
accounting principle....................................................... 702 835
Net income.................................................................. 736 823
Media Group basic and diluted loss per common share*........................ (0.90) (0.64)
</TABLE>
-------------------------------------
* Before extraordinary item.
In May 1997, pursuant to an FCC order, U S WEST entered into an agreement to
sell its cable systems in Minnesota for proceeds of $600. Under the terms of the
agreement, Media Group had the right to terminate the agreement at any time upon
payment of a $30 termination fee. As a result of the Separation, Media Group
will no longer be prohibited by federal law from owning the Minnesota cable
systems. In February 1998, in response to U S WEST's petition, the FCC granted
to U S WEST a waiver which would permit Media Group to retain the Minnesota
cable systems so long as the Separation is consummated by July 31, 1998. On
February 26, 1998, Media Group terminated the agreement to sell the Minnesota
cable systems.
Media Group owns a 10.4 percent interest in PrimeStar, a nationwide provider
of DBS services. Each of the partners of PrimeStar, including Media Group, have
entered into an agreement whereby each partner's DBS customers and certain
related assets will be contributed to PrimeStar, Inc., which will be a newly
formed company. In exchange, Media Group will receive a combination of cash and
stock in PrimeStar, Inc. In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
Media Group has stopped depreciation and amortization related to these assets.
The transaction is subject to various approvals and is expected to close in
1998.
NOTE 5: INDUSTRY SEGMENTS
The businesses comprising the Communications Group operate in a single
industry segment-- communications and related services. Approximately 97 percent
of the revenues of the Communications
71
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INDUSTRY SEGMENTS (CONTINUED)
Group are attributable to the operations of U S WEST Communications, of which
approximately 67 percent are derived from the states of Arizona, Colorado,
Minnesota, Oregon and Washington.
The Media Group operates in four industry segments: cable and broadband,
wireless communications, directory and information services, and capital assets,
which is held for sale. The cable and broadband segment consists of cable
television properties serving 4.9 million domestic subscribers and passing 8.4
million domestic homes. The wireless communications segment provides information
products and services over wireless networks in 12 western and midwestern
states. The directory and information services segment publishes White and
Yellow Pages telephone directories, and provides database marketing and
interactive services in domestic markets. Yellow Pages advertising generates
approximately 95 percent of the revenue of the directory and information
services segment.
On June 4, 1997, U S WEST sold Thomson Directories, its directory operation
in the United Kingdom, for proceeds of $121. On October 1, 1997, U S WEST sold U
S WEST Polska, its directory operation in Poland, for proceeds of $30, and a
pretax gain of $29. These sales have resulted in the disposition of U S WEST's
wholly owned international directory operations.
Industry segment financial information follows:
<TABLE>
<CAPTION>
COMMUNI-
CATIONS AND CABLE AND WIRELESS DIRECTORY AND CORPORATE INTER-
RELATED BROAD- COMMUNI- INFORMATION AND SEGMENT
SERVICES BAND(1) CATIONS(2) SERVICES(3) OTHER ELIMINATIONS
----------- ----------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1997
Sales and other revenues........ $ 10,319 $ 2,341 $ 1,428 $ 1,245 $ 29 $ (127)
Operating income (loss)......... 2,210 (126) 340 537 (155) --
Identifiable assets............. 17,246 18,687 2,370 606 951 (120)
Depreciation and amortization... 2,126 1,050 182 45 17 --
Capital expenditures............ 2,643 1,232 258 31 10 --
1996
Sales and other revenues........ 10,079 494 1,183 1,259 19 (123)
Operating income (loss)......... 2,340 (20) 240 454 (159) --
Identifiable assets............. 16,915 20,146 2,371 716 828 (121)
Depreciation and amortization... 2,122 212 150 48 12 --
Capital expenditures............ 2,806 353 266 36 13 --
1995
Sales and other revenues........ 9,484 215 941 1,180 38 (112)
Operating income (loss)......... 2,178 23 147 398 (101) --
Identifiable assets............. 16,585 5,163 2,000 614 838 (129)
Depreciation and amortization... 2,042 77 121 36 15 --
Capital expenditures............ 2,739 64 277 37 23 --
<CAPTION>
CONSOLIDATED
-------------
<S> <C>
1997
Sales and other revenues........ $ 15,235
Operating income (loss)......... 2,806
Identifiable assets............. 39,740
Depreciation and amortization... 3,420
Capital expenditures............ 4,174
1996
Sales and other revenues........ 12,911
Operating income (loss)......... 2,855
Identifiable assets............. 40,855
Depreciation and amortization... 2,544
Capital expenditures............ 3,474
1995
Sales and other revenues........ 11,746
Operating income (loss)......... 2,645
Identifiable assets............. 25,071
Depreciation and amortization... 2,291
Capital expenditures............ 3,140
</TABLE>
- ------------------------------
(1) Includes results for Continental since the date of Acquisition. Includes
revenues of $18 and $6, operating losses of $15 and $7, and identifiable
assets of $103 and $122 associated with cable operations in the Czech
Republic for 1997 and 1996, respectively.
(2) Includes operating losses from wireless operations in Russia of $(13) and
$(3), and identifiable assets of $105 and $121 in 1997 and 1996,
respectively.
(3) Includes revenues from directory publishing activities in the United Kingdom
and Poland of $48, $139 and $122, and operating income (loss) of $(11), $2,
and $(1) for 1997, 1996 and 1995, respectively, and identifiable assets of
$154 and $133 in 1996 and 1995, respectively.
Operating income (loss) represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other expense (income) and income taxes.
72
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INDUSTRY SEGMENTS (CONTINUED)
Certain costs relating to U S WEST's general and administrative services,
including executive management, legal, tax, accounting and auditing, treasury,
strategic planning and public policy services, are directly assigned by U S WEST
to the Communications Group (the communications and related services segment)
and the Media Group (the cable and broadband, wireless communications, and
directory and information services segments). U S WEST costs are directly
assigned based on actual utilization or are allocated based on operating
expenses, number of employees, external revenues, average capital and/or average
equity.
Corporate and other operating losses include such U S WEST costs related to
services provided by U S WEST to the Media Group. Also included are Media Group
costs related to managing its international operations. Corporate and other
operating losses increased in 1996 primarily as a result of a change in cost
allocation policy.
Identifiable assets are those assets and investments that are used in, or
pertain to, each segment's operations. Corporate and other assets consist
primarily of cash, debt and equity securities, the net investment in assets held
for sale and other corporate assets.
SIGNIFICANT CONCENTRATIONS. The largest volume of the Communications
Group's services are provided to AT&T. During 1997, 1996 and 1995, revenues from
services provided to AT&T were $1,049, $1,046 and $1,085, respectively. Related
accounts receivable at December 31, 1997 and 1996, totaled $80 and $89,
respectively. As of December 31, 1997, the Communications Group is not aware of
any other significant concentration of business transacted with a particular
customer or supplier that could, if suddenly eliminated, severely impact
operations.
The domestic cellular business utilizes Motorola as its primary vendor for
cellular infrastructure equipment and cellular mobile telephone equipment and
accessories. In addition, Motorola provides ongoing technological support for
the infrastructure equipment. As a result, the wireless segment receives
significant discounts on the purchase of cellular equipment from Motorola. The
infrastructure of approximately 75 percent of the Media Group's cellular markets
are comprised of Motorola equipment.
At December 31, 1997, approximately 69 percent of the communications and
related services segment employees and 64 percent of the directory and
information services segment employees are represented by unions. The Company's
principal collective bargaining agreements expire in May, August and October
1998. Negotiations with respect to future collective bargaining agreements are
underway.
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment for an aggregate purchase price of $2.553 billion. TWE owns and
operates substantially all of the entertainment assets previously owned by Time
Warner, consisting primarily of its filmed entertainment, programming-HBO and
cable television businesses.
U S WEST has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or part, between January 1, 1999 and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or U S WEST may elect that the exercise price for
the option be paid with partnership interests rather than cash.
73
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the general partners); A preferred priority capital (held pro rata by the
general and limited partners); B preferred priority capital (held by the general
partners); and residual equity capital (held pro rata by the general and limited
partners). Of the $2.553 billion contributed by U S WEST, $1.658 billion
represents A preferred priority capital and $895 represents residual equity
capital. The TWE Partnership Agreement provides for special allocations of
income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' residual equity capital accounts according to their
residual partnership interests. To the extent partnership income is insufficient
to satisfy all special allocations in a particular accounting period, the
unearned portion is carried over until satisfied out of future partnership
income. Partnership losses generally are allocated in reverse order, first to
eliminate prior allocations of partnership income, except senior preferred and
special tax income, next to reduce initial capital amounts, other than senior
preferred, then to reduce the senior preferred account and finally, to eliminate
special tax allocations.
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
PRIORITY
CAPITAL RATES LIMITED PARTNERS
OF RETURN(D) TIME (OWNERSHIP %)
UNDISTRIBUTED CUMULATIVE (% PER ANNUM WARNER --------------------
CONTRIBUTED PRIORITY COMPOUNDED GENERAL TIME U S
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) CAPITAL(B) QUARTERLY) PARTNERS WARNER WEST
- ------------------------------------- ------------- ----------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Senior preferred..................... $ 900 $ 1,100(c) 8.00% 100.00% -- --
A preferred priority capital......... 5,600 11,300 13.00% 63.27% 11.22% 25.51%
B preferred priority capital......... 2,900 6,000 13.25% 100.00% -- --
Residual equity capital.............. 3,300 3,300 -- 63.27% 11.22% 25.51%
</TABLE>
- ------------------------------
(a) Represents the estimated fair value of net assets contributed as of
formation of TWE, excluding partnership income or loss allocated thereto.
(b) Cumulative priority capital is not necessarily indicative of the fair value
of the underlying priority capital interests.
(c) Net of $900 of cumulative cash distributions received by Time Warner.
(d) To the extent income allocations are concurrently distributed, the priority
capital rates of return on the A preferred capital and the B preferred
capital are 11% and 11.25%, respectively.
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions are paid to the partners on a
current basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the general partners receive
their full share of distributions. No cash distributions have been made to U S
WEST.
Through the TWE management committee, U S WEST and Time Warner jointly
direct the businesses and affairs of TWE cable systems, subject in certain cases
to regulatory approval. The TWE management committee has full discretion and
final authority with respect to the businesses and affairs of such cable
systems. The TWE management committee consists of six voting members, of which
three members are
74
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
designated by U S WEST and three members are designated by Time Warner. Each
voting member of the TWE management committee has one vote. Any action required
or permitted to be taken by the TWE management committee must be approved by a
majority of its members. Determinations of the TWE management committee are
binding upon TWE and the TWE board of representatives.
U S WEST accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by U S WEST's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
U S WEST's recorded share of TWE operating results represents allocated TWE net
income or loss adjusted for the amortization of the excess of fair market value
over the book value of the partnership net assets. As a result of this
amortization and the special income allocations described above, U S WEST's
recorded pretax share of TWE operating results before extraordinary item was
$11, $(4) and $(31) in 1997, 1996 and 1995, respectively. In addition, TWE
recorded an extraordinary loss for the early extinguishment of debt in 1995. U S
WEST's share of this extraordinary loss was $4, net of income tax benefits of
$2.
As consideration for its expertise and participation in the cable operations
of TWE, U S WEST earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 were
recorded to other income in each of 1997, 1996 and 1995. The Consolidated
Balance Sheets include management fee receivables of $42 and $56 at December 31,
1997 and 1996, respectively. In addition, Media Group purchases cable television
programming from TWE at market prices. These services totaled $110, $23 and $10
in 1997, 1996 and 1995, respectively.
75
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................................................... $ 11,318 $ 10,852 $ 9,517
Operating expenses(1, 2).......................................................... 9,874 9,774 8,557
Interest and other expense, net(3, 4)............................................. 722 798 777
Income before income taxes and extraordinary item................................. 722 280 183
Income before extraordinary item.................................................. 637 210 97
Net income........................................................................ 614 210 73
</TABLE>
- ------------------------------
(1) Includes depreciation and amortization of $1,370, $1,235, and $1,039 in
1997, 1996 and 1995, respectively.
(2) 1997 operating expenses are reflected net of approximately $200 of net gains
related to the sale or exchange of certain cable television systems.
(3) Includes corporate services of $72, $69 and $64 in 1997, 1996 and 1995,
respectively, and minority interest expense of $305, $207 and $133 in 1997,
1996 and 1995, respectively.
(4) 1997 interest and other expense includes a gain of approximately $250
related to the sale of TWE's interest in E! Entertainment Television, Inc.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
SUMMARIZED FINANCIAL POSITION 1997 1996
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets(5)........................................................................... $ 3,622 $ 3,146
Noncurrent assets(6)........................................................................ 17,109 16,827
Current liabilities......................................................................... 3,974 4,075
Noncurrent liabilities, including minority interest......................................... 9,306 7,781
Senior preferred capital.................................................................... 1,118 1,543
Partners' capital(7)........................................................................ 6,333 6,574
</TABLE>
- ------------------------------
(5) Includes cash of $322 and $216 at December 31, 1997 and 1996, respectively.
(6) Includes a loan receivable from Time Warner of $400 at December 31, 1997 and
1996.
(7) Contributed capital is based on the estimated fair value of the net assets
that each partner contributed to the partnership. The aggregate of such
amounts is significantly higher than TWE's partners' capital as reflected in
this Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
76
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES
U S WEST's equity method investments in international ventures follow:
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP DECEMBER
31,
--------------------
VENTURE 1997 1996
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
CABLE AND BROADBAND
Telewest Communications, United Kingdom....................................... 26.8 26.8
Binariang SDN BHD, Malaysia................................................... 19.0(1) 20.0
A2000 (KTA), Netherlands...................................................... 50.0 50.0
Fintelco, S.A., Argentina..................................................... -- 50.0
Telenet Flanders, Belgium..................................................... 25.0(1) 28.0
Aria WEST, Indonesia.......................................................... 35.0 35.0
Singapore Cablevision, Singapore.............................................. 25.0 25.0
Titus Communications Corp., Japan............................................. 25.0 25.0
Chofu Cable Television, Japan................................................. 19.1 19.1
WIRELESS
One 2 One, United Kingdom..................................................... 50.0 50.0
Delta Telecommunications, Russia(2)........................................... 42.5 42.5
Moscow Cellular Communications, Russia(2)..................................... 22.0 22.0
Westel Radiotelefon, Hungary.................................................. 49.0 49.0
Westel 900 GSM Mobile Telecommunications, Hungary............................. 46.6 46.6
Eurotel Praha, Czech Republic................................................. 24.5 24.5
Eurotel Bratislava, Slovak Republic........................................... 24.5 24.5
Polska Telefonia Cyfrowa, Poland.............................................. 22.5 22.5
U S WEST BPL Cellular Telecommunications, India............................... 49.0 49.0
DIRECTORY
Listel, Brazil................................................................ 50.0 50.0
</TABLE>
--------------------------------------
(1) Decrease in ownership reflects venture equity issuances in 1997.
(2) Investments are held by Russian Telecommunications Development
Corporation owned 66.5 percent by U S WEST.
At December 31, 1997 and 1996, the difference between the carrying amount
and U S WEST's interest in the underlying equity of the international ventures
was approximately $162 and $365, respectively. This difference has been
allocated primarily to licenses and is being amortized over lives ranging from 5
to 20 years.
During late 1997, the value of Asian currencies as compared with the U. S.
dollar declined significantly, particularly in Indonesia. These declines,
coupled with political uncertainties, led to a fourth-quarter 1997 pretax charge
of $200.
77
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
The following table shows summarized combined financial information for U S
WEST's investments in international ventures, accounted for on the equity
method:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMBINED RESULTS OF OPERATIONS 1997 1996 1995
- -------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................ $ 3,353 $ 1,869 $ 1,163
Operating losses.................................................... (601) (540) (373)
Net loss............................................................ (1,696) (857) (514)
</TABLE>
-------------------------------------
Note: Combined Results of Operations for Continental ventures have been
included since the date of Acquisition.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1997 1996
- ------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets................................................................. $ 1,140 $ 1,126
Property, plant and equipment--net............................................. 6,625 5,105
Other assets................................................................... 1,610 2,226
--------- ---------
Total assets................................................................... $ 9,375 $ 8,457
--------- ---------
--------- ---------
Current liabilities............................................................ $ 1,570 $ 1,275
Long-term debt................................................................. 5,527 3,880
Other liabilities.............................................................. 389 478
Equity......................................................................... 1,889 2,824
--------- ---------
Total liabilities and equity................................................... $ 9,375 $ 8,457
--------- ---------
--------- ---------
</TABLE>
During the first quarter of 1997, U S WEST sold its five percent interest in
a French wireless venture for proceeds of $81. U S WEST recognized a gain of
$31, net of income tax expenses of $20.
On October 27, 1997, U S WEST sold its 90 percent interest in Fintelco, for
proceeds of $641. U S WEST acquired a 50 percent interest in Fintelco in
connection with the Continental Acquisition and then acquired an additional 40
percent interest in August 1997, to bring its total interest in Fintelco to 90
percent. U S WEST recognized a gain on the sale of $80, net of income tax
expenses of $55.
On October 2, 1995, Telewest and SBC CableComms (UK) completed a merger of
their UK cable television and telecommunications interests, creating the largest
provider of combined cable and broadband services in the United Kingdom. U S
WEST recognized a gain of $95, net of $62 in deferred income taxes, in
conjunction with the merger.
Telewest, which is the only equity method investment of U S WEST for which a
quoted market price is available, had a market value of $464 and $786 at
December 31, 1997 and 1996, respectively.
FOREIGN CURRENCY TRANSACTIONS. U S WEST selectively enters into forward and
option contracts to manage the market risks associated with fluctuations in
foreign exchange rates after considering offsetting foreign exposures among
international operations. The use of forward and option contracts allows U S
WEST to fix or cap the cost of firm foreign investment commitments, the amount
of foreign currency proceeds from sales of foreign investments, the repayment of
foreign currency denominated receivables and the repatriation of dividends. All
foreign exchange contracts have maturities of one year or less. The use of such
contracts was limited in 1997 and 1996. As of December 31, 1997, the market
value of foreign exchange contracts outstanding was not material and there were
none outstanding at December 31, 1996.
78
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
Forward contracts were selectively used to hedge foreign denominated
proceeds from the sale of foreign investments and foreign denominated
receivables during 1997 and 1996. Foreign currency pretax hedging gains of $5
and pretax hedging losses of $24 were included in earnings in the years ended
December 31, 1997 and 1996, respectively.
The counterparties to these contracts are major financial institutions. U S
WEST is exposed to credit loss in the event of nonperformance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
Foreign currency transaction pretax losses of $40 and pretax gains of $27
were included in earnings in the years ended December 31, 1997 and 1996,
respectively.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Land and buildings...................................................... $ 2,764 $ 2,722
Telecommunications network equipment.................................... 13,513 12,925
Telecommunications outside plant........................................ 13,802 13,148
Cable distribution systems.............................................. 2,787 2,640
Cellular systems........................................................ 1,124 897
General purpose computers and other..................................... 4,137 4,414
Construction in progress................................................ 1,096 1,010
--------- ---------
39,223 37,756
Less accumulated depreciation........................................... 20,643 19,475
--------- ---------
Property, plant and equipment--net...................................... $ 18,580 $ 18,281
--------- ---------
--------- ---------
</TABLE>
Property, plant and equipment balances at December 31, 1997 include the
results of a comprehensive appraisal conducted on the Continental properties. As
compared with estimated amounts recorded at December 31, 1996, cable
distribution systems decreased approximately $630.
In 1997, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $160. Consideration received for the sales was $237, including
$67 in cash. In 1996 and 1995, U S WEST Communications sold certain rural
telephone exchanges with a cost basis of $243 and $258, respectively, and
received consideration of $306 (including $174 in cash) during 1996, and $388
(including $214 in cash) during 1995.
Effective January 1, 1996, U S WEST adopted SFAS No. 121. SFAS No. 121
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 income tax
expense of $22) in 1996 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 U S WEST formally
committed to a plan to dispose of the rural telephone exchange assets to January
1, 1996. The income was recorded as a cumulative effect of
79
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
change in accounting principle in accordance with SFAS No. 121. As a result of
adopting SFAS No. 121, depreciation expense for 1996 was reduced by $24.
NOTE 9: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value....................... $ 9,263 $ 8,388
Goodwill................................................................ 4,159 4,465
--------- ---------
13,422 12,853
Less accumulated amortization........................................... 748 258
--------- ---------
Total intangible assets--net............................................ $ 12,674 $ 12,595
--------- ---------
--------- ---------
</TABLE>
Intangible balances at December 31, 1997 include the results of a
comprehensive appraisal conducted on the Continental cable properties. As
compared with estimated amounts recorded at December 31, 1996, franchise value
increased approximately $770 and goodwill decreased approximately $300.
Amortization expense for 1997, 1996 and 1995 was $530, $133 and $76,
respectively.
NOTE 10: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper......................................................... $ 812 $ 842
Bank loan................................................................ 17 --
Other.................................................................... -- 55
Current portion of long-term debt.......................................... 701 300
Allocated to the capital assets segment--net............................... (100) (146)
--------- ---------
Total...................................................................... $ 1,430 $ 1,051
--------- ---------
--------- ---------
</TABLE>
The weighted-average interest rate on commercial paper was 6.15 percent and
5.73 percent at December 31, 1997 and 1996, respectively.
The bank loan at December 31, 1997 is a floating-rate loan denominated in
Czech Koruna. Other notes payable at December 31, 1996 included $50 associated
with U S WEST's increase in ownership of Cable Plus. This note was repaid in
January 1997.
In January 1997, U S WEST paid the cash portion of the Continental
Acquisition consideration totaling $1,150. This payment was financed with
commercial paper.
80
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
In 1995, U S WEST issued $130 of DECS, due December 15, 1998, in the
principal amount of $24.00 per note. The notes bear annual interest at 7.625
percent. Upon maturity, each DECS will be redeemed by U S WEST for shares of
Enhance held by U S WEST or the cash equivalent, at U S WEST's option. The
number of shares to be delivered at maturity varies based on the per share
market price of Enhance. If the market price is $24.00 per share or less, one
share of Enhance will be delivered for each note; if the market price is between
$24.00 and $28.32 per share, a fractional share equal to $24.00 is delivered; if
the market price is greater than $28.32 per share, .8475 of a share is delivered
for each note. At December 31, 1997, the Enhance shares had a market price of
$59.50 per share. The capital assets segment currently owns 29.2 percent of the
outstanding Enhance common stock.
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. U S WEST is permitted to borrow up to approximately $4.5 billion under
lines of credit, all of which were available at December 31, 1997.
LONG-TERM DEBT
On November 15, 1996, U S WEST assumed Continental debt totaling $6,525 (at
market value) in conjunction with the Acquisition. Concurrently, U S WEST
refinanced $3,657 of the assumed debt with commercial paper. In January 1997, U
S WEST issued medium- and long-term debt totaling $4.1 billion, at a
weighted-average interest rate of 7.47 percent. The net proceeds were used to
refinance outstanding commercial paper. At December 31, 1996, such commercial
paper was classified as long-term debt in the accompanying Consolidated Balance
Sheets and the following table.
The components of long-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Senior unsecured notes, debentures, medium-term notes and refinanced
commercial paper...................................................... $ 12,246 $ 12,536
Zero coupon subordinated notes, 7.3 percent yield to maturity
convertible at any time into equal shares of Communications Stock and
Media Stock........................................................... -- 1,529
Senior subordinated debt................................................ 300 400
Debt exchangeable for common stock...................................... 254 384
Insurance company notes................................................. 36 68
Leveraged employee stock ownership plans (LESOP)........................ -- 53
Capital lease obligations............................................... 88 140
Other................................................................... 169 134
Unamortized discount--net............................................... (132) (1,118)
Unamortized premium--net................................................ 287 335
Allocated to the capital assets segment--net............................ -- (161)
--------- ---------
Total................................................................... $ 13,248 $ 14,300
--------- ---------
--------- ---------
</TABLE>
Senior unsecured notes and debentures and senior subordinated debt totaling
$2.3 billion as of December 31, 1997 were assumed by U S WEST in connection with
the Continental Acquisition and are not guaranteed by U S WEST. These notes and
debentures limit MediaOne Delaware's ability to, among
81
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
other things, pay dividends, create liens, incur additional debt, dispose of
property, investments and leases, and require certain minimum ratios of cash
flow to debt and cash flow to related fixed charges.
During 1997, U S WEST redeemed its zero coupon subordinated notes due June
25, 2011. Upon redemption, the notes had a recorded value of $571. The debt
extinguishment resulted in a loss of $6 (net of income tax benefits of $4)
primarily related to the write-off of deferred debt issuance costs. Also during
1997, MediaOne Delaware redeemed a 10 5/8 percent senior subordinated note with
a recorded value of $110, including a premium of $10. The debt extinguishment
resulted in a gain of $3 (net of income tax expenses of $2). The net loss on the
redemptions is reflected as an extraordinary charge in the accompanying
Consolidated Statements of Operations. U S WEST financed the redemptions with
floating-rate commercial paper.
On May 13, 1996, U S WEST issued $254 of DECS due May 15, 1999, in the
principal amount of $26.63 per note. The notes bear annual interest at 7.625
percent. Upon maturity, each DECS will be mandatorily redeemed by U S WEST for
shares of FSA held by U S WEST or the cash equivalent, at U S WEST's option. The
number of shares to be delivered at maturity varies based on the per share
market price of FSA. If the market price is $26.63 per share or less, one share
of FSA will be delivered for each note; if the market price is between $26.63
and $32.48 per share, a fractional share is delivered so that the value at
maturity is equal to $26.63; if the market price is greater than $32.48 per
share, .8197 of a share is delivered for each note. At December 31, 1997, the
FSA shares had a market price of $48.25 per share. The capital assets segment
currently owns approximately 42.1 percent of the outstanding FSA common stock.
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1999 2000 2001 2002 THEREAFTER 1997 1996
- ---------------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%...................................... $ -- $ 90 $ -- $ 100 $ 50 $ 240 $ 275
Above 5% to 6%................................ -- -- 50 -- 221 271 701
Above 6% to 7%................................ 380 304 170 1,012 2,877 4,743 4,728
Above 7% to 8%................................ -- -- -- 10 4,365 4,375 5,876
Above 8% to 9%................................ 2 -- 240 -- 1,725 1,967 2,018
Above 9% to 10%............................... 15 200 10 -- 525 750 750
Above 10%..................................... 35 -- -- -- 300 335 467
Variable-rate debt indexed to two- and
ten-year constant maturity U. S. Treasury
rates....................................... 155 -- -- -- -- 155 155
--------- --------- --------- --------- ----------- --------- ---------
$ 587 $ 594 $ 470 $ 1,122 $ 10,063 12,836 14,970
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other........... 257 274
Unamortized discount--net..................... (132) (1,118)
Unamortized premium--net...................... 287 335
Allocated to the capital assets
segment--net................................ -- (161)
--------- ---------
Total......................................... $ 13,248 $ 14,300
--------- ---------
--------- ---------
</TABLE>
82
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
Interest payments, net of amounts capitalized, were $946, $658 and $518 for
1997, 1996 and 1995, respectively, of which $47, $59 and $87, respectively,
related to the capital assets segment.
Total debt at December 31, 1997 was approximately $14.6 billion and
Preferred Securities totaled approximately $1.1 billion. The total debt and
Preferred Securities of approximately $15.7 billion includes $5.5 billion of U S
WEST Communications debt, $2.7 billion of MediaOne Delaware debt and $7.5
billion of U S WEST Indebtedness.
In connection with the Separation, New U S WEST and MediaOne will seek to
refinance the U S WEST Indebtedness through a combination of tender offers,
prepayments, defeasance, consent solicitations and/or exchange offers. As of
February 20, 1998, the estimated cost of the Refinancing is $346 ($231 after
tax). In addition to refinancing costs, such costs include the difference
between the market and face value of the U S WEST Indebtedness and a charge for
unamortized debt issuance costs.
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 interest rate variability. This is
achieved through the use of interest rate swaps, which adjust the ratio of
fixed- to variable-rate debt.
Under an interest rate swap, U S WEST 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.
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 were issued
directly.
The following table summarizes terms of swaps and interest rate contracts.
Variable rates are indexed to two- and ten-year constant maturity U. S. Treasury
and 30-day commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------ ------------------------------------------------
WEIGHTED- AVERAGE RATE WEIGHTED- AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed............... $ 700 1998-2004 5.68 6.93 $ 1,235 1997-2004 5.70 6.89
Currency........................ 204 1999-2001 -- 6.55 204 1999-2001 -- 6.55
</TABLE>
During fourth-quarter 1996, U S WEST purchased $1.5 billion notional of put
options on U. S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. The contracts closed in January
1997 and a deferred gain of $5 was recognized. U S WEST Communications executed
forward U. S. Treasury Bond contracts to lock in the U. S. Treasury rate
component of future debt issues. At December 31, 1997, deferred gains of $8 and
deferred losses of $50 on the closed forward contracts are included as part of
the carrying value of the underlying debt. The deferred gains and losses are
being recognized as yield adjustments over the life of the related debt, which
mature at various dates through 2043.
83
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
The counterparties to swaps or other interest rate contracts are major
financial institutions. U S WEST is exposed to credit loss in the event of
nonperformance by these counterparties. U S WEST manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations which correspond to the respective credit rating of each
counterparty. U S WEST does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
NOTE 11: 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 carrying values of mandatorily redeemable preferred stock and long-term
receivables approximate the fair values based on quoted market prices or
discounting future cash flows. The carrying value of foreign exchange contracts
approximate the carrying values based on estimated amounts U S WEST would
receive or pay to terminate such agreements. It is not practicable to estimate
the fair value of financial guarantees because there are no quoted market prices
for similar transactions.
The fair values of interest rate swaps are based on estimated amounts U S
WEST 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, including debt associated with the
capital assets segment, Preferred Securities and Series D Preferred Stock, 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,
------------------------------------------
1997 1996
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion).................................... $ 15,050 $ 15,770 $ 15,832 $ 15,850
Interest rate swap agreements--assets................................. -- -- -- (22)
Interest rate swap agreements--liabilities............................ -- 47 17 47
--------- --------- --------- ---------
Debt--net............................................................. $ 15,050 $ 15,817 $ 15,849 $ 15,875
--------- --------- --------- ---------
--------- --------- --------- ---------
Preferred Securities.................................................. $ 1,080 $ 1,110 $ 1,080 $ 1,074
Series D Preferred Stock.............................................. 923 1,234 920 960
</TABLE>
Investments in debt and equity securities are classified as available for
sale and are carried at market value. The debt securities have various maturity
dates through the year 2002. The market value of these securities is based on
quoted market prices where available or, if not available, is based on
discounting future cash flows using current interest rates.
84
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The amortized cost and estimated market value of debt and equity securities
follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------------- ---------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED
SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES
- ---------------------------------- --- ------------- ------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity securities................. $ 21 $ 19 $ -- $ 40 $ 713 $ 2 $ --
Debt securities................... 18 -- -- 18 20 -- --
Securitized loan.................. 55 -- (3) 52 55 -- (6)
-- --
--- --- --------- --------- ---
Total............................. $ 94 $ 19 $ (3) $ 110 $ 788 $ 2 $ (6)
-- --
-- --
--- --- --------- --------- ---
--- --- --------- --------- ---
<CAPTION>
FAIR
SECURITIES VALUE
- ---------------------------------- ---------
<S> <C>
Equity securities................. $ 715
Debt securities................... 20
Securitized loan.................. 49
---------
Total............................. $ 784
---------
---------
</TABLE>
During 1997, U S WEST received proceeds of $898 from the sales of TCG and
TWX shares and realized pretax gains totaling $206. Net unrealized gains and
losses on marketable securities are included in equity. The 1997 net unrealized
gains were $13 (net of deferred taxes of $6). The 1996 net unrealized gains were
$1 (net of deferred taxes).
NOTE 12: LEASING ARRANGEMENTS
U S WEST has entered into operating leases for office facilities, equipment
and real estate. Rent expense under operating leases was $304, $245 and $263 in
1997, 1996 and 1995, respectively. Future minimum lease payments as of December
31, 1997, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- -------------------------------------------------------------------------------------
<S> <C>
1998................................................................................. $ 194
1999................................................................................. 187
2000................................................................................. 157
2001................................................................................. 149
2002................................................................................. 108
Thereafter........................................................................... 777
---------
Total................................................................................ $ 1,572
---------
---------
</TABLE>
Minimum rentals to be received under noncancelable subleases total $52. The
minimum future lease payments have not been reduced by the minimum sublease
rentals.
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
On October 29, 1996, Financing II issued $480 of 8.25 percent Preferred
Securities and $15 of common securities. U S WEST holds all of the outstanding
common securities of Financing II. Financing II used the proceeds from such
issuance to purchase from Capital Funding $495 principal amount of Capital
Funding's 8.25 percent Subordinated Deferrable Interest Notes (the "Subordinated
Debt Securities") due 2036, the obligations under which are fully and
unconditionally guaranteed by U S WEST (the "Debt Guarantee"). The sole assets
of Financing II are and will be the Subordinated Debt Securities and the Debt
Guarantee.
On September 11, 1995, Financing I issued $600 of 7.96 percent Preferred
Securities and $19 of common securities. U S WEST holds all of the outstanding
common securities of Financing I. Financing I
85
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
(CONTINUED)
used the proceeds from such issuance to purchase from Capital Funding $619
principal amount of Capital Funding's 7.96 percent Subordinated Debt Securities
due 2025, the obligations under which are fully and unconditionally guaranteed
by U S WEST. The sole assets of Financing I are and will be the Subordinated
Debt Securities and the Debt Guarantee.
U S WEST has guaranteed the payment of interest and redemption amounts to
holders of Preferred Securities when Financing I and II have funds available for
such payments (the "Payment Guarantee") as well as Capital Funding's undertaking
to pay all of Financing I and II's costs, expenses and other obligations (the
"Expense Undertaking"). The Payment Guarantee and the Expense Undertaking,
including U S WEST's guarantee with respect thereto, considered together with
Capital Funding's obligations under the indenture and Subordinated Debt
Securities and U S WEST's obligations under the indenture, declaration and Debt
Guarantee, constitute a full and unconditional guarantee by U S WEST of
Financing I and II's obligations under the Preferred Securities. The interest
and other payment dates on the Subordinated Debt Securities correspond to the
distribution and other payment dates on the Preferred Securities. Under certain
circumstances, the Subordinated Debt Securities may be distributed to the
holders of Preferred Securities and common securities in liquidation of
Financing I and II.
The 7.96 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after September 11, 2000, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing I is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1997
and 1996, 24,000,000 shares of the 7.96 percent Preferred Securities were
outstanding.
The 8.25 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after October 29, 2001, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing II is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1997
and 1996, 19,200,000 shares of the 8.25 percent Preferred Securities were
outstanding.
In connection with the Separation, MediaOne will seek to refinance the
Preferred Securities. See Note 10--Debt--to the Consolidated Financial
Statements.
NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On June 30, 1997, U S WEST acquired cable systems serving approximately
40,000 subscribers in Michigan for cash of $25 and the issuance of 994,082
shares of U S WEST Series E Preferred Stock. Dividends are payable quarterly at
the annual rate of 6.34 percent. The Series E Preferred Stock was recorded at
fair value of $50.00 per share at June 30, 1997, which was equal to its
liquidation value. Upon redemption, the preferred stockholders may elect to
receive cash or convert their Series E Preferred Stock into Media Stock. Cash
redemption is equal to the Series E Preferred Stock's liquidation value of
$50.00 per share, plus accrued dividends. The number of shares of Media Stock to
be received upon conversion is $47.50 per share divided by the then current
market price of Media Stock. The conversion rate is subject to adjustment by U S
WEST under certain circumstances.
86
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (CONTINUED)
The Series E Preferred Stock is redeemable as follows: (a) U S WEST may call
for redemption all or any part of the Series E Preferred Stock beginning on June
30, 2002; (b) on a yearly basis beginning August 1, 2007, and continuing through
August 1, 2016, U S WEST will redeem 49,704 shares of Series E Preferred Stock,
and on June 30, 2017, all of the remaining outstanding shares of Series E
Preferred Stock; or (c) all of the outstanding Series E Preferred Stock shall be
redeemed upon the occurrence of certain events, including the dissolution or
sale of all or substantially all of Media Group.
On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative
Redeemable Preferred Stock (the "Series C Preferred Stock") for a total of $50.
See Note 22--Net Investment in Assets Held for Sale--to the Consolidated
Financial Statements. The preferred stock was recorded at the fair market value
of $51 at the issue date. Media Group has the right commencing September 2,
1999, to redeem the shares for one thousand dollars per share plus unpaid
dividends and a redemption premium. The shares are mandatorily redeemable in
2004 at face value plus unpaid dividends. At the option of FFC, the preferred
stock also can be redeemed for common shares of FSA. The market value of the
option was $71 and $35 (based on the Black-Scholes model) at December 31, 1997
and 1996, respectively, with no carrying value.
The Series E and Series C Preferred Stocks rank senior to all classes of U S
WEST common stock, are subordinated to any senior debt and the Preferred
Securities, and rank equally with the Series D Preferred Stock.
87
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
MEDIA COMMON RETAINED
COMMUNICATIONS STOCK U S WEST STOCK PREFERRED EARNINGS
STOCK SHARES SHARES SHARES AMOUNT STOCK AMOUNT (DEFICIT)
----------------- --------- ----------- ----------- ------------- -----------
SHARES IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994............ 469,343 $ 8,056 $ (458)
Issuance of common stock........... 2,791 117
Benefit trust contribution
(OPEB)........................... 1,500 61
Purchase of treasury stock......... (1,705) (63)
Other.............................. 3
November 1, 1995.....................
Recapitalization Plan.............. 471,929 471,922 (471,929)
Recapitalization Plan
dissenters(1).................... (6)
Issuance of Communications Stock... 1,712 52
Issuance of Media Stock............ 392 7
Net income......................... 1,317
Common dividends declared ($2.14
per Communications share)........ (1,010)
Preferred dividends................ (3)
Market value adjustment for debt
securities....................... 36
Foreign currency translation.......
Other.............................. (5) 3
------- --------- ----------- ----------- ----- -----------
Balance December 31, 1995............ 473,635 472,314 -- 8,228 (115)
Issuance of Communications Stock... 6,822 216
Issuance of Media Stock for
Continental Acquisition.......... 150,615 2,590
Other issuances of Media Stock..... 1,853 38
Issuance of Series D Preferred
Stock............................ $ 920
Purchase of treasury stock......... (15,919) (297)
Net income......................... 1,178
Common dividends declared ($2.14
per Communications share)........ (1,024)
Preferred dividends................ (9)
Market value adjustment for debt
and equity securities............ (6)
Foreign currency translation.......
Other.............................. (34) (6)
------- --------- ----------- ----------- ----- -----------
Balance December 31, 1996............ 480,457 608,863 -- 10,741 920 18
Issuance of Communications Stock... 4,058 138
Issuance of Media Stock............ 1,783 40
Purchase of treasury stock......... (2,838) (53)
Net income......................... 697
Common dividends declared ($2.14
per Communications share)........ (1,034)
Preferred dividends................ (52)
Market value adjustment for debt
and equity securities............ 35
Foreign currency translation.......
Other.............................. 10 3 2
------- --------- ----------- ----------- ----- -----------
Balance December 31, 1997............ 484,515 607,808 -- $ 10,876 $ 923 $ (334)
------- --------- ----------- ----------- ----- -----------
------- --------- ----------- ----------- ----- -----------
<CAPTION>
FOREIGN
CURRENCY LESOP
TRANSLATION GUARANTEE
--------------- -------------
<S> <C> <C>
Balance December 31, 1994............ $ (29) $ (187)
Issuance of common stock...........
Benefit trust contribution
(OPEB)...........................
Purchase of treasury stock.........
Other..............................
November 1, 1995.....................
Recapitalization Plan..............
Recapitalization Plan
dissenters(1)....................
Issuance of Communications Stock...
Issuance of Media Stock............
Net income.........................
Common dividends declared ($2.14
per Communications share)........
Preferred dividends................
Market value adjustment for debt
securities.......................
Foreign currency translation....... (9)
Other.............................. 60
--- -----
Balance December 31, 1995............ (38) (127)
Issuance of Communications Stock...
Issuance of Media Stock for
Continental Acquisition..........
Other issuances of Media Stock.....
Issuance of Series D Preferred
Stock............................
Purchase of treasury stock.........
Net income.........................
Common dividends declared ($2.14
per Communications share)........
Preferred dividends................
Market value adjustment for debt
and equity securities............
Foreign currency translation....... (1)
Other.............................. 36
--- -----
Balance December 31, 1996............ (39) (91)
Issuance of Communications Stock...
Issuance of Media Stock............
Purchase of treasury stock.........
Net income.........................
Common dividends declared ($2.14
per Communications share)........
Preferred dividends................
Market value adjustment for debt
and equity securities............
Foreign currency translation....... (56)
Other.............................. 45
--- -----
Balance December 31, 1997............ $ (95) $ (46)
--- -----
--- -----
</TABLE>
- ------------------------------
(1) Under the Recapitalization Plan, Media Stock was not issued to shareowners
who elected to receive cash rather than Communications Stock and Media
Stock. Dissenting shareowners were paid $47.9375 per U S WEST share on
December 15, 1995.
88
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
SERIES D PREFERRED STOCK. On November 15, 1996, U S WEST issued 19,999,478
shares of 4.5 percent, 20 year, Series D Preferred Stock to Continental
shareowners. Dividends are payable quarterly on the nonvoting Series D Preferred
Stock as and when declared by the Board out of funds legally available. The
Series D Preferred Stock has a liquidation value of $50 per share and was
recorded at the November 15, 1996 fair value of $46 per share. The Series D
Preferred Stock is convertible, at the option of the holder, into shares of
Media Stock at $26.25 per share. Between November 15, 1999 and November 15,
2001, the Series D Preferred Stock is redeemable at par, at the option of U S
WEST, into shares of Media Stock if the market price of Media common shares have
closed at $35.44 per share for at least 20 of the 30 consecutive trading days
prior to the notice of redemption. After November 15, 2001, the Series D
Preferred Stock is redeemable at par, at the option of U S WEST, in cash, Media
Stock, or any combination of cash and stock. If Media Stock is elected, the
number of shares to be issued will be determined based on the average market
price for the ten consecutive trading days ending on the third business day
prior to redemption, reduced by five percent. On November 15, 2016, U S WEST is
required to redeem the Series D Preferred Stock, at its election, for cash,
Media Stock, or any combination of cash and stock. Upon certain events,
including the disposition of all or substantially all of the properties and
assets attributed to the Media Group, the Series D Preferred Stock becomes
mandatorily redeemable. The Series D Preferred Stock ranks senior to all classes
of U S WEST common stock, is subordinated to any senior debt and the Preferred
Securities, and ranks equally with the Series E and C Preferred Stocks.
COMMON STOCK. In connection with the November 15, 1996, Continental
Acquisition, U S WEST issued 150,615,000 shares of Media Stock to Continental
shareowners, valued at $2,590.
SHARE REPURCHASE. During 1997 and 1996, U S WEST purchased and placed into
treasury 2,838,000 and 15,919,000 shares of Media Stock, at an average price per
share of $18.71 and $18.66, and a cost basis of $53 and $297, respectively.
Under the 1995 Recapitalization, shares of U S WEST stock held in treasury were
canceled.
FOREIGN CURRENCY TRANSLATION. Included in U S WEST's cumulative foreign
currency translation adjustment are cumulative tax benefits of $61, $24 and $24
at December 31, 1997, 1996 and 1995, respectively.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). U S WEST maintains a
defined contribution savings plan for substantially all management and
occupational employees of the Company, except for employees of the Atlanta cable
systems and foreign national employees. 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 Company contributions between Communications Stock and Media
Stock. In 1989, U S WEST established two LESOPs to provide Company 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, 1997, 11,966,157
shares of Communications Stock and 12,100,791 shares of Media Stock had been
allocated from the LESOP to participants' accounts, while 918,494 and 1,050,657
shares of Communications Stock and Media Stock, respectively, remained
unallocated.
The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are included in the accompanying Consolidated Balance
Sheets and corresponding amounts have been recorded as reductions to
shareowners' equity. Contributions from U S WEST as well as dividends on
unallocated shares held by the LESOP ($3, $5 and $8 in 1997, 1996 and 1995,
respectively) are used for
89
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
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.
U S WEST recognizes expense based on the cash payments method. Total Company
contributions to the plan (excluding dividends) were $89, $77 and $86 in 1997,
1996 and 1995, respectively, of which $7, $10 and $15, respectively, have been
classified as interest expense.
SHAREHOLDER RIGHTS PLAN. The Board has adopted a shareholder rights plan
which, in the event of a takeover attempt, would entitle existing shareowners to
certain preferential rights. The rights expire on April 6, 1999, and are
redeemable by the Company at any time prior to the date they would become
effective.
NOTE 16: EARNINGS PER SHARE
In 1997, the Company adopted SFAS No. 128 which specifies new computation,
presentation and disclosure requirements for earnings per share to be applied
retroactively. Among other things, SFAS No. 128 requires presentation of basic
and diluted earnings per common share on the face of the income statement. The
following reflects the computation of diluted earnings (loss) per share for
Communications Stock and Media Stock. Income and earnings per share are before
extraordinary items and the cumulative effect of change in accounting principle.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
SHARES IN THOUSANDS
<S> <C> <C> <C>
COMMUNICATIONS GROUP
Income used for basic earnings per share......................................... $ 1,180 $ 1,215 $ 1,184
Interest on convertible zero coupon subordinated notes, net of tax............... 9 13 12
--------- --------- ---------
Income used for diluted earnings per share....................................... $ 1,189 $ 1,228 $ 1,196
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares used for basic earnings per share.............. 482,751 477,549 470,716
Effect of dilutive securities:
Stock options.................................................................. 2,386 1,536 1,459
Convertible zero coupon subordinated notes..................................... 6,095 9,506 9,758
--------- --------- ---------
Weighted average number of shares used for diluted earnings per share............ 491,232 488,591 481,933
--------- --------- ---------
--------- --------- ---------
Communications Group basic earnings per share.................................... $ 2.44 $ 2.55 $ 2.52
Communications Group diluted earnings per share.................................. $ 2.42 $ 2.51 $ 2.48
</TABLE>
The Communications Group dilutive securities represent the incremental
weighted average shares from the assumed exercise of Communications Group stock
options and the assumed conversion of the
90
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EARNINGS PER SHARE (CONTINUED)
zero coupon subordinated notes for the period they were outstanding. The zero
coupon subordinated notes were redeemed in August 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
SHARES IN THOUSANDS
<S> <C> <C> <C>
MEDIA GROUP
Income (loss).................................................................... $ (480) $ (71) $ 145
Dividends on preferred stock..................................................... (52) (9) (3)
--------- --------- ---------
Income (loss) available to common shareowners used for basic and diluted earnings
per share...................................................................... $ (532) $ (80) $ 142
--------- --------- ---------
--------- --------- ---------
Weighted average number of shares used for basic earnings per share.............. 606,749 491,924 470,549
Effect of dilutive securities:
Stock options.................................................................. -- -- 1,063
--------- --------- ---------
Weighted average number of shares used for diluted earnings per share............ 606,749 491,924 471,612
--------- --------- ---------
--------- --------- ---------
Media Group basic and diluted earnings (loss) per share.......................... $ (0.88) $ (0.16) $ 0.30
</TABLE>
Media Group diluted loss per share for 1997 and 1996 does not include
potential share issuances associated with stock options, convertible zero coupon
subordinated notes and the convertible Series D Preferred Stock due to their
antidilutive effects. In 1995, convertible zero coupon subordinated notes are
not included in Media Group's diluted earnings per share due to their
antidilutive effects. The zero coupon subordinated notes were redeemed in August
1997.
NOTE 17: STOCK INCENTIVE PLANS
U S WEST maintains stock incentive plans 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 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 of Directors 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.
The maximum aggregate number of shares of Communications Stock and Media
Stock that may be granted in any calendar year for all purposes under the Plan
is nine-tenths of one percent (0.90 percent) and three-quarters of one percent
(0.75 percent), respectively, 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 vest over periods up
to three years and may be exercised no later than 10 years after the grant date.
91
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
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 $1, $3 and $7 in 1997, 1996 and
1995, respectively, all of which related to the Plan modifications.
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, the pro forma
net income and earnings per share for U S WEST and both the Communications and
Media Groups would have been the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- ----------------------------------- ------------------------
EARNINGS (LOSS) EARNINGS (LOSS) EARNINGS
PER SHARE PER SHARE PER SHARE
NET INCOME ---------------------- NET INCOME ---------------------- -----------
(LOSS) BASIC DILUTED (LOSS) BASIC DILUTED NET INCOME BASIC
----------- --------- ----------- ----------- --------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
As reported................... $ 1,177 $ 2.43 $ 2.41 $ 1,249 $ 2.62 $ 2.58 $ 1,176 $ 2.50
Pro forma..................... 1,164 2.41 2.40 1,247 2.61 2.58 1,178 2.50
MEDIA GROUP:
As reported................... (480) (0.88) (0.88) (71) (0.16) (0.16) 141 0.29
Pro forma..................... (501) (0.91) (0.91) (82) (0.18) (0.18) 140 0.29
<CAPTION>
DILUTED
-----------
<S> <C>
COMMUNICATIONS GROUP:
As reported................... $ 2.46
Pro forma..................... 2.48
MEDIA GROUP:
As reported................... 0.29
Pro forma..................... 0.29
</TABLE>
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 option's 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
during 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
COMMUNICATIONS GROUP:
Risk-free interest rate.................................................... 6.40% 6.50% 6.00%
Expected dividend yield.................................................... 5.80% 6.70% 6.70%
Expected life.............................................................. 4.0 years 4.5 years 4.5 years
Expected volatility........................................................ 25.0% 19.6% 19.6%
MEDIA GROUP:
Risk-free interest rate.................................................... 6.40% 6.30% 6.00%
Expected life.............................................................. 5.0 years 5.0 years 5.0 years
Expected volatility........................................................ 30.0% 28.5% 28.5%
</TABLE>
92
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP MEDIA GROUP U S WEST, INC.
------------------------- ------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES* PRICE
------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1, 1995.......... 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 $ 16.28 (9,843,179) $ (40.39)
------------ ----------- ------------ ----------- ----------- -----------
----------- -----------
Granted............................ 138,309 32.16 71,580 18.51
Exercised.......................... (543,037) 21.23 (191,243) 14.71
Canceled or expired................ (15,350) 24.91 (15,350) 16.82
------------ ----------- ------------ -----------
Outstanding December 31, 1995........ 9,423,101 $ 24.39 9,708,166 $ 16.33
------------ ----------- ------------ -----------
Granted............................ 3,624,602 30.97 5,523,728 19.36
Exercised.......................... (1,205,730) 22.37 (507,329) 14.93
Canceled or expired................ (429,058) 25.01 (610,471) 17.86
------------ ----------- ------------ -----------
Outstanding December 31, 1996........ 11,412,915 $ 26.67 14,114,094 $ 17.49
------------ ----------- ------------ -----------
Granted............................ 9,491,642 34.87 8,733,782 20.33
Exercised.......................... (2,648,569) 25.41 (1,371,529) 16.30
Canceled or expired................ (637,411) 27.54 (1,027,388) 18.35
------------ ----------- ------------ -----------
Outstanding December 31, 1997........ 17,618,577 $ 31.23 20,448,959 $ 18.74
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
- ------------------------------
* Includes options granted in tandem with stock appreciation rights.
(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).
The number of exercisable options under the Plan and the weighted-average
exercise prices follow:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP MEDIA GROUP
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
EXERCISABLE OPTIONS AT: SHARES PRICE SHARES PRICE
- ----------------------------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995................................................ 2,672,666 $ 22.22 3,021,166 $ 14.89
December 31, 1996................................................ 3,881,100 25.71 4,867,207 16.74
December 31, 1997................................................ 5,299,955 25.72 7,235,685 16.54
</TABLE>
93
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1997:
<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>
COMMUNICATIONS GROUP
$16.08 - $26.11.................................... 4,449,954 6.63 $ 23.71 3,518,013 $ 23.12
$26.34 - $33.13.................................... 4,238,914 7.99 31.03 1,577,356 30.30
$33.25........................................... 4,637,013 9.31 33.25 6,375 33.25
$33.63 - $46.13.................................... 4,292,696 9.19 37.02 198,211 35.36
------------ --- ----------- ---------- -----------
Total............................................ 17,618,577 8.28 $ 31.23 5,299,955 $ 25.72
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
MEDIA GROUP
$10.86 - $16.13.................................... 4,632,940 5.88 $ 14.92 3,994,271 $ 14.73
$16.17 - $18.50.................................... 6,009,898 8.46 18.06 1,627,574 17.59
$18.54 - $20.50.................................... 4,276,400 8.00 19.56 1,477,907 19.89
$20.56 - $22.13.................................... 4,241,765 8.69 21.32 135,933 20.65
$22.31 - $28.88.................................... 1,287,956 9.80 24.47 -- --
------------ --- ----------- ---------- -----------
Total............................................ 20,448,959 7.91 $ 18.74 7,235,685 $ 16.54
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 9,491,642, 3,624,602 and 4,953,165 Communications Group options
and 8,733,782, 5,523,728 and 4,886,436 Media Group options were granted in 1997,
1996 and 1995, respectively. Included in the total grants were 198,027 and
1,751,936 of modified Communications Group options and 249,827 and 1,751,936 of
modified Media Group options revalued as new grants during 1996 and 1995,
respectively. The modified Communications Group or Media Group options were not
significant during 1997. The weighted-average grant date fair value of
Communications Group and Media Group options granted during the year, inclusive
of modified options, using the Black-Scholes option-pricing model was $3.87 and
$7.10, respectively, for 1996, and $3.19 and $6.07, respectively, for 1995.
Excluding the modifications, the weighted-average grant date fair value was
$5.70 and $7.81, respectively, for 1997, $3.67 and $7.23, respectively, for
1996, and $2.92 and $6.45, respectively, for 1995. The exercise price of
Communications Group and Media 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 3,100,000 and 2,950,000 shares of Communications Stock and
2,700,000 and 2,200,000 of Media Stock were available for grant under the plans
in effect at December 31, 1997 and 1996, respectively. Approximately 20,720,000
shares of Communications Stock and 23,150,000 shares of Media Stock were
reserved for issuance under the Plan at December 31, 1997.
94
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: EMPLOYEE BENEFITS
PENSION PLAN
U S WEST sponsors a defined benefit pension plan covering substantially all
management and occupational employees of the Company, except for foreign
national employees. Effective January 1, 1997, Continental's defined benefit
pension plan was merged into the U S WEST plan. On April 1, 1997, employees of
the cable systems in Atlanta, Georgia joined the U S WEST plan. Management
benefits are based on a final pay formula while occupational benefits are based
on a flat benefit formula. U S WEST uses 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 is to fund amounts
required under the Employee Retirement Income Security Act of 1974 and no
funding was required in 1997, 1996 and 1995.
The composition of the net pension cost (credit) and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost--benefits earned during the period.............................. $ 189 $ 203 $ 173
Interest cost on projected benefit obligation................................ 612 575 558
Actual return on plan assets................................................. (1,996) (1,509) (1,918)
Net amortization and deferral................................................ 1,159 726 1,185
--------- --------- ---------
Net pension credit $ (36) $ (5) $ (2)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1997, 1996 and 1995.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $7,404 and $6,544,
respectively.............................................................................. $ 8,278 $ 7,446
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds(1).................................... $ 12,260 $ 10,958
Less: Projected benefit obligation.......................................................... 9,167 8,310
--------- ---------
Plan assets in excess of projected benefit obligation....................................... 3,093 2,648
Unrecognized net (gain)..................................................................... (1,966) (1,502)
Prior service cost not yet recognized in net periodic pension cost.......................... 6 31
Balance of unrecognized net asset at January 1, 1987........................................ (546) (626)
--------- ---------
Prepaid pension cost........................................................................ $ 587 $ 551
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Pension plan assets include Communications Stock and Media Stock of $12 and
$8, respectively, in 1997, and $8 and $7, respectively, in 1996.
95
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Discount rate.................................................................................. 7.00% 7.50%
Weighted-average rate of compensation increase................................................. 5.50% 5.50%
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
U S WEST and most of its subsidiaries provide certain health care and life
insurance benefits to retired employees. In conjunction with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," U S
WEST immediately recognized the accumulated postretirement benefit obligation
for current and future retirees. However, the FCC and certain state
jurisdictions permit 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 uses 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,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the period........................................... $ 66 $ 70 $ 65
Interest on accumulated benefit obligation................................................ 296 259 267
Actual return on plan assets.............................................................. (394) (231) (415)
Net amortization and deferral............................................................. 211 68 286
--------- --------- ---------
Net postretirement benefit costs.......................................................... $ 179 $ 166 $ 203
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1997, 1996 and 1995.
96
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees................................................................................... $ 2,403 $ 2,255
Fully eligible plan participants........................................................... 820 347
Other active plan participants............................................................. 1,183 1,289
--------- ---------
Total accumulated postretirement benefit obligation.......................................... 4,406 3,891
Unrecognized net gain........................................................................ 631 534
Unamortized prior service cost............................................................... (160) 32
Fair value of plan assets, primarily stocks, bonds and life insurance(1)..................... (2,413) (2,063)
--------- ---------
Accrued postretirement benefit obligation.................................................... $ 2,464 $ 2,394
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155 and
$94, respectively, in 1996.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Discount rate..................................... 7.00% 7.50%
Medical cost trend rate*.......................... 8.00% 8.00%
</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 1997 net postretirement benefit cost by approximately $11 and
increased the 1997 accumulated postretirement benefit obligation by
approximately $394.
For U S WEST, the annual funding amount is based on its cash requirements,
with the funding at U S WEST Communications based on regulatory accounting
requirements.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
97
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
FEDERAL:
Current......................................... $587 $601 $481
Deferred........................................ (147) 5 225
Investment tax credits--net..................... (15) (28) (38)
---- ---- ----
425 578 668
---- ---- ----
STATE AND LOCAL:
Current......................................... 100 75 64
Deferred........................................ (16) 11 54
---- ---- ----
84 86 118
---- ---- ----
FOREIGN:
Current......................................... (1) 2 6
Deferred........................................ 14 30 33
---- ---- ----
13 32 39
---- ---- ----
Provision for income taxes........................ $522 $696 $825
---- ---- ----
---- ---- ----
</TABLE>
U S WEST paid $636, $693 and $566 for income taxes in 1997, 1996 and 1995,
respectively, inclusive of the capital assets segment.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1997 1996 1995
----- ----- -----
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate........................ 35.0 35.0 35.0
State income taxes--net of federal effect......... 4.4 3.0 3.5
Foreign taxes--net of federal effect.............. 0.7 1.1 1.2
Goodwill amortization............................. 4.6 0.8 0.4
Investment tax credit amortization................ (0.8) (0.9) (1.2)
Other............................................. (1.2) (1.2) (0.6)
----- ----- -----
Effective tax rate................................ 42.7 37.8 38.3
----- ----- -----
----- ----- -----
</TABLE>
98
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Intangible assets................................. $2,605 $2,414
Property, plant and equipment..................... 1,862 1,891
State deferred taxes--net of federal effect....... 871 1,141
Leases............................................ 591 679
Investments....................................... -- 373
Other............................................. 345 126
------ ------
Deferred tax liabilities........................ 6,274 6,624
------ ------
Postemployment benefits, including pension........ 768 698
State deferred taxes--net of federal effect....... 221 223
Restructuring, assets held for sale and other..... 209 301
Investments....................................... 203 --
Net operating loss and tax credit carryforwards... 155 466
Unamortized investment tax credit................. 59 61
Valuation allowance............................... (320) (387)
Other............................................. 615 455
------ ------
Deferred tax assets............................. 1,910 1,817
------ ------
Net deferred tax liability........................ $4,364 $4,807
------ ------
------ ------
</TABLE>
In connection with the Continental Acquisition, U S WEST has net operating
loss carryforwards of approximately $300 for federal income tax purposes,
expiring in various years through 2011. U S WEST also acquired investment tax
credit carryforwards of approximately $50, expiring in various years through
2005. A valuation allowance of $320 has been established for the carryforwards
and a deferred tax asset associated with an investment due to potential
limitations on utilization which may exist for U S WEST. If in future periods
the realization of the carryforwards or deferred tax asset becomes more likely
than not, any reduction in the valuation allowance will be allocated to reduce
goodwill and acquired intangible assets.
The current portion of the deferred tax asset was $373 and $213 at December
31, 1997 and 1996, respectively, resulting primarily from restructuring charges
and compensation-related items. The net deferred tax liability includes $669 and
$671 in 1997 and 1996, respectively, related to the capital assets segment.
Foreign operations contributed pretax losses of $604, $362, and $35 during 1997,
1996 and 1995, respectively.
NOTE 20: COMMITMENTS AND CONTINGENCIES
COMMUNICATIONS GROUP CONTINGENCIES
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
99
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED)
WASHINGTON. In 1996, the 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.
On December 24, 1997, the Washington State Supreme Court upheld the WUTC
ruling. The Washington State Supreme Court's ruling resulted in an estimated
liability for the revenues that were collected subject to refund from May 1,
1996 through December 31, 1997, 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 Washington State Supreme Court's ruling. Tariffs
implementing both orders became effective February 1, 1998.
OREGON. On May 1, 1996, the OPUC approved a stipulation terminating
prematurely U S WEST Communications' 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 which granted U S
WEST Communications' request for a stay, pending a full review of the OPUC's
order. On February 19, 1998, the Oregon Circuit Court entered a judgment 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, is not expected to exceed $180.
UTAH. In another proceeding, the Utah Supreme Court has remanded a UPSC
order to the UPSC for hearing, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The UPSC'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, is not expected to exceed
$160.
STATE REGULATORY ACCRUALS. U S WEST Communications has accrued $348 at
December 31, 1997, which represents its estimated liability for all state
regulatory proceedings, predominately the items discussed above. 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. U S WEST Communications will continue to
monitor and evaluate the risks associated with its local regulatory
jurisdictions, and will adjust estimates as new information becomes available.
MEDIA GROUP CONTINGENCIES
In February 1997, the King County Superior Court in Washington state ruled
that a subsidiary of Media Group violated the terms of its partnership agreement
with its minority partners in the Seattle cellular partnership by entering into
the AirTouch Joint Venture. Similar litigation was filed in other
100
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED)
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. On December 1, 1997, this minority partner
announced it was selling its minority interests in the eight cellular properties
where it was a partner with a Media Group subsidiary to AirTouch. As a result of
the minority partner's actions, litigation in the states of Washington, Arizona,
Colorado, Minnesota, Idaho and Delaware has now been stayed or dismissed pending
consummation of the transfer of the minority partner's interest to AirTouch. The
AirTouch Transaction has been entered into in lieu of the AirTouch Joint
Venture.
U S WEST GUARANTEES
U S WEST commitments and debt guarantees associated with Media Group
international and domestic investments totaled approximately $650 and $175
respectively, at December 31, 1997. In addition, a Media Group subsidiary
guarantees debt, non-recourse to U S WEST, associated with its international
investment in the principal amount of approximately $600.
NOTE 21: SUBSEQUENT EVENT
SALE OF DOMESTIC WIRELESS BUSINESSES
On January 29, 1998, U S WEST entered into the AirTouch Merger Agreement
pursuant to which U S WEST agreed to sell its domestic wireless business to
AirTouch in a tax-efficient transaction. The domestic wireless business includes
cellular communication services provided to 2.6 million customers in 12 western
and midwestern states and a 25 percent interest in PrimeCo. Pursuant to the
AirTouch Merger Agreement, AirTouch will acquire these cellular and PCS
interests. Consideration under the AirTouch Transaction totals approximately
$5.7 billion (subject to certain closing adjustments) and consists of (i) debt
reduction of approximately $1.4 billion, (ii) the issuance to U S WEST of $1.6
billion in liquidation preference of dividend bearing AirTouch preferred stock
(fair value of approximately $1.45 billion), and (iii) approximately $2.7
billion in value of AirTouch common stock. The number of shares of AirTouch
common stock to be received by U S WEST will depend on the volume-weighted
average trading price of the AirTouch common stock during a 30-day period ending
on the fifth trading day prior to the closing of the transaction (the "AirTouch
Determination Price"). If the AirTouch Determination Price is greater than or
equal to $45, U S WEST will receive 60.8 million shares of AirTouch common
stock. If the AirTouch Determination Price is $40 or lower, U S WEST will
receive 67.1 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 will decrease from 67.1 million to 60.8 million on a
proportionate basis.
U S WEST 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. Consummation of the transaction will result
in the disposition of Media Group's domestic wireless businesses. If the terms
of the AirTouch Determination Price were applied as of February 20, 1998, this
transaction would result in a gain of approximately $2.2 billion, net of
deferred taxes of $1.6 billion.
In connection with this transaction, U S WEST and AirTouch will enter into
an investment agreement, pursuant to which AirTouch will agree to provide to U S
WEST registration rights with respect to the shares of AirTouch preferred stock
and AirTouch common stock which U S WEST receives in the AirTouch Transaction.
101
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: SUBSEQUENT EVENT (CONTINUED)
U S WEST 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.
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE
The Consolidated Financial Statements include the discontinued operations of
the capital assets segment. In 1993, the Board approved a plan to dispose of the
capital assets segment through the sale of segment assets and businesses. The
capital assets segment includes activities related to financial services and
financial guarantee insurance operations. Also included in the segment is U S
WEST Real Estate, Inc., for which disposition was announced in 1991.
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
and Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a "net investment in assets held for sale." The net
realizable value of the assets is evaluated on an ongoing basis with adjustments
to the existing reserve, if any, charged to continuing operations. No such
adjustment was required in 1997, 1996 or 1995.
In second-quarter 1996, U S WEST received proceeds of $98 from the sale of
3,750,000 shares of FSA common stock. This sale reduced U S WEST's ownership in
FSA to approximately 40 percent. Also in second-quarter 1996, U S WEST issued
DECS due May 15, 1999. The shares of FSA to be delivered upon maturity of the
DECS, combined with the exercise of outstanding options held by Fund American
Enterprises Holdings, Inc. to purchase FSA shares would, if consummated,
substantially dispose of U S WEST's ownership in FSA. See Note 10--Debt and Note
14--Preferred Stock Subject to Mandatory Redemption--to the Consolidated
Financial Statements.
In fourth-quarter 1995, U S WEST issued DECS to reduce its investment in
Enhance by December 1998. During 1997, in order to monetize unrealized gains
associated with its investment in Enhance, U S WEST sold options for the
purchase of 828,000 residual shares of Enhance common stock at the DECS
maturity. At December 31, 1997, an unrecognized loss of $10 (net of income tax
benefits of $7) was included in equity related to these contracts. The shares of
Enhance to be delivered upon maturity of the DECS combined with the option
would, if consummated, result in a complete disposition of U S WEST's ownership
in Enhance. See Note 10--Debt--to the Consolidated Financial Statements.
U S WEST Real Estate, Inc. has sold various assets for proceeds of $88, $156
and $120 in each of the three years ended December 31, 1997, respectively. The
sales proceeds were in line with estimates. Proceeds from sales were primarily
used to repay related debt. U S WEST expects to substantially complete the
liquidation of this portfolio by the end of 1998. The balance of real estate and
related assets subject to sale is approximately $213, net of reserves, as of
December 31, 1997.
Building sales and operating revenues of the capital assets segment were
$116, $223 and $237 in 1997, 1996 and 1995, respectively. Income or losses from
the capital assets segment are being deferred and are included within the
reserve for assets held for sale.
The assets and liabilities of the capital assets segment have been
separately classified on the Consolidated Balance Sheets as net investment in
assets held for sale.
102
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 54 $ 21
Finance receivables--net.......................... 777 869
Investment in real estate--net of valuation
allowance....................................... 156 182
Bonds, at market value............................ 119 146
Investment in FSA................................. 365 326
Other assets...................................... 197 165
------ ------
Total assets...................................... $1,668 $1,709
------ ------
------ ------
LIABILITIES
Debt.............................................. $ 372 $ 481
Deferred income taxes............................. 669 671
Accounts payable, accrued liabilities and other... 197 137
Minority interests................................ 11 11
------ ------
Total liabilities................................. 1,249 1,300
------ ------
Net investment in assets held for sale............ $ 419 $ 409
------ ------
------ ------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases that U S WEST intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
nonrecourse debt which is netted against the related lease receivable.
The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Receivables....................................... $ 719 $ 821
Unguaranteed estimated residual values............ 431 444
------ ------
1,150 1,265
Less: Unearned income............................. 355 380
Credit loss and other allowances.................. 18 16
------ ------
Finance receivables--net.......................... $ 777 $ 869
------ ------
------ ------
</TABLE>
Investments in debt securities are classified as available for sale and are
carried at market value. Any resulting unrealized holding gains or losses, net
of applicable deferred income taxes, are reflected as a component of equity.
The amortized cost of $117 and $147 at December 31, 1997 and 1996,
respectively, of investments in debt securities approximates market value. Total
net unrealized gains in 1997 of $22 (net of deferred taxes of $16) and 1996 net
unrealized losses of $7 (net of deferred taxes of $5) are included in equity.
103
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
DEBT
Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
-------------------------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 2002 THERE- AFTER 1997 1996
- ---------------------------------- ----- --------- ----- ----- ----- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Above 6% to 7%.................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 15
Above 7% to 8%.................... 12 12 -- -- 1 148 173 --
Above 8% to 9%.................... -- 95 4 -- -- -- 99 154
Above 9% to 10%................... -- -- -- -- -- -- -- 5
--- --------- --- --- --- ----- --------- ---------
$ 12 $ 107 $ 4 $ -- $ 1 $ 148 272 174
--- --------- --- --- --- -----
--- --------- --- --- --- -----
Allocated to the capital assets
segment--net.................... 100 307
--------- ---------
Total............................. $ 372 $ 481
--------- ---------
--------- ---------
</TABLE>
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK--FINANCIAL GUARANTEES
U S WEST retained certain risks in asset-backed obligations related to the
commercial real estate portfolio. The principal amounts insured on the
asset-backed obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TERMS OF MATURITY 1997 1996
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
0 to 5 Years.................................................................. $ 449 $ 416
5 to 10 Years................................................................. 266 436
10 to 15 Years................................................................ -- 8
--------- ---------
Total......................................................................... $ 715 $ 860
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1997 1996
- ------------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate...................................................... $ 319 $ 341
Corporate secured........................................................... 396 519
--------- ---------
Total......................................................................... $ 715 $ 860
--------- ---------
--------- ---------
</TABLE>
104
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
ADDITIONAL FINANCIAL INFORMATION
Information for U S WEST Financial Services, Inc. ("USWFS"), a member of the
capital assets segment, follows:
<TABLE>
<CAPTION>
YEAR ENDED OR AS OF DECEMBER
31,
-------------------------------
SUMMARIZED FINANCIAL INFORMATION 1997 1996 1995
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................... $ 23 $ 26 $ 44
Net finance receivables.......................................... 824 859 931
Total assets..................................................... 1,208 1,058 1,085
Total debt....................................................... 363 236 274
Total liabilities................................................ 1,121 998 1,024
Equity........................................................... 87 60 61
</TABLE>
In September 1997, USWFS pledged certain finance receivables as collateral
for a nonrecourse loan totaling $173. The loan bears interest at an annual rate
of 7.2 percent and matures in the year 2009.
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
The Supplemental Combined Statements of the Communications Group and the
Media Group (collectively the "Groups") comprise all of the accounts included in
the corresponding Consolidated Financial Statements of U S WEST. Investments in
less than majority-owned ventures are generally accounted for using the equity
method. The separate Supplemental Group Combined Statements have been prepared
on a basis that management believes to be reasonable and appropriate and
include: (i) the combined historical balance sheets, results of operations and
cash flows of the businesses that comprise each of the Groups, with all
significant intra-group amounts and transactions eliminated; (ii) in the case of
the Communications Group Supplemental Combined Statements, certain corporate
assets and liabilities of U S WEST and related transactions identified with the
Communications Group; (iii) in the case of the Media Group Supplemental Combined
Statements, all other corporate assets and liabilities and related transactions
of U S WEST; and (iv) an allocated portion of the corporate expense of U S WEST.
Transactions between the Communications Group and the Media Group have not been
eliminated. Certain reclassifications within the Supplemental Group Combined
Statements have been made to conform to the current year presentation.
Notwithstanding the allocation of assets and liabilities (including
contingent liabilities) and shareowners' equity between the Communications Group
and the Media Group for the purpose of preparing the respective supplemental
statements of such Group, owners of Communications Stock and Media Stock are
subject to risks associated with an investment in a single company and all of U
S WEST's businesses, assets and liabilities. Financial effects arising from
either Group that affect U S WEST's results of operations or financial condition
could, if significant, affect the results of operations or financial position of
the other Group or the market price of the class of common stock relating to the
other Group. Any net losses of the Communications Group or the Media Group, and
dividends or distributions on, or repurchases of Communications Stock, Media
Stock or preferred stock, will reduce the funds of U S WEST legally available
for payment of dividends on both the Communications Stock and Media Stock.
Accordingly, each of the Group's Supplemental Combined Statements should be read
in conjunction with U S WEST's Consolidated Financial Statements and the other
Group's Supplemental Combined Statements.
105
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
U S WEST COMMUNICATIONS GROUP COMBINED STATEMENTS OF INCOME 1997 1996 1995
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Operating revenues:
Local service................................................................... $ 5,016 $ 4,770 $ 4,344
Interstate access service....................................................... 2,666 2,507 2,378
Intrastate access service....................................................... 761 770 747
Long-distance network services.................................................. 885 1,100 1,189
Other services.................................................................. 991 932 826
--------- --------- ---------
Total operating revenues...................................................... 10,319 10,079 9,484
Operating expenses:
Employee-related expenses....................................................... 3,697 3,594 3,341
Other operating expenses........................................................ 1,870 1,634 1,543
Taxes other than income taxes................................................... 416 389 380
Depreciation and amortization................................................... 2,126 2,122 2,042
--------- --------- ---------
Total operating expenses...................................................... 8,109 7,739 7,306
--------- --------- ---------
Operating income.................................................................. 2,210 2,340 2,178
Interest expense.................................................................. (403) (445) (427)
Gains on sales of rural telephone exchanges....................................... 77 59 136
Gain on sale of investment in Bellcore............................................ 53 -- --
Other expense--net................................................................ (73) (41) (41)
--------- --------- ---------
Income before income taxes, extraordinary items and cumulative effect of change in
accounting principle............................................................ 1,864 1,913 1,846
Provision for income taxes........................................................ (684) (698) (662)
--------- --------- ---------
Income before extraordinary items and cumulative effect of change in accounting
principle....................................................................... 1,180 1,215 1,184
Extraordinary items--early extinguishment of debt--net of tax..................... (3) -- (8)
--------- --------- ---------
Income before cumulative effect of change in accounting principle................. 1,177 1,215 1,176
Cumulative effect of change in accounting principle--net of tax................... -- 34 --
--------- --------- ---------
NET INCOME........................................................................ $ 1,177 $ 1,249 $ 1,176
--------- --------- ---------
--------- --------- ---------
</TABLE>
106
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
U S WEST COMMUNICATIONS GROUP COMBINED BALANCE SHEETS 1997 1996
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 27 $ 80
Accounts and notes receivable, less allowance for credit
losses of $54 and $40, respectively..................................................... 1,681 1,622
Inventories and supplies.................................................................. 150 144
Deferred tax asset........................................................................ 247 171
Prepaid and other......................................................................... 77 65
--------- ---------
Total current assets........................................................................ 2,182 2,082
Gross property, plant and equipment......................................................... 33,408 32,645
Less accumulated depreciation............................................................... 19,176 18,639
--------- ---------
Property, plant and equipment--net.......................................................... 14,232 14,006
Other assets................................................................................ 832 827
--------- ---------
Total assets................................................................................ $ 17,246 $ 16,915
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt........................................................................... $ 626 $ 834
Accounts payable.......................................................................... 1,325 897
Employee compensation..................................................................... 375 342
Dividends payable......................................................................... 259 257
Advanced billings and customer deposits................................................... 292 250
Current portion state regulatory liability................................................ 225 --
Accrued property taxes.................................................................... 205 193
Payable to Media Group.................................................................... 90 92
Other..................................................................................... 603 602
--------- ---------
Total current liabilities................................................................... 4,000 3,467
Long-term debt.............................................................................. 5,020 5,664
Postretirement and other postemployment benefit obligations................................. 2,468 2,387
Deferred income taxes....................................................................... 805 749
Unamortized investment tax credits.......................................................... 168 173
Deferred credits and other.................................................................. 586 558
Contingencies
Communications Group equity................................................................. 4,199 3,917
--------- ---------
Total liabilities and equity................................................................ $ 17,246 $ 16,915
--------- ---------
--------- ---------
</TABLE>
107
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
U S WEST COMMUNICATIONS GROUP COMBINED STATEMENTS OF CASH FLOWS 1997 1996 1995
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 1,177 $ 1,249 $ 1,176
Adjustments to net income:
Depreciation and amortization................................................. 2,126 2,122 2,042
Gains on sales of rural telephone exchanges................................... (77) (59) (136)
Gain on sale of investment in Bellcore........................................ (53) -- --
Cumulative effect of change in accounting principle........................... -- (34) --
Deferred income taxes and amortization of investment tax
credits..................................................................... (18) 91 172
Changes in operating assets and liabilities:
Restructuring payments........................................................ (67) (226) (315)
Postretirement medical and life costs, net of cash fundings................... 80 28 (90)
Accounts receivable........................................................... (46) (5) (117)
Inventories, supplies and other current assets................................ (45) 27 (51)
Accounts payable and accrued liabilities...................................... 564 98 7
Other--net...................................................................... 207 15 31
--------- --------- ---------
Cash provided by operating activities........................................... 3,848 3,306 2,719
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (2,139) (2,419) (2,462)
Purchase of PCS licenses........................................................ (73) -- --
Proceeds from sales of rural telephone exchanges................................ 67 174 214
Proceeds from sale of investment in Bellcore.................................... 65 -- --
Proceeds from (payments on) disposals of property, plant and equipment.......... 22 15 (18)
Other--net...................................................................... -- -- (2)
--------- --------- ---------
Cash (used for) investing activities............................................ (2,058) (2,230) (2,268)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt............................... (510) 96 (832)
Proceeds from issuance of long-term debt........................................ 29 23 1,647
Repayments of long-term debt.................................................... (445) (482) (334)
Dividends paid on common stock.................................................. (992) (939) (926)
Proceeds from issuance of common stock.......................................... 75 134 50
--------- --------- ---------
Cash (used for) financing activities............................................ (1,843) (1,168) (395)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................. (53) (92) 56
Beginning balance............................................................... 80 172 116
--------- --------- ---------
Ending balance.................................................................. $ 27 $ 80 $ 172
--------- --------- ---------
--------- --------- ---------
</TABLE>
108
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
U S WEST MEDIA GROUP COMBINED STATEMENTS OF OPERATIONS 1997 1996 1995
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues:
Cable and broadband................................................................ $ 2,341 $ 494 $ 215
Wireless communications............................................................ 1,428 1,183 941
Directory and information services................................................. 1,245 1,259 1,180
Other.............................................................................. 29 19 38
--------- --------- ---------
Total sales and other revenues................................................... 5,043 2,955 2,374
Operating expenses:
Cost of sales and other revenues................................................... 1,666 966 772
Selling, general and administrative expenses....................................... 1,487 1,052 886
Depreciation and amortization...................................................... 1,294 422 249
--------- --------- ---------
Total operating expenses......................................................... 4,447 2,440 1,907
--------- --------- ---------
Operating income..................................................................... 596 515 467
Interest expense..................................................................... (680) (168) (100)
Equity losses in unconsolidated ventures............................................. (909) (346) (207)
Gains on sales of investments........................................................ 421 -- --
Gain on merger of joint venture interest............................................. -- -- 157
Guaranteed minority interest expense................................................. (87) (55) (14)
Other income (expense)--net.......................................................... 17 (19) 5
--------- --------- ---------
Income (loss) before income taxes and extraordinary item............................. (642) (73) 308
(Provision) benefit for income taxes................................................. 162 2 (163)
--------- --------- ---------
Income (loss) before extraordinary item.............................................. (480) (71) 145
Extraordinary item--early extinguishment of debt--net of tax......................... -- -- (4)
--------- --------- ---------
NET INCOME (LOSS).................................................................... $ (480) $ (71) $ 141
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock......................................................... (52) (9) (3)
--------- --------- ---------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK........................................... $ (532) $ (80) $ 138
--------- --------- ---------
--------- --------- ---------
</TABLE>
109
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
U S WEST MEDIA GROUP COMBINED BALANCE SHEETS 1997 1996
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 184 $ 121
Accounts and notes receivable, less allowance for credit
losses of $82 and $85, respectively..................................................... 589 508
Deferred directory costs.................................................................. 257 259
Receivable from Communications Group...................................................... 90 92
Marketable securities..................................................................... -- 58
Deferred tax asset........................................................................ 126 43
Other..................................................................................... 82 58
--------- ---------
Total current assets........................................................................ 1,328 1,139
Property, plant and equipment--net.......................................................... 4,348 4,275
Investment in Time Warner Entertainment..................................................... 2,486 2,477
Net investment in international ventures.................................................... 475 1,548
Net investment in assets held for sale...................................................... 419 409
Intangible assets--net...................................................................... 12,597 12,595
Other assets................................................................................ 961 1,618
--------- ---------
Total assets................................................................................ $ 22,614 $ 24,061
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt........................................................................... $ 804 $ 217
Due to Continental Cablevision shareholders............................................... -- 1,150
Accounts payable.......................................................................... 432 425
Accrued interest payable.................................................................. 212 84
Deferred revenue and customer deposits.................................................... 152 129
Employee compensation..................................................................... 146 128
Other..................................................................................... 680 583
--------- ---------
Total current liabilities................................................................... 2,426 2,716
Long-term debt.............................................................................. 8,228 8,636
Deferred income taxes....................................................................... 3,262 3,600
Deferred credits and other.................................................................. 393 346
Commitments and contingencies
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures...................................................... 1,080 1,080
Preferred stock subject to mandatory redemption............................................. 100 51
Media Group equity.......................................................................... 7,171 7,723
Company LESOP guarantee..................................................................... (46) (91)
--------- ---------
Total equity................................................................................ 7,125 7,632
--------- ---------
Total liabilities and equity................................................................ $ 22,614 $ 24,061
--------- ---------
--------- ---------
</TABLE>
110
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
U S WEST MEDIA GROUP COMBINED STATEMENTS OF CASH FLOWS 1997 1996 1995
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................................... $ (480) $ (71) $ 141
Adjustments to net income (loss):
Depreciation and amortization................................................. 1,294 422 249
Equity losses in unconsolidated ventures...................................... 909 346 207
Gains on sales of investments................................................. (421) -- --
Gain on merger of joint venture interest...................................... -- -- (157)
Deferred income taxes......................................................... (146) (73) 102
Provision for uncollectibles.................................................. 95 65 55
Changes in operating assets and liabilities:
Restructuring payments........................................................ (3) (16) (19)
Accounts and notes receivable................................................. (189) (101) (103)
Deferred directory costs, prepaid and other................................... (60) 4 (28)
Accounts payable and accrued liabilities...................................... 218 112 36
Other adjustments--net.......................................................... 101 36 157
--------- --------- ---------
Cash provided by operating activities........................................... 1,318 724 640
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (1,551) (652) (363)
Payment to Continental Cablevision shareowners.................................. (1,150) -- --
Investments in international ventures........................................... (325) (243) (681)
Investment in PCS............................................................... (213) (132) (286)
Proceeds from sales of investments.............................................. 1,827 28 127
Cash from net investment in assets held for sale................................ 231 213 --
Other--net...................................................................... (61) (32) (35)
--------- --------- ---------
Cash (used for) investing activities............................................ (1,242) (818) (1,238)
--------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from (repayments of) short-term debt............................... (3,685) 3,891 (449)
Proceeds from issuance of long-term debt........................................ 4,123 360 1,085
Repayments of long-term debt.................................................... (379) (4,217) (724)
Proceeds from issuance of Preferred Securities--net............................. -- 465 581
Proceeds from issuance of common stock.......................................... 31 2 57
Purchase of treasury stock...................................................... (53) (297) --
Dividends paid on preferred stock............................................... (50) (9) (3)
Other--net...................................................................... -- -- (22)
--------- --------- ---------
Cash (used for) provided by financing activities................................ (13) 195 525
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................. 63 101 (73)
Beginning balance............................................................... 121 20 93
--------- --------- ---------
Ending balance.................................................................. $ 184 $ 121 $ 20
--------- --------- ---------
--------- --------- ---------
</TABLE>
111
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Sales and other revenues................................................... $ 3,766 $ 3,787 $ 3,918 $ 3,764
Income before income taxes and extraordinary item.......................... 400 415 333 74
Income before extraordinary item........................................... 230 235 198 37
Net income................................................................. 230 238 192 37
COMMUNICATIONS GROUP:
Basic earnings per common share before extraordinary item................ 0.70 0.69 0.70 0.35
Basic earnings per common share.......................................... 0.70 0.69 0.69 0.35
Diluted earnings per common share before extraordinary item.............. 0.70 0.68 0.69 0.35
Diluted earnings per common share........................................ 0.70 0.68 0.69 0.35
MEDIA GROUP:
Basic and diluted loss per common share before extraordinary item........ (0.20) (0.17) (0.26) (0.24)
Basic and diluted loss per common share.................................. (0.20) (0.17) (0.26) (0.24)
1996
Sales and other revenues................................................... $ 3,050 $ 3,124 $ 3,179 $ 3,558
Income before income taxes and cumulative effect of change in accounting
principle................................................................ 489 519 494 338
Income before cumulative effect of change in accounting principle.......... 297 313 304 230
Net income................................................................. 331 313 304 230
COMMUNICATIONS GROUP:
Basic earnings per common share before cumulative effect of change in
accounting principle................................................... 0.62 0.68 0.60 0.65
Basic earnings per common share.......................................... 0.69 0.68 0.60 0.65
Diluted earnings per common share before cumulative effect of change in
accounting principle................................................... 0.61 0.67 0.59 0.64
Diluted earnings per common share........................................ 0.68 0.67 0.59 0.64
MEDIA GROUP:
Basic and diluted earnings (loss) per common share....................... -- (0.03) 0.04 (0.16)
</TABLE>
1997 first-quarter net income includes a gain of $31 ($0.05 per share of
Media Stock) related to the sale of the Company's wireless interest in France
and $11 ($0.02 per share of Communications Stock) from gains on the sales of
certain rural telephone exchanges. 1997 second-quarter net income includes a
gain of $25 ($0.04 per share of Media Stock) related to the sales of TCG and
Time Warner shares, $18 ($0.04 per share of Communications Stock) from gains on
the sales of certain rural telephone exchanges, and a gain of $3 (no per share
Media Stock impact) on the early extinguishment of debt. 1997 third-quarter net
income includes $19 ($0.04 per share of Communications Stock) from gains on the
sales of certain rural telephone exchanges, a $6 charge ($0.01 per share of
Communications Stock and no per share Media Stock impact) for the early
extinguishment of debt, and a gain of $7 ($0.01 per share of Media Stock)
related to sales of TCG shares. 1997 fourth-quarter net income includes a $120
charge ($0.20 per share of Media Stock) related to Asian investments, and a $152
regulatory charge ($0.31 per share of Communications Stock) related primarily to
the 1997 Washington State Supreme Court ruling that upheld a WUTC 1996 rate
order. Also included is a gain of $89 ($0.15 per share of Media Stock) related
to the sale of TCG shares, a gain of $80 ($0.13 per share of Media Stock) on the
sale of Fintelco, a gain of $32 ($0.07 per share of Communications Stock) from
the sale of U S WEST Communications' investment in Bellcore, and a gain of $17
($0.03 per share of Media Stock) from the sale of U S WEST Polska.
112
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
1996 first-quarter net income includes the cumulative and current effects of
$34 ($0.07 per share of Communications Stock) and $5 ($0.01 per share of
Communications Stock), respectively, from adopting SFAS No. 121. 1996
second-quarter net income includes $30 ($0.06 per share of Communications Stock)
from gains on the sales of certain rural telephone exchanges, a charge of $19
($0.04 per share of Media Stock) related to the sale of the Company's cable
television interests in Norway, Sweden and Hungary and the current effects of $5
($0.01 per share of Communications Stock) from adopting SFAS No. 121. 1996
third-quarter net income includes $1 (no per share impact) from gains on the
sales of certain rural telephone exchanges and the current effects of $3 ($0.01
per share of Communications Stock) from adopting SFAS No. 121. 1996
fourth-quarter net income includes $5 ($0.01 per share of Communications Stock)
from gains on the sales of certain rural telephone exchanges, losses of $71 and
losses available for common stock of $77 ($0.15 per share of Media Stock)
related to the Continental Acquisition and the current effects of $2 ($0.01 per
share of Communications Stock) from adopting SFAS No. 121.
<TABLE>
<CAPTION>
MARKET PRICE
----------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- ------------------------------------------------------------------ ---------- ---------- ---------- -----------
(WHOLE DOLLARS)
<S> <C> <C> <C> <C>
1997
COMMUNICATIONS STOCK
First quarter................................................... $ 37.2500 $ 31.7500 $ 33.8750 $ 0.5350
Second quarter.................................................. 38.5000 31.1250 37.6875 0.5350
Third quarter................................................... 39.4375 35.6250 38.5000 0.5350
Fourth quarter.................................................. 46.9375 36.8750 45.1250 0.5350
MEDIA STOCK
First quarter................................................... $ 20.6250 $ 17.6250 $ 18.5000 $ --
Second quarter.................................................. 22.3750 16.0000 20.2500 --
Third quarter................................................... 24.2500 19.8125 22.3125 --
Fourth quarter.................................................. 29.1250 22.3125 28.8750 --
1996
COMMUNICATIONS STOCK
First quarter................................................... $ 37.5000 $ 30.2500 $ 32.3750 $ 0.5350
Second quarter.................................................. 34.6250 31.1250 32.0000 0.5350
Third quarter................................................... 32.2500 27.2500 29.8750 0.5350
Fourth quarter.................................................. 33.6250 29.2500 32.2500 0.5350
MEDIA STOCK
First quarter................................................... $ 23.0000 $ 18.8750 $ 20.6250 $ --
Second quarter.................................................. 21.0000 16.8750 18.2500 --
Third quarter................................................... 18.8750 14.3750 16.8750 --
Fourth quarter.................................................. 19.8750 15.3750 18.3750 --
</TABLE>
113
<PAGE>
U S WEST, INC.
SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
U S WEST believes that proportionate financial data facilitates the
understanding and assessment of its Consolidated Financial Statements. The
following proportionate accounting table reflects the relative weight of U S
WEST's ownership interest in its domestic and international investments in cable
and broadband, wireless communications and directory and information services
operations. The financial information included below departs materially from
GAAP because it aggregates the revenues and operating income of entities not
controlled by U S WEST with those of the consolidated operations of U S WEST.
This table is not intended to replace the Consolidated Financial Statements
prepared in accordance with GAAP. U S WEST considers earnings before interest,
taxes, depreciation, amortization and other ("EBITDA") an important indicator of
the operating performance of its businesses. This calculation of EBITDA may not
be comparable to other similarly titled measures of other companies. 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.
<TABLE>
<CAPTION>
COMMUNICATIONS MEDIA
GROUP GROUP ELIMINATIONS TOTAL
--------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
1997
Sales and other revenues.................................... $ 10,319 $ 9,107 $ (127) $ 19,299
Operating expenses.......................................... 5,983 6,486 (127) 12,342
------- --------- ----- ---------
EBITDA...................................................... 4,336 2,621 -- 6,957
Depreciation and amortization............................... 2,126 2,136 -- 4,262
------- --------- ----- ---------
Operating income............................................ 2,210 485 -- 2,695
Income (loss) before extraordinary items.................... 1,180 (480) -- 700
Net income (loss)........................................... 1,177 (480) -- 697
- --------------------------------------------------------------------------------------------------------------------
1996
Sales and other revenues.................................... $ 10,079 $ 6,367 $ (123) $ 16,323
Operating expenses.......................................... 5,617 4,894 (123) 10,388
------- --------- ----- ---------
EBITDA...................................................... 4,462 1,473 -- 5,935
Depreciation and amortization............................... 2,122 1,014 -- 3,136
------- --------- ----- ---------
Operating income............................................ 2,340 459 -- 2,799
Income (loss) before cumulative effect of change in
accounting principle...................................... 1,215 (71) -- 1,144
Net income (loss)........................................... 1,249 (71) -- 1,178
- --------------------------------------------------------------------------------------------------------------------
1995 (UNAUDITED)
Sales and other revenues.................................... $ 9,484 $ 5,115 $ (112) $ 14,487
Operating expenses.......................................... 5,264 3,966 (112) 9,118
------- --------- ----- ---------
EBITDA...................................................... 4,220 1,149 -- 5,369
Depreciation and amortization............................... 2,042 673 -- 2,715
------- --------- ----- ---------
Operating income............................................ 2,178 476 -- 2,654
Income before extraordinary item............................ 1,184 145 -- 1,329
Net income.................................................. 1,176 141 -- 1,317
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
114
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SEPARATION AGREEMENT
between
U S WEST, INC.
(to be renamed MEDIAONE GROUP, INC.)
and
USW-C, INC.
(to be renamed U S WEST, INC.)
Dated as of _________ __, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I
DEFINITIONS
<S> <C>
1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Terms Defined Elsewhere in the Agreement. . . . . . . . . 15
1.3 Other Definitional Provisions . . . . . . . . . . . . . . 17
1.4 References to Time. . . . . . . . . . . . . . . . . . . . 17
ARTICLE II
CERTAIN PRE-SEPARATION TRANSACTIONS
2.1 Certificates of Incorporation; Bylaws; Name
Changes . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2 Stockholders' Meeting . . . . . . . . . . . . . . . . . . 18
2.3 Registration and Listing. . . . . . . . . . . . . . . . . 18
2.4 Boards of Directors . . . . . . . . . . . . . . . . . . . 19
2.5 Rights Agreements . . . . . . . . . . . . . . . . . . . . 20
2.6 The Transaction Documents . . . . . . . . . . . . . . . . 20
2.7 U S WEST Approval of Certain New U S WEST
Actions . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE III
REORGANIZATION; CONTRIBUTION;
REFINANCING OF INDEBTEDNESS
3.1 Reorganization. . . . . . . . . . . . . . . . . . . . . . 21
3.2 Refinancing of Indebtedness . . . . . . . . . . . . . . . 23
3.3 Contribution. . . . . . . . . . . . . . . . . . . . . . . 28
3.4 Discharge of Liabilities. . . . . . . . . . . . . . . . . 32
3.5 Closing; Delivery; Methods of Transfer and
Assumption . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE IV
THE SEPARATION
4.1 The Separation. . . . . . . . . . . . . . . . . . . . . . 35
4.2 Separation Time . . . . . . . . . . . . . . . . . . . . . 35
4.3 Certain Determinations. . . . . . . . . . . . . . . . . . 36
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.4 New U S WEST SIP Accounts; Certificates;
Distribution Procedures . . . . . . . . . . . . . . . . . 36
4.5 Conditions to the Separation. . . . . . . . . . . . . . . 41
ARTICLE V
POST-SEPARATION INTERCOMPANY
BUSINESS RELATIONSHIPS
5.1 Pending Litigation. . . . . . . . . . . . . . . . . . . . 43
5.2 Settlements for Cash Collections and
Disbursements After the Separation Time . . . . . . . . . 44
5.3 Transition Services . . . . . . . . . . . . . . . . . . . 45
5.4 U S WEST Name . . . . . . . . . . . . . . . . . . . . . . 46
5.5 Transfer Taxes. . . . . . . . . . . . . . . . . . . . . . 47
5.6 Intellectual Property . . . . . . . . . . . . . . . . . . 47
ARTICLE VI
EMPLOYEE MATTERS
6.1 Employees . . . . . . . . . . . . . . . . . . . . . . . . 48
6.2 Employee Benefit Plans and Employee
Arrangements. . . . . . . . . . . . . . . . . . . . . . . 48
6.3 Internal Revenue Service Forms. . . . . . . . . . . . . . 49
ARTICLE VII
INSURANCE MATTERS
7.1 Policies and Rights Included Within AssetS. . . . . . . . 49
7.2 Administration; Other Matters . . . . . . . . . . . . . . 50
7.3 Cooperation; Disagreements. . . . . . . . . . . . . . . . 51
ARTICLE VIII
INDEMNIFICATION
8.1 New U S WEST's Agreement to Indemnify . . . . . . . . . . 52
8.2 U S WEST's Agreement to Indemnify . . . . . . . . . . . . 53
8.3 Procedure for Indemnification . . . . . . . . . . . . . . 54
8.4 Miscellaneous Indemnification Provisions. . . . . . . . . 58
8.5 Contribution. . . . . . . . . . . . . . . . . . . . . . . 59
8.6 Tax Matters; Construction of Agreements . . . . . . . . . 60
8.7 Remedies Cumulative . . . . . . . . . . . . . . . . . . . 60
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
ARTICLE IX
CERTAIN ADDITIONAL COVENANTS
9.1 Licenses and Permits. . . . . . . . . . . . . . . . . . . 60
9.2 Intercompany Agreements . . . . . . . . . . . . . . . . . 61
9.3 Guarantee Obligations . . . . . . . . . . . . . . . . . . 61
9.4 Further Assurances. . . . . . . . . . . . . . . . . . . . 62
9.5 National Contracts. . . . . . . . . . . . . . . . . . . . 64
9.6 Non-Solicitation of Employees . . . . . . . . . . . . . . 65
9.7 Lock Boxes. . . . . . . . . . . . . . . . . . . . . . . . 65
9.8 Agreements with Respect to Common Stock
Received by Savings Plan/ESOPs. . . . . . . . . . . . . . 66
9.9 AirTouch Transaction. . . . . . . . . . . . . . . . . . . 66
ARTICLE X
ACCESS TO INFORMATION
10.1 Provision of Corporate Records. . . . . . . . . . . . . . 67
10.2 Access to Information . . . . . . . . . . . . . . . . . . 68
10.3 Production of Witnesses . . . . . . . . . . . . . . . . . 70
10.4 Retention of Records. . . . . . . . . . . . . . . . . . . 70
10.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . 71
10.6 Cooperation with Respect to Government
Reports and Filings . . . . . . . . . . . . . . . . . . . 71
10.7 Certain Limitations with Respect to
Information . . . . . . . . . . . . . . . . . . . . . . . 71
10.8 Protective Arrangements . . . . . . . . . . . . . . . . . 72
ARTICLE XI
MUTUAL RELEASE;
NO REPRESENTATIONS OR WARRANTIES
11.1 Mutual Release . . . . . . . . . . . . . . . . . . . . . 73
11.2 No Representations or Warranties . . . . . . . . . . . . 74
ARTICLE XII
GENERAL PROVISIONS
12.1 Merger or Consolidation . . . . . . . . . . . . . . . . . 75
12.2 Separation Committee; Dispute Resolution. . . . . . . . . 75
12.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . 77
12.4 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 78
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
12.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . 78
12.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 78
12.7 Entire Agreement. . . . . . . . . . . . . . . . . . . . . 79
12.8 Headings; References. . . . . . . . . . . . . . . . . . . 79
12.9 Schedules . . . . . . . . . . . . . . . . . . . . . . . . 79
12.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . 79
12.11 Parties in Interest; Assignment;
Successors. . . . . . . . . . . . . . . . . . . . . . . 79
12.12 Severability; Enforcement . . . . . . . . . . . . . . . 80
12.13 Amendment . . . . . . . . . . . . . . . . . . . . . . . 80
12.14 Termination . . . . . . . . . . . . . . . . . . . . . . 80
EXHIBITS
Exhibit A - Employee Matters Agreement
Exhibit B - Tax Sharing Agreement
</TABLE>
iv
<PAGE>
SEPARATION AGREEMENT
SEPARATION AGREEMENT, dated as of _______ __, 1998, between
U S WEST, INC., a Delaware corporation ("U S WEST"), to be renamed "MEDIAONE
GROUP, INC.," and USW-C, INC., a Delaware corporation and indirect wholly
owned subsidiary of U S WEST ("NEW U S WEST"), to be renamed "U S WEST, INC."
W I T N E S S E T H:
WHEREAS, pursuant to the Restated Certificate of Incorporation of
U S WEST (the "RESTATED CERTIFICATE"), U S WEST's assets, liabilities and
businesses are divided between the Communications Group (as defined in the
Restated Certificate) and the Media Group (as defined in the Restated
Certificate);
WHEREAS, pursuant to the Restated Certificate, the domestic
directories business of U S WEST (the "DIRECTORIES BUSINESS") conducted by
U S WEST Dex, Inc., a Colorado corporation ("DEX"), is currently attributed to
the Media Group;
WHEREAS, the Board of Directors of U S WEST has determined that it
is in the best interests of U S WEST and its stockholders to (i) align the
Directories Business with the Communications Group and (ii) separate the
Communications Group and the Media Group into two separately traded public
companies;
WHEREAS, in furtherance of the foregoing, the Board of Directors of
U S WEST and New U S WEST have approved this Agreement, pursuant to which,
among other things, (a) U S WEST shall effect a restructuring of certain of
its assets, liabilities and businesses, as a result of which New U S WEST
shall own the Directories Business and the businesses currently attributed to
the Communications Group and (b) U S WEST shall distribute all of the
outstanding capital stock of New U S WEST to its stockholders, all on the
terms and subject to the conditions described herein;
WHEREAS, it is the intention of the parties hereto that the
transactions contemplated by this Agreement shall be tax-free transactions
under Sections 332, 368(a) and 355 of the Internal Revenue Code of 1986, as
amended (the
<PAGE>
"CODE"), and the rules and regulations promulgated thereunder; and
WHEREAS, the parties hereto desire to make certain covenants and
agreements and to allocate certain assets, liabilities and obligations in
connection with the transactions contemplated hereby and to prescribe various
conditions to the transactions contemplated hereby.
NOW, THEREFORE, in furtherance of the foregoing and in
consideration of the mutual promises and undertakings contained herein and in
any other document executed in connection with this Agreement, the parties
agree as follows:
ARTICLE I
DEFINITIONS
1.1 GENERAL. For the purposes of this Agreement, the following
terms shall have the meanings set forth below:
"ACTION" shall mean any action, claim (whether or not filed), suit,
arbitration, inquiry, demand proceeding or investigation.
"AFFILIATE" shall mean, with respect to any specified Person, any
other Person directly or indirectly controlling, controlled by, or under
common control with, such specified Person; PROVIDED, HOWEVER, that for
purposes of this Agreement, no member of either Group shall, after giving
effect to the Separation, be deemed to be an Affiliate of any member of the
other Group.
"AGREEMENT" shall mean this Separation Agreement, together with all
exhibits and schedules hereto, as the same may be amended from time to time
in accordance with the terms hereof.
"AIRTOUCH" shall mean AirTouch Communications, Inc., a Delaware
corporation.
"AIRTOUCH FUNDS" shall mean the portion of the funds received in
the AirTouch Transaction which is not used to repay outstanding indebtedness.
2
<PAGE>
"AIRTOUCH MERGER AGREEMENT" shall mean Agreement and Plan of
Merger, dated as of January 29, 1998, among U S WEST, MGI, NewVector, PCS
Holdings and AirTouch.
"AIRTOUCH STOCK" shall mean all of the shares of common stock and
preferred stock of AirTouch which MGI receives in connection with the
AirTouch Transaction.
"AIRTOUCH TRANSACTION" shall mean the merger of NewVector and PCS
Holdings with and into AirTouch pursuant to the terms of the AirTouch Merger
Agreement.
"APPLICABLE LAW" shall mean, with respect to any Person, all
statutes, laws, ordinances, rules, orders and regulations of any Governmental
Authority applicable to such Person and its business, properties and assets.
"ASSET" shall mean any and all right, title and interest in and to
all of the rights, properties, assets, claims, Contracts and businesses of
every kind, character and description, whether real, personal or mixed,
whether accrued, contingent or otherwise, and wherever located, including,
without limitation, the following: (i) all Cash Equivalents, notes, prepaid
expenses and accounts receivable (whether current or non-current); (ii) all
capital stock, partnership interests and other equity or ownership interests
or rights, directly or indirectly, in any entity; (iii) debentures, evidences
of indebtedness, certificates of interest or participation, collateral trust
certificates, preorganization certificates or subscriptions, investment
contracts, foreign currency and interest rate contracts (including, without
limitation, forward, option, cap and swap contracts), trust certificates,
puts, calls, straddles, options and other securities or hedging arrangements
of any kind; (iv) all registered and unregistered trademarks, service marks,
service names, trade styles and trade names (including, without limitation,
trade dress and other names, marks and slogans) and all associated goodwill;
all statutory, common law and registered copyrights; all patents; all
applications for any of the foregoing together with all rights to use all of
the foregoing and all other rights in, to and under the foregoing; and all
know-how, inventions, discoveries, improvements, processes, formulae (secret
or otherwise), specifications, trade secrets (whether patentable or not),
licenses and other similar agreements, confidential information, and all
drawings, records, books or other indicia, however evidenced, of the
foregoing; (v) all Contracts and rights existing thereunder
3
<PAGE>
and under all other business arrangements; (vi) all real estate and all
plants, buildings and other improvements thereon; (vii) all leasehold
improvements and all machinery, tools, dies, equipment (including all
transportation and office equipment), fixtures, trade fixtures and furniture;
(viii) all ingredients, supplies, spare parts, other miscellaneous supplies
and other tangible property of any kind; (ix) all raw materials,
work-in-process, finished goods, consigned goods and other inventories; (x)
all computer hardware, software, computer programs, systems and codes and
documentation relating thereto and all databases and reference and resource
materials; (xi) all prepayments of prepaid expenses; (xii) all claims, causes
of action, choses in action, rights under express or implied warranties,
rights of recovery and rights of set-off of any kind; (xiii) the right to
receive mail, accounts receivable payments and other communications; (xiv)
all customer lists and records pertaining to customers and accounts,
personnel records, all lists and records pertaining to suppliers and agents,
and all books, ledgers, files and business records of every kind; (xv) all
advertising materials and all other printed or written materials; (xvi) all
permits, licenses, approvals and authorizations issued by any Governmental
Authority or third party; (xvii) all goodwill as a going concern and all
other intangible properties; and (xviii) all employee Contracts, including,
without limitation, the right thereunder to restrict the employee from
competing in certain respects.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday or
other day on which banks located in New York City are authorized or required
by law to close.
"CAPITAL FUNDING" shall mean U S WEST Capital Funding, Inc., a
Colorado corporation.
"CAPITAL FUNDING INDEBTEDNESS" shall mean the Capital Funding
Private Indebtedness, the Capital Funding Public Indebtedness and the Capital
Funding Trust Indebtedness.
"CAPITAL FUNDING PRIVATE INDEBTEDNESS" shall mean all of the
indebtedness owed by Capital Funding to third parties immediately prior to
the Separation Time other than the Capital Funding Public Indebtedness and
the Capital Funding Trust Indebtedness.
4
<PAGE>
"CAPITAL FUNDING PUBLIC INDEBTEDNESS" shall mean all of the
indebtedness of Capital Funding listed in Section 1.1(a) of the Separation
Disclosure Schedule.
"CAPITAL FUNDING TRUST INDEBTEDNESS" shall mean all of the
indebtedness owed by Capital Funding to the Trusts (other than a portion of
such indebtedness equal to the liquidation value of the common securities of
the Trusts).
"CASH EQUIVALENTS" shall mean cash on hand, all other cash in any
bank, savings or similar accounts at any financial institution, and checks,
drafts and similar instruments and any bonds or similar marketable
securities, certificates of deposit, commercial paper, eurodollar deposits
and any other cash equivalents, held in the name of or for the account of U S
WEST or any of its Subsidiaries.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. SECTION SECTION 9601 ET SEQ.).
"CODE" shall mean the Internal Revenue Code of 1986, as amended,
and the rules and regulations promulgated thereunder.
"COMMUNICATIONS EMPLOYEES" shall have the meaning ascribed to such
term in the Employee Matters Agreement.
"COMMUNICATIONS EMPLOYEE ARRANGEMENTS" shall have the meaning
ascribed to such term in the Employee Matters Agreement.
"COMMUNICATIONS EMPLOYEE BENEFIT PLANS" shall have the meaning
ascribed to such term in the Employee Matters Agreement.
"COMMUNICATIONS STOCK" shall mean the U S WEST Communications Group
Common Stock, par value $.01 per share, of U S WEST.
"CONTRACT" shall mean any contract, agreement, lease, license,
sales order, purchase order, instrument or other commitment, written or oral,
that is binding on any Person or any part of its property under Applicable
Law.
5
<PAGE>
"COVERED EMPLOYEE" shall mean an employee of the U S WEST Group or
the New U S WEST Group at the grade 5 manager level or above.
"EMPLOYEE ARRANGEMENTS" shall mean all employment or consulting
agreements, and all bonus or other incentive compensation, deferred
compensation, disability, severance, stock award, stock option or stock
purchase agreements, policies or arrangements with respect to the employment
and termination of employment of any employee, officer, director or other
Person employed at any time by U S WEST or any of its Subsidiaries.
"EMPLOYEE BENEFIT PLAN" shall mean (i) each employee benefit plan,
as defined in Section 3(3) of the Employment Retirement Income Security Act
of 1974, as amended ("ERISA"), together with the regulations promulgated
thereunder, and (ii) each international employee benefit plan, whether or not
each plan in (i) and (ii) is covered by ERISA, which U S WEST or any of its
Subsidiaries maintains or to which U S WEST or any of its Subsidiaries has an
obligation to make contributions.
"EMPLOYEE MATTERS AGREEMENT" shall mean the Employee Matters
Agreement, substantially in the form of EXHIBIT A to this Agreement.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"FINANCIAL SERVICES" shall mean U S WEST Financial Services, Inc.,
a Colorado corporation.
"FINANCIAL SERVICES INDEBTEDNESS" shall mean all of the
indebtedness of Financial Services listed in Section 1.1(b) of the Separation
Disclosure Schedule.
"GOVERNMENTAL AUTHORITY" shall mean any foreign, federal, state or
local government, court, agency or commission or other governmental or
regulatory body or authority.
"GROUP" shall mean either the New U S WEST Group or the U S WEST
Group and "GROUPS" shall mean the New U S WEST Group and the U S WEST Group,
collectively.
6
<PAGE>
"INDEMNIFIABLE LOSSES" shall mean, with respect to any claim by an
Indemnified Party for indemnification under this Agreement, any and all
damages, losses, deficiencies, Liabilities, obligations, penalties,
judgments, settlements, claims, payments, fines, interest, costs and expenses
(including, without limitation, the costs and expenses of any and all
Actions, demands, assessments, judgments, settlements and compromises
relating thereto and the reasonable costs and expenses of attorneys',
accountants', consultants' and other professionals' fees and expenses
incurred in the investigation or defense thereof or the enforcement of rights
thereunder), including direct, consequential, exemplary, special and punitive
damages and lost profits.
"INDEMNIFIED PARTY" shall mean any Person that is seeking
indemnification from an Indemnifying Party pursuant to the provisions of this
Agreement.
"INDEMNIFYING PARTY" shall mean any party hereto from which any
Indemnified Party is seeking indemnification pursuant to the provisions of
this Agreement.
"INFORMATION" shall mean all records, books, Contracts,
instruments, computer data and other data and information.
"INSURANCE ADMINISTRATION" shall mean, with respect to each Joint
Insurance Arrangement, (i) the accounting for premiums, retrospectively rated
premiums, defense costs, indemnity payments, deductibles and retentions, as
appropriate under the terms and conditions of each of the Joint Insurance
Arrangements, (ii) the reporting to Insurers of any losses or claims that may
cause the per-occurrence, per claim or aggregate limits of any Joint
Insurance Arrangement to be exceeded and (iii) the processing of claims made
under the Joint Insurance Arrangements, including, without limitation, the
reporting of claims to the Insurers' management and defense of claims and
providing for appropriate releases upon settlement of claims.
"INSURANCE ARRANGEMENT" shall mean insurance policies and insurance
contracts of any kind (other than insurance policies and insurance contracts
which are Employee Benefit Plans), including, without limitation, primary and
excess policies, commercial general liability policies, automobile policies,
product liability policies, directors' and officers' liability policies,
fiduciary
7
<PAGE>
liability policies, workers' compensation policies, and self-insurance
programs and captive insurance company arrangements, together with the
rights, benefits and privileges thereunder.
"INSURANCE PROCEEDS" shall mean those monies received by an insured
from an Insurer or paid by an Insurer on behalf of an insured, in either case
net of any applicable premium adjustment, retrospectively rated premium,
deductible, retention or cost of reserve paid or held by or for the benefit
of such insured.
"INSURED CLAIMS" shall mean those Liabilities which, individually
or in the aggregate, are covered within the terms and conditions of any of
the Joint Insurance Arrangements, whether or not subject to deductibles,
co-insurance, uncollectibility or retrospectively rated premium adjustments.
"INSURER" shall mean a third party insurance carrier.
"INTERCOMPANY INDEBTEDNESS" shall mean, with respect to any
Subsidiary of U S WEST, the aggregate principal amount of indebtedness owed
by such Subsidiary to Capital Funding immediately prior to the Reorganization.
"JOINT INSURANCE ARRANGEMENTS" shall mean the Insurance
Arrangements of U S WEST existing at the Separation Time and/or prior thereto
that are owned or maintained by or on behalf of U S WEST or any of its
predecessors (other than Insurance Arrangements of Western Range) and that
relate to both (a) the MediaOne Business and/or the MediaOne Liabilities and
(b) the New U S WEST Business and/or the New U S WEST Liabilities.
"JOINT OTHER INTELLECTUAL PROPERTY" shall mean all Other
Intellectual Property of U S WEST and its Subsidiaries that is not either
MediaOne Other Intellectual Property or New U S WEST Other Intellectual
Property, and shall include Other Intellectual Property licensed to or
acquired by U S WEST and its Subsidiaries for use by both the New U S WEST
Business and the MediaOne Business, or which is created by or for both the
New U S WEST Business and the MediaOne Business prior to the Separation Time
(including all Other Intellectual Property which is created by or for U S
WEST prior to the Separation Time).
8
<PAGE>
"JOINT PATENTS" shall mean the U.S. patents (and any non-U.S.
patents corresponding thereto) listed in Section 1.1(c) of the Separation
Disclosure Schedule, as well as any divisions, continuations,
continuations-in-part (but only to the extent claims are supported by the
specification of the patents listed in Section 1.1(c) of the Separation
Disclosure Schedule), re-examinations, reissues, extensions or renewals of
such U.S. or non-U.S. patents.
"LESOP NOTES" shall mean the indebtedness of the U S WEST Savings
Plan/ESOP, all of which is guaranteed by U S WEST.
"LIABILITY" shall mean, with respect to any Person, except as
otherwise expressly provided herein, any direct or indirect liability
(whether absolute, accrued or unaccrued, contingent, liquidated or
unliquidated, matured or unmatured or known or unknown), indebtedness,
obligation, expense, claim, deficiency, guarantee or endorsement of or by
such Person (including, without limitation, those arising under any
Applicable Law or Action or under any award of any court, tribunal or
arbitrator of any kind, and those arising under any Contract or undertaking).
"LITIGATION MATTERS" shall mean actual, threatened or future
Actions that have been or may be asserted against, or otherwise adversely
affect, any member of either Group.
"MARKET VALUE" on any Trading Day shall mean the average of the
high and low reported sales prices regular way of a share of Communications
Stock as reported on the NYSE Composite Tape; PROVIDED, HOWEVER, that, for
purposes of determining the market value of a share of Communications Stock
for any period, the high and low sales prices of a share of Communications
Stock on any day prior to any "ex-dividend" date occurring during such period
for any dividend paid or to be paid with respect to the Communications Stock
shall be reduced by the amount of such dividend.
"MEDIA EMPLOYEES" shall have the meaning ascribed to such term in
the Employee Matters Agreement.
"MEDIA EMPLOYEE ARRANGEMENTS" shall have the meaning ascribed to
such term in the Employee Matters Agreement.
9
<PAGE>
"MEDIA EMPLOYEE BENEFIT PLANS" shall have the meaning ascribed to
such term in the Employee Matters Agreements.
"MEDIAONE BUSINESS" shall mean the businesses of U S WEST currently
attributed to the Media Group pursuant to the Restated Certificate other than
the Directories Business (including the domestic wireless business attributed
to the Media Group being transferred to AirTouch pursuant to the AirTouch
Transaction).
"MEDIAONE INSURANCE ARRANGEMENTS" shall mean the Insurance
Arrangements of U S WEST existing at the Separation Time and/or prior thereto
which are owned or maintained by or on behalf of U S WEST or any of its
predecessors and which relate only to the MediaOne Business and/or the
MediaOne Liabilities (other than Shared Liabilities), including, without
limitation, the Insurance Arrangements provided by Western Range (other than
the Western Range Transferred Insurance Arrangements).
"MEDIAONE PATENTS" shall mean the U.S. patents (and any non-U.S.
patents corresponding thereto) listed in Section 1.1(d) of the Separation
Disclosure Schedule, as well as any divisions, continuations,
continuations-in-part, re-examinations, reissues, extensions or renewals of
such U.S. or non-U.S. patents.
"MEDIAONE OTHER INTELLECTUAL PROPERTY" shall mean all Other
Intellectual Property licensed to or acquired by U S WEST and its
Subsidiaries for use only by the MediaOne Business or which is created by or
for only the MediaOne Business prior to the Separation Time.
"MEDIAONE TRADEMARKS" shall mean the Trademarks listed in Section
1.1(e) of the Separation Disclosure Schedule.
"MEDIA SAVINGS PLAN/ESOP" shall have the meaning ascribed to such
term in the Employee Matters Agreement.
"MEDIA STOCK" shall mean the U S WEST Media Group Common Stock, par
value $.01 per share, of U S WEST.
"MGI" shall mean U S WEST Media Group, Inc., a Delaware corporation.
10
<PAGE>
"NEW TRUST" shall mean a newly formed Delaware statutory business
trust, all of the common securities of which shall be owned by U S WEST.
"NEW U S WEST" shall have the meaning set forth in the preamble to
this Agreement.
"NEW U S WEST BUSINESS" shall mean (i) all of the businesses of U S
WEST currently attributed to the Communications Group pursuant to the
Restated Certificate and (ii) the Directories Business.
"NEW U S WEST GROUP" shall mean, at and after the Separation Time,
New U S WEST and all of its Subsidiaries.
"NEW U S WEST INSURANCE ARRANGEMENTS" shall mean the Insurance
Arrangements of U S WEST existing at the Separation Time and/or prior thereto
which are owned or maintained by or on behalf of U S WEST or any of its
predecessors and which relate only to the New U S WEST Business and/or the
New U S WEST Liabilities (other than Shared Liabilities) including, without
limitation, the Western Range Transferred Insurance Arrangements.
"NEW U S WEST OTHER INTELLECTUAL PROPERTY" shall mean all Other
Intellectual Property licensed to or acquired by U S WEST and its
Subsidiaries for use only by the New U S WEST Business or which is created by
or for only the New U S WEST Business prior to the Separation Time.
"NEW U S WEST PATENTS" shall mean the U.S. patents (and any
non-U.S. patents corresponding thereto) listed in Section 1.1(f) of the
Separation Disclosure Schedule, as well as any divisions, continuations,
continuations-in-part, re-examinations, reissues, extensions or renewals of
such U.S. or non-U.S. patents.
"NEW U S WEST TRADEMARKS" shall mean the Trademarks listed in
Section 1.1(g) of the Separation Disclosure Schedule.
"NEWVECTOR" shall mean U S WEST NewVector Group, Inc., a Colorado
corporation.
"OTHER INTELLECTUAL PROPERTY" shall mean all registered and
unregistered copyrights, all know-how, discoveries, inventions, improvements,
processes, formulae, specifications, trade secrets (whether patentable or
not),
11
<PAGE>
business plans, marketing data, software, tools and documentation and all
drawings, records, books or other indicia, however evidenced, of the
foregoing, but excluding patents, patent applications and Trademarks.
"PERSON" or "PERSON" shall mean and include any individual,
partnership, joint venture, corporation, association, joint stock company,
limited liability company, trust, unincorporated organization or similar
entity.
"PCS HOLDINGS" shall mean U S WEST PCS Holdings, Inc., a Delaware
corporation.
"PRIVILEGED INFORMATION" shall mean, with respect to either Group,
Information regarding a member of such Group, or any of its operations,
Assets or Liabilities (whether in documents or stored in any other form or
known to its employees or agents) that is or may be protected from disclosure
pursuant to the attorney-client privilege, the work-product doctrine or other
applicable privileges.
"REPRESENTATIVE" shall mean, with respect to any Person, any of
such Person's directors, officers, employees, agents, consultants, advisors,
accountants, attorneys and representatives.
"SEC" shall mean the United States Securities and Exchange
Commission.
"SEC FILINGS" shall mean the Proxy Statement, the Form S-4, the
Form 8-A and the Form 8-B/A (and all documents incorporated therein by
reference).
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"SEPARATION DISCLOSURE SCHEDULE" shall mean the Separation
Disclosure Schedule, dated as of the date hereof, as the same may be amended
or supplemented pursuant to this Agreement.
"SHARED CONTINGENT GAIN" shall mean any right of U S WEST and its
Subsidiaries against any Person to the extent such right (i) does not relate
primarily to the New U S WEST Business or the MediaOne Business or (ii)
relates primarily to both the New U S WEST Business and the MediaOne
12
<PAGE>
Business, including, without limitation, the rights listed in Section 1.1(h)
of the Separation Disclosure Schedule.
"SHARED LIABILITY" shall mean any Liability of U S WEST or any of
its Subsidiaries (whether arising prior to, at or following the Separation
Time) which (i) arises out of or is in connection with or otherwise relates
to the management or conduct prior to the Separation Time of the businesses
of U S WEST and its Subsidiaries and is not otherwise included in the
definition of "New U S WEST Liabilities" or "MediaOne Liabilities" or
allocated to one of the Groups pursuant to this Agreement or the Tax Sharing
Agreement or (ii) arises out of any Transaction Suit, including, without
limitation, the Liabilities listed in Section 1.1(i) of the Separation
Disclosure Schedule, but excluding Transaction Costs.
"SUBSIDIARY" shall mean, with respect to any Person, (i) each
corporation, partnership, joint venture or other legal entity of which such
Person owns, either directly or indirectly, 50% or more of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or similar governing body of such
corporation, partnership, joint venture or other legal entity and (ii) each
partnership in which such Person or another Subsidiary of such Person is the
general partner or otherwise controls such partnership.
"TAX" or "TAXES" shall mean all taxes, charges, fees, imposts,
levies or other assessments, including, without limitation, all net income,
gross receipts, capital, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp,
occupation, property and estimated taxes, customs duties, fees, assessments
and charges of any kind whatsoever, together with any interest and any
penalties, fines, additions to tax or additional amounts imposed by any
taxing authority (domestic or foreign) and shall include any transferee
liability in respect of Taxes.
"TAX SHARING AGREEMENT" shall mean the Tax Sharing Agreement,
substantially in the form of EXHIBIT B to this Agreement.
13
<PAGE>
"TERMINATED COMMUNICATIONS EMPLOYEES" shall have the meaning
ascribed to such term in the Employee Matters Agreement.
"TERMINATED MEDIA EMPLOYEES" shall have the meaning ascribed to
such term in the Employee Matters Agreement.
"TRADEMARKS" shall mean all registered and unregistered trademarks,
service marks, service names, trade styles and trade names (including,
without limitation, trade dress and other names, marks and slogans) and all
associated goodwill and all applications for any of the foregoing, together
with all rights to use any of the foregoing.
"TRADING DAY" shall mean each weekday other than any day on which
the Communications Stock is not traded on the NYSE.
"TRANSACTION COSTS" shall mean the costs and expenses associated
with the transactions contemplated by this Agreement listed in Section 1.1(j)
of the Separation Disclosure Schedule.
"TRANSACTION DOCUMENTS" shall mean this Agreement, the Employee
Matters Agreement and the Tax Sharing Agreement and documents, schedules,
exhibits and annexes attached hereto or thereto or delivered pursuant hereto
or thereto, including, without limitation, the deeds, lease assignments and
assumptions, leases, subleases and sub-subleases, and the supplemental and
other agreements and instruments relative thereto.
"TRANSACTION SUIT" shall mean any Action that (i) is commenced
against any member of the U S WEST Group or any member of the New U S WEST
Group or any of their respective directors, officers or employees challenging
this Agreement or any other Transaction Document or any of the transactions
contemplated hereby or thereby or any of the terms thereof or (ii) arises out
of any untrue statement or alleged untrue statement of a material fact
contained in any of the SEC Filings, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading (but only with respect to information relating to
transactions contemplated by this Agreement or any other Transaction Document
contained in or omitted from the SEC
14
<PAGE>
Filings); PROVIDED, HOWEVER, that any Action arising out of or relating to
the transfer of Assets between employee benefits trusts sponsored by the
Groups shall not be a "Transaction Suit" and shall be governed by the
provisions of the Employee Matters Agreement.
"TRUSTS" shall mean U S WEST Financing I, a Delaware statutory
business trust, and U S WEST Financing II, a Delaware statutory business
trust.
"TRUST SECURITIES" shall mean the 7.96% Trust Originated Preferred
Securities of U S WEST Financing I, a Delaware statutory business trust, and
the 8 1/4% Trust Originated Preferred Securities of U S WEST Financing II, a
Delaware statutory business trust.
"U S WEST" shall have the meaning set forth in the
preamble to this Agreement.
"U S WEST GROUP" shall mean, at and after the Separation Time, U S
WEST and all of its Subsidiaries (other than New U S WEST and its
Subsidiaries).
"U S WEST SAVINGS PLAN/ESOP" shall have the meaning ascribed to
such term in the Employee Matters Agreement.
1.2 TERMS DEFINED ELSEWHERE IN THE AGREEMENT. For the purposes of
this Agreement, the following terms have the meanings set forth in the
Sections indicated:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
AAA Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2
Asserted Liability. . . . . . . . . . . . . . . . . . . . . . . . .8.3(a)
AT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.3(c)
Beneficial Holder . . . . . . . . . . . . . . . . . . . . . . . . .9.4(c)
Borrower Subsidiaries . . . . . . . . . . . . . . . . . . . . . . .3.2(k)
Charter Amendments. . . . . . . . . . . . . . . . . . . . . . . . .2.1(b)
Claim Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . .8.3(a)
CGI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(g)
Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .recitals
Communications. . . . . . . . . . . . . . . . . . . . . . . . . . .3.3(c)
Communications Certificates . . . . . . . . . . . . . . . . . . . .4.4(b)
Communications Group. . . . . . . . . . . . . . . . . . . . . . .recitals
Communications Redemption . . . . . . . . . . . . . . . . . . . . .4.1(a)
Communications Rights . . . . . . . . . . . . . . . . . . . . . 2.6(b)(i)
Contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2
Dex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .recitals
Directories Business. . . . . . . . . . . . . . . . . . . . . . .recitals
Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2
Distribution Agent. . . . . . . . . . . . . . . . . . . . . . . . .4.4(c)
Dividend Number . . . . . . . . . . . . . . . . . . . . . . . . . .4.3(b)
Domestic Cable. . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(c)
Exchange Agent. . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(l)
Exchange Offers . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(j)
Federal Relations . . . . . . . . . . . . . . . . . . . . . . . . .3.2(f)
FinanceCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(a)
Financially Reasonable Terms. . . . . . . . . . . . . . . . . .8.3(c)(i)
Form 8-A. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3(b)(i)
Form 8-B/A. . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(b)(ii)
Form S-4. . . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(a)(ii)
International . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(e)
Interactive Services. . . . . . . . . . . . . . . . . . . . . . . .3.1(e)
Media Certificates. . . . . . . . . . . . . . . . . . . . . . . . .4.4(b)
Media Dividend. . . . . . . . . . . . . . . . . . . . . . . . . . .4.1(b)
Media Group . . . . . . . . . . . . . . . . . . . . . . . . . . .recitals
Media Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(b)(i)
MediaOne Assets . . . . . . . . . . . . . . . . . . . . . . . . . .3.3(b)
MediaOne Common Stock . . . . . . . . . . . . . . . . . . . . . . .4.1(c)
MediaOne Delaware . . . . . . . . . . . . . . . . . . . . . . . . .3.1(d)
MediaOne Exchange Securities. . . . . . . . . . . . . . . . . . . .3.2(j)
MediaOne Georgia. . . . . . . . . . . . . . . . . . . . . . . . . .3.1(a)
MediaOne Liabilities. . . . . . . . . . . . . . . . . . . . . . . .3.4(b)
MediaOne New Indebtedness . . . . . . . . . . . . . . . . . . . . .3.2(a)
Multimedia. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(b)
National Contract . . . . . . . . . . . . . . . . . . . . . . . . .9.4(e)
New U S WEST . . . . . . . . . . . . . . . . . . . . . . . . . .Recitals
New U S WEST Action . . . . . . . . . . . . . . . . . . . . . . . .5.1(a)
New U S WEST Assets . . . . . . . . . . . . . . . . . . . . . . . .3.3(a)
New U S WEST Common Stock . . . . . . . . . . . . . . . . . . . . .2.1(a)
New U S WEST DRS System . . . . . . . . . . . . . . . . . . . . . .4.4(d)
New U S WEST Exchange Securities. . . . . . . . . . . . . . . . . .3.2(j)
New U S WEST Indemnified Parties. . . . . . . . . . . . . . . . 8.2(a)
New U S WEST Liabilities. . . . . . . . . . . . . . . . . . . . . .3.4(a)
New U S WEST New Indebtedness . . . . . . . . . . . . . . . . . . .3.2(h)
New U S WEST Right. . . . . . . . . . . . . . . . . . . . . . . . .2.6(a)
New U S WEST Rights Agreement . . . . . . . . . . . . . . . . . . .2.6(a)
New U S WEST SIP. . . . . . . . . . . . . . . . . . . . . . . . . .4.4(a)
New U S WEST SIP Account. . . . . . . . . . . . . . . . . . . . . .4.4(a)
Non-Managing Party. . . . . . . . . . . . . . . . . . . . . . . . .8.3(b)
Non-Receiving Party . . . . . . . . . . . . . . . . . . . . . . . .8.3(b)
Notice Period . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(a)
NYSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(b)
Panel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2
Pre-Separation Adjustment . . . . . . . . . . . . . . . . . . . . .3.3(d)
Provider. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 5.3
Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . 2.3(a)(i)
PSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(b)
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(e)
Recipient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3
Receiving Party . . . . . . . . . . . . . . . . . . . . . . . . . .8.3(b)
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3(a)(i)
Record Holder . . . . . . . . . . . . . . . . . . . . . . . . . . .9.4(c)
Redemption Date . . . . . . . . . . . . . . . . . . . . . . . 4.3(a)(iii)
Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(j)
Reorganization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1
Restated Certificate. . . . . . . . . . . . . . . . . . . . . . .recitals
Separation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1
Separation Committee. . . . . . . . . . . . . . . . . . . . . . . . .12.2
Separation Time . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2
Shared Asserted Liability . . . . . . . . . . . . . . . . . . . . .8.3(b)
Shared Claim Notice . . . . . . . . . . . . . . . . . . . . . . . .8.3(b)
Shared Liability Insurance Proceeds . . . . . . . . . . . . . . . .7.2(c)
SIP Participant . . . . . . . . . . . . . . . . . . . . . . . . . .4.4(a)
Stockholders' Meeting . . . . . . . . . . . . . . . . . . . . . . . . 2.2
Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(j)
Trust Exchange Securities . . . . . . . . . . . . . . . . . . . . .3.2(j)
U S WEST. . . . . . . . . . . . . . . . . . . . . . . . . . . . .Recitals
U S WEST Action . . . . . . . . . . . . . . . . . . . . . . . . . .5.1(b)
U S WEST Indemnified Parties. . . . . . . . . . . . . . . . . . . .8.1(a)
U S WEST Rights Agreement . . . . . . . . . . . . . . . . . . . . .2.6(b)
U S WEST SIP. . . . . . . . . . . . . . . . . . . . . . . . . . . .4.4(a)
U S WEST SIP Account. . . . . . . . . . . . . . . . . . . . . . . .4.4(a)
Western Range . . . . . . . . . . . . . . . . . . . . . . . . . 3.3(b)(i)
Western Range Transferred Insurance Arrangements. . . . . . . . . .7.1(a)
</TABLE>
1.3 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof",
"herein", and "hereunder" and words of similar import, when used in this
Agreement, shall refer to this Agreement as a whole and not to any particular
provision of this Agreement.
(b) The terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
1.4 REFERENCES TO TIME. All references in this Agreement to times
of the day shall be to Mountain time.
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<PAGE>
ARTICLE II
CERTAIN PRE-SEPARATION TRANSACTIONS
2.1 CERTIFICATES OF INCORPORATION; BYLAWS; NAME CHANGES. (a)
Prior to the Separation Time, U S WEST shall cause New U S WEST to take all
actions necessary to amend its Certificate of Incorporation and Bylaws in the
manner specified by U S WEST. The Certificate of Incorporation of New U S
WEST shall, among other things, authorize (i) 2,000,000,000 shares of Common
Stock, par value $.01 per share ("NEW U S WEST COMMON STOCK"), of New U S
WEST and (ii) 200,000,000 shares of Preferred Stock, par value $.01 per
share, of New U S WEST.
(b) Prior to the Separation Time, U S WEST shall take all actions
necessary in accordance with Applicable Law and the Restated Certificate to
amend the Restated Certificate (the "CHARTER AMENDMENTS") as specified by U S
WEST to, among other things, (i) permit the redemption of the Communications
Stock in exchange for shares of New U S WEST Common Stock pursuant to Section
4.1 and (ii) following such redemption, delete all references to the
Communications Stock and amend certain terms of the Media Stock set forth
therein.
(c) Prior to the Separation Time, the parties hereto shall take
all actions necessary so that, immediately after the Separation Time, (i) New
U S WEST's name shall be changed to "U S WEST, Inc." and (ii) U S WEST's name
shall be changed to "MediaOne Group, Inc."
2.2 STOCKHOLDERS' MEETING. U S WEST shall take all actions
necessary in accordance with Applicable Law, the Restated Certificate and U S
WEST's Bylaws to call, give notice of, convene and hold a meeting of its
stockholders (the "STOCKHOLDERS' MEETING") as soon as practicable for the
purpose of obtaining (i) the adoption of the Charter Amendments by the
stockholders of U S WEST and (ii) such other approvals as may be determined
by the Board of Directors of U S WEST.
2.3 REGISTRATION AND LISTING. (a) Prior to the Separation Time,
(i) U S WEST shall prepare and file with the SEC a proxy statement under the
Exchange Act relating to the Stockholders' Meeting (the "PROXY STATEMENT")
and (ii) New U S WEST shall prepare and file with the SEC a
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<PAGE>
registration statement on Form S-4 registering under the Securities Act the
shares of New U S WEST Common Stock to be issued to stockholders of U S WEST
pursuant to Section 4.1, in which the Proxy Statement shall be included as a
prospectus (the "FORM S-4"). The parties hereto shall use their reasonable
best efforts to have the Form S-4 declared effective under the Securities Act
as promptly as practicable after the filing thereof. U S WEST shall cause
the Proxy Statement to be mailed to U S WEST's stockholders as promptly as
practicable after the Form S-4 is declared effective under the Securities
Act. New U S WEST shall use its reasonable best efforts to take all such
actions as may be necessary or appropriate under state securities and "blue
sky" laws in connection with the Separation.
(b) Prior to the Separation Time, (i) New U S WEST shall prepare
and file with the SEC a registration statement on Form 8-A registering under
the Exchange Act the New U S WEST Common Stock (the "FORM 8-A") and (ii) U S
WEST shall prepare and file with the SEC an amendment to U S WEST's existing
registration statement on Form 8-B amending the terms of the Media Stock to
reflect the changes set forth in the Charter Amendments (the "FORM 8-B/A").
New U S WEST shall prepare, file and seek to make effective an application
for the listing of the New U S WEST Common Stock on The New York Stock
Exchange ("NYSE") and the Pacific Stock Exchange (the "PSE"), subject to
official notice of issuance. U S WEST shall prepare, file and seek to make
effective amendments to U S WEST's listing applications with the NYSE and the
PSE to provide for the delisting of the Communications Stock and the
amendment of the terms of the Media Stock to reflect the changes set forth in
the Charter Amendments.
(c) The parties hereto shall cooperate in preparing and filing
with the SEC and causing to be declared effective any registration statements
or amendments thereto that are necessary or appropriate in order to reflect
the establishment of, or amendments to, any employee benefit plans
contemplated by this Agreement or any other Transaction Document requiring
registration under the Securities Act.
2.4 BOARDS OF DIRECTORS. Prior to the Separation Time, the
parties hereto shall take all actions necessary so that, effective
immediately after the Separation Time, the Boards of Directors of U S WEST
and New U S WEST shall be
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<PAGE>
comprised of the individuals so named in the Proxy Statement.
2.5 RIGHTS AGREEMENTS. (a) Prior to the Separation Time, New U S
WEST shall enter into a Rights Agreement (the "NEW U S WEST RIGHTS
AGREEMENT") on terms specified by U S WEST pursuant to which one Preferred
Stock Purchase Right of New U S WEST (a "NEW U S WEST RIGHT") will be
attached to each share of New U S WEST Common Stock issued to U S WEST
pursuant to Section 4.1. All references in this Agreement to New U S WEST
Common Stock shall be deemed to include such New U S WEST Rights.
(b) Prior to the Separation Time, the Amended and Restated Rights
Agreement, dated as of October 31, 1995 (the "U S WEST RIGHTS AGREEMENT"),
between U S WEST and State Street Bank and Trust Company, as rights agent,
shall be amended to provide (i) that the U S WEST Communications Group Rights
(as defined in the U S WEST Rights Agreement) (the "COMMUNICATIONS RIGHTS")
and the U S WEST Media Group Rights (as defined in the U S WEST Rights
Agreement) (the "MEDIA RIGHTS") shall 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; and (iii) for
certain amendments to the terms of the Media Rights.
2.6 THE TRANSACTION DOCUMENTS. Prior to the Separation Time, each
of U S WEST and New U S WEST shall enter into, or cause the appropriate
members of the Group of which it is a member to enter into, the Transaction
Documents.
2.7 U S WEST APPROVAL OF CERTAIN NEW U S WEST ACTIONS. Prior to
the Separation Time, U S WEST shall take and/or ratify all actions necessary
under Applicable Law, as the sole stockholder of New U S WEST, to effectuate
the transactions contemplated by this Agreement, including, without
limitation, adopting and implementing appropriate plans, agreements and
arrangements for New U S WEST Employees.
20
<PAGE>
ARTICLE III
REORGANIZATION; CONTRIBUTION;
REFINANCING OF INDEBTEDNESS
3.1 REORGANIZATION. Subject to the terms and conditions of this
Agreement, at such time as determined by U S WEST in its sole discretion, U S
WEST shall cause the following transactions to occur in the order set forth
below (collectively, the "REORGANIZATION"):
(a) MediaOne, Inc., a Georgia corporation ("MEDIAONE GEORGIA"),
shall cause:
(i) MediaOne Business Services, Inc., a Colorado corporation, to be
merged with and into MediaOne Georgia;
(ii) MediaOne of Clayton County, Inc., a Georgia corporation, to be
merged with and into MediaOne Georgia;
(iii) MediaOne of Cobb County, Inc., a Georgia corporation, to be
merged with and into MediaOne Georgia;
(iv) MediaOne of Conyers Rockdale, Inc., a Georgia corporation, to
be merged with and into MediaOne Georgia;
(v) MediaOne of Fayette County, Inc., a Georgia corporation, to be
merged with and into MediaOne Georgia;
(vi) MediaOne of Fulton County, Inc., a Georgia corporation, to be
merged with and into MediaOne Georgia;
(vii) MediaOne of Georgia, Inc., a Georgia corporation, to be
merged with and into MediaOne Georgia;
(viii) MediaOne of Henry County, Inc., a Georgia corporation, to be
merged with and into MediaOne Georgia;
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<PAGE>
(ix) Peachtree SMATV Corporation, a Georgia corporation, to be
merged with and into MediaOne Georgia; and
(x) Atlanta Home Network, Inc., a Georgia corporation, to be merged
with and into MediaOne Georgia.
(b) U S WEST Multimedia Communications, Inc., a Colorado
corporation ("MULTIMEDIA"), shall cause MediaOne Georgia to be merged with
and into Multimedia.
(c) MGI shall assume from U S WEST Domestic Cable, Inc., a
Delaware corporation ("DOMESTIC CABLE"), all of the Intercompany Indebtedness
of Domestic Cable, in repayment of a corresponding amount of the indebtedness
owed by MGI to Domestic Cable.
(d) MediaOne of Delaware, Inc., a Delaware corporation ("MEDIAONE
DELAWARE"), shall assume from MGI all of the indebtedness owed by MGI to
Domestic Cable (after giving effect to the repayment contemplated by Section
3.1(c)).
(e) MediaOne Delaware shall assume from MGI a portion of the
Intercompany Indebtedness of MGI equal to the difference between (A) the
total amount of Intercompany Indebtedness of MGI (after giving effect to the
assumption contemplated by Section 3.2(c)) and (B) the sum of (1) the
difference between (x) $3.9 billion and (y) the Intercompany Indebtedness of
Dex plus (2) the principal amount of the indebtedness owed by Capital Funding
to U S WEST.
(f) MGI shall contribute as a capital contribution to Multimedia:
(i) all of the issued and outstanding shares of capital stock of:
(A) U S WEST Capital Corporation, a Colorado corporation; (B) U S WEST
Interactive Services, Inc., a Colorado corporation ("INTERACTIVE
SERVICES"); (C) U S WEST International Holdings, Inc., a Delaware
corporation ("INTERNATIONAL"); (D) U S WEST Investments, Inc., a
Colorado corporation; (E) MediaOne Delaware; (F) if the AirTouch
Transaction has not been consummated, NewVector; (G) if the AirTouch
Transaction has not been consummated, PCS Holdings; (H) Far East
Investment Company, a Colorado corporation; (I) Domestic Cable; (J) U S
WEST Cellular Holdings, Inc., a
22
<PAGE>
Delaware corporation; and (K) U S WEST PCS Services, Inc., a Delaware
corporation;
(ii) if the AirTouch Transaction has not been consummated, a note,
payable by NewVector to MGI in the aggregate principal amount of
$900,000,000; and
(iii) if the AirTouch Transaction has been consummated, all of the
AirTouch Stock.
(g) MGI shall distribute as a dividend all of the issued and
outstanding capital stock of Multimedia to U S WEST.
(h) U S WEST shall merge U S WEST Communications Group, Inc., a
Colorado corporation ("CGI"), with and into New U S WEST, with New U S WEST
continuing as the surviving corporation. Pursuant to such merger, the issued
and outstanding capital stock of CGI shall be converted into 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 in
connection with the Separation pursuant to Section 4.1. Each share of New U
S WEST Common Stock so issued to U S WEST shall be fully paid, nonassessable
and free of preemptive rights.
3.2 REFINANCING OF INDEBTEDNESS. Following consummation of the
Reorganization, U S WEST shall cause the following actions to be taken with
respect to certain indebtedness of U S WEST and its Subsidiaries (as used in
this Section 3.2, all references to "amounts" or "aggregate principal
amounts" of any indebtedness shall refer to the face amount of such
indebtedness):
(a) A newly formed direct or indirect Subsidiary of U S WEST
("FINANCECO") shall incur an aggregate principal amount of indebtedness equal
to the difference between (i) the sum of (A) the total aggregate principal
amount of the Capital Funding Indebtedness attributed to the Media Group plus
(B) the total aggregate principal amount of the Financial Services
Indebtedness plus (C) an aggregate principal amount of indebtedness
sufficient to fund the costs and expenses payable by the U S WEST Group in
connection with the Separation, as well as any negative Pre-Separation
Adjustment and (ii) the sum of (A) $3.9 billion
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<PAGE>
plus (B) if the AirTouch Transaction is consummated, the amount of the
AirTouch Funds (the "MEDIAONE NEW INDEBTEDNESS"). All of the indebtedness
incurred by FinanceCo shall be guaranteed by U S WEST.
(b) FinanceCo shall lend to Financial Services an amount of funds
equal to the total aggregate principal amount of the Financial Services
Indebtedness.
(c) FinanceCo shall lend to each of (i) PCS Holdings, (ii)
Interactive Services, (iii) Financial Services and (iv) U S WEST Real Estate,
Inc., a Colorado corporation ("REAL ESTATE"), an amount of funds equal to the
Intercompany Indebtedness of such entity. Each such entity shall, in turn,
use the funds so borrowed from FinanceCo to repay its Intercompany
Indebtedness.
(d) FinanceCo shall lend to International an amount of funds equal
to the difference between (i) the Intercompany Indebtedness of International
and (ii) the indebtedness owed by Capital Funding to International.
International shall, in turn, use the funds so borrowed from FinanceCo to
repay a corresponding aggregate principal amount of its Intercompany
Indebtedness. International shall transfer to Capital Funding the
indebtedness owed by Capital Funding to International, thereby cancelling the
remaining Intercompany Indebtedness of International.
(e) FinanceCo shall lend to MediaOne Delaware an amount of funds
equal to the sum of the Intercompany Indebtedness of Multimedia and MediaOne
Delaware (after giving effect to the assumption made pursuant to Section
3.1(c)). MediaOne Delaware shall, in turn, use a portion of the funds so
borrowed from FinanceCo to repay its Intercompany Indebtedness and shall
distribute as a dividend to Multimedia the balance of the funds so borrowed
from FinanceCo. Multimedia shall, in turn, use such balance of funds to
repay its Intercompany Indebtedness.
(f) Capital Funding shall repay a portion of the indebtedness owed
by Capital Funding to U S WEST equal to the aggregate principal amount of the
Intercompany Indebtedness of U S WEST Federal Relations, Inc., a Delaware
corporation ("FEDERAL RELATIONS"), by distributing to U S WEST the
Intercompany Indebtedness of Federal Relations. U S WEST will, in turn,
contribute as a capital contribution to Federal Relations such Intercompany
Indebtedness and
24
<PAGE>
Federal Relations shall transfer such capital contribution to Capital Funding
to repay such Intercompany Indebtedness.
(g) U S WEST shall contribute as a capital contribution to MGI all
of the indebtedness owed by Capital Funding to U S WEST. MGI shall use such
indebtedness to repay a corresponding aggregate principal amount of its
Intercompany Indebtedness.
(h) Capital Funding shall incur an aggregate principal amount of
new indebtedness equal to the sum of (i) the total aggregate principal amount
of Capital Funding Indebtedness attributed to the Communications Group plus
(ii) $3.9 billion plus (iii) an aggregate principal amount of new
indebtedness sufficient to fund the costs and expenses payable by the New U S
WEST Group in connection with the Separation, as well as any positive
Pre-Separation Adjustment (the "NEW U S WEST NEW INDEBTEDNESS"). All of the
new indebtedness incurred by Capital Funding shall be guaranteed by New U S
WEST.
(i) FinanceCo shall loan to U S WEST all of the proceeds of the
indebtedness incurred by FinanceCo to fund the costs and expenses payable by
the U S WEST Group in connection with the Separation, as well as any negative
Pre-Separation Adjustment, and U S WEST shall use such funds to pay or cause
to be paid such costs and expenses and/or such negative Pre-Separation
Adjustment. Capital Funding shall loan to New U S WEST all of the proceeds
of the indebtedness incurred by Capital Funding to fund the costs and
expenses payable by the New U S WEST Group in connection with the Separation,
as well as any Positive Pre-Separation Adjustment, and New U S WEST shall use
such funds to pay or cause to be paid such costs and expenses and/or such
positive Pre-Separation Adjustment.
(j) U S WEST shall take all actions necessary to cause the Capital
Funding Public Indebtedness, the Capital Funding Private Indebtedness, the
Trust Securities and the Financial Services Indebtedness to be refinanced
(collectively, the "REFINANCING") through one or more of: (i) offers to
purchase the Capital Funding Public Indebtedness, the Financial Services
Indebtedness and the Trust Securities (the "TENDER OFFERS"); (ii) offers to
exchange (the "EXCHANGE OFFERS") (A) the Capital Funding Public Indebtedness
for new debt securities of Capital Funding guaranteed by New U S WEST (the
"NEW U S WEST EXCHANGE SECURITIES") or new debt securities of FinanceCo
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guaranteed by U S WEST (the "MEDIAONE EXCHANGE SECURITIES") and (B) the Trust
Securities for new trust securities of New Trusts (the "TRUST EXCHANGE
SECURITIES"); (iii) repayments of the Capital Funding Private Indebtedness;
and (iv) defeasance of the Capital Funding Public Indebtedness, Financial
Services Indebtedness and the Capital Funding Trust Indebtedness.
(k) Capital Funding shall use a portion of the proceeds of the New
U S WEST New Indebtedness, together with the AirTouch Funds, if any, and the
funds it receives from PCS Holdings, Interactive Services, Financial
Services, Real Estate, International, MediaOne Delaware and Multimedia
(collectively, the "BORROWER SUBSIDIARIES") pursuant to Sections 3.2 (d), (e)
and (f) to (i) repay all of the Capital Funding Private Indebtedness, (ii)
repay all of the Capital Funding Public Indebtedness tendered pursuant to the
Tender Offers, (iii) repurchase all of the Trust Securities tendered in the
Tender Offers and the Exchange Offers and (iv) defease all of the Capital
Funding Public Indebtedness and Capital Funding Trust Indebtedness to be
defeased pursuant to the Refinancing. Capital Funding shall use the Trust
Securities which it repurchases pursuant to the Tender Offers to satisfy its
obligations under a corresponding aggregate principal amount of Capital
Funding Trust Indebtedness. Financial Services shall use the funds it
receives from FinanceCo pursuant to Section 3.2(b) to repay all of the
Financial Services Indebtedness tendered pursuant to the Tender Offers.
(l) In the event that holders of Capital Funding Public
Indebtedness offer to exchange such indebtedness for New U S WEST Exchange
Securities pursuant to the Exchange Offers, the amount of New U S WEST New
Indebtedness shall be reduced by an amount equal to the aggregate principal
amount of the New U S WEST Exchange Securities issued. In no event shall New
U S WEST Exchange Securities be issued in an aggregate principal amount which
exceeds the aggregate principal amount of the New U S WEST New Indebtedness.
In the event that holders of Capital Funding Public Indebtedness offer to
exchange such indebtedness for MediaOne Exchange Securities pursuant to the
Exchange Offers, (i) FinanceCo shall distribute to U S WEST such MediaOne
Exchange Securities, U S WEST shall contribute such MediaOne Exchange
Securities to Capital Funding and Capital Funding shall issue such MediaOne
Exchange Securities in exchange for the Capital Funding Public Indebtedness
offered for exchange, (ii) the amount of MediaOne New Indebtedness
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shall be reduced by an amount equal to the aggregate principal amount of the
MediaOne Exchange Securities issued and (iii) Capital Funding shall transfer
to U S WEST all of its rights under an amount of Intercompany Indebtedness of
the Borrower Subsidiaries equal to the aggregate principal amount of such
MediaOne Exchange Securities and U S WEST may, in turn, transfer such
Intercompany Indebtedness to FinanceCo (in which event the transactions
contemplated by Sections 3.2(d), (e) and (f) shall not be effected with
respect to an amount equal to the amount of such Intercompany Indebtedness).
In the event that holders of Trust Securities offer to exchange such
securities for Trust Exchange Securities pursuant to the Exchange Offers, (i)
Capital Funding shall repurchase such Trust Securities as described in
Section 3.2(l), (ii) the exchange agent for the Exchange Offers (the
"EXCHANGE AGENT") shall use the funds which Capital Funding would otherwise
pay to such holders to purchase, on behalf of such holders, Trust Exchange
Securities from one or more New Trusts with an aggregate liquidation amount
corresponding to the aggregate liquidation amount of the Trust Securities
repurchased by Capital Funding and shall deliver such Trust Exchange
Securities to such holders, (iii) each New Trust shall loan to FinanceCo the
funds received upon issuance of such Trust Exchange Securities and FinanceCo
shall use such funds to repay a portion of the MediaOne New Indebtedness and
(iv) Capital Funding shall use the Trust Securities which it so repurchases
to satisfy its obligations under a corresponding aggregate principal amount
of Capital Funding Trust Indebtedness. In no event shall MediaOne Exchange
Securities and Trust Exchange Securities be issued in an aggregate principal
amount which exceeds the aggregate principal amount of the MediaOne New
Indebtedness.
(m) In the event that less than all of the Capital Funding Public
Indebtedness, Trust Securities and Financial Services Indebtedness are
tendered or exchanged pursuant to the Refinancing and U S WEST does not elect
to defease such indebtedness (or, in the case of the Trust Securities, the
related Capital Funding Trust Indebtedness), (i) U S WEST shall assume (A)
from Capital Funding all of the Capital Funding Public Indebtedness not
tendered or exchanged and an amount of Capital Funding Trust Indebtedness
equal to the liquidation amount of the Trust Securities not tendered or
exchanged and (B) from Financial Services all of the Financial Services
Indebtedness not tendered, (ii) the amount of the MediaOne New Indebtedness
shall be reduced by an amount equal to the principal amount
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of the indebtedness assumed by U S WEST from Capital Funding and Financial
Services, (iii) to the extent U S WEST assumes a portion of the Capital
Funding Public Indebtedness or Capital Funding Trust Indebtedness, Capital
Funding shall transfer to U S WEST all of its rights under an amount of the
Intercompany Indebtedness of the Borrower Subsidiaries equal to the aggregate
principal amount of the Capital Funding Public Indebtedness and the Capital
Funding Trust Indebtedness assumed by U S WEST and U S WEST may, in turn,
transfer such Intercompany Indebtedness to FinanceCo (in which event the
transactions contemplated by Sections 3.2(d), (e) and (f) shall not be
effected with respect to an amount equal to the amount of such Intercompany
Indebtedness) and (iv) to the extent that U S WEST assumes a portion of the
Financial Services Indebtedness, FinanceCo shall not make the loans
contemplated by Section 3.2(b) with respect to an amount equal to such amount
of Financial Services Indebtedness.
(n) U S WEST shall cause the U S WEST Savings Plan/ESOP to repay
all LESOP Notes outstanding immediately prior to the Separation Time.
3.3 CONTRIBUTION. Subject to the terms and conditions of this
Agreement, following consummation of the Reorganization and the transactions
contemplated by Section 3.2, U S WEST and New U S WEST shall cause the
following transactions to occur in the order set forth below (collectively,
the "Contribution"):
(a) U S WEST shall, as a capital contribution to New U S WEST,
convey, transfer, assign and deliver to New U S WEST all of U S WEST's
right, title and interest in and to all of the following Assets (together
with all of the Assets of New U S WEST and its Subsidiaries prior to such
transfer, the "NEW U S WEST ASSETS"):
(i) all of the issued and outstanding capital stock, together with
all the Assets, of: (A) MGI; (B) Capital Funding; (C) Federal Relations;
(D) U S WEST Investment Management Company, a Colorado corporation; (E)
U S WEST Educational Foundation, a Washington corporation; (F) U S WEST
Foundation, a Colorado corporation; (G) U S WEST SPF Co., a Colorado
corporation; and (H) U S WEST IP Holdings, Inc., a Delaware corporation;
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(ii) except as set forth in Section 3.3(c), all of the Assets
included on the combined balance sheet of the Communications Group as of
March 31, 1998 and any Assets acquired by U S WEST or any of its
Subsidiaries relating primarily to the businesses attributed to the
Communications Group from April 1, 1998 to the Separation Time
(including, in each case, the proceeds received upon disposition of any
such Assets);
(iii) all of the Assets included on the consolidated balance sheet
of Dex, as of March 31, 1998 and any Assets acquired by U S WEST or any
of its Subsidiaries relating primarily to the Directories Business from
April 1, 1998 to the Separation Time (including, in each case, the
proceeds received upon disposition of any such Assets);
(iv) subject to Section 5.6 and except as otherwise agreed to by
U S WEST and New U S WEST, all of the New U S WEST Trademarks, New U S
WEST Patents and New U S WEST Other Intellectual Property and an equal
and undivided interest in the Joint Patents and the Joint Other
Intellectual Property;
(v) all of the New U S WEST Insurance Arrangements, an equal and
undivided interest in the Joint Insurance Arrangements and all of the
other rights granted, and Assets contemplated to be transferred, to New
U S WEST pursuant to Article VII;
(vi) all of the rights granted, and Assets contemplated to be
transferred, to New U S WEST and the Communications Employee Benefit
Plans and Communications Employee Arrangements pursuant to the Employee
Matters Agreement;
(vii) all of the rights of U S WEST and its Subsidiaries with
respect to the Actions listed in Section 3.3(a)(vii) of the Separation
Disclosure Schedule and any other rights of U S WEST and its
Subsidiaries against any Person to the extent such rights relate
primarily to the New U S WEST Business;
(viii) 50% of all Shared Contingent Gains;
(ix) all of the leasehold interests listed in Section 3.3(a)(ix) of
the Separation Disclosure Schedule; and
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(x) all of the Assets listed in Section 3.3(a)(x) of the Separation
Disclosure Schedule.
(b) U S WEST shall retain and shall not contribute to New U S
WEST, and the New U S WEST Assets shall not include, all of U S WEST's right,
title and interest in all of the Assets of U S WEST other than the New U S
WEST Assets (together with any Assets transferred to U S WEST or any member
of the U S WEST Group pursuant to Section 3.3(c) or the Employee Matters
Agreement, the "MEDIAONE ASSETS"), including, without limitation, the
following Assets:
(i) all of the issued and outstanding capital stock, together with
all of the assets, of (A) Multimedia; (B) MediaOne of Michigan, Inc., a
Michigan corporation; (C) Western Range Insurance Co, a Vermont
corporation ("Western Range"); and (D) if FinanceCo is a Subsidiary of
U S WEST, FinanceCo;
(ii) all of the Assets included on the combined balance sheet of
the Media Group as of March 31, 1998 (other than the Assets of Dex and
its Subsidiaries) and any Assets acquired by U S WEST or any of its
Subsidiaries relating primarily to the MediaOne Business from April 1,
1998 to the Separation Time (including, in each case, the proceeds
received upon disposition of any such Assets);
(iii) all of the shares of Media Stock held as treasury stock by
U S WEST;
(iv) all of the common securities of the Trusts, any New Trusts
and U S WEST Financing III, a Delaware statutory business trust;
(v) subject to Section 5.6 and except as otherwise agreed to by U S
WEST and New U S WEST, all of the MediaOne Trademarks, MediaOne Patents
and MediaOne Other Intellectual Property, and an equal and undivided
interest in the Joint Patents and the Joint Other Intellectual Property;
(vi) all of the MediaOne Insurance Arrangements, an equal and
undivided interest in the Joint Insurance Arrangements and all of the
rights granted to, and Assets contemplated to be retained by, U S WEST
pursuant to Article VII;
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(vii) all of the rights of U S WEST and its Subsidiaries with
respect to the Actions listed in Section 3.3(b)(vii) of the Separation
Disclosure Schedule and any other rights of U S WEST and its
Subsidiaries against any Person to the extent such rights relate
primarily to the MediaOne Business;
(viii) 50% of all Shared Contingent Gains;
(ix) all of the leasehold interests listed in Section 3.3(b)(ix) of
the Separation Disclosure Schedule; and
(x) all of the Assets listed in Section 3.3(b)(x) of the Separation
Disclosure Schedule.
(c) New U S WEST shall cause the following transfers:
(i) U S WEST Advanced Technologies, Inc., a Colorado corporation
which will be a Subsidiary of New U S WEST upon consummation of the
Reorganization ("AT"), shall convey, transfer, assign and deliver to U S
WEST all of AT's right, title and interest in and to the Assets of AT
listed in Section 3.3(c) of the Separation Disclosure Schedule.
(ii) U S WEST Communications, Inc., a Colorado corporation which
will be a Subsidiary of New U S WEST upon consummation of the
Reorganization ("COMMUNICATIONS") shall convey, transfer, assign and
deliver to U S WEST all of Communications' right, title and interest in
and to the Assets of Communications listed in Section 3.3(c) of the
Separation Disclosure Schedule.
(iii) Federal Relations shall convey, transfer, assign and deliver
to U S WEST all of Federal Relation's right, title and interest in and
to the Assets of Federal Relations listed in Section 3.3(c) of the
Separation Disclosure Schedule.
(d) Prior to the Separation Time, the Chief Financial Officer of
the Communications Group and the Chief Financial Officer of the Media Group
shall agree in writing as to the amount of the Pre-Separation Adjustment (as
determined below). If the Pre-Separation Adjustment is positive, New U S
WEST shall declare as a dividend to U S
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WEST an amount in cash equal to the Pre-Separation Adjustment. If the
Pre-Separation Adjustment is negative, U S WEST shall contribute as a capital
contribution to New U S WEST an amount in cash equal to the Pre-Separation
Adjustment. The "Pre-Separation Adjustment" shall be determined in the
manner set forth in Section 3.3(d) of the Separation Disclosure Schedule.
3.4 DISCHARGE OF LIABILITIES. (a) From and after the Separation
Time, New U S WEST agrees to (or to cause a member of the New U S WEST Group
to) discharge or perform when due all of the following Liabilities (the "NEW
U S WEST LIABILITIES"):
(i) all Liabilities of U S WEST arising out of or relating
primarily to the New U S WEST Assets or the operation of the New U S
WEST Business, whether arising before or after the Separation Time;
(ii) all of the Liabilities included on the combined balance sheet
of the Communications Group as of March 31, 1998 and any Liabilities
incurred by U S WEST or any of its Subsidiaries relating primarily to
the businesses attributed to the Communications Group from April 1, 1998
to the Separation Time;
(iii) all of the Liabilities included on the consolidated balance
sheet of Dex as of March 31, 1998 and any Liabilities incurred by U S
WEST or any of its Subsidiaries relating primarily to the Directories
Business from April 1, 1998 to the Separation Time;
(iv) all indebtedness incurred by Capital Funding pursuant to
Section 3.2 and all of the indebtedness of U S WEST Communications,
Inc., a Colorado corporation;
(v) all Liabilities identified in Section 2(a) of the Employee
Matters Agreement and all other Liabilities identified in the Employee
Matters Agreement as Liabilities of the New U S WEST Group;
(vi) subject to Section 3.3(d), the Transaction Costs identified in
Section 1.1(j) of the Separation Disclosure Schedule as the
responsibility of New U S WEST;
(vii) for each category of Shared Liabilities listed in Section
1.1(i) of the Separation Disclosure
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Schedule, the percentage of such category of Shared Liabilities
indicated in such section as the responsibility of New U S WEST;
(viii) the Actions and Liabilities listed in Section 3.4(a)(viii)
of the Separation Disclosure Schedule
(ix) the Liabilities listed in Section 3.4(a)(ix) of the Separation
Disclosure Schedule; and
(x) all Liabilities that are expressly contemplated by any of the
Transaction Documents as Liabilities of any member of the New U S WEST
Group.
(b) U S WEST shall retain and discharge or perform when due, and
New U S WEST shall have no liability with respect to, all Liabilities of U S
WEST other than the New U S WEST Liabilities (the "MEDIAONE LIABILITIES"),
including, without limitation, the following:
(i) all Liabilities arising out of or relating primarily to the
MediaOne Assets or the operation of the MediaOne Business, whether
arising before or after the Separation Time;
(ii) all of the Liabilities included on the combined balance sheet
of the Media Group as of March 31, 1998 (other than (A) the Liabilities
of Dex and its Subsidiaries and (B) $3.9 billion of indebtedness (net of
any indebtedness of Dex and its Subsidiaries)) and any Liabilities
incurred by U S WEST or any of its Subsidiaries relating primarily to
the MediaOne Business from April 1, 1998 to the Separation Time;
(iii) all indebtedness incurred by FinanceCo or assumed by U S
WEST from Capital Funding or Financial Services pursuant to Section 3.2
and all indebtedness of MediaOne Delaware;
(iv) all Liabilities identified in Section 2(b) of the Employee
Matters Agreement and all other Liabilities contemplated by the Employee
Matters Agreement as Liabilities of the U S WEST Group;
(v) subject to Section 3.3(d), the Transaction Costs identified in
Section 1.1(j) of the Separation Disclosure Schedule as the
responsibility of U S WEST;
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(vi) for each category of Shared Liabilities listed in Section
1.1(i) of the Separation Disclosure Schedule, the percentage of such
category of Shared Liabilities indicated in such section as the
responsibility of U S WEST;
(vii) the Actions and Liabilities listed in Section 3.4(b)(vii) of
the Separation Disclosure Schedule;
(viii) the Liabilities listed in Section 3.4(b)(viii) of the
Separation Disclosure Schedule; and
(ix) all Liabilities that are expressly contemplated by any of the
Transaction Documents as Liabilities of any member of the U S WEST Group.
3.5 CLOSING; DELIVERY; METHODS OF TRANSFER AND ASSUMPTION. (a)
Unless otherwise provided in this Agreement, or in any other Transaction
Document, the closing of the Reorganization, the Refinancing and the
Contribution shall occur immediately prior to the Separation Time at the
offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York
10153.
(b) In connection with the Reorganization and the Contribution,
(i) U S WEST shall execute and deliver and shall cause its Subsidiaries to
execute and deliver, such deeds, bills of sale, stock powers, certificates of
title, assignments of leases and contracts, assumption agreements and other
instruments of contribution, grant, conveyance, assignment, transfer,
delivery and assumption necessary to evidence the Reorganization and the
Refinancing and (ii) U S WEST and New U S WEST shall (and shall cause their
Subsidiaries, as applicable, to) execute and deliver such deeds, bills of
sale, stock powers, certificates of title, assignments of leases and
contracts, assumption agreements and other instruments of contribution,
grant, conveyance, assignment, transfer, delivery and assumption necessary to
evidence the Contribution and the transactions contemplated by Section 3.4.
All such instruments shall be deemed to have been delivered as of the
Separation Time.
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ARTICLE IV
THE SEPARATION
4.1 THE SEPARATION. Subject to the terms and conditions of this
Agreement, at the Separation Time, U S WEST shall cause the following
transactions to occur (collectively, the "SEPARATION"):
(a) U S WEST shall, in accordance with the terms of Section 2.4.3
of Article V of the Restated Certificate (as amended by the Charter
Amendments), redeem each share of Communications Stock issued and outstanding
immediately prior to the Separation Time for one share of New U S WEST Common
Stock (the "COMMUNICATIONS REDEMPTION"). Each share of Communications Stock
held as treasury stock by U S WEST shall be cancelled.
(b) U S WEST shall distribute as a dividend (the "MEDIA DIVIDEND")
on each share of Media Stock outstanding as of the close of trading on the
Record Date (other than shares of Media Stock held as treasury stock by U S
WEST) a number of shares of New U S WEST Common Stock equal to the Dividend
Number (as determined in accordance with Section 4.3(b)).
(c) From and after the Separation Time, each outstanding share of
Media Stock shall remain outstanding and shall thereafter represent a share
of common stock, par value $.01 per share, of U S WEST, with the terms set
forth in the Restated Certificate (as amended by the Charter Amendments). As
used herein, such common stock is referred to as "MEDIAONE COMMON STOCK".
(d) From and after the Separation Time, each outstanding share of
Series C Cumulative Redeemable Preferred Stock, par value $1.00 per share, of
U S WEST; Series D Convertible Preferred Stock, par value $1.00 per share, of
U S WEST; and Series E Convertible Preferred Stock, par value $1.00 per
share, of U S WEST, shall remain outstanding.
4.2 SEPARATION TIME. The Board of Directors shall determine the
time at which the Separation shall become effective (the "SEPARATION TIME"),
which time shall be following the satisfaction or waiver of all of the
conditions set forth in Section 4.5 as determined by the Board of Directors
of U S WEST.
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4.3 CERTAIN DETERMINATIONS. (a) Prior to the Separation Time,
the Board of Directors of U S WEST shall (i) fix the record date for
determining the holders of Media Stock entitled to receive the Media Dividend
(the "RECORD DATE"), (ii) declare the Media Dividend, (iii) fix the date on
which the Communications Stock shall be redeemed pursuant to the
Communications Redemption (the "REDEMPTION DATE") and (iv) give notice to
holders of Communications Stock of the Communications Redemption. The
Redemption Date and the Record Date shall be the date on which the Separation
Time shall occur.
(b) The "DIVIDEND NUMBER" shall equal the quotient of (i)
$850,000,000 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 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 date of the Separation Time, rounded to
the nearest one-hundred thousandth (or if there shall not be a nearest
one-hundred thousandth, to the next highest one-hundred thousandth).
4.4 NEW U S WEST SIP ACCOUNTS; CERTIFICATES; DISTRIBUTION
PROCEDURES. (a) Prior to the Separation Time, New U S WEST shall establish
a Shareowner Investment Plan (the "NEW U S WEST SIP"). As of the Separation
Time, New U S WEST shall establish an account (a "NEW U S WEST SIP ACCOUNT")
under the New U S WEST SIP for each stockholder of U S WEST (each, a "SIP
PARTICIPANT") which, immediately prior to the Separation Time, maintained an
account (a "U S WEST SIP ACCOUNT") under the U S WEST Shareowner Investment
Plan (the "U S WEST SIP"). As of the Separation Time, the New U S WEST SIP
Account of each SIP Participant shall, without any action on the part of the
SIP Participants, be credited by New U S WEST with that number of shares of
New U S WEST Common Stock that such SIP Participant has the right to receive
pursuant to the provisions of Section 4.1 and all shares of Communications
Stock held in the U S WEST SIP Account of such SIP Participant shall no
longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist. SIP Participants shall be mailed the cash in lieu of
fractional shares of New U S WEST Common Stock to which they are entitled
pursuant to Section 4.4(h).
(b) As of the Separation Time, all shares or fractions of a share
of Communications Stock redeemed
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pursuant to the Communications Redemption shall no longer be outstanding and
shall automatically be cancelled and retired and shall cease to exist. As of
the Separation Time, each certificate that immediately prior to the
Separation Time evidenced shares of Communication Stock ("COMMUNICATIONS
CERTIFICATES") shall be deemed at any time after the Separation Time to
represent only the right to receive the shares of New U S WEST Common Stock
issuable in respect thereof pursuant to Section 4.1 and the unpaid dividends
and distributions payable with respect to such shares pursuant to this
Article IV. As of the Separation Time, each certificate that as of the
Record Date evidenced shares of Media Stock ("MEDIA CERTIFICATES") shall
after the Separation Time represent a corresponding number of shares of
MediaOne Common Stock, the right to receive the shares of New U S WEST Common
Stock issuable in respect thereof pursuant to Section 4.1 and the unpaid
dividends and distributions payable with respect to such shares pursuant to
this Article IV.
(c) Prior to the Separation Time, New U S WEST shall establish a
Direct Registration System which shall enable holders of New U S WEST Common
Stock to hold such shares in uncertificated book-entry form (the "NEW U S
WEST DRS SYSTEM"). As of the Separation Time, U S WEST shall deposit with
Boston Equiserve, as Distribution Agent ("DISTRIBUTION AGENT"), (a) for the
benefit of holders of Communications Certificates, the shares of New U S WEST
Common Stock to which such holders are entitled pursuant to Section 4.1, (b)
for the benefit of holders of Media Certificates, the shares of New U S WEST
Common Stock and certificates evidencing the shares of MediaOne Common Stock
to which such holders are entitled pursuant to Section 4.1 and (c) for the
benefit of SIP Participants, certificates evidencing the shares of MediaOne
Common Stock to which such holders are entitled pursuant to Section 4.1. New
U S WEST shall provide to the Distribution Agent the funds necessary to pay
any cash payable in lieu of fractional shares of New U S WEST Common Stock
pursuant to Section 4.4(h) and the funds or other property necessary to pay
or make any dividends or distributions with respect to shares of New U S WEST
Common Stock pursuant to Section 4.4(g).
(d) As soon as reasonably practicable after the Separation Time,
the Distribution Agent shall mail to each holder of record of Communications
Certificates (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Communications
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Certificates shall pass, only upon proper delivery of the Communications
Certificates to the Distribution Agent and shall be in such form and have
such other provisions as U S WEST reasonably may specify), (ii) an affidavit
of loss for use by holders whose Communications Certificates are lost,
mutilated or destroyed and (iii) instructions for use in effecting the
surrender of the Communications Certificates or completing such affidavit of
loss. Upon surrender of a Communications Certificate for cancellation to
the Distribution Agent or such affidavit of loss together with such letter of
transmittal, duly executed, and such other customary documents as may be
required pursuant to such instructions, the holder of such Communications
Certificate shall be entitled to receive in exchange therefor that number of
shares of New U S WEST Common Stock that such holder has the right to receive
pursuant to Section 4.1 in respect thereof in uncertificated book-entry form
through the New U S WEST DRS System and any cash payable in lieu of
fractional shares of New U S WEST Common Stock to which such holder is
entitled pursuant to Section 4.4(h) and dividends or other distributions to
which such holder is entitled pursuant to Section 4.4(g) and the
Communications Certificate (if any) so surrendered shall forthwith be
canceled. Notwithstanding the foregoing, a holder of a Communications
Certificate shall have the right to elect to receive a certificate
representing that number of shares of New U S WEST Common Stock that such
holder has the right to receive pursuant to Section 4.1 in respect thereof in
lieu of receiving such shares in uncertificated book-entry form through the
New U S WEST DRS System.
(e) As soon as reasonably practicable after the Separation Time,
the Distribution Agent shall mail to each holder of record of Media
Certificates (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Media Certificates shall
pass, only upon proper delivery of the Media Certificates to the Distribution
Agent and shall be in such form and have such other provisions as U S WEST
reasonably may specify), (ii) an affidavit of loss for use by holders whose
Media Certificates are lost, mutilated or destroyed and (iii) instructions
for use in effecting the surrender of the Media Certificates or completing
such affidavit of loss. Upon surrender of a Media Certificate for
cancellation to the Distribution Agent or such affidavit of loss together
with such letter of transmittal, duly executed, and such other customary
documents as may be required pursuant to such instructions, the holder of such
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Media Certificate shall be entitled to receive in exchange therefor (x) a new
certificate representing that number of shares of MediaOne Common Stock
represented by such Media Certificate and (y) that number of shares of New
U S WEST Common Stock that such holder has the right to receive pursuant to
Section 4.1 in respect thereof in uncertificated book-entry form through the
New U S WEST DRS System, and any cash payable in lieu of fractional shares of
New U S WEST Common Stock to which such holder is entitled pursuant to
Section 4.4(h) and dividends or other distributions to which such holder is
entitled pursuant to Section 4.4(g) and the Media Certificate (if any) so
surrendered shall forthwith be canceled. Notwithstanding the foregoing, a
holder of a Media Certificate shall have the right to elect to receive a
certificate representing that number of shares of New U S WEST Common Stock
that such holder has the right to receive pursuant to Section 4.1 in respect
thereof in lieu of receiving such shares in uncertificated book-entry form
through the New U S WEST DRS System. As soon as reasonably practicable after
the Separation Time, the Distribution Agent shall mail to each SIP
Participant a certificate representing a number of shares of MediaOne Common
Stock equal to the number of shares of Media Stock held in such SIP
Participant's U S WEST SIP Account. Following such mailing to SIP
Participants, the U S WEST SIP shall be terminated.
(f) In the event of a transfer of ownership of shares of
Communications Stock or Media Stock that is not registered in the transfer
records of U S WEST, certificates evidencing the proper number of shares of
New U S WEST Common Stock and MediaOne Common Stock may be issued in
accordance with this Section 4.4 to a transferee if the Communications
Certificate or Media Certificate evidencing such shares of Communications
Stock or Media Stock is presented to the Distribution Agent, accompanied by
all documents required to evidence and effect such transfer and by evidence
that any applicable stock transfer taxes have been paid.
(g) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared after the Separation Time shall be
paid with respect to any shares of New U S WEST Common Stock represented by a
Communications Certificate or a Media Certificate until such Communications
Certificate or Media Certificate or an affidavit of loss is surrendered for
exchange as provided herein. Subject to the effect of Applicable Laws,
following
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surrender of any such Communications Certificate or Media Certificate or
affidavit of loss, there shall be paid to the holder of the shares of New U S
WEST Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Separation Time theretofore payable with respect to
such shares of New U S WEST Common Stock and not paid, less the amount of any
withholding taxes which may be required thereon, and (ii) at the appropriate
payment date, the amount of dividends or other distributions with a record
date after the Separation Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such shares of New U S WEST
Common Stock, less the amount of any withholding taxes which may be required
thereon.
(h) No certificates or scrip representing fractional shares of New
U S WEST Common Stock shall be issued pursuant to the Media Dividend and such
fractional share interests will not entitle the holder thereof to vote or to
any rights of a stockholder of New U S WEST. Notwithstanding any provision of
this Agreement, each Person who immediately prior to the Separation Time was
a holder of shares of Media Stock who would otherwise have been entitled to
receive a fraction of a share of New U S WEST Common Stock (after taking into
account all of the shares of Media Stock owned by such holder) shall receive,
in lieu thereof, cash (without interest) in an amount equal to such
fractional part of a share of New U S WEST Common Stock multiplied by the
average Market Value of the Communications Stock over the period of 20
Trading Days ending on the fifth Trading Day prior to the date of the
Separation Time, rounded to the nearest cent (or if there shall not be a
nearest cent, to the next highest cent).
(i) None of U S WEST, New U S WEST or the Distribution Agent shall
be liable to any holder of shares of Communications Stock or Media Stock for
shares of New U S WEST Common Stock, cash in lieu of fractional shares of New
U S WEST Common Stock or dividends or distributions with respect to shares of
New U S WEST Common Stock that have been delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(j) U S WEST shall be entitled to, or shall be entitled to cause
the Distribution Agent to, deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of shares of
Communication
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Stock or Media Stock such amounts as are required to be deducted and withheld
with respect to the making of such payment under the Code, or any provision
of state, local or foreign Tax law. To the extent that amounts are so
withheld by U S WEST or the Distribution Agent, such withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the
holder of the shares of Communications Stock or Media Stock in respect of
which such deduction and withholding was made by U S WEST or the Distribution
Agent.
(k) If any Communications Certificates or Media Certificates shall
not have been surrendered prior to seven years after the Separation Time (or
immediately prior to such earlier date on which any shares of New U S WEST
Common Stock, cash in lieu of fractional shares of New U S WEST Common Stock
or unpaid dividends or distributions with respect to shares of New U S WEST
Common Stock in respect of such Communications Certificates or Media
Certificates would otherwise escheat to or become the property of any
Governmental Authority), any undistributed shares of New U S WEST Common
Stock in respect of Communications Certificates or unpaid dividends or
distributions in respect of such shares shall, to the extent permitted by
Applicable Laws, become the property of New U S WEST and any undistributed
shares of New U S WEST Common Stock in respect of Media Certificates or cash
in lieu of fractional shares or unpaid dividends or distributions in respect
of such shares shall, to the extent permitted by Applicable Laws, become the
property of U S WEST.
(l) Notwithstanding any other provision of this Article IV,
stockholders who are entitled to receive shares of New U S WEST Common Stock
pursuant to Section 4.1 with an aggregate value greater than or equal to $15
million will not receive such shares until such stockholders make all
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 shall be held in escrow by the
Distribution Agent until such time as New U S WEST receives evidence from
such stockholders that such filings have been made.
4.5 CONDITIONS TO THE SEPARATION. (a) The undertaking of U S
WEST to effect the Separation is subject to the satisfaction of each of the
following conditions, unless waived by the Board of Directors of U S WEST in
its sole and absolute discretion:
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(i) All of the transactions contemplated by this Agreement to be
performed on or prior to the consummation of the Separation shall have
been consummated.
(ii) The Form S-4, the Form 8-A and the Form 8-B/A shall each have
been declared effective by the SEC, and no stop order with respect
thereto shall be in effect.
(iii) The Charter Amendments shall have been approved and adopted
by the stockholders of U S WEST.
(iv) The Charter Amendments shall have been executed, acknowledged
and filed with the Secretary of State of the State of Delaware in
accordance with Section 242 of the Delaware General Corporation Law.
(v) The Board of Directors of U S WEST shall have set the
Redemption Date and given notice of the Communications Redemption to the
holders of Communications Stock.
(vi) The Board of Directors of U S WEST shall have fixed the
Record Date and declared the Media Dividend.
(vii) The New U S WEST Common Stock shall have been approved for
listing on the NYSE and the PSE, subject to official notice of issuance.
(viii) No order, injunction or decree shall have been issued by
any Governmental Authority and remain in effect preventing the
consummation of the Separation.
(ix) All consents of, approvals of, notices to and filings with
any Governmental Authority or any other Person necessary to consummate
the Reorganization, the Contribution or the Separation shall have been
obtained and be in full force and effect.
(x) U S WEST shall have provided the NYSE and the PSE with the
prior written notice of the Redemption Date and the Record Date as
required by Rule 10b-17 of the Exchange Act and the rules and
regulations of the NYSE.
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(xi) U S WEST shall have obtained an advance letter ruling from
the Internal Revenue Service that certain aspects of the Reorganization,
the Contribution and the Separation will qualify as tax-free
transactions within the meaning of Sections 332, 368(a)(1)(D) and 355 of
the Code, and such ruling shall be in full force and effect at the
Separation Time.
(xii) On or prior to the Separation Time, each of U S WEST and New
U S WEST shall have entered into, or caused the appropriate members of
the Group of which it is a member to enter into, each of the Transaction
Documents.
(b) Any determination made by the Board of Directors of U S WEST
on behalf of any of the parties hereto prior to the Separation Time
concerning the satisfaction or waiver of any or all of the conditions set
forth in this Section 4.5 shall be conclusive.
ARTICLE V
POST-SEPARATION INTERCOMPANY
BUSINESS RELATIONSHIPS
5.1 PENDING LITIGATION. Following the Separation Time, subject to
the provisions of Section 8.3, (a) New U S WEST shall have exclusive
authority and control over the investigation, prosecution, defense and appeal
of all pending Actions relating to the New U S WEST Liabilities, including,
but not limited to, the pending Actions listed in Section 3.4(a) of the
Separation Disclosure Schedule (each, a "NEW U S WEST ACTION"), and may
settle or compromise, or consent to the entry of any judgment with respect
to, any such New U S WEST Action without the consent of U S WEST and (b) U S
WEST shall have exclusive authority and control over the investigation,
prosecution, defense and appeal of all pending Actions relating to the
MediaOne Liabilities, including, but not limited to, the pending Actions
listed in Section 3.4(b) of the Separation Disclosure Schedule (each, a "U S
WEST ACTION"), and may settle or compromise, or consent to the entry of any
judgment with respect to, any such U S WEST Action without the consent of New
U S WEST; PROVIDED, HOWEVER, that if any member of the New U S WEST Group or
any of their respective
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directors, officers or employees is named as a party to a U S WEST Action or
any member of the U S WEST Group or any of their respective directors,
officers or employees is named as a party to a New U S WEST Action, neither
U S WEST nor New U S WEST, as the case may be, may settle or compromise, or
consent to the entry of any judgment with respect to, any such Action without
the prior written consent of such other named party (which consent may not be
unreasonably withheld), unless such settlement (i) includes a complete
release of such other named party and such party's directors, officers or
employees (to the extent such directors, officers or employees are named in
such Action) and (ii) does not require such other named party or such party's
directors, officers or employees (to the extent such directors, officers or
employees are named in such Action) to make or forego any payment or forego
or take any action. Each of U S WEST and New U S WEST shall cooperate fully
with the other and its counsel in the investigation, defense and settlement
of any U S WEST Action or New U S WEST Action.
5.2 SETTLEMENTS FOR CASH COLLECTIONS AND DISBURSEMENTS AFTER THE
SEPARATION TIME. (a) For each calendar month commencing with the month in
which the Separation Time occurs and, unless sooner terminated by agreement
of the parties, continuing for a period of two years thereafter, (i) within
30 Business Days of the end of the month in question, New U S WEST shall
prepare and deliver to U S WEST, and U S WEST shall fully cooperate in
preparing, a statement of transactions that shall reflect a complete analysis
of any cash collections and cash disbursements by the New U S WEST Group on
behalf of the U S WEST Group during the relevant month or for any prior month
that should have been (but was not) included in a prior statement and (ii)
within 30 Business Days of the end of the month in question, U S WEST shall
prepare and deliver to New U S WEST, and New U S WEST shall fully cooperate
in preparing, a statement of transactions that shall reflect a complete
analysis of any cash collections and cash disbursements by the U S WEST Group
on behalf of the New U S WEST Group during the relevant month or for any
prior month that should have been (but was not) included in a prior
statement; PROVIDED, HOWEVER, in each case that, with respect to the first
such monthly period, such statement shall not reflect any cash collections or
disbursements occurring prior to the Separation Time.
(b) Not later than five Business Days (unless otherwise
specifically provided in the relevant Transaction Document) following
delivery of each such monthly statement, New U S WEST shall pay to U S WEST
or U S WEST shall pay to
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New U S WEST, as the case may be, in cash an amount necessary to eliminate
the account balance as reflected in each such statement (which amounts may be
set off against each other as appropriate). Any disputes relating to such
amounts payable shall be submitted to the Separation Committee for resolution
in accordance with the procedures set forth in Section 12.2.
(c) Following the end of the two-year period referred to in
Section 5.2(a) (or such earlier period as the parties hereto may agree), U S
WEST and New U S WEST shall continue to deliver the statement of transactions
referred to in Section 5.2(a) and pay the amounts necessary to eliminate the
account balance as reflected in such statement in accordance with Section
5.2(b), at such intervals as the parties may agree. Any disputes relating to
such amounts payable shall be submitted to the Separation Committee for
resolution in accordance with the procedures set forth in Section 12.2.
(d) Each of U S WEST and New U S WEST hereby grants the other a
limited irrevocable power-of-attorney to endorse, deposit and negotiate any
check, draft or other form of payment made in respect of any invoice
representing a receivable payable to one of them but which is sent by the
payor to a lock box maintained by the other or is made payable to either of
them or any of their subsidiaries but which is the payment of a receivable
that is a receivable of the other.
5.3 TRANSITION SERVICES. (a) From and after the Separation Time,
each party will provide, or cause one or more of the members of its Group to
provide, to the other Group such services on such terms as may be agreed upon
between U S WEST and New U S WEST from time to time in writing. The party
that is to provide the services (the "PROVIDER") will use its commercially
reasonable efforts to provide such services to the other party (the
"RECIPIENT") in a satisfactory and timely manner and as further specified in
writing by the parties.
(b) All employees and representatives of the Provider providing
services to the Recipient pursuant to this Section 5.3 shall be deemed for
purposes of all compensation and employee benefits matters to be employees or
representatives of the Provider and not employees or representatives of the
Recipient. In performing such services, such employees and representatives
will be under
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the direction, control and supervision of the Provider (and not the
Recipient) and the Provider will have the sole right to exercise all
authority with respect to the employment (including, without limitation,
termination of employment), assignment and compensation of such employees and
representatives. Any disputes relating to the provision of services under
this Section 5.3 shall be submitted to the Separation Committee for
resolution in accordance with the procedures set forth in Section 12.2.
5.4 U S WEST NAME. (a) U S WEST acknowledges that the name "U S
WEST", whether alone or in combination with one or more words, is an asset
being transferred to New U S WEST pursuant to the Contribution. Promptly
after the Separation Time, U S WEST shall cause each member of the U S WEST
Group whose corporate name includes the name "U S WEST" to change its name to
delete any reference therein to "U S WEST" (for example, without limiting the
generality of the foregoing, the word "U S WEST" shall be removed from the
name of "U S WEST International Holdings, Inc."). Promptly after the
Separation Time, U S WEST shall, and shall cause each member of the U S WEST
Group to, subject to the requirements of Section 7.8 of the AirTouch Merger
Agreement, (i) assign, and does hereby assign, to New U S WEST any license to
use the name U S WEST (including any appurtenant rights and obligations such
as quality control) with all agents, franchisees and licensees of the U S
WEST Group and the MediaOne Business (to the extent permitted by the terms of
such license), including any license granted pursuant to Section 7.8 of the
AirTouch Merger Agreement, (ii) to the extent assignment is not permitted,
terminate any license to use the name U S WEST with all agents, franchisees
and licensees of the U S WEST Group and the MediaOne Business (to the extent
permitted by the terms of such license) and (iii) if neither assignment or
termination is permitted, the U S WEST Group shall cooperate with New U S
WEST, and if appropriate enter into necessary agreements, to preserve New U S
WEST's ownership rights in the U S WEST name. U S WEST further agrees not to
use the name "U S WEST" in connection with the operations of the U S WEST
Group or the MediaOne Business; PROVIDED, HOWEVER, that for a period of six
months after the Separation Time, the U S WEST Group may continue to use the
"U S WEST" name for internal purposes on business forms, business cards (with
the company name manually corrected) and stationery. Nothing herein shall
require U S WEST or any member of the U S WEST Group to retrieve from
customers telephones, accessories or other equipment or materials labeled
with the
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"U S WEST" name and remove such name from such telephones, accessories or
other equipment or materials.
(b) For a period of two years following the Separation Time, New
U S WEST shall not, and shall cause each member of the New U S WEST Group not
to, use the names "U S WEST Media Group," "U S WEST Media," "U S WEST
Interactive Services," "U S WEST International" or "U S WEST NewVector" in
the operations of the New U S WEST Business; PROVIDED, HOWEVER, that,
notwithstanding the foregoing, the New U S WEST Group shall be permitted to
use the words "Media Group," "Media," "Interactive Services," and
"International" as long as such words do not immediately follow the name "U S
WEST" as referenced above. By way of example, New U S WEST may use as
"taglines" references to "the Media Group of U S WEST," the "International
Division of U S WEST" or similar references in the operation of the New U S
WEST Business. Promptly after the Separation Time, New U S WEST shall cause
MGI to change its corporate name to delete any reference therein to the words
"Media Group".
5.5 TRANSFER TAXES. New U S WEST and U S WEST agree to cooperate
to determine the amount of sales, transfer or other similar taxes or fees
(including, without limitation, all real estate, patent, copyright and
trademark transfer taxes and recording fees) payable in connection with the
transactions contemplated by this Agreement. U S WEST and New U S WEST agree
to file promptly and timely returns for such taxes and fees with the
appropriate taxing authorities. The amounts payable with respect to such
taxes and fees shall be borne equally by U S WEST and New U S WEST. Any
disputes relating to such amounts payable shall be submitted to the
Separation Committee for resolution in accordance with the procedures set
forth in Section 12.2.
5.6 INTELLECTUAL PROPERTY. (a) At the Separation Time, subject to
Section 5.6(b), (i) the U S WEST Group shall become the sole and exclusive
owner of all right, title and interest in the MediaOne Patents, the MediaOne
Trademarks and the MediaOne Other Intellectual Property, (ii) the New U S
WEST Group shall become the sole and exclusive owner of all right, title and
interest in the New U S WEST Patents, the New U S WEST Trademarks and the New
U S WEST Other Intellectual Property and (iii) the U S WEST Group and the New
U S WEST Group shall each have, as joint owners, an equal and undivided
interest in and to all right, title and interest in both the Joint Patents
and the Joint Other Intellectual Property. The parties agree to file
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appropriate assignment documents with the U.S. Patent and Trademark Office
(or other appropriate agencies) in order to effect and record the ownership
of the MediaOne Patents, the MediaOne Trademarks, the New U S WEST Patents,
the New U S WEST Trademarks and the Joint Patents as provided under this
Section 5.6(a).
(b) From and after the Separation Time, subject to the protection
of Information required by Section 10.5, (i) the New U S WEST Group shall
have the non-exclusive right to use all MediaOne Other Intellectual Property
and New U S WEST Other Intellectual Property which is in the possession of,
and is used by or for which there are good faith plans for use by, the New U
S WEST Business as of the Separation Time and (ii) the U S WEST Group shall
have the non-exclusive right to use all New U S WEST Other Intellectual
Property and MediaOne Intellectual Property which is in the possession of,
and is used by or for which there are good faith plans for use by, the
MediaOne Business as of the Separation Time.
(c) It is understood that the right of each party to use both the
MediaOne Other Intellectual Property and the New U S WEST Other Intellectual
Property under Section 5.6(b) shall include (but only to the extent necessary
for such use) rights under MediaOne Patents and New U S WEST Patents.
ARTICLE VI
EMPLOYEE MATTERS
6.1 EMPLOYEES. Effective as of the Separation Time, except as
otherwise provided in the Employee Matters Agreement, (a) those Media
Employees who are employed by U S WEST or any of its Subsidiaries immediately
prior to the Separation Time shall remain or become employees of U S WEST or
any Subsidiary thereof and (b) those Communications Employees who are
employed by U S WEST or any of its Subsidiaries immediately prior to the
Separation Time shall become employees of New U S WEST or any Subsidiary
thereof.
6.2 EMPLOYEE BENEFIT PLANS AND EMPLOYEE ARRANGEMENTS. U S WEST
and New U S WEST shall take all
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actions necessary to effect the transfer to New U S WEST and the assumption
by New U S WEST of the Employee Benefit Plans and Employee Arrangements and
the Assets and Liabilities thereunder as described in the Employee Matters
Agreement.
6.3 INTERNAL REVENUE SERVICE FORMS. U S WEST and New U S WEST
agree that pursuant to the "Alternative Procedure" provided in Section 5 of
Revenue Procedure 96-60, 1996-53, I.R.B. 24, with respect to preparing,
filing and furnishing the Internal Revenue Service Forms W-2, W-3, 941 and
W-5, (i) U S WEST and New U S WEST shall report on a "predecessor-successor"
basis as set forth therein, (ii) U S WEST shall be relieved from furnishing
Forms W-2 to the New U S WEST Employees and (iii) New U S WEST shall assume
the obligations of U S WEST to furnish such forms to the New U S WEST
Employees for the full 1998 calendar year.
ARTICLE VII
INSURANCE MATTERS
7.1 POLICIES AND RIGHTS INCLUDED WITHIN ASSETS. (a) Immediately
prior to the Separation Time, U S WEST shall cause Western Range to transfer
to an Insurer or to a member of the New U S WEST Group all of the Insurance
Arrangements provided by Western Range (as well as the liabilities and
corresponding reserves) which relate to members of the New U S WEST Group or
the New U S WEST Business or New U S WEST Liabilities (the "WESTERN RANGE
TRANSFERRED INSURANCE ARRANGEMENTS").
(b) The MediaOne Assets shall include (i) all MediaOne Insurance
Arrangements and (ii) subject to the provisions of this Article VII, an equal
and undivided interest in the Joint Insurance Arrangements. The New U S WEST
Assets shall include (i) all New U S WEST Insurance Arrangements (including
the Western Range Transferred Insurance Arrangements) and (ii) subject to the
provisions of this Article VII, an equal and undivided interest in the Joint
Insurance Arrangements.
(c) As of the Separation Time, all of the Joint Insurance
Arrangements shall be discontinued and each of the Groups shall be
responsible for arranging separate Insurance
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Arrangements with respect to injuries, losses, liabilities, damages and
expenses arising after the Separation Time with respect to such Group and its
businesses. At the Separation Time, all prepaid and unused premiums with
respect to each Joint Insurance Arrangement shall be distributed to U S WEST
and New U S WEST in the same ratio in which such premiums were allocated by
U S WEST to the MediaOne Business and the New U S WEST Business prior to the
Separation Time. Following the Separation Time, any refunds received by U S
WEST or New U S WEST with respect to a Joint Insurance Arrangement shall be
distributed to U S WEST and New U S WEST in the same ratio in which premiums
payable with respect to such Joint Insurance Arrangement were allocated by
U S WEST to the MediaOne Business and the New U S WEST Business prior to the
Separation Time. To the extent U S WEST or New U S WEST receives any such
refund, the party receiving such refund shall promptly transfer to the other
party the portion of such refund to which such other party is entitled.
7.2 ADMINISTRATION; OTHER MATTERS. (a) From and after the
Separation Time, except as set forth in Section 7.2(c), U S WEST shall be
responsible for Insurance Administration under the Joint Insurance
Arrangements with respect to MediaOne Liabilities and New U S WEST shall be
responsible for Insurance Administration under the Joint Insurance
Arrangements with respect to New U S WEST Liabilities. The disbursements,
out-of-pocket expenses and costs of employees or agents of U S WEST or New
U S WEST relating to Insurance Administration contemplated by this Section
7.2(a) shall be borne by the party incurring such expenses or costs.
Insurance Proceeds with respect to claims, costs and expenses under the Joint
Insurance Arrangements shall be paid by the Insurer to the party making the
Insured Claim thereunder. In the event U S WEST or New U S WEST makes an
Insured Claim under a Joint Insurance Arrangement, such party shall deliver
notice to the other party of such Insured Claim and shall keep the other
party periodically updated as to the status of such Insured Claim.
(b) From and after the Separation Time, subject to Section 7.2(c),
each of U S WEST and New U S WEST shall have the right to claim coverage for
Insured Claims under each Joint Insurance Arrangement with respect to any
claim covered by such Joint Insurance Arrangement as and to the extent that
such insurance is available up to the full extent of the applicable limits of
liability, if any, of
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such Joint Insurance Arrangement (and may receive any Insurance Proceeds with
respect thereto); PROVIDED, HOWEVER, that, prior to making any Insured Claim
under a Joint Insurance Arrangement, U S WEST or New U S WEST, as the case
may be, shall be required to have retained a portion of the Liability
underlying such Insured Claim equal to the amount of the self-insured
retention or deductible, if any, of such party with respect to such
Liability. In the event that the total Insurance Proceeds payable to the U S
WEST Group and the New U S WEST Group under a Joint Insurance Arrangement
shall have exhausted the limits of liability, if any, under such Joint
Insurance Arrangement, payment of any future claims which are not reimbursed
under such Joint Insurance Arrangement as a result of such exhaustion of the
limits of liability shall be the sole responsibility of the party having
liability for such claim under Section 3.4. Each of the parties agrees to
use commercially reasonable efforts to maximize available coverage under
those Joint Insurance Arrangements applicable to it, and to take all
commercially reasonable steps to recover from all other responsible parties
in respect of an Insured Claim.
(c) With respect to any Insured Claim in respect of a Shared
Liability, U S WEST and New U S WEST shall share any Insurance Proceeds
received in respect of such Insured Claim in the same proportions in which
such Shared Liability is shared by U S WEST and New U S WEST. In the event
of any such Insured Claim, U S WEST and New U S WEST shall jointly determine
which party shall be responsible for Insurance Administration under the Joint
Insurance Arrangements in respect of such Insured Claim. The disbursements,
out-of-pocket expenses and costs relating to Insurance Administration
contemplated by this Section 7.2(c) shall be borne by the parties in the same
proportions in which the Shared Liability underlying such Insured Claim is
shared by U S WEST and New U S WEST.
7.3 COOPERATION; DISAGREEMENTS. The parties shall use their
commercially reasonable efforts to cooperate with respect to the various
insurance matters contemplated
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by this Agreement. Any disagreements between U S WEST and New U S WEST under
this Article VII shall be submitted to the Separation Committee in accordance
with the procedures set forth in Section 12.2.
ARTICLE VIII
INDEMNIFICATION
8.1 NEW U S WEST'S AGREEMENT TO INDEMNIFY. (a) Except as
otherwise specifically provided in the other Transaction Documents, subject
to the terms and conditions set forth in this Agreement, from and after the
Separation Time, New U S WEST shall indemnify, defend and hold harmless U S
WEST and its directors, officers, employees, representatives, advisors,
agents and Affiliates (collectively, the "U S WEST INDEMNIFIED PARTIES")
from, against and in respect of any and all Indemnifiable Losses of the U S
WEST Indemnified Parties arising out of, relating to or resulting from,
directly or indirectly:
(i) any and all New U S WEST Liabilities (including any New U S
WEST Liability which could be covered by the terms of the
indemnification provisions contained in the Bylaws of U S WEST prior to
the Separation Time);
(ii) New U S WEST's failure to observe from and after the
Separation Time its obligations under this Agreement or any of the other
Transaction Documents; and
(iii) any untrue statement or alleged untrue statement of a
material fact contained in any of the SEC Filings, or any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (but, in each
case, only with respect to information relating to the New U S WEST
Business contained in or omitted from the SEC Filings).
(b) Notwithstanding New U S WEST's obligations to indemnify U S
WEST Indemnified Parties pursuant to Section 8.1(a), U S WEST hereby waives,
releases and agrees not to make any claim or bring any contribution, cost
recovery or other action against any member of the New U S WEST Group,
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and, if applicable, their respective directors, officers, employees,
representatives, agents and Affiliates and their heirs, successors and
assigns, under CERCLA or any similar federal, state or local environmental
law or regulation now existing or hereafter enacted that seeks to allocate
liabilities between U S WEST and New U S WEST in a different manner than as
expressly set forth in this Agreement.
8.2 U S WEST'S AGREEMENT TO INDEMNIFY. (a) Except as otherwise
specifically provided in the other Transaction Documents, subject to the
terms and conditions set forth in this Agreement, from and after the
Separation Time, U S WEST shall indemnify, defend and hold harmless New U S
WEST and each of its directors, officers, employees, representatives,
advisors, agents and Affiliates (collectively, the "NEW U S WEST INDEMNIFIED
PARTIES") from, against and in respect of any and all Indemnifiable Losses of
the New U S WEST Indemnified Parties arising out of, relating to or resulting
from, directly or indirectly:
(i) any and all MediaOne Liabilities;
(ii) U S WEST's failure to observe from and after the Separation
Time its obligations under this Agreement or any of the other
Transaction Documents; and
(iii) any untrue statement or alleged untrue statement of a
material fact contained in any of the SEC Filings, or any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (but, in each
case, only with respect to information relating to the MediaOne Business
contained in or omitted from the SEC Filings).
(b) Notwithstanding U S WEST's obligations to indemnify New U S
WEST Indemnified Parties pursuant to Section 8.2(a), New U S WEST hereby
waives, releases and agrees not to make any claim or bring any contribution,
cost recovery or other action against any member of the U S WEST Group, and,
if applicable, their respective directors, officers, employees,
representatives, agents and Affiliates and their heirs, successors and
assigns, under CERCLA or any similar federal, state or local environmental
law or regulation now existing or hereafter enacted that seeks to allocate
liabilities between New U S WEST and U S WEST in a
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different manner than as expressly set forth in this Agreement.
8.3 PROCEDURE FOR INDEMNIFICATION. Except as set forth in the
Employee Matters Agreement, all claims for indemnification under this Article
VIII shall be asserted and resolved as follows:
(a) THIRD PARTY CLAIMS (OTHER THAN WITH RESPECT TO SHARED
LIABILITIES). In the event that any claim or demand for which an
Indemnifying Party may be liable to an Indemnified Party hereunder (other
than with respect to Shared Liabilities) is asserted against or sought to be
collected by a third party from an Indemnified Party (an "ASSERTED
LIABILITY"), the Indemnified Party shall as soon as possible notify the
Indemnifying Party in writing of such Asserted Liability, specifying the
nature of such Asserted Liability (the "CLAIM NOTICE"); provided that no
delay on the part of the Indemnified Party in giving any such Claim Notice
shall relieve the Indemnifying Party of any indemnification obligation
hereunder except to the extent that the Indemnifying Party is materially
prejudiced by such delay. The Indemnifying Party shall have 60 days (or less
if the nature of the Asserted Liability requires) from its receipt of the
Claim Notice to notify the Indemnified Party whether or not the Indemnifying
Party desires, at the Indemnifying Party's sole cost and expense and by
counsel of its own choosing, to defend against such Asserted Liability;
PROVIDED, HOWEVER, that if, under applicable standards of professional
conduct a conflict on any significant issue between the Indemnifying Party
and any Indemnified Party exists in respect of such Asserted Liability, then
the Indemnifying Party shall reimburse the Indemnified Party for the
reasonable fees and expenses of one additional counsel (who shall be
reasonably acceptable to the Indemnifying Party).
The Indemnified Party shall have the right to control, pay or
settle any Asserted Liability which the Indemnifying Party shall have
undertaken to defend so long as the Indemnified Party shall also (at the time
it exercises such right to control, pay or settle such Asserted Liability)
waive any right to indemnification therefor by the Indemnifying Party. If
the Indemnifying Party undertakes to defend against such Asserted Liability,
the Indemnified Party shall cooperate fully with the Indemnifying Party and
its counsel in the investigation, defense and settlement thereof, but the
Indemnifying Party
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shall control the investigation, defense and settlement thereof. If the
Indemnified Party desires to participate in any such defense, it may do so at
its sole cost and expense. If the Indemnifying Party elects not to defend
against such Asserted Liability, then the Indemnifying Party shall have the
right to participate in any such defense at its sole cost and expense, but
the Indemnified Party shall control the investigation, defense and settlement
thereof at the reasonable cost and expense of the Indemnifying Party. The
Indemnifying Party shall not, without the prior written consent of the
Indemnified Party (which consent shall not be unreasonably withheld), consent
to any settlement unless such settlement (i) includes a complete release of
the Indemnified Party and (ii) does not require the Indemnified Party to make
or forego any payment or forego or take any action. The Indemnifying Party
shall not be liable for any settlement of any Asserted Liability effected
without its prior written consent (which consent shall not be unreasonably
withheld). In the event a dispute arises as to which party has
responsibility under this Agreement for an Asserted Liability, the
Indemnified Party shall have the right to defend such Asserted Liability
until such dispute is resolved in accordance with the procedures set forth in
Section 12.2; PROVIDED, HOWEVER, that in such circumstances (i) the
Indemnified Party shall not have the right to settle such Asserted Liability
unless the Indemnified Party shall also (at the time it exercises such right
to settle such Asserted Liability) waive any right to indemnification
therefor by the Indemnifying Party and (ii) if it is subsequently determined
pursuant to Section 12.2 that such Asserted Liability is the responsibility
of the Indemnifying Party, the Indemnifying Party shall thereafter have the
right to defend against such Asserted Liability in accordance with this
Section 8.3(a). Any disputes between the Indemnifying Party and the
Indemnified Party under this Section 8.3(a) shall be submitted to the
Separation Committee in accordance with the procedures set forth in Section
12.2.
(b) THIRD PARTY CLAIMS WITH RESPECT TO SHARED LIABILITIES. In the
event that any claim or demand with respect to a Shared Liability is asserted
against or sought to be collected by a third party (a "SHARED ASSERTED
LIABILITY"), the Indemnifying Party receiving notice of such claim (the
"RECEIVING PARTY") shall as soon as practicable notify the other Indemnifying
Party (the "NON-RECEIVING PARTY") in writing of such Shared Asserted
Liability, specifying the nature of such Shared Asserted Liability (the
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"SHARED CLAIM NOTICE"); PROVIDED, HOWEVER, that no delay on the part of the
Receiving Party in giving any such Shared Claim Notice shall relieve the
Non-Receiving Party of any indemnification obligation hereunder except to the
extent that the Non-Receiving Party is materially prejudiced by such delay.
If one of the Indemnifying Parties has responsibility for greater than 50% of
such Shared Asserted Liability as set forth in Section 1.1(i) of the
Separation Disclosure Schedule, such Indemnifying Party shall have management
and administrative responsibility in respect of such Shared Asserted
Liability (the "MANAGING PARTY"), including responsibility for the defense of
such Shared Asserted Liability, negotiation with claimants and potential
claimants (subject to the limitations in the following paragraph) and other
activities related thereto. If one of the Indemnifying Parties does not have
responsibility for greater than 50% of such Shared Asserted Liability as set
forth in Section 1.1(i) of the Separation Disclosure Schedule, New U S WEST
shall be the Managing Party.
The Managing Party shall assume the defense of the Shared Asserted
Liability with counsel selected by the Managing Party and shall control the
defense of such Shared Asserted Liability, although the Indemnifying Party
that is not the Managing Party (the "NON-MANAGING PARTY") shall have the
right at its own cost to participate in such defense and to employ counsel
separate from the counsel employed by the Managing Party. The Non-Managing
Party shall cooperate with the Managing Party in the defense or prosecution
of such Shared Asserted Liability. In the event a dispute arises as to
whether the Non-Receiving Party has any responsibility under this Agreement
for the Shared Asserted Liability, the Receiving Party shall have the right
to defend such Shared Asserted Liability until such dispute is resolved in
accordance with the procedures set forth in Section 12.2; PROVIDED, HOWEVER,
that in such circumstances (i) the Receiving Party shall not have the right
to settle such Shared Asserted Liability unless the Indemnified Party shall
also (at the time it exercises such right to settle such Shared Asserted
Liability) waive any right to indemnification therefor by the Non-Receiving
Party and (ii) if the Non-Receiving Party becomes the Managing Party, the
Managing Party shall thereafter defend against such Shared Asserted Liability
in accordance with this Section 8.3(b).
In no event will the Managing Party admit any liability with
respect to, or settle, compromise or discharge, any such Shared Asserted
Liability without the
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prior written consent of the Non-Managing Party; PROVIDED, HOWEVER, that the
Managing Party shall have the right to settle, compromise or discharge, any
such Shared Asserted Liability without the consent of the Non-Managing Party
if the aggregate amount payable by the Indemnifying Parties in respect of
such settlement, compromise or discharge does not exceed $5,000,000 and such
settlement, compromise or discharge does not require the Non-Managing Party
to take any action other than the payment of damages; PROVIDED, FURTHER, that
the Managing Party shall have the right to settle, compromise or discharge
such Shared Asserted Liability without the consent of the Non-Managing Party
if the Managing Party releases in writing the Non-Managing Party from its
indemnification obligation hereunder with respect to such Shared Asserted
Liability and such settlement, compromise or discharge would not otherwise
adversely affect the Non-Managing Party; and PROVIDED, FURTHER, that if the
Managing Party recommends a settlement, compromise or discharge of such
Shared Asserted Liability to the Non-Managing Party that does not require the
Non-Managing Party to take any action other than the payment of damages and
the Non-Managing Party does not consent to such settlement, compromise or
discharge, then the Non-Managing Party shall be required to indemnify the
Managing Party for any amount that the Managing Party may be required to pay
in the future in connection with such Shared Asserted Liability which is in
excess of the amount that would have been paid by or on behalf of the
Managing Party pursuant to such settlement, compromise or discharge. All
amounts payable by the Indemnifying Parties in connection with a Shared
Asserted Liability, including all reasonable legal and other expenses
incurred in connection with such Shared Asserted Liability (including
reasonable legal expenses of the Non-Managing Party), shall be shared by the
parties in the same proportions in which the related Shared Liability is
shared. Any disputes between the parties under this Section 8.3(b) shall be
submitted to the Separation Committee in accordance with the procedures set
forth in Section 12.2.
(C) NON-THIRD PARTY CLAIMS. In the event that an Indemnified
Party should have a claim against the Indemnifying Party hereunder that does
not involve a claim or demand being asserted against or sought to be
collected from it by a third party, the Indemnified Party shall send a notice
with respect to such claim to the Indemnifying Party. The Indemnifying Party
shall have 60 days from the date such notice is delivered during which to
notify the Indemnified Party in writing of any good faith objections it has
to the
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Indemnified Party's notice or claims for indemnification, setting forth in
reasonable detail each of the Indemnifying Party's objections thereto. If
the Indemnifying party does not deliver such written notice of objection
within such 60-day period, the Indemnifying Party shall be deemed to not have
any objections to such claim. If the Indemnifying Party does deliver such
written notice of objection within such 60-day period, the Indemnifying Party
and the Indemnified Party shall attempt in good faith to resolve any such
dispute within 60 days of the delivery by the Indemnifying Party of such
written notice of objection. If the Indemnifying Party and the Indemnified
Party are unable to resolve any such dispute within such 60-day period, such
dispute shall be submitted to the Separation Committee in accordance with the
procedures set forth in Section 12.2.
8.4 MISCELLANEOUS INDEMNIFICATION PROVISIONS.
(a) The Indemnifying Party agrees to indemnify any successors of
the Indemnified Party to the same extent and in the same manner and on the
same terms and conditions as the Indemnified Party is indemnified by the
Indemnifying Party under this Article VIII.
(b) The amount that an Indemnifying Party is required to pay to
any Indemnified Party pursuant to this Article VIII shall be reduced
(retroactively or prospectively) by any Insurance Proceeds or other amounts
actually recovered by or on behalf of such Indemnified Party in respect of
the related Indemnifiable Loss (including any Insurance Proceeds in respect
of a Shared Liability recovered by or on behalf of such Indemnified Party in
respect of the related Indemnifiable Loss). If an Indemnified Party shall
have received the payment required by this Article VIII in respect of an
Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds
or other amounts in respect of such Indemnifiable Loss, then such Indemnified
Party shall pay to such Indemnifying Party a sum equal to the amount of such
Insurance Proceeds or other amounts actually received, up to the aggregate
amount of any payments received from such Indemnifying Party pursuant to this
Article VIII in respect of such Indemnifiable Loss.
(c) In determining the amount of any indemnity payable under this
Article VIII, such amount shall be reduced by any related Tax benefits if and
when actually realized or received (but only after taking into account any
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Tax benefits (including, without limitation, any net operating losses or
other deductions) to which the Indemnified Party would be entitled without
regard to such item), except to the extent such Tax benefit has already been
taken into account in determining the amount of any indemnity payable under
this Article VIII in respect of the related Indemnifiable Loss. Any such Tax
benefit shall be promptly repaid by the Indemnified Party to the Indemnifying
Party following the time at which such recovery is realized or received
pursuant to the previous sentence, minus all reasonably allocable costs,
charges and expenses incurred by the Indemnified Party in obtaining such Tax
benefit. Notwithstanding the foregoing, if (x) the amount of Indemnifiable
Losses for which the Indemnifying Party is obligated to indemnify the
Indemnified Party is reduced by any Tax benefit in accordance with the
provisions of the previous sentence and (y) the Indemnified Party
subsequently is required to repay the amount of any such Tax benefit or such
Tax benefit is disallowed, then the obligation of the Indemnifying Party to
indemnify with respect to such amounts shall be reinstated immediately and
such amounts shall be paid promptly to the Indemnified Party in accordance
with the provisions of this Agreement.
(d) No Indemnifying Party shall be liable to an Indemnified Party
under this Article VIII in respect of consequential, exemplary, special or
punitive damages, or lost profits, except to the extent such consequential,
exemplary, special or punitive damages, or lost profits are actually paid to
a third party.
8.5 CONTRIBUTION. (a) If the indemnification provided for in
this Article VIII is not permitted under Applicable Law, then the
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a
result of such Indemnifiable Losses (i) any amount that such Indemnified
Party would be entitled to pursuant to Article VIII of this Agreement or the
relevant indemnity provisions of any other Transaction Document or (ii) if
the allocation provided by clause (i) above is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relevant
benefits of the indemnity provisions described in clause (i) above, but also
the relative ownership of the Assets or responsibility for the Liabilities
associated with such Indemnifiable Losses.
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(b) The amounts paid or payable by an Indemnified Party as a
result of Indemnifiable Losses referred to in Section 8.5(a) above shall be
deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
8.6 TAX MATTERS; CONSTRUCTION OF AGREEMENTS.
(a) Except as set forth in the Tax Sharing Agreement, all
indemnification relating to Taxes shall be governed by the Tax Sharing
Agreement.
(b) Notwithstanding any other provision in this Agreement to the
contrary, except as set forth in Section 8.6(a), in the event and to the
extent that there shall be a conflict between the provisions of this Article
VIII and the provisions of any other part of this Agreement or any exhibit or
schedule hereto, the provisions of this Article VIII shall control, and in
the event and to the extent that there shall be a conflict between the
provisions of this Agreement (including, without limitation, the provisions
of this Article VIII) and the provisions of any other Transaction Document,
the provisions of such other Transaction Document shall control.
8.7 REMEDIES CUMULATIVE. The remedies provided in this Article
VIII shall be cumulative and, subject to the provisions of Section 12.2,
shall not preclude assertion by any Indemnitee of any other rights or the
seeking of any and all other remedies against any Indemnifying Party.
ARTICLE IX
CERTAIN ADDITIONAL COVENANTS
9.1 LICENSES AND PERMITS. Each party hereto shall cause the
appropriate members of its Group to prepare and file with the appropriate
licensing and permitting authorities applications for the transfer or
issuance, as may be necessary or advisable in connection with the Separation,
to its Group of all material governmental licenses and permits required for
the members of its Group to operate its business after the Separation. The
members of the New U S WEST Group and the members of the U S WEST Group shall
cooperate and use all reasonable best efforts to
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secure the transfer or issuance of such licenses and permits.
9.2 INTERCOMPANY AGREEMENTS. All contracts, licenses, agreements,
commitments or other arrangements, formal or informal, between any member of
the U S WEST Group, on the one hand, and any member of the New U S WEST
Group, on the other, in existence as of the Separation Time, pursuant to
which any member of either Group provides services to any member of the other
Group (including, without limitation, management, administrative, financial,
accounting, data processing, insurance or technical support), or the use of
any Assets of any member of the other Group, or the secondment of any
employee, or pursuant to which rights, privileges or benefits are afforded to
members of either Group or Affiliates of the other Group, shall terminate as
of the close of business on the day prior to the Separation Time, except (i)
as specifically provided herein or in the Transaction Documents or as
otherwise agreed to by the parties, (ii) for the agreements listed in Section
9.2 of the Separation Disclosure Schedule, which will remain in effect
following the Separation Time and (iii) to the extent required by the terms
of the AirTouch Merger Agreement, for any agreements between a member of the
New U S WEST Group, on the one hand, and NewVector or any of its Subsidiaries
or investments or PCS Holdings, on the other hand. From and after the
Separation Time, no member of either Group shall have any rights under any
contract, license, agreement, commitment or arrangement so terminated.
9.3 GUARANTEE OBLIGATIONS. (a) U S WEST and New U S WEST shall
cooperate, and shall cause their respective Groups to cooperate, to
terminate, or to cause a member of the New U S WEST Group to be substituted
in all respects for any member of the U S WEST Group in respect of, all
obligations of any member of the U S WEST Group under any loan, letter of
credit, financing, lease, contract or other obligation in existence as of the
Separation Time pertaining to the New U S WEST Business for which such member
of the U S WEST Group may be liable, as guarantor, original tenant, primary
obligor or otherwise. If such a termination or substitution is not effected
by the Separation Time, (i) New U S WEST shall indemnify and hold harmless
the U S WEST Indemnified Parties for any Indemnifiable Loss arising from or
relating to any such loan, letter of credit, financing, lease, contract or
other obligation and (ii) without the prior written consent of U S WEST, from
and after the Separation Time, New U S WEST shall not, and shall not
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permit any member of the New U S WEST Group or any of its Affiliates to,
renew or extend the term of, increase its obligations under, transfer to a
third party, or amend in any manner adverse to the U S WEST Group, any such
loan, letter of credit, financing, lease, contract or other obligation unless
all obligations of the U S WEST Group with respect thereto are thereupon
terminated by documentation reasonably satisfactory in form and substance to
U S WEST.
(b) U S WEST and New U S WEST shall cooperate, and shall cause
their respective Groups to cooperate, to terminate, or to cause a member of
the U S WEST Group to be substituted in all respects for any member of the
New U S WEST Group in respect of, all obligations of any member of the New U
S WEST Group under any loan, financing, letter of credit, lease, contract, or
other obligation in existence as of the Separation Time pertaining to the U S
WEST Business for which such member of the New U S WEST Group may be liable,
as guarantor, original tenant, primary obligor or otherwise. If such a
termination or substitution is not effected by the Separation Time, (i) U S
WEST shall indemnify and hold harmless the New U S WEST Indemnified Parties
for any Indemnifiable Loss arising from or relating to any such loan, letter
of credit, financing, lease, contract or other obligation, and (ii) without
the prior written consent of New U S WEST, from and after the Separation
Time, U S WEST shall not, and shall not permit any member of the U S WEST
Group or any of its Affiliates to, renew or extend the term of, increase its
obligations under, transfer to a third party, or amend in any manner adverse
to the New U S WEST Group, any such loan, letter of credit, financing, lease,
contract or other obligation unless all obligations of the New U S WEST Group
with respect thereto are thereupon terminated by documentation reasonably
satisfactory in form and substance to New U S WEST.
9.4 FURTHER ASSURANCES. (a) In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto shall use reasonable best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things reasonably necessary,
proper or advisable under Applicable Laws, regulations and agreements to
consummate and make effective the transactions contemplated by this
Agreement. Without limiting the foregoing, each party hereto shall cooperate
with the other party, and execute and deliver, or use reasonable best efforts
to cause to be executed and delivered, all instruments, including instruments
of conveyance, assignment
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and transfer, and to make all filings with, and to obtain all consents,
approvals or authorizations of, any governmental or regulatory authority or
any other Person under any permit, license, agreement, indenture or other
instrument, and take all such other actions as such party may reasonably be
requested to take by the other party hereto from time to time, consistent
with the terms of this Agreement and the Transaction Documents, in order to
effectuate the provisions and purposes of this Agreement and the transfers of
Assets and Liabilities and the other transactions contemplated hereby.
(b) If any such transfer of Assets or Liabilities is not
consummated prior to or at the Separation Time, then the party hereto
retaining such Asset or Liability shall continue to take the actions required
by Section 9.4(a) to consummate and make effective such transfer as soon as
practicable after the Separation Time and, in the case of Assets, shall use
its reasonable best efforts to preserve the value of such Assets until the
time of transfer. If and when any such Asset or Liability becomes
transferable, such transfer shall be effected forthwith. The parties hereto
agree that, as of the Separation Time, each party hereto shall be deemed to
have acquired complete and sole beneficial ownership to all of the Assets,
together with all rights, powers and privileges incident thereto, and shall
be deemed to have assumed in accordance with the terms of this Agreement and
the Transaction Documents all of the Liabilities, and all duties, obligations
and responsibilities incident thereto, that such party is entitled to acquire
or required to assume pursuant to the terms of this Agreement.
(c) Each of the parties hereto agrees to use its respective
reasonable best efforts, at such party's expense, to obtain any consents
required to transfer and assign to (i) New U S WEST all Contracts, licenses
and other rights of any nature whatsoever included in the New U S WEST Assets
and (ii) U S WEST all Contracts, licenses and other rights of any nature
whatsoever included in the MediaOne Assets. In the event and to the extent
that either party hereto is unable to obtain any such required consents, (i)
such party shall continue to be bound thereby (such party in such capacity,
the "RECORD HOLDER") and (ii) the party to which such Asset would otherwise
be transferred pursuant to this Agreement (the "BENEFICIAL HOLDER") shall
pay, perform and discharge fully all of the obligations of the Record Holder
thereunder from and after the Separation Time and indemnify
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such Record Holder for all losses arising out of such performance by such
Record Holder. The Record Holder shall, without further consideration
therefor, pay, assign and remit to the Beneficial Holder promptly all monies,
rights and other consideration received in respect of such performance. The
Record Holder shall exercise or exploit its rights and options under all such
Contracts, licenses and other rights and commitments referred to in this
Section 9.5(c) only as reasonably directed by the Beneficial Holder and at
the Beneficial Holder's expense. If and when any such consent shall be
obtained or any such Contract, license or other right shall otherwise become
assignable, the Record Holder shall promptly assign all of its rights and
obligations thereunder to the Beneficial Holder without payment of further
consideration and the Beneficial Holder shall, without the payment of any
further consideration therefor, assume such rights and obligations.
(d) In the event that, subsequent to the Separation Time, U S WEST
shall either (i) receive written notice from New U S WEST that certain
specified Assets which properly constitute New U S WEST Assets were not
transferred to it on or prior to the Separation Time or (ii) determine that
certain Assets of U S WEST which constitute New U S WEST Assets were not
transferred to New U S WEST on or prior to the Separation Time, then, as
promptly as practicable thereafter, U S WEST shall use its reasonable best
efforts to transfer and deliver any and all of such Assets to New U S WEST
without the payment by New U S WEST of any consideration therefor. In the
event that, subsequent to the Separation Time, New U S WEST shall either (i)
receive written notice from U S WEST that certain specified Assets were
transferred to New U S WEST which properly constitute MediaOne Assets, or
(ii) determine that certain Assets of New U S WEST which constitute MediaOne
Assets were transferred to New U S WEST, then as promptly as practicable
thereafter, New U S WEST shall use its reasonable best efforts to transfer
and deliver any and all of such Assets to U S WEST without the payment by U S
WEST of any consideration therefor.
9.5 NATIONAL CONTRACTS. Each of the parties hereto agrees to use
its respective reasonable best efforts to permit the other party hereto to
obtain the benefits of certain Contracts with nationally-based vendors and
suppliers existing as of the Separation Time and listed on Section 9.5 of the
Separation Disclosure Schedule (such Contracts, each individually a "NATIONAL
CONTRACT" and
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collectively the "NATIONAL CONTRACTS"). Each of U S WEST and New U S WEST
hereby agrees to cooperate with respect to obtaining favorable prices under
such National Contracts by combining or consolidating orders made under such
National Contracts. Each of U S WEST and New U S WEST hereby agrees that New
U S WEST or a member of the New U S WEST Group shall administer these
National Contracts and that U S WEST shall be responsible for the portions
attributable to U S WEST of any order or delivery of goods and services
received under each National Contract (including costs of administration).
The arrangements of U S WEST and New U S WEST with respect to National
Contracts relating to employee matters shall be governed by the terms of the
Employee Matters Agreement.
9.6 NON-SOLICITATION OF EMPLOYEES. Each of U S WEST and New U S
WEST shall not, and shall cause the other members of the Group of which it is
a member not to, until the first anniversary of the Separation Time, directly
or indirectly, (i) recruit any Covered Employee of the other Group or (ii)
solicit any Covered Employee of the other Group to leave the employment of
the other Group; PROVIDED, HOWEVER, that nothing contained herein shall (A)
prohibit any advertisement or general solicitation (or employment as a result
thereof) by any member of the U S WEST Group or the New U S WEST Group that
is not specifically targeted at employees of the other Group or (B) prohibit
any employee of one Group from initiating employment discussion with the
other Group without any recruitment or solicitation from such other Group.
In the event U S WEST or New U S WEST breaches the provisions of this Section
9.5, the breaching party shall be required to pay to the non-breaching party
as liquidated damages an amount equal to the product of (x) 1.5 multiplied by
(y) the total salary and bonus under the non-breaching party's short-term
compensation plan received by the Covered Employee recruited or solicited
during the most recent 12-month period.
9.7 LOCK BOXES. U S WEST shall take all such actions as may be
necessary or required to deliver to New U S WEST full authority as of the
Separation Time with respect to all lock boxes or similar deposit
arrangements maintained by U S WEST prior to the Separation Time and which
are utilized exclusively by the New U S WEST Business. Effective as of the
Separation Time, U S WEST shall terminate any arrangement whereby funds
directed to such lock boxes or similar arrangements are consolidated with
other funds of U S WEST or otherwise made available to U S
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WEST. U S WEST shall, effective as of the Separation Time, take all
necessary steps to remove all Persons who are not New U S WEST Employees but
who are signatories or holders of powers-of-attorney with respect to such
lock boxes or other arrangements from the list of such signatories and
holders and otherwise extinguish their signing authority with respect thereto.
9.8 AGREEMENTS WITH RESPECT TO COMMON STOCK RECEIVED BY SAVINGS
PLAN/ESOPS. (a) U S WEST and the U S WEST Savings Plan/ESOP and New U S WEST
and the MediaOne Savings Plan/ESOP shall cooperate with each other in
supplying such information as may be necessary for any of such parties to
complete and file any information reporting forms presently or hereafter
required by the SEC or any commissioner or other authority administering the
"blue sky" or securities laws of any applicable jurisdiction which would be
required to be filed as a condition to the availability of an exemption from
registration or qualification of an offer or sale of the shares of the
MediaOne Common Stock owned by the U S WEST Savings Plan/ESOP after the
Separation (the "New U S WEST Savings Plan Shares") and the shares of the New
U S WEST Common Stock received by the MediaOne Savings Plan/ESOP in the
Separation (the "MediaOne Savings Plan Shares") under the Securities Act, or
any such "blue sky" or securities laws.
(b) To the extent required by Applicable Law, (i) until the sale
by the New U S WEST Savings Plan of the New U S WEST Savings Plan Shares, U S
WEST shall file in a timely manner all reports contemplated by Rule 144(c)(1)
under the Securities Act as satisfying the condition that adequate public
information with respect to U S WEST is available and (ii) until the sale by
the MediaOne Savings Plan of the MediaOne Savings Plan Shares, New U S WEST
shall file in a timely manner all reports contemplated by Rule 144(c)(1)
under the Securities Act as satisfying the condition that adequate public
information with respect to New U S WEST is available.
9.9 AIRTOUCH TRANSACTION. (a) Except as set forth in this
Section 9.9 or as otherwise agreed to by the parties, all rights and
obligations of U S WEST and its Subsidiaries under the AirTouch Merger
Agreement shall be retained by U S WEST in connection with the Separation.
(b) At the Separation Time (whether or not the AirTouch
Transaction shall have been consummated), U S WEST
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shall assign to New U S WEST and the New U S WEST Group, pursuant to the
instrument of assignment attached as Exhibit K-2 to the AirTouch Merger
Agreement, the following rights (and related obligations):
(i) all of the rights (and related obligations) of U S WEST and
its Subsidiaries under Section 7.8 of the AirTouch Merger Agreement
(relating to use of the "U S WEST" name by AirTouch and its
Subsidiaries), subject to the limitations set forth therein; and
(ii) an equal and undivided interest (together with the U S WEST
Group) in all of the rights (and related obligations) of U S WEST and
its Subsidiaries under Sections 7.9(b) and 7.9(c) of the AirTouch Merger
Agreement (relating to Intellectual Property), subject to the
limitations set forth therein; and
(iii) an equal and undivided interest (together with the U S WEST
Group) in all of the rights (and related obligations) of U S WEST and
its Subsidiaries under Section 7.11 of the AirTouch Merger Agreement
(relating to Third Party Rights), subject to the limitations set forth
therein.
(c) New U S WEST acknowledges the right of AirTouch pursuant to
Section 7.10 of the AirTouch Merger Agreement to make claims (directly or
through U S WEST) under the Joint Insurance Arrangments and agrees that, for
purposes of Article VII hereof, any such claim shall be deemed to have been
made by the U S WEST Group.
(d) New U S WEST acknowledges the right of AirTouch pursuant to
Section 7.12(c) of the AirTouch Merger Agreement to terminate any
contract, license or other arrangement between NewVector or any of its
Subsidiaries or investments or PCS Holdings, on the one hand, and a
member of the New U S WEST Group, on the other hand, on 30 Business
Days' prior written notice.
ARTICLE X
ACCESS TO INFORMATION
10.1 PROVISION OF CORPORATE RECORDS. Prior to or as promptly as
practicable after the Separation Time, U S WEST shall deliver to New U S WEST
all corporate books and
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records of the New U S WEST Group in its possession and copies of the
relevant portions of all corporate books and records of the U S WEST Group
relating directly and primarily to the New U S WEST Group, the New U S WEST
Assets, the New U S WEST Business, the New U S WEST Liabilities and the New U
S WEST Employees, including, without limitation, original corporate minute
books, stock ledgers and certificates and the corporate seal of each
corporation the capital stock of which is included in the New U S WEST
Assets, copies of portions of the minute books of U S WEST and other members
of the U S WEST Group that are directly and primarily related to the New U S
WEST Business and documentation relating to the New U S WEST Liabilities,
including, in each case, all active agreements, active litigation files and
government filings. From and after the Separation Time, all such books,
records and copies shall be the property of New U S WEST. Prior to or as
promptly as practicable after the Separation Time, New U S WEST shall deliver
to U S WEST all corporate books and records of the U S WEST Group in its
possession and copies of the relevant portions of all corporate books and
records of the New U S WEST Group relating directly and primarily to the U S
WEST Group, the MediaOne Assets, the Media Business, the U S WEST Liabilities
and the MediaOne Employees, including, without limitation, original corporate
minute books, stock ledgers and certificates and the corporate seal of each
corporation the capital stock of which is included in the MediaOne Assets,
copies of portions of the minute books of members of the New U S WEST Group
that are directly and primarily related to the MediaOne Business and
documentation relating to the U S WEST Liabilities, including, in each case,
all active agreements, active litigation files and government filings. From
and after the Separation Time, all such books, records and copies shall be
the property of U S WEST.
10.2 ACCESS TO INFORMATION. From and after the Separation Time,
each of U S WEST and New U S WEST shall afford to the other and to the
other's Representatives reasonable access and duplicating rights, during
normal business hours and upon reasonable advance notice, to all Information
within the possession or control of such party's Group relating to the other
party's Group's pre-Separation business, Assets or Liabilities or relating to
or arising in connection with the relationship between the Groups on or prior
to the Separation Time, insofar as such access is reasonably required for a
reasonable purpose, subject to the provisions below regarding Privileged
Information. Without limiting the foregoing and except as otherwise provided
in
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the Transaction Documents, Information may be requested under this Section
10.2 for audit, accounting, claims, litigation and Tax purposes, as well as
for purposes of fulfilling disclosure and reporting obligations.
In furtherance of the foregoing:
(a) Each party hereto acknowledges that: (i) Each of U S WEST and
New U S WEST (and the members of the U S WEST Group and the New U S WEST
Group, respectively) has or may obtain Privileged Information; (ii) there are
a number of Litigation Matters affecting each or both of U S WEST and New U S
WEST; (iii) both U S WEST and New U S WEST have a common legal interest in
Litigation Matters, in the Privileged Information, and in the preservation of
the confidential status of the Privileged Information, in each case relating
to pre-Separation business of the U S WEST Group or the New U S WEST Group or
relating to or arising in connection with the relationship between the Groups
on or prior to the Separation Time; and (iv) both U S WEST and New U S WEST
intend that the transactions contemplated hereby and by the other Transaction
Documents and any transfer of Privileged Information in connection therewith
shall not operate as a waiver of any applicable privilege.
(b) Each of U S WEST and New U S WEST agrees, on behalf of itself
and each member of the Group of which it is a member, not to disclose or
otherwise waive any privilege attaching to any Privileged Information
relating to pre-Separation business of the New U S WEST Group or the U S WEST
Group, respectively, or relating to or arising in connection with the
relationship between the Groups on or prior to the Separation Time, without
providing prompt written notice to and obtaining the prior written consent of
the other, which consent shall not be unreasonably withheld; PROVIDED,
HOWEVER, that U S WEST and New U S WEST may make such disclosure or waiver
with respect to Privileged Information if such Privileged Information relates
solely to the pre-Separation business of the U S WEST Group, in the case of
U S WEST, or the New U S WEST Group, in the case of New U S WEST. Any
disagreement between any member of the U S WEST Group and any member of the
New U S WEST Group concerning the reasonableness of withholding such consent
shall be submitted to the Separation Committee in accordance with the
procedures set forth in Section 12.2 and no disclosure shall be made prior to
a resolution of such disagreement.
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(c) Upon any member of the U S WEST Group or any member of the New
U S WEST Group receiving any subpoena or other compulsory disclosure notice
from a court, other governmental agency or otherwise that requests disclosure
of Privileged Information, in each case relating to pre-Separation business
of the New U S WEST Group or the U S WEST Group, respectively, or relating to
or arising in connection with the relationship between the Groups on or prior
to the Separation Time, in the event the recipient of such the notice intends
to disclose such Privileged Information, such recipient shall promptly
provide to the other Group (following the notice provisions set forth herein)
a copy of such notice, the intended response, and all materials or
information relating to the other Group that might be disclosed. In the
event of a disagreement as to the intended response or disclosure, unless and
until the disagreement is resolved as provided in subsection (b), the parties
shall cooperate to assert all defenses to disclosure claimed by either
party's Group, and shall not disclose any disputed documents or information
until all legal defenses and claims of privilege have been finally determined.
10.3 PRODUCTION OF WITNESSES. Subject to Section 10.2, after the
Separation Time, each of U S WEST and New U S WEST shall, and shall cause
each member of the U S WEST Group and the New U S WEST Group, respectively,
to, make available to U S WEST or New U S WEST or any member of the U S WEST
Group or of the New U S WEST Group, as the case may be, upon written request
of the other, such Group's directors, officers, employees and agents as
witnesses to the extent that any such Person may reasonably be required in
connection with any Litigation Matters, administrative or other proceedings
in which the requesting party may from time to time be involved and relating
to the pre-Separation business of the U S WEST Group or the New U S WEST
Group or relating to or in connection with the relationship between the
Groups on or prior to the Separation Time; PROVIDED, HOWEVER, that,
notwithstanding the foregoing, neither the U S WEST Group nor the New U S
WEST Group shall be required to make available such Group's directors,
officers, employees or witnesses in response to a subpoena received by any
member of the other Group from a third party.
10.4 RETENTION OF RECORDS. Except as otherwise agreed in writing,
or as otherwise provided in the Transaction Documents, each of U S WEST and
New U S WEST shall, and shall cause the members of the Group of which it is a
member to, comply with the current records retention
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policy of U S WEST included in Section 10.4 of the Separation Disclosure
Schedule with respect to all Information in such party's Group's possession
or under its control relating directly and primarily to the pre-Separation
business, Assets or Liabilities of the other party's Group.
10.5 CONFIDENTIALITY. Subject to Section 10.2, which shall govern
Privileged Information, from and after the Separation Time, each of New U S
WEST and U S WEST shall, and shall use reasonable best efforts to cause the
members of its Group and Representatives to, preserve the confidentiality of
all Information concerning the other party's Group obtained by it prior to
the Separation Time or furnished to it by such other party's Group pursuant
to this Agreement or the other Transaction Documents with the same degree of
care as it takes to preserve confidentiality for its own similar Information.
10.6 COOPERATION WITH RESPECT TO GOVERNMENT REPORTS AND FILINGS.
U S WEST, on behalf of itself and each member of the U S WEST Group, agrees to
provide any member of the New U S WEST Group, and New U S WEST, on behalf of
itself and each member of the New U S WEST Group, agrees to provide any
member of the U S WEST Group, with such cooperation and Information as may be
reasonably requested by the other in connection with the preparation or
filing of any government report or other government filing contemplated by
this Agreement or the other Transaction Documents or in conducting any other
government proceeding relating to pre-Separation business of the U S WEST
Group or the New U S WEST Group, Assets or Liabilities of either Group or
relating to or in connection with the relationship between the Groups on or
prior to the Separation Time. Such cooperation and Information shall
include, without limitation, promptly forwarding copies of appropriate
notices and forms or other communications received from or sent to any
Governmental Authority which relate to the U S WEST Group, in the case of the
New U S WEST Group, or the New U S WEST Group, in the case of the U S WEST
Group. Each party shall make its employees and facilities available during
normal business hours and on reasonable prior notice to provide explanation
of any documents or Information provided hereunder.
10.7 CERTAIN LIMITATIONS WITH RESPECT TO INFORMATION. (a) Any
Information owned by one Group that is provided to a requesting party
pursuant to this Agreement
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or any other Transaction Document shall be deemed to remain the property of
the providing party. Unless specifically set forth herein, nothing contained
in this Agreement shall be construed as granting or conferring rights of
license or otherwise in any such Information.
(b) A party providing Information hereunder or under any other
Transaction Document shall be entitled to receive from the requesting party
the reasonable costs, if any, of creating, gathering and copying such
Information, to the extent that such costs are incurred for the benefit of
the requesting party. Except as may be otherwise specifically provided
elsewhere in this Agreement or in any of the Transaction Documents, such
costs shall be computed solely in accordance with the providing party's
standard methodology and procedures.
(c) No party shall have any liability to any other party in the
event that any Information exchanged or provided pursuant to this Article X
hereof which is an estimate or forecast, or which is based on an estimate or
forecast, is found to be inaccurate, in the absence of willful misconduct by
the party providing such Information. No party shall have any liability to
any other party if any Information is destroyed after reasonable best efforts
by such party to comply with the provisions of Section 10.4.
(d) The rights and obligations granted under this Article X are
subject to any specific limitations, qualifications or additional provisions
on the sharing, exchange or confidential treatment of Information set forth
in any other Transaction Document.
10.8 PROTECTIVE ARRANGEMENTS. In the event that any party or any
member of its Group either determines on the advice of its counsel that it is
required to disclose any Information pursuant to applicable law or receives
any demand under lawful process or from any Governmental Authority to
disclose or provide Information concerning any other party (or any member of
any other party's Group) that is subject to the confidentiality provisions
hereof, such party shall notify the other party prior to disclosing or
providing such Information and shall cooperate at the expense of the
requesting party in seeking any reasonable protective arrangements requested
by such other party. Subject to the foregoing, the Person that received such
request may thereafter disclose or provide Information to
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the extent required by such law (as so advised by counsel) or by lawful
process or such Governmental Authority.
ARTICLE XI
MUTUAL RELEASE;
NO REPRESENTATIONS OR WARRANTIES
11.1 MUTUAL RELEASE. (a) Effective as of the Separation Time and
except as specifically set forth in this Agreement or any of the other
Transaction Documents, each of New U S WEST, on the one hand, and U S WEST,
on the other hand, on its own behalf and on behalf of each member of its
respective Group, releases and forever discharges the other and the members
of its Group, and its and their respective officers, directors, agents,
Affiliates, record and beneficial security holders (including, without
limitation, trustees and beneficiaries of trusts holding such securities),
advisors and Representatives (in their respective capacities as such) and
their respective heirs, executors, administrators, successors and assigns, of
and from all debts, demands, Actions, causes of action, suits, accounts,
covenants, contracts, agreements, damages, claims and Liabilities whatsoever
of every name and nature, both in law and in equity, which the releasing
party has or ever had, which arise out of or relate to, in whole or in part,
events, circumstances or actions, whether known or unknown, taken by such
other party occurring or failing to occur or any conditions existing on or
prior to the Separation Time; PROVIDED, HOWEVER, that the foregoing general
release shall not apply to (i) any Liabilities assumed, transferred,
assigned, allocated or arising under this Agreement or any of the other
Transaction Documents and shall not affect any party's rights to enforce this
Agreement (including the provisions of Article VIII) or any of the other
Transaction Documents in accordance with their terms; (ii) any Liability
arising under any agreement listed in Section 9.2 of the Separation
Disclosure Schedule (each of which shall remain in effect following the
Separation Time); and (iii) any Liability the release of which would result
in the release of any Person other than a Person released pursuant to this
Section 11.1 (provided that the parties agree not to bring suit or permit any
members of their Group to bring suit against any Person with respect to any
Liability to the extent such Person would be released with respect to such
Liabilities by this Section 11.1 but for this clause (iii)). U S WEST and New
U S WEST acknowledge that the foregoing
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general release shall not apply to any Liabilities assigned by members of the
U S WEST Group or members of the New U S WEST Group to third parties prior to
the Separation Time.
(b) The parties acknowledge that members of the U S WEST Law
Department and U S WEST's outside counsel currently represent members of both
the U S WEST Group and the New U S WEST Group. Effective as of the
Separation Time, each of New U S WEST, on the one hand, and U S WEST, on the
other hand, on its own behalf and on behalf of each member of its respective
Group, waives any conflict with respect to such common representation before,
at or after the Separation Time (other than, in the case of such common
representation by U S WEST's outside counsel, with respect to any dispute or
Action between a member of the U S WEST Group and a member of the New U S
WEST Group).
11.2 NO REPRESENTATIONS OR WARRANTIES. New U S WEST understands
and agrees that neither U S WEST nor any other member of the U S WEST Group
is, and U S WEST understands and agrees that neither New U S WEST nor any
other member of the New U S WEST Group is, in this Agreement or in any other
agreement or document, representing or warranting to the other in any way as
to such Group's Assets, business or Liabilities or as to any consents or
approvals required in connection with the consummation of the transactions
contemplated by this Agreement, it being agreed and understood that each
member of the Group shall take all of the Assets "AS IS, WHERE IS". Except
as set forth in this Agreement and the other Transaction Documents, both
parties shall bear the economic and legal risk of the Reorganization,
Contribution and Separation that (a) any conveyance of such Group's Assets
shall prove to be insufficient, (b) the title of any member of the New U S
WEST Group or the U S WEST Group to any of their respective Assets shall be
other than good and marketable and free from encumbrances, (c) the title of
any member of the New U S WEST Group or the U S WEST Group to the shares of
any Subsidiary of such Group shall be other than good and marketable and free
from encumbrances or (d) any member of the other Group shall fail to obtain
any consents or approvals relating to its business required in connection
with the consummation of the transactions contemplated by this Agreement.
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ARTICLE XII
GENERAL PROVISIONS
12.1 MERGER OR CONSOLIDATION. Neither New U S WEST nor U S WEST
(in either case, the "TRANSACTION PARTY") shall (a) consolidate with or merge
into any Person or permit any Person to consolidate with or merge into the
Transaction Party (other than a merger or consolidation in which the
Transaction Party is the surviving or continuing corporation) or (b) sell,
assign, transfer, lease or otherwise dispose of, in one transaction or a
series of related transactions, all or substantially all of the assets of the
Transaction Party, unless the resulting, surviving or transferee Person shall
expressly assume, by instrument in form and substance reasonably satisfactory
to the other party, all of the obligations of the Transaction Party under
this Agreement and each of the other Transaction Documents.
12.2 SEPARATION COMMITTEE; DISPUTE RESOLUTION.
(a) As of the Separation Time, New U S WEST and U S WEST shall
form a committee (the "SEPARATION COMMITTEE") comprised of one representative
designated from time to time by the General Counsel of New U S WEST in his
sole discretion and one representative designated from time to time by the
General Counsel of U S WEST in his sole discretion. Until the tenth
anniversary of the Separation Time, the Separation Committee shall be
responsible for resolving any and all disputes between any member of the U S
WEST Group and any member of the New U S WEST Group arising with respect to
any matter, whether based in contract, tort, statute or otherwise
(collectively, "DISPUTES"), including any dispute as to (i) whether any
Action or other Liability is a New U S WEST Liability, a MediaOne Liability
or a Shared Liability, (ii) whether any Asset is a New U S WEST Asset or a
MediaOne Asset, (iii) the interpretation of any provision of this Agreement
or any other Transaction Document and (iv) such other matters as are
contemplated by this Agreement or any other Transaction Document to be
resolved by the Separation Committee. In the event of any such Dispute, each
of New U S WEST and U S WEST shall have the right to refer in writing such
Dispute to the Separation Committee for resolution. The Separation Committee
shall be required to render a written decision with respect to any Dispute
within 30 days of its receipt of the referral. The decision of the
Separation Committee with respect to any Dispute shall be binding on the New
U S WEST Group and the U
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S WEST Group and their respective successors and assigns. In the event that
the Separation Committee is unable to reach a unanimous determination as to
any Dispute to which it is referred within 30 days of such referral, each of
New U S WEST and U S WEST shall have the right to submit such Dispute to
arbitration in accordance with the procedures set forth in Section 12.2(b).
All out-of-pocket expenses and costs incurred by New U S WEST or U S WEST in
connection with the procedures set forth in this Section 12.2(a) shall be
borne by the party incurring such expenses and costs.
(b) In the event that the Separation Committee is unable to reach
a unanimous determination as to any Dispute pursuant to Section 12.2(a), each
of New U S WEST and U S WEST shall have the right to submit such Dispute to
arbitration in accordance with the procedures set forth in this Section
12.2(b). Until the tenth anniversary of the Separation Time, resolution of
any and all such Disputes, including, but not limited to, disputes over
arbitrability, shall be exclusively governed by and settled in accordance
with the provisions of this Section 12.2(b); PROVIDED, HOWEVER, that nothing
contained herein shall preclude either party from seeking or obtaining
injunctive relief or equitable or other judicial relief to enforce this
Section 12.2(b).
U S WEST or New U S WEST (each a "PARTY") may commence proceedings
hereunder by delivering a written notice (the "DEMAND") to the other Party
providing a reasonable description of the Dispute to the other, and expressly
requesting arbitration hereunder. The parties hereby agree to submit all
Disputes to arbitration under the terms hereof, which arbitration shall be
final, conclusive and binding upon the parties, their successors and assigns.
The arbitration shall be conducted in Denver, Colorado by three arbitrators
acting by majority vote (the "PANEL"). Of the three arbitrators comprising
the Panel, one arbitrator shall be selected by U S WEST, one arbitrator shall
be selected by New U S WEST and one arbitrator shall be jointly selected by
the arbitrators selected by U S WEST and New U S WEST. If either U S WEST or
New U S WEST fail to select an arbitrator within 15 days after delivery of
the Demand, the arbitrator which is to be selected by such Party shall be
appointed pursuant to the commercial arbitration rules of the American
Arbitration Association, as amended from time to time (the "AAA RULES"). If
an arbitrator so selected or appointed becomes unable to serve, his or her
successors shall be similarly selected or appointed. Notwithstanding
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the foregoing, at the agreement of the Parties, the Panel shall consist of
one arbitrator selected by agreement of the Parties for appropriate Disputes.
The arbitration shall be conducted pursuant to the Federal
Arbitration Act and such procedures as the Parties may agree, or, in the
absence of or failing such agreement, pursuant to the AAA Rules.
Notwithstanding the foregoing, the Panel, taking into consideration the
desires of the Parties for expedited resolution of the Dispute, shall have
discretion to order discovery, including, in appropriate circumstances,
depositions. All hearings shall be conducted on an expedited schedule, and
all proceedings shall be confidential. Either Party may at its expense make
a stenographic record thereof, which shall then be shared with the other
Party. Hearings with respect to a Dispute shall commence not later than 60
days after selection or appointment of the Panel, and shall no be more than
30 days in length. The Panel shall be required to make a final award within
30 days of the conclusion of the hearings. The award shall be in writing and
shall specify the factual and legal basis for the award. The Panel shall
apportion all costs and expenses of arbitration, including the Panel's fees
and expenses, fees and expenses of experts and reasonable attorneys fees,
between the prevailing and non-prevailing Party as the Panel deems fair and
reasonable. The Parties agree that monetary damages may be inadequate and
that either Party shall be entitled to seek, and that the Panel shall be
empowered to enter, equitable and injunctive relief, including preliminary
and temporary injunctive relief, in addition to any other appropriate relief
or remedy. The Parties consent to the jurisdiction of the Panel to award
such relief and to the binding nature of any such relief awarded by the
Panel. In no event may the Panel award consequential, exemplary, special or
punitive damages, or lost profits, except to the extent such consequential,
exemplary, special or punitive damages, or lost profits are actually paid by
a Party or a member of that Party's Group to a third party. Any arbitration
award shall be binding and enforceable against the Parties and each member of
their respective Groups and judgment may be entered thereon in any court of
competent jurisdiction.
12.3 SUBSIDIARIES. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party
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or by any entity that is contemplated to be a Subsidiary of such party on or
after the Separation Time.
12.4 EXPENSES. Except as set forth in Sections 3.4(a) and 3.4(b)
of the Separation Disclosure Schedule, all out-of-pocket costs with respect
to the transfer of the New U S WEST Assets and the transactions contemplated
hereby and by the other Transaction Documents shall be borne equally by U S
WEST and New U S WEST.
12.5 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of Colorado, without reference to
choice of law principles, including matters of construction, validity and
performance.
12.6 NOTICES. Notices, requests, permissions, waivers, referrals
and all other communications hereunder shall be in writing and shall be
deemed to have been duly given if signed by the respective persons giving
them (in the case of any corporation the signature shall be by an officer
thereof) and delivered by hand or by telecopy or on the date of receipt
indicated on the return receipt if mailed (registered or certified, return
receipt requested, properly addressed and postage prepaid):
If to U S WEST, to:
U S WEST, INC.
(to be renamed "MEDIAONE GROUP, INC.")
188 Inverness Drive West
Englewood, Colorado 80112
Attention: General Counsel
Telephone: (303) 858-5800
If to New U S WEST, to:
USW-C, INC.
(to be renamed "U S WEST, INC.")
1801 California Street
Englewood, Colorado 80202
Attention: General Counsel
Telephone: (303) 896-2020
Such names and addresses may be changed by notice given in accordance with
this Section 12.6. Copies of all notices, requests, permissions, waivers,
referrals and all other communications hereunder shall be given to:
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Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Dennis J. Block, Esq.
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
12.7 ENTIRE AGREEMENT. This Agreement and the other Transaction
Documents, together with all schedules, exhibits, annexes, certificates,
instruments and agreements delivered pursuant hereto and thereto, contain the
entire understanding of the parties hereto and thereto with respect to the
subject matter contained herein and therein, and supersede and cancel all
prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written, respecting such subject
matter.
12.8 HEADINGS; REFERENCES. The article, section and paragraph
headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
All references herein to "Articles", "Sections" or "Exhibits" shall be deemed
to be references to Articles or Sections hereof or Exhibits hereto unless
otherwise indicated. All references herein to "Sections" of the Separation
Disclosure Schedule shall be deemed to be references to the Separation
Disclosure Schedule unless otherwise indicated.
12.9 SCHEDULES. The Separation Disclosure Schedule referenced in
this Agreement and attached hereto is incorporated into this Agreement by
reference and made a part hereof.
12.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original, but all
of which shall constitute one and the same original.
12.11 PARTIES IN INTEREST; ASSIGNMENT; SUCCESSORS. Neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of
the other parties. Subject to the preceding sentence, this Agreement shall
inure to the benefit of and be binding upon U S WEST and New U S WEST and
their respective successors and permitted assigns. Nothing in this
Agreement, express or implied, is intended to confer upon any other Person
any rights or remedies under or by reason of this Agreement.
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12.12 SEVERABILITY; ENFORCEMENT. The invalidity of any portion
hereof shall not affect the validity, force or effect of the remaining
portions hereof. If it is ever held that any restriction hereunder is too
broad to permit enforcement of such restriction to its fullest extent, each
party agrees that a court of competent jurisdiction may enforce such
restriction to the maximum extent permitted by law, and each party hereby
consents and agrees that such scope may be judicially modified accordingly in
any proceeding brought to enforce such restriction.
12.13 AMENDMENT. This Agreement may be amended, modified or
supplemented only by a written agreement signed by all of the parties hereto.
12.14 TERMINATION. This Agreement may be terminated and the
Separation abandoned at any time prior to the Separation Time by and in the
sole discretion of the Board of Directors of U S WEST without the approval of
any other party hereto or of U S WEST's stockholders. In the event of such
termination, no party hereto or to any other Transaction Document shall have
any Liability to any Person by reason of this Agreement or any other
Transaction Document, except as otherwise expressly provided herein or
therein.
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IN WITNESS WHEREOF, each of the parties has caused this Separation
Agreement to be duly executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first above written.
U S WEST, INC.
By:
---------------------------------------------
Name:
Title:
USW-C, INC.
By:
---------------------------------------------
Name:
Title:
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EMPLOYEE MATTERS AGREEMENT
TRANSFER, ASSUMPTION AND/OR DIVISION
OF EMPLOYEE BENEFITS PLANS AND EMPLOYEE ARRANGEMENTS
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. GENERAL PRINCIPLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) New U S WEST Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7
(b) MediaOne Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(c) Shared Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(d) Class Action Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 9
(e) Appeal Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(f) Funded Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(g) Control of litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 10
(h) Election to Assume Liability . . . . . . . . . . . . . . . . . . . . . . 10
3. SPONSORSHIP AND ADMINISTRATION OF EMPLOYEE BENEFIT PLANS AND EMPLOYEE
ARRANGEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. EMPLOYEE SAVINGS PLANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. TRANSFER OF U S WEST PENSION PLAN ASSETS AND LIABILITIES. . . . . . . . . . . 17
6. OTHER TAX-QUALIFIED PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7. WELFARE PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(a) Communications Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(b) Media Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(c) Joint Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
(d) Continuing Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . 28
(e) Continuance of Elections . . . . . . . . . . . . . . . . . . . . . . . . 28
(f) Co-Payments and Maximum Benefits . . . . . . . . . . . . . . . . . . . . 28
(g) Pre-existing conditions. . . . . . . . . . . . . . . . . . . . . . . . . 29
(h) COBRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
(i) Long-Term Disability . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8. VEBA's. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
9. INCENTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
(a) Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
(b) Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
(c) LTIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
(d) ESTIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
(e) Phantom Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
10. OTHER BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(a) Top-hat plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(b) Employment contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 41
(c) Split-dollar contracts . . . . . . . . . . . . . . . . . . . . . . . . . 41
(d) Ex-Pat Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(e) Vail Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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(f) Leaves of Absence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
(g) Non-Employee Director Plans. . . . . . . . . . . . . . . . . . . . . . . 43
(h) Non-Employee State Executive Board Plan. . . . . . . . . . . . . . . . . 43
11. PORTABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
12. FURTHER AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
13. COOPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
14. NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES . . . . . . . . . 46
15. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
(a) Payment of 1998 Administrative Costs and Expenses. . . . . . . . . . . . 47
(b) Audit Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
(1) Information Provided. . . . . . . . . . . . . . . . . . . . . . . . 48
(2) Vendor Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . 48
(c) Beneficiary Designations . . . . . . . . . . . . . . . . . . . . . . . . 49
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Effect If Separation Does Not Occur . . . . . . . . . . . . . . . . . . . . . 49
(e) Provisions of Separation Agreement . . . . . . . . . . . . . . . . . . . 49
</TABLE>
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<PAGE>
EMPLOYEE MATTERS AGREEMENT
TRANSFER, ASSUMPTION AND/OR DIVISION
OF EMPLOYEE BENEFITS PLANS AND EMPLOYEE ARRANGEMENTS
1. DEFINITIONS.
(a) All capitalized terms used in this EM Agreement shall have the
meanings set forth below or, if not set forth below, the meaning
given in the Separation Agreement.
"AirTouch Transfers" shall mean Terminated Employees whose employment
is transferred to AirTouch Communications, Inc. or any of its
affiliates prior to the Separation Time as a result of the merger
agreement among Existing U S WEST, certain subsidiaries thereof and
AirTouch Communications, Inc. and who either: (i) are eligible for
retiree medical coverage or retiree life insurance as of the date of
transfer of employment; or (ii) have an account balance in the Media
Savings Plan/ESOP immediately after the Separation Time.
"Average Value" shall mean the average Market Value of the
Communications Stock or Media Stock, as applicable, over the period of
20 Trading Days ending on the fifth Trading Day prior to the date of
the Separation Time, rounded to the nearest one-hundred thousandth (or
if there shall not be a nearest one-hundred thousandth, to the next
highest one-hundred thousandth).
"Cable Companies" shall mean MediaOne of Delaware, Inc. (f/k/a
Continental Cablevision, Inc.), MediaOne, Inc. and/or MediaOne of
Michigan, Inc. (f/k/a Booth Communications), or their predecessors.
"COBRA" shall mean the continuation coverage requirements for group
health plans under Title X of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, and as codified in Code
Section 4980B and ERISA Sections 601 through 608.
"Communications Employees" shall mean all persons who are Employees of
the New U S WEST Group at the Separation Time, including without
limitation (1) Employees who worked for Existing U S WEST prior to the
Separation Time that are designated as Communications Employees by
Existing U S WEST as of the Separation Time, (2) Employees who, prior
to the Separation Time, worked for an entity that is a
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<PAGE>
member of the MediaOne Group that are designated as Communications
Employees as of the Separation Time, and (3) Employees who, prior to
the Separation Time, worked for Dex that are designated as
Communications Employees as of the Separation Time.
"Communications Employee Arrangements" shall mean all Employee
Arrangements sponsored by members of the New U S WEST Group after the
Separation Time.
"Communications Employee Benefit Plans" shall mean all Employee
Benefit Plans sponsored by members of the New U S WEST Group after the
Separation Time.
"Deferred Benefits" shall mean the entitlement of a Terminated
Employee, based solely on the records of the Existing U S WEST Group
at the Separation Time, to future benefits under one or more of the
Deferred Plans. Except as provided in the definition of Terminated
Media Employee and Terminated Inc. Employee, a Terminated Employee
who, according to such records, is not entitled to any benefits under
the Deferred Plans or who has already received all of such benefits
prior to the Separation Time does not have any Deferred Benefits.
"Deferred Plans" shall mean the U S WEST Employee Savings Plan/ESOP
(except accounts attributable to AirTouch Transfers); the U S WEST
Pension Plan (including the disability pensions provided thereunder);
retiree medical benefits under any medical plan maintained by the
Existing U S WEST Group (but excluding COBRA); and long-term
disability benefits under a long-term disability plan maintained by
the Existing U S WEST Group.
"EBC" shall mean the Employee Benefits Committee of Existing U S WEST
as constituted prior to the Separation Time.
"EM Agreement" shall mean this Employee Matters Agreement, which is
Exhibit A to the Separation Agreement.
"Employee" means a person who is an employee of the Existing U S WEST
Group at the Separation Time, including an employee who is not
actively performing services because such employee is on an approved
leave of absence, short-term disability, illness or other similar
reasons. Employee shall include: (i) a person who is a former
employee of the Existing U S WEST Group; and/or (ii) a person who has
been transferred to Time Warner Communications pursuant to
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<PAGE>
the agreement of Existing U S WEST and Time Warner Communications;
and/or (iii) a person who is an employee of Time Warner Communications
at the Separation Time, including an employee who is not actively
performing services because such employee is on an approved leave of
absence, short-term disability, illness or other similar reasons. In
addition, an individual who is described in either of the preceding
sentences (whether he works for the Existing U S WEST Group or Time
Warner Communications) immediately prior to the Separation Time who
does not report for work to the New U S WEST Group, MediaOne Group or
Time Warner Communications (depending upon his applicable assignment)
immediately after the Separation Time shall be considered an Employee
(for purposes of this EM Agreement only) unless (1) prior to the
Separation Time, he notifies the Existing U S WEST Group or Time
Warner Communications, as applicable, that he is terminating,
effective on or before the Separation Time or (2) prior to the
Separation Time, the Existing U S WEST Group or Time Warner
Communications, as applicable, notifies him that he is terminated,
effective on or before the Separation Time. All Employees shall be
either Communications Employees or Media Employees. A former employee
who is on lay-off is a Terminated Employee, not an Employee.
"Employment Related Liabilities" shall mean all Liabilities, including
litigation costs, which relate to an Employee, a Terminated Employee
or their respective dependents and beneficiaries, in each case
relating to, arising out of or resulting from employment by the
Existing U S WEST Group or predecessor prior to the Separation Time,
including Liabilities under Employee Benefit Plans and Employee
Arrangements. Notwithstanding the preceding sentence, the following
Liabilities are not Employment Related Liabilities: (1) any Liability
which is specifically addressed in a provision other than Section 2 of
this EM Agreement, (2) Liabilities arising under or relating to the
severance agreements between Existing U S WEST and members of the
Executive Group (which Liabilities are addressed in Schedules 3.4(a)
and 3.4(b) of the Separation Agreement) and (3) any other Liability
scheduled in the Separation Agreement.
"Executive Group" shall mean Richard D. McMormick, Charles P. Russ
III, Michael P. Glinsky, Robert W. Gras, and James T. Anderson.
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<PAGE>
"Existing U S WEST" shall mean U S WEST, Inc., a Delaware corporation,
prior to the Separation Time.
"Existing U S WEST Group" shall mean, prior to the Separation Time,
Existing U S WEST and all of its Subsidiaries.
"Media Employees" shall mean all persons who are Employees of the
MediaOne Group at the Separation Time, including without limitation
(1) Employees who worked for Existing U S WEST prior to the Separation
Time that are designated as Media Employees by Existing U S WEST as of
the Separation Time (including, without limitation, Employees who are
employed by Time Warner Communications), (2) Employees who, prior to
the Separation Time, worked for an entity that is a member of the New
U S WEST Group that are designated as Media Employees as of the
Separation Time and (3) Employees who, prior to the Separation Time,
worked for MGI that are designated as Media Employees as of the
Separation Time.
"Media Employee Arrangements" shall mean the Employee Arrangements
sponsored by members of the MediaOne Group after the Separation Time.
"Media Employee Benefit Plans" shall mean the Employee Benefit Plans
sponsored by members of the MediaOne Group after the Separation Time.
"MediaOne" shall mean MediaOne Group, Inc., a Delaware corporation, at
and after the Separation Time. MediaOne was known as U S WEST, Inc.
prior to the Separation Time.
"MediaOne Employee Benefits Committee" shall mean, effective on and
after the Separation Time, the committee of MediaOne Group, Inc.
designated to administer various Media Employee Benefit Plans and
Media Employee Arrangements.
"MediaOne Group" shall mean, at and after the Separation Time,
MediaOne Group, Inc. and all of its Subsidiaries.
"New U S WEST Employee Benefits Committee" shall mean, effective on
and after the Separation Time, the committee of New U S WEST
designated to administer various Communications Employee Benefit Plans
and Communications Employee Arrangements.
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<PAGE>
"Non-Employee Directors" shall mean those members of the Board of
Directors of the respective corporation who are or were not employees
of that entity during their term of office. "Retired Non-Employee
Directors" shall mean those Non-Employee Directors who have completed
their term on the respective Board of Directors prior to the
Separation Time.
"Non-Employee Director Plans" shall mean the U S WEST, Inc. Deferred
Compensation Plan for Non-Employee Directors and the U S WEST, Inc.
Retirement Plan for Non-Employee Directors.
"Separation Agreement" shall mean the Separation Agreement, dated as
of __________, 1998, between U S WEST, Inc. and USW-C, Inc.
"Terminated Communications Employees" shall mean all persons who are
Terminated Employees and who are not Terminated Media Employees or
Terminated Inc. Employees. Terminated Communications Employees shall
include (1) all Terminated Employees (other than AirTouch Transfers)
with Deferred Benefits (unless they were actively employed by one of
the Cable Companies on their last day of active employment with the
Existing U S WEST Group); (2) all Terminated Employees who were last
actively employed before November 1, 1995 (unless they were actively
employed by one of the Cable Companies on their last day of active
employment with the Existing U S WEST Group) and are not entitled to
Deferred Benefits at the Separation Time; and (3) all Terminated
Employees who were last actively employed (on or after November 1,
1995 and before the Separation Time) by an entity that is a member of
the New U S WEST Group (excluding MGI, but including Dex and its
subsidiaries) after the Separation Time and are not entitled to
Deferred Benefits at the Separation Time.
"Terminated Employee" means a person who formerly was actively
employed by the Existing U S WEST Group and who is not an Employee.
An individual who is employed by the Existing U S WEST Group
immediately prior to the Separation Time who does not report for work
to the New U S WEST Group or MediaOne Group (depending upon his
applicable assignment) immediately after the Separation Time shall be
considered a Terminated Employee if (1) prior to the Separation Time,
he notifies Existing U S WEST or its Subsidiaries that he is
terminating, effective on or before the Separation Time or (2) prior
to the Separation Time, Existing U S WEST or its Subsidiaries notify
him that he is terminated,
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<PAGE>
effective on or before the Separation Time. All members of the
Executive Group shall be Terminated Employees. Each Terminated
Employee shall be either (a) a Terminated Communications Employee,
(b) a Terminated Inc. Employee or (c) a Terminated Media Employee,
provided that, to the extent set forth in this EM Agreement, a
Terminated Employee may be classified differently for different
purposes.
"Terminated Inc. Employees" shall mean all Terminated Employees who
were last actively employed (on or after November 1, 1995 and before
the Separation Time) by Existing U S WEST (but not its Subsidiaries)
and are not entitled to Deferred Benefits at the Separation Time. If,
after the Separation Time, it is determined by a final decision of a
court of competent jurisdiction or an agreement of MediaOne and New U
S WEST that a Terminated Inc. Employee is entitled to benefits under
one or more Deferred Plans (other than as a result of future
employment with the MediaOne Group or New U S WEST Group), such
Terminated Employee shall be considered to have Deferred Benefits
solely with respect to those Deferred Plans that owe him additional
benefits (and shall therefore be a Terminated Communications Employee
solely with respect to such Deferred Plans, provided that if the
Deferred Plan is the U S WEST Pension Plan, the individual shall also
be a Terminated Communications Employee with respect to the U S WEST
Nonqualified Pension Plan).
"Terminated Media Employees" shall mean (1) all Terminated Employees
(whether or not they have Deferred Benefits) who were actively
employed by one of the Cable Companies on their last day of active
employment with the Existing U S WEST Group; (2) all Terminated
Employees who were last actively employed (on or after November 1,
1995 and before the Separation Time) by an entity that is a member of
the MediaOne Group after the Separation Time (unless such last
employer was Existing U S WEST) and are not entitled to Deferred
Benefits at the Separation Time; (3) all Terminated Employees who were
last actively employed (on or after November 1, 1995 and before the
Separation Time) by MGI and are not entitled to Deferred Benefits at
the Separation Time; and (4) all AirTouch Transfers, regardless of
their last day of employment. Notwithstanding the foregoing, if,
after the Separation Time, it is determined by a final decision of a
court of competent jurisdiction or an agreement of MediaOne and New U
S WEST that a Terminated Media Employee described in clause (2) or (3)
above is entitled to benefits under one or more
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<PAGE>
Deferred Plans (other than as a result of future employment with
the MediaOne Group or New U S WEST Group), such Terminated Employee
shall be considered to have Deferred Benefits solely with respect
to those Deferred Plans that owe him additional benefits (and shall
therefore be a Terminated Communications Employee solely with
respect to such Deferred Plans, provided that if the Deferred Plan
is the U S WEST Pension Plan, the individual shall also be a
Terminated Communications Employee with respect to the U S WEST
Nonqualified Pension Plan).
"Welfare Plan" shall mean an Employee Benefit Plan which is a health
benefit, life insurance or other employee welfare benefit plan, within
the meaning of Section 3(1) of ERISA, which is maintained by Existing
U S WEST, New U S WEST, MediaOne or a Subsidiary of any of them.
(b) All determinations under this Section 1 with respect to status as an
Employee, Terminated Employee, Media Employee, Communications
Employee, Terminated Media Employee, Terminated Inc. Employee or
Terminated Communications Employee shall be made as of the Separation
Time, unless otherwise specifically set forth in this Section 1.
(c) Notwithstanding the foregoing definitions, in the event it is unclear
as to whether a Terminated Employee is a Terminated Communications
Employee, Terminated Inc. Employee or a Terminated Media Employee, or
in the event that a Terminated Employee was last actively employed at
a time the individual was on a temporary transfer from one member of
the Existing U S WEST Group to another for less than 12 months,
MediaOne and New U S WEST shall agree on an equitable classification
of such employee or employees (and the assumption of any liability
attributable thereto).
2. GENERAL PRINCIPLES.
(a) New U S WEST Liabilities. Except as otherwise provided in this EM
Agreement, New U S WEST and its Subsidiaries hereby assume and agree
to pay, perform, fulfill and discharge:
(1) All Employment Related Liabilities (regardless of where such
Employment Related Liabilities arose or arise or were or are incurred)
to or relating to Communications Employees and Terminated
Communications Employees;
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<PAGE>
(2) All Liabilities, including litigation costs, relating to, or
arising out of or resulting from the performance of services to the
New U S WEST Business (other than MGI) prior to the Separation Time by
an independent contractor, leased employee or similar individual or by
any person who alleges that he was an employee of the New U S WEST
Business (other than MGI) prior to the Separation Time or the
dependent or beneficiary of any such independent contractor or alleged
employee;
(3) All Liabilities, including litigation costs, which relate to a
Communications Employee or his dependents and beneficiaries, in each
case relating to, arising out of or resulting from employment by the
New U S WEST Group on or after the Separation Time (including
Liabilities under Communications Employee Benefit Plans and
Communications Employee Arrangements); and
(4) All Liabilities, including litigation costs, relating to, or
arising out of or resulting from the performance of services to the
New U S WEST Group on or after the Separation Time by an independent
contractor, leased employee or similar individual or by any person who
alleges that he was an employee of the New U S WEST Group on or after
the Separation Time or the dependent or beneficiary of any such
independent contractor or alleged employee.
(b) MediaOne Liabilities. Except as otherwise provided in this EM
Agreement, MediaOne and its Subsidiaries hereby assume and agree to
pay, perform, fulfill and discharge:
(1) All Employment Related Liabilities (regardless of where such
Employment Related Liabilities arose or arise or were or are incurred)
to or relating to Media Employees and Terminated Media Employees;
(2) All Liabilities, including litigation costs, relating to, or
arising out of or resulting from the performance of services to the
MediaOne Business (other than Existing U S WEST) or MGI prior to the
Separation Time by an independent contractor, leased employee or
similar individual or by any person who alleges that he was an
employee of the MediaOne Business (other than Existing U S WEST) or
MGI prior to the Separation Time or the dependent or beneficiary of
any such independent contractor or alleged employee;
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<PAGE>
(3) All Liabilities, including litigation costs, which relate to a
Media Employee or his dependents and beneficiaries, in each case
relating to, arising out of or resulting from employment by the
MediaOne Group on or after the Separation Time (including Liabilities
under Media Employee Benefit Plans or Media Employee Arrangements);
and
(4) All Liabilities, including litigation costs, relating to, or
arising out of or resulting from the performance of services to the
MediaOne Group on or after the Separation Time by an independent
contractor, leased employee or similar individual or by any person who
alleges that he was an employee of the MediaOne Group on or after the
Separation Time or the dependent or beneficiary of any such
independent contractor or alleged employee.
(c) Shared Liabilities. New U S WEST and MediaOne hereby agree to share
equally:
(1) All Employment Related Liabilities (regardless of where such
Employment Related Liabilities arose or arise or were or are incurred)
to or relating to Terminated Inc. Employees; and
(2) All Liabilities, including litigation costs, relating to, or
arising out of or resulting from the performance of services to
Existing U S WEST (but not its Subsidiaries) prior to the Separation
Time by an independent contractor, leased employee or similar
individual or by any person who alleges that he was an employee of
Existing U S WEST prior to the Separation Time or the dependent or
beneficiary of any such independent contractor or alleged employee.
(d) Class Action Liabilities. For purposes of determining whether the New
U S WEST Group or Media Group is responsible for Liabilities involving
or arising out of actions relating to more than one Employee or
Terminated Employee, the portion of Employment Related Liabilities
relating to any single Employee or Terminated Employee shall be in
proportion to the total number of Employees and Terminated Employees
to which the action relates, whether or not all such Employees or
Terminated Employees submit claims.
(e) Appeal Rights. If either New U S WEST or MediaOne believes that the
result arising from the application of the foregoing provisions of
this Section 2 will result in an inequitable allocation of liability,
it may refer the matter to the Separation Committee and
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the procedures set forth in Section 12.2 of the Separation Agreement
shall apply. Any such referral must be made in writing within sixty
days after the referring party becomes aware of the Employment Related
Liability to which the referral relates.
(f) Funded Benefits. Notwithstanding the foregoing provisions of this
Section 2, neither the New U S WEST Group nor the MediaOne Group shall
be liable to the extent that any Liability is payable from a trust or
insurance contract which funds the benefits under an Employee Benefit
Plan or Employee Arrangement maintained by the New U S WEST Group or
MediaOne Group after the Separation Date.
(g) Control of litigation. Except as set forth in sub-section (h) below,
if any litigation is brought by an Employee or Terminated Employee
over Liabilities addressed in this EM Agreement, the MediaOne Group
shall control the litigation if it is responsible for the Liabilities
and the New U S WEST Group shall control the litigation if it is
responsible for the Liabilities, irrespective of which party is the
defendant, provided that if the party (or its Subsidiaries) entitled
to control the litigation is not sued, it shall not control the
litigation unless it agrees in writing that it will be responsible for
any resulting Liability. In the case of a shared liability described
in subsection (c) above or an action described in subsection (d)
above, the parties agree to cooperate to jointly control the
litigation, unless one of the parties agrees to assume all Liabilities
arising out of the litigation.
(h) Election to Assume Liability. In the event that any Employee or
Terminated Employee makes a claim or commences litigation which, if
successful, would result in Liability that is allocated under this EM
Agreement (other than under this paragraph (h)) exclusively to either
MediaOne or New U S WEST (the "Allocated Liability Party"), but which
Liability, if any, arises from alleged actions taken by an Employee or
Terminated Employee of the business of the other party (the "Other
Party"), then the Allocated Liability Party shall give written notice
of such claim or litigation (the "Claim Notice") to the Other Party
within thirty days of becoming aware that such claim or litigation
involves an Employee or Terminated Employee of the business of the
Other Party. The Other Party may then elect, by giving written notice
(the "Election Notice") to the Allocated Liability Party within thirty
days after receiving the Claim Notice, to take control of the
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<PAGE>
defense of the claim and/or litigation and to assume all Liability,
including litigation costs, associated with such claim or litigation
(other than a Liability described in subsection (f) above). If the
Election Notice is given, the Allocated Liability Party shall cease to
have any Liability with respect to the claim or litigation which is
the subject of the Election Notice and all such Liability (other than
a Liability described in subsection (f) above) shall be assumed by the
Other Party.
(i) The provisions of this Section 2 are designed solely to allocate
Liabilities between the New U S WEST Group and the MediaOne Group.
Notwithstanding any provision of this EM Agreement, except to the
extent required by the preceding sentence, this EM Agreement shall not
impose any Liability relating to an Employee or Terminated Employee on
any entity or Subsidiary other than the entity or Subsidiary that
incurred the Liability. For example, if a Communications Employee
worked solely for one Subsidiary of New U S WEST, that Subsidiary (but
not New U S WEST or any other Subsidiary) shall be responsible for any
unfunded Liabilities owed to that individual.
3. SPONSORSHIP AND ADMINISTRATION OF EMPLOYEE BENEFIT PLANS AND EMPLOYEE
ARRANGEMENTS.
(a) At or prior to the Separation Time, all Communications Employee
Benefit Plans and Communications Employee Arrangements that are not
already sponsored by a member of the New U S WEST Group shall be
transferred to and assumed by New U S WEST in accordance with the
terms of this EM Agreement. Each of such Communications Employee
Benefit Plans and Communications Employee Arrangements is hereby
amended (such amendments to be self-effectuating), effective as of the
Separation Time, to provide transfer of sponsorship to New U S WEST.
In addition, each Communications Employee Benefit Plan and
Communications Employee Arrangement is hereby amended (such amendments
to be self-effectuating), effective as of the Separation Time, to
provide that the Liabilities to be assumed by a corresponding Media
Employee Benefit Plan or Media Employee Arrangement shall cease to be
Liabilities under such Communications Employee Benefit Plan or
Communications Employee Arrangement. New U S WEST, MediaOne and their
Subsidiaries shall take all action reasonably appropriate prior to the
Separation Time (or as soon as practicable thereafter) to effectuate
such assumptions, including amendments of the
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applicable Employee Benefit Plans and Employee Arrangements where
desirable.
To the extent that any of the Communications Employee Benefit Plans or
Communications Employee Arrangements is administered by the EBC prior
to the Separation Time, such plan or arrangement shall be administered
by the New U S WEST Employee Benefits Committee on and after the
earlier of the Separation Time or the date sponsorship of the
applicable plan or arrangement is assumed by New U S WEST. In
addition, any functions or responsibilities of the Treasurer of
Existing U S WEST with respect to such plans or arrangements prior to
the Separation Time shall become duties and responsibilities of the
Treasurer of New U S WEST (or such other officer as New U S WEST shall
designate) on the date set forth in the preceding sentence.
(b) To the extent that a Media Employee Benefit Plan or Media Employee
Arrangement (or, in the case of any newly adopted Media Employee
Benefit Plan or Media Employee Arrangement, the Employee Benefit Plan
or Employee Arrangement that is replaced by such newly adopted Media
plan or arrangement) is administered by the EBC prior to the
Separation Time, such plan or arrangement shall be administered by the
MediaOne Employee Benefits Committee on and after the Separation Time.
In addition, any functions or responsibilities of the Treasurer of
Existing U S WEST with respect to such plans or arrangements prior to
the Separation Time shall become duties and responsibilities of the
Treasurer of MediaOne (or such other officer as MediaOne shall
designate) on and after the Separation Time.
4. EMPLOYEE SAVINGS PLANS.
(a) On or before the Separation Time, sponsorship of the U S WEST Savings
Plan/ESOP (consisting of the "U S WEST Savings Plan" and the "U S WEST
ESOP") shall be transferred from Existing U S WEST to New U S WEST.
Prior to the Separation Time, Multimedia shall establish a new defined
contribution plan or plans consisting of a profit-sharing plan and a
stock bonus plan which shall be an employee stock ownership plan (the
"Media Savings Plan/ESOP", consisting of the "Media Savings Plan" and
the "Media ESOP"), effective immediately after the Separation Time,
for the benefit of Media Employees and Terminated Media Employees
(excluding persons described in clauses (2) or (3) of the definition
of Terminated Media Employee) covered by the existing U S WEST Savings
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Plan/ESOP. The Media Savings Plan/ESOP shall initially contain terms
and conditions that are similar to those of the existing U S WEST
Savings Plan/ESOP, including without limitation (1) provisions
required by Section 411(d)(6) of the Code for account balances to be
transferred from the U S WEST Savings Plan/ESOP, and (2) provisions
granting credit for past service with the Existing U S WEST Group for
purposes of eligibility, vesting, distributions and withdrawals. Each
Media Employee and Terminated Media Employee who was a participant in
the U S WEST Savings Plan/ESOP as of the Separation Time shall become
a participant in the Media Savings Plan/ESOP as of the Separation
Time.
(b) As soon as reasonably practicable after the Separation Time, New U S
WEST shall cause to be transferred from the U S WEST Savings Plan to
the Media Savings Plan assets having a fair market value equal to the
aggregate value of the account balances in the U S WEST Savings Plan
(but not the ESOP), as of the date of the transfer, applicable to
Media Employees and Terminated Media Employees, and Multimedia shall
cause the Media Savings Plan to accept such transfers and to assume
all Savings Plan liabilities relating to Media Employees and
Terminated Media Employees (excluding persons described in clauses (2)
or (3) of the definition of Terminated Media Employee). All such
liabilities shall cease to be liabilities of the U S WEST Savings
Plan. Such transfer shall be in (i) shares of MediaOne Common Stock
and New U S WEST Common Stock to the extent such shares are allocated
in the U S WEST Savings Plan to accounts of Media Employees or
Terminated Media Employees, (ii) notes evidencing loans to Media
Employees or Terminated Media Employees, and (iii) with the balance in
cash or, to the extent that the parties mutually agree, other
securities held by the U S WEST Savings Plan.
(c) As soon as reasonably practicable after the Separation Time, New U S
WEST shall cause to be transferred from the U S WEST ESOP to the Media
ESOP assets having a fair market value equal to the aggregate value of
the account balances in the U S WEST ESOP (but not the Savings Plan),
as of the date of the transfer, applicable to Media Employees and
Terminated Media Employees, and Multimedia shall cause the Media ESOP
to accept such transfers and to assume all ESOP liabilities relating
to Media Employees and Terminated Media Employees (excluding persons
described in clauses (2) or (3) of the definition of Terminated Media
Employee). All such
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liabilities shall cease to be liabilities of the U S WEST ESOP.
Such transfer shall be in shares of MediaOne Common Stock and of
New U S WEST Common Stock. To the greatest extent possible and
consistent with fiduciary duties under Sections 404 and 406 of
ERISA, the shares of Common Stock shall be transferred so that,
immediately following the transfer, the U S WEST ESOP will have at
least 60% of its assets invested in New U S WEST Common Stock and
the Media ESOP will have at least 60% of its assets invested in
MediaOne Common Stock.
(d) U S WEST Savings Plan/ESOP shall transfer to the Media Savings
Plan/ESOP all qualified domestic relations orders (within the meaning
of Section 414(p) of the Code) ("QDROs") held by the U S WEST Savings
Plan/ESOP with respect to Media Employees and Terminated Media
Employees. New U S WEST shall cause to be transferred from the U S
WEST Savings Plan/ESOP assets having a fair market value equal to the
aggregate account values relating to such QDROs in accordance with
paragraphs (b) and (c) above, and the Media Savings Plan ESOP shall
assume all liabilities relating to such QDROs.
(e) The U S WEST ESOP will repay all "acquisition loans" (as defined in
the U S WEST Savings Plan/ESOP) prior to the Separation Time. If, as
of the Separation Time, the U S WEST ESOP holds shares of common stock
that have not been allocated to participants' accounts, the U S WEST
ESOP will transfer to the Media ESOP unallocated shares of stock
having a fair market value equal to (x) the total market value of all
unallocated shares held by the U S WEST ESOP as of the Separation
Time, multiplied by (y) the aggregate dollar value of the Employing
Company Contributions made under the U S WEST ESOP during the first
calendar quarter of 1998 as matched allotments to Media Employees and
Terminated Media Employees, divided by (z) the aggregate dollar value
of the Employing Company Contributions made under the U S WEST ESOP
during the first calendar quarter of 1998 as matched allotments to all
Employees and Terminated Employees. To the greatest extent possible,
the unallocated shares transferred to the Media ESOP pursuant to this
paragraph shall be shares of MediaOne Common Stock.
(f) If required by law, New U S WEST and Multimedia shall cause to be
filed with the IRS all applicable Forms 5310A and any other required
forms with the appropriate governmental agency in order for the Media
Savings Plan/ESOP to receive a transfer of
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assets from the U S WEST Savings Plan/ESOP on or following the
Separation Time in accordance with paragraphs (b), (c), (d) and (e)
above. Within nine months after the Separation Time, Multimedia
shall cause to be filed with the IRS a request for a determination
that the Media Savings Plan/ESOP is qualified under Section 401(a)
of the Code. Multimedia agrees to make all reasonable amendments
requested by the IRS to obtain such determination letter.
(g) Subject to paragraph (h), and in accordance with applicable law and to
the extent consistent with fiduciary duties under Sections 404 and 406
of ERISA, the U S WEST Savings Plan and the U S WEST ESOP will
maintain a MediaOne Common Stock Fund for participants who retain such
investment of their account balances after the Separation Time. No
new investments in the MediaOne Common Stock Fund of the U S WEST
Savings Plan or in the MediaOne Common Stock Fund of the U S WEST ESOP
will be permitted after the Separation Time. Subject to paragraph
(h), and in accordance with applicable law and to the extent
consistent with fiduciary duties under Sections 404 and 406 of ERISA,
the Media Savings Plan and the Media ESOP will maintain a New U S WEST
Common Stock Fund for participants who retain such investment of their
account balances after the Separation Time. No new investments in the
New U S WEST Common Stock Fund of the Media Savings Plan or in the New
U S WEST Common Stock Fund of the Media ESOP will be permitted after
the Separation Time. The U S WEST Savings Plan (but not the ESOP)
will maintain the MediaOne Common Stock Fund, and the Media Savings
Plan (but not the ESOP) will maintain the New U S WEST Common Stock
Fund, for at least five years after the Separation Time; as soon as
practicable after either plan sponsor decides to eliminate such stock
fund, it shall inform the issuer of the stock to be sold so that the
issuer may arrange a facility to exercise the right of first refusal
described below. When the trustee of the U S WEST Savings Plan
intends to sell MediaOne Common Stock because the MediaOne Common
Stock Fund will no longer be maintained or the trustee of the Media
Savings Plan intends to sell New U S WEST Common Stock because the New
U S WEST Common Stock Fund will no longer be maintained, such trustee
shall first offer such stock to the issuer prior to offering such
stock for sale on the open market. After the close of business, the
issuer shall then have the right to purchase such stock at the closing
price of the stock on that day. If the issuer does not exercise such
right to purchase, the trustee
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shall be free to sell the stock on the open market the next day,
provided that,subject to fiduciary duties under Sections 404 and
406 of ERISA, the trustee shall not sell in any one day more than
20% of the average daily trading volume of the relevant stock.
(For this purpose, the average daily trading volume is the
arithmetic mean of the reported daily trading volumes of the
relevant stock on the New York Stock Exchange (or, if not traded on
the New York Stock Exchange, the principal exchange on which the
stock is traded) in the two calendar months preceding any such
sale.)
(h) Within two years after the Separation Time, the U S WEST ESOP (but not
the Savings Plan) will dispose of all investment in MediaOne Common
Stock and the Media ESOP (but not the Savings Plan) will dispose of
all investment in New U S WEST Common Stock (each, a "Non-Employer
Common Stock"). Subject to fiduciary duties under Sections 404 and
406 of ERISA, the U S WEST ESOP shall exchange shares of MediaOne
Common Stock it holds for shares of New U S WEST Common Stock held by
the Media ESOP, and VICE VERSA, at the Common Stocks' relative fair
market values. To the extent such exchanges are not practicable for
some or all of the Non-Employer Common Stock held by either ESOP, the
U S WEST ESOP and the Media ESOP will sell shares of Non-Employer
Common Stock. As soon as practicable after either plan sponsor
decides to sell such Non-Employer Common Stock, it shall inform the
issuer of the stock to be sold so that the issuer may arrange a
facility to exercise the right of first refusal described below. When
the trustee of the U S WEST ESOP intends to sell MediaOne Common Stock
or the trustee of the Media ESOP intends to sell New U S WEST Common
Stock (other than because of a sale by, or distribution to, plan
participants), such trustee shall first offer such stock to the issuer
prior to offering such stock for sale on the open market. After the
close of business, the issuer shall then have the right to purchase
such stock at the closing price of the stock on that day. If the
issuer does not exercise such right to purchase, the trustee shall be
free to sell the stock on the open market the next day. Subject to
fiduciary duties under Sections 404 and 406 of ERISA, from the
Separation Time to and including the second anniversary of the
Separation Time, neither the U S WEST ESOP nor the Media ESOP will
sell in any one day more than 20% of the average daily trading volume
of the relevant Non-Employer Common Stock. (For this purpose, the
average daily trading volume is the arithmetic mean of the reported
daily trading volumes of the relevant
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stock on the New York Stock Exchange (or, if not traded on the New
York Stock Exchange, the principal exchange on which the stock is
traded) in the two calendar months preceding any such sale.)
(i) MediaOne and New U S WEST shall take such action as necessary to
ensure that participants in the U S WEST Savings Plan/ESOP and the
Media Savings Plan/ESOP are notified that a quiet period will occur
beginning on or about the Separation Time, during which changes in
investment direction with respect to participants' accounts generally
will not be permitted.
(j) The Media Savings Plan/ESOP and the assets and liabilities with
respect thereto shall be considered a Media Employee Benefit Plan.
The U S WEST Savings Plan/ESOP and the assets and liabilities with
respect thereto shall be considered a Communications Employee Benefit
Plan.
5. TRANSFER OF U S WEST PENSION PLAN ASSETS AND LIABILITIES.
(a) On or prior to the Separation Time, sponsorship of the U S WEST
Pension Plan shall be transferred from Existing U S WEST to New U S
WEST. Prior to the Separation Time, Multimedia shall establish a
defined benefit pension plan (the "Media Pension Plan"), effective
immediately after the Separation Time, for the benefit of the Media
Employees and Terminated Media Employees (excluding persons described
in clauses (2) or (3) of the definition of Terminated Media Employee)
covered by the existing U S WEST Pension Plan. The Media Pension Plan
shall contain terms and conditions that are substantially similar to
those of the existing U S WEST Pension Plan, including credit for past
service with the Existing U S WEST Group for eligibility, vesting,
early retirement, and, contingent upon the transfer of assets set
forth in paragraph (b) below, benefit accrual and compensation earned
with the Existing U S WEST Group. Notwithstanding the preceding
sentence, the Media Pension Plan shall contain two benefit structures.
In general, (1) the benefits for all Media Employees who are employed
immediately after the Separation Time and who earned benefits under
Articles V-B or V-D of such Pension Plan prior to the Separation Time
shall continue in such benefit structure and (2) all other Media
Employees, as well as all future employees of the MediaOne Group shall
participate in a benefit structure substantially similar to the
benefit structure currently contained in the Appendix I of the U S
WEST Pension Plan, provided that this EM Agreement does not obligate
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Multimedia to continue to maintain such benefit formulas for any
particular period of time. In addition, the U S WEST Pension Plan
currently contains two subsidies relating to service pensions: (i) the
early retirement pension under the grandfathered formula in Article
V-B (but not the DLS formula in Article V-D) is unreduced (or provides
for a lower reduction) for Participants that are service pension
eligible and (ii) if a lump sum service pension is elected, a 0%
interest rate applies prior to age 65. The Media Pension Plan shall
include, for all Media Employees described in clause (2) of the second
preceding sentence (but not any future employees of the MediaOne Group
or any Terminated Media Employees) whose combined age and service (in
each case rounded up to the next integer), as of January 1, 1999,
equals or exceeds 55, both of the foregoing subsidies with respect to
both the DLS formula set forth in Article 6, and the grandfathered
formula in Article 7, of Appendix I of the Pension Plan; such
provisions shall be referred to as the "Service Pension Amendments."
Immediately after the Separation Time, all Liabilities under the U S
WEST Pension Plan to, or relating to, Media Employees or Terminated
Media Employees (excluding persons described in clauses (2) or (3) of
the definition of Terminated Media Employee) shall be assumed by the
Media Pension Plan and shall cease to be Liabilities of the U S WEST
Pension Plans. Such Liabilities shall include all accrued benefits,
within the meaning of Section 411(d)(6) of the Code, all ancillary
benefits (such as the death benefits set forth in Article VII of the U
S WEST Pension Plan and disability benefits set forth in Appendix J
thereof) and any other benefits. The Media Pension Plan shall comply
with Section 411(d)(6) of the Code with respect to such assumed
Liabilities. Each Media Employee and Terminated Media Employee who
was a participant in the U S WEST Pension Plan as of the Separation
Time shall become a participant in the Media Pension Plan as of the
Separation Time.
Notwithstanding the foregoing, the following rules shall apply to any
Terminated Employee who is not vested in the U S WEST Pension Plan at
the Separation Time who returns to employment with either the MediaOne
Group or the New U S WEST Group after the Separation Time. To the
extent required by law, any such Terminated Employee who becomes
entitled to credit, for benefit accrual purposes, for his service with
the Old U S WEST Group prior to the Separation
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Time as a result of returning to employment after the Separation
Time, then (1) any benefits attributable to such prior service
shall be payable from the Media Pension Plan if the individual
returns to employment with the MediaOne Group and (2) any benefits
attributable to such prior service shall be payable from the U S
WEST Pension Plan if the individual returned to employment with the
New U S WEST Group.
(b) New U S WEST shall cause a "spin-off" transfer within the meaning of
Section 414(1) of the Code, from the U S WEST Pension Plan to the
Media Pension Plan in the manner and at the times specified in
paragraph (e) below. For purposes of this Section 5, the following
definitions shall apply:
(1) "Actuaries" refer to the enrolled actuaries for the U S WEST
Pension Plan at the Separation Time.
(2) "Contingent Amount" equals the difference between the amount that
the Final Determination provides that should have been
transferred from the U S WEST Pension Plan to the Media Pension
Plan in connection with the spinoff and the Media Asset Share.
If the difference is positive, that is, the Final Determination
provides that additional assets should have been transferred to
the Media Pension Plan, the difference shall be referred to as a
"Positive Contingent Amount." If the difference is negative,
that is, the Final Determination provides that the amount that
should have been transferred is less than the Media Asset Share,
the difference shall be referred to as a "Negative Contingent
Amount."
(3) "Final Determination" means a final nonappealable determination
by a court, or a final settlement of litigation or a dispute
among Multimedia, New U S WEST, the U S WEST Pension Plan and the
Media Pension Plan and any other parties to the litigation or
dispute, that provides that the amount of assets to be
transferred from U S WEST Pension Plan to the Media Pension Plan
in connection with the spinoff should be more than or less than
the Media Asset Share.
(4) "Media Asset Share" shall mean the product of: (i) the fair
market value of the assets of the U S WEST Pension Plan as of the
end of the month coinciding with or immediately preceding
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the Separation Time, and (ii) the Media Fraction; increased or
decreased by an amount to be agreed to by New U S WEST and
MediaOne to reflect the rate of return of the U S WEST Pension
Plan (or any other mutually agreeable rate) during the period, if
any, commencing immediately after the end of the month coinciding
with or immediately preceding the Separation Time and ending on
the Separation Time.
(5) "Media Economic PBO" for the U S WEST Pension Plan shall mean the
portion of the Total Economic PBO as of the Separation Time
attributable to the Media Employees and Terminated Media
Employees, as calculated by the Actuaries. For this purpose, the
U S WEST Pension Plan shall be deemed amended to include the
Service Pension Amendments.
(6) "Media Fraction" for the U S WEST Pension Plan shall mean (i) the
Media Economic PBO, divided by (ii) the Total Economic PBO.
(7) "Premium Amount" shall equal the estimated PBGC premiums
initially paid to the PBGC by the Media Pension Plan for plan
year 1998, without regard to any adjustment required as a result
of an audit.
(8) "Total Economic PBO" shall be the projected benefit obligation,
as defined in SFAS No. 87, of the U S WEST Pension Plan, as
calculated by the Actuaries as of the Separation Time using
actuarial methods and assumptions mutually agreeable to the
parties. For this purpose, the U S WEST Pension Plan shall be
deemed amended to include the Service Pension Amendments.
(9) "Transfer Amount" shall equal the Media Asset Share plus the
Premium Amount plus the Positive Contingent Amount and minus the
Negative Contingent Amount.
(c) In order to determine the Media Asset Share, Multimedia and New U S
WEST shall determine in good faith the Media Employees, Terminated
Media Employees, Communications Employees, Terminated Communications
Employees and Terminated Inc. Employees as of the Separation Time.
Such determinations shall be updated six months after the Separation
Time to take into account the
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reclassification of Employees as of the Separation Time as Media
Employees or Communications Employees.
(d) If required by law, Multimedia and New U S WEST shall cause to be
filed all applicable Forms 5310A and any other required IRS or PBGC
forms with the appropriate governmental agency in order for the Media
Pension Plan to receive a transfer of assets from the U S WEST Pension
Plan on or following the Separation Time, in accordance with paragraph
(e) below. Within nine months after the Separation Time, Multimedia
shall cause to be filed with the IRS a request for a determination
that the Media Pension Plan is qualified under Section 401(a) of the
Code. Multimedia agrees to make all reasonable amendments requested
by the IRS to obtain such determination letter.
(e) New U S WEST shall cause the U S WEST Pension Plan to transfer assets
in an amount equal to the Transfer Amount (plus interest to the extent
set forth below) to the Media Pension Plan and Multimedia shall cause
the Media Pension Plan to accept such assets equal to such Transfer
Amount (and interest), as follows:
(1) Immediately after the Separation Time or as soon as reasonably
practicable thereafter, an amount equal to 98% of the Media Asset
Share, as estimated by the Actuaries (immediately prior to the
Separation Time) and provided to Multimedia and New U S WEST in
writing.
(2) As soon as practicable after the value of the plan assets as of
the Separation Time is determined and the Media Asset Share is
determined by the Actuaries and provided in writing to MediaOne
and New U S WEST (but not later than 30 days after such writing
is provided), the excess of the Media Asset Share over the sum of
(i) the interim transfer effected under (1) above, and (ii) any
benefit payments paid to Terminated Media Employees or Media
Employees by the U S WEST Pension Plan after the Separation Time.
(If such amount is a negative number, such amount shall be
transferred from the Media Pension Plan to the U S WEST Pension
Plan.)
(3) In addition, if there is a Final Determination that sets forth a
Contingent Amount, New U S WEST, the U S WEST Pension Plan,
Multimedia, and the Media Pension Plan agree as follows:
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(A) If there is a Positive Contingent Amount, as soon as
practicable after the Final Determination, the U S WEST
Pension Plan shall transfer the assets equal to the Positive
Contingent Amount to the Media Pension Plan, and the Media
Pension Plan shall accept such transfers; and
(B) If there is a Negative Contingent Amount, as soon as
practicable after the Final Determination, the Media Pension
Plan shall transfer the assets equal to the Negative
Contingent Amount to the U S WEST Pension Plan, and the U S
WEST Pension Plan shall accept such transfers.
(4) As soon as practicable after the Premium Amount is determined and
paid by the Media Pension Plan, an amount equal to the Premium
Amount.
To the extent any of the foregoing amounts set forth in paragraphs (1)
through (4) of this subsection (e) are paid after the Separation Time,
such amount shall be increased or decreased by interest from the
Separation Time to the date of payment (to the extent not paid or
previously advanced) at a rate to be agreed to by New U S WEST and
MediaOne to reflect the rate of return of the U S WEST Pension Plan or
the Media Pension Plan, whichever is applicable (or any other mutually
agreeable rate), during the period commencing with the Separation Time
and ending with the date of payment; provided that (i) no interest
shall be paid with respect to the Contingent Amount if the Final
Determination already provides for an adjustment reflecting interest
or plan earnings and (ii) no interest shall be paid with respect to
the Premium Amount.
With respect to all of the foregoing transfers between the U S WEST
Pension Plan and the Media Pension Plan, the specific assets to be
transferred shall be agreed upon by New U S WEST and Multimedia in
good faith so as to not treat the Media Pension Plan and the U S WEST
Pension Plan unfairly in any material respect.
(f) Notwithstanding subsections (a) through (e) above, the value of assets
to be transferred to and liabilities to be assumed by the Media
Pension Plan shall be no less than that necessary to satisfy the
requirements of Section 414(1) of the Code, as
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determined by the Actuaries, based on the assumptions used by the PBGC
in the case of a termination of a trusteed pension plan.
(g) Multimedia, New U S WEST, the U S WEST Pension Plan and the Media
Pension Plan (collectively, the "Pension Parties") all agree that, if
there is a Final Determination that provides for a Contingent Amount,
such Final Determination shall be satisfied to the maximum extent
permitted by law by making the transfers among the U S WEST Pension
Plan and the Media Pension Plan as set forth above, as opposed to
requiring any additional contributions or payments (a "Corporate
Liability") from either MediaOne, New U S WEST or any of their
Subsidiaries. The Pension Parties agree to cooperate to the maximum
extent to ensure that no such Corporate Liability ensues as a result
of any Final Determination or claims relating to the allocation of
plan assets between the two plans. If any litigation is brought
against one of the Pension Parties claiming that the amount of assets
transferred from the U S WEST Pension Plan to the Media Pension Plan
should have been higher or lower, the other Pension Parties shall, at
the request of the Pension Party that was sued, agree to be joined in
any such litigation and to use their best efforts to ensure that any
potential Contingent Amount be satisfied by plan-to-plan transfers, as
opposed to Corporate Liability.
In addition, the Pension Parties agree that, to the extent permitted
by law, any costs of defending any claims that a Contingent Amount is
payable and any Liabilities arising out of such claims shall be borne
by the U S WEST Pension Plan and the Media Pension Plan.
The following rules shall apply if there is any Corporate Liability
for a Contingent Amount or arising out of any claims that a Contingent
Amount is payable. Any Corporate Liability that is an out-of-pocket
cost of defending any such claims (whether or not the claims result in
litigation), such as attorneys or consultant fees (but excluding any
fees for Plaintiffs' attorneys) and travel expenses, shall be borne
equally by New U S WEST and Multimedia; provided that each party shall
bear all expenses for salaries and benefits of its employees. Any
other Corporate Liability, such as the payment of a Contingent Amount,
any direct payments to claimants in lieu of a Contingent Amount or
fees for plaintiffs' attorneys, shall be borne by (1) New U S WEST, if
the claimants asserted that the amount of
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plan assets transferred to the Media Pension Plan should have been
greater than the amount actually transferred and (2) Multimedia, if
the claimants asserted that the amount of plan assets transferred to
the Media Pension Plan should have been less than the amount actually
transferred.
(h) The U S WEST Pension Plan shall transfer to the Media Pension Plan all
qualified domestic relations orders (within the meaning of Section
414(p) of the Code) ("QDROs") held by the U S WEST Pension Plan with
respect to Media Employees and Terminated Media Employees.
(i) Qualified transfers. This subsection (i) applies if a qualified
transfer, within the meaning of Code Section 420 (a "Qualified
Transfer"), is made within either the U S WEST Pension Plan or the
Media Pension Plan during the calendar year in which the Separation
Time occurs.
(1) If the Internal Revenue Service, a court of competent
jurisdiction or the sponsor of the plan in which the Qualified
Transfer is made determines that any Terminated Employees who
terminated employment during the period commencing twelve months
prior to the Qualified Transfer and ending on the Separation Time
are entitled to vested pension benefits solely because of the
Qualified Transfer, then, notwithstanding any other provision of
this EM Agreement, the plan in which the Qualified Transfer is
made shall provide such vested pension benefits to such
Terminated Employee.
(2) If (i) the Internal Revenue Service declines to issue a favorable
determination letter with respect to the provisions of either the
U S WEST Pension Plan or the Media Pension Plan setting forth the
terms of a Qualified Transfer unless Employees or other employees
who terminate employment after the Separation Time from the
business of the sponsor of the other pension plan are provided
vested pension benefits on account of the Qualified Transfer or
(ii) a court of competent jurisdiction determines that such
Employees or employees are entitled to such benefits on account
of the Qualified Transfer, then such other pension plan shall
provide such Employees or employees with the required vested
pension benefits.
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(j) The Media Pension Plan and the assets and liabilities with respect
thereto shall be considered a Media Employee Benefit Plan. The U S
WEST Pension Plan and the assets and liabilities with respect thereto
shall be considered a Communications Employee Benefit Plan.
6. OTHER TAX-QUALIFIED PLANS.
Any other plan that is qualified under Section 401 of the Code and is not
described in Section 4 or 5 above shall be retained by the entity that
sponsors it before the Separation Time.
7. WELFARE PLANS.
(a) Communications Plans. As of the Separation Time, any Welfare Plan,
including all insurance or amounts held in trust and associated
therewith to the extent attributable solely to such plan, which
exclusively covers Communications Employees, Terminated Communications
Employees and/or Terminated Inc. Employees and their eligible spouses
and dependents shall be transferred to and assumed by New U S WEST and
shall be deemed to be amended to provide for such transfer and
assumption. New U S WEST or its Subsidiaries shall assume and pay the
Liability with respect thereto (whether accrued or arising before or
after the Separation Time). All such plans shall be considered
Communications Employee Benefit Plans.
(b) Media Plans. As of the Separation Time, any Welfare Plan, including
all insurance or amounts held in trust and associated therewith to the
extent attributable solely to such plan, which exclusively covers
Media Employees and/or Terminated Media Employees and their eligible
spouses and dependents shall be retained by the MediaOne Group and, if
necessary, are hereby amended to provide for such retention (without
the need for any further action). MediaOne or its Subsidiaries shall
assume and pay the Liability with respect thereto (whether accrued or
arising before or after the Separation Time). All such plans shall be
considered Media Employee Benefit Plans.
(c) Joint Plans. This subsection (c) addresses the treatment of any
Welfare Plan (including, without limitation, any retiree medical plan
or retiree life insurance plan) which, as of the Separation Time,
covers both: (1) Communications Employees, Terminated Communications
Employees and/or Terminated Inc. Employees; and (2) Media Employees
and/or Terminated Media Employees (a "Joint Welfare Plan").
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(1) As of the Separation Time, each Joint Welfare Plan shall be
transferred to and assumed by New U S WEST or one of its
Subsidiaries. Each of such Joint Welfare Plans is hereby amended
as set forth in Section 3 of this EM Agreement. At and
immediately following the Separation Time, New U S WEST or its
Subsidiaries shall maintain as a separate plan and assume and pay
the Liabilities and expenses (whether accrued or arising before
or after the Separation Time) with respect to that portion of the
Joint Welfare Plans as relates to obligations to Communications
Employees, Terminated Communications Employees and Terminated
Inc. Employees; in addition, any such retiree medical plan shall
assume any retiree medical Liabilities or expenses of persons
described in clauses (2) or (3) of the definition of Terminated
Media Employee. This EM Agreement does not obligate New U S WEST
to continue to maintain such plans or their terms for any
particular period of time. All such plans shall be considered
Communications Employee Benefit Plans.
(2) As soon as practicable, Multimedia or its Subsidiaries shall
establish and maintain one or more separate plans corresponding
to each of the Joint Welfare Plans. Such Plans shall be
effective as of the Separation Time and shall contain such
benefits as desired by Multimedia. However, such plans shall
assume and pay the Liabilities and expenses (whether accrued or
arising before or after the Separation Time) under the Joint
Welfare Plans with respect to Media Employees and Terminated
Media Employees, provided that any new Media retiree medical plan
shall not assume any retiree medical Liabilities or expenses of
persons described in clauses (2) or (3) of the definition of
Terminated Media Employee. All Liabilities and expenses assumed
by such Media Employee Benefit Plans shall cease to be
Liabilities of the Communications Employee Benefit Plans
described in the preceding paragraph. The Liabilities of each
such Joint Welfare Plan so assumed by Multimedia or its
Subsidiaries together with each such separate plan established by
Multimedia, shall be considered a Media Employee Benefit Plan.
Unless Multimedia or its Subsidiaries adopts a plan with respect
to a Joint Welfare Plan prior to the Separation Time, Multimedia
is hereby deemed to have
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adopted (without the requirement of any additional action),
effective as of the Separation Time, a separate Media Welfare
Plan that is substantially identical in all respects to the
Joint Welfare Plan it replaces, provided that this EM Agreement
does not obligate Multimedia to continue to maintain such terms
for any particular period of time.
(3) MediaOne (and Multimedia) and New U S WEST shall use commercially
reasonable efforts to obtain, effective as of the Separation
Time, separate coverages or to split the coverages between
Multimedia and New U S WEST under the Joint Welfare Plans that
provided benefits through Provider Contracts prior to the
Separation Time. Such coverage shall be on substantially the
same terms and conditions as applied immediately before the
Separation Time, or such other terms and conditions as are
acceptable to Multimedia and New U S WEST. To the extent
practicable, such coverages shall be obtained by entering into a
separate contract between Multimedia and the third party. For
purposes of this paragraph, the term "Provider Contract" shall
mean a contract to provide benefits with an insurance company,
health maintenance organization, preferred provider organization
or similar provider of benefits, as well as third party
administrative services contracts. To the extent such efforts
are not successful with respect to any Provider Contract, then
New U S WEST shall administer such Provider Contract on an
equitable basis for the benefit of both Multimedia and New U S
WEST until the expiration of the applicable contract. For any
period after the Separation Time when Multimedia is participating
in any such Provider Contract administered by New U S WEST,
Multimedia shall pay an allocable share of the cost of such
contract based upon the actual experience attributable to Media
Employees and Terminated Media Employees thereunder, or if actual
experience is not readily determinable, based upon the relative
headcount of Media Employees and Terminated Media Employees to
all individuals covered by such Provider Contract. Such payments
shall include interest on any funds advanced by New U S WEST at a
rate to be agreed upon in a services agreement to be effective as
of the Separation Time.
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(d) Continuing Treatment. Notwithstanding the foregoing provisions of
this Section 7, all treatments which have been precertified or are
being provided as of the Separation Time shall be provided without
interruption under the appropriate Welfare Plan until such treatment
is concluded or discontinued pursuant to applicable plan rules and
limitations, but New U S WEST, in the case of a Communications
Employee or Terminated Communications Employee, or Multimedia, in the
case of a Media Employee or Terminated Media Employee, shall be
responsible for all expenses relating to, arising out of or resulting
from such on-going treatments after the Separation Time.
(e) Continuance of Elections. Multimedia and New U S WEST shall cause the
Welfare Plans which they or their Subsidiaries maintain after the
Separation Time to recognize and maintain all coverage and
contribution elections made by Employees under the Welfare Plans
maintained by the Existing U S WEST Group prior to the Separation Time
and shall apply such elections under the Welfare Plans maintained by
Multimedia and New U S WEST or their Subsidiaries, whichever is
applicable, for the remainder of the period or periods for which such
elections are by their terms applicable. Neither the transfer or
other movement of employment from one member of the Existing U S WEST
Group to another member on or before the Separation Time nor the
transfer and assignment to the New U S WEST Group or the MediaOne
Group in connection with the Reorganization, Contribution and
Separation shall constitute or be treated as a "status change" under
the Welfare Plans maintained by either Existing U S WEST, New U S
WEST, Multimedia or their Subsidiaries.
(f) Co-Payments and Maximum Benefits. Multimedia and New U S WEST shall
cause the Welfare Plans which they or their Subsidiaries maintain
after the Separation Time to recognize and give credit for:
(1) All amounts applied to deductibles, out-of-pocket maximums, and
other applicable benefit coverage limits with respect to
Employees covered by Welfare Plans maintained by the Existing U S
WEST Group prior to the Separation Time for the remainder of the
year in which the Separation Time occurs; and
(2) All benefits paid to Employees under the Welfare Plans maintained
by the Existing U S WEST Group prior to the Separation Time for
purposes of determining when such persons have
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reached their lifetime maximum benefits under the Welfare Plans
maintained by Multimedia and New U S WEST or their Subsidiaries,
whichever is applicable, after the Separation Time.
(g) Pre-existing conditions. After the Separation Time, any group health
plan maintained by Multimedia and New U S WEST or their Subsidiaries
shall be prohibited from making exceptions from the coverage of
individuals who were Employees or Terminated Employees prior to the
Separation Time and their eligible spouses and dependents for
pre-existing conditions except to the extent such exception is
applicable under the plan in effect immediately prior to the
Separation Time.
(h) COBRA. Notwithstanding the foregoing provisions of this Section 7:
(1) New U S WEST or its Subsidiaries shall be responsible for
providing coverage required under COBRA, including the
administration of such coverage, to (A) all Employees and
Terminated Employees (and their eligible spouses and dependents)
whose entitlement to benefits under COBRA is attributable to a
"qualifying event," as defined in COBRA, which occurred before
the Separation Time under any group health plan other than a
group health plan maintained by the Cable Companies and (B) all
Communications Employees, Terminated Communications Employees and
Terminated Inc. Employees if such individual's entitlement to
benefits under COBRA is attributable to a "qualifying event"
which occurs on or after the Separation Time.
(2) MediaOne or its Subsidiaries shall be responsible for providing
coverage required under COBRA, including the administration of
such coverage, to (A) all Employees and Terminated Employees (and
their eligible spouses and dependents) whose entitlement to
benefits under COBRA is attributable to a "qualifying event," as
defined in COBRA, which occurred before the Separation Time under
any group health plan maintained by the Cable Companies and (B)
all Media Employees and Terminated Media Employees if such
individual's entitlement to benefits under COBRA is attributable
to a "qualifying event" which occurs on or after the Separation
Time.
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(i) Long-Term Disability. Notwithstanding the foregoing provisions of
this Section 7, this subsection (i) applies to long-term disability
benefits provided to Terminated Employees other than through the U S
WEST Pension Plan ("LTD").
(1) New U S WEST shall be responsible for providing LTD, including
the administration of such coverage, to Terminated Communications
Employees, Terminated Inc. Employees and Terminated Media
Employees who were employed immediately prior to commencing LTD
by an employer other than one of the Cable Companies.
(2) MediaOne shall be responsible for providing LTD, including the
administration of such coverage, to Terminated Media Employees
who were employed immediately prior to commencing LTD by one of
the Cable Companies.
8. VEBA'S.
(a) As of the Separation Time, sponsorship of the U S WEST Benefit
Assurance Trust ("BAT"), the U S WEST Management Benefit Assurance
Trust ("MBAT") and U S WEST Life Insurance Welfare Trust ("Life
Insurance Trust") shall be transferred from Existing U S WEST to New U
S WEST. In addition, each of the BAT, MBAT and Life Insurance Trust
are hereby amended (such amendments to be self-effectuating),
effective as of the Separation Time, to provide that the "Company" (as
well as the sponsor, settlor and all other similar terms) under such
trusts shall be New U S WEST and that the trust shall be administered
by New U S WEST.
(b) Sponsorship of the U S WEST VEBA Trust shall be retained by MediaOne
or, at its option, transferred to Multimedia.
(c) Effective as of the Separation Time, Multimedia shall adopt one or
more new voluntary employee benefit associations or modify the U S
WEST VEBA Trust (the "Media VEBA") to assume, immediately after the
Separation Time, all Liabilities under the MBAT and Life Insurance
Trust to, or relating to, Media Employees or Terminated Media
Employees (excluding persons described in clauses (2) or (3) of the
definition of Terminated Media Employee); all such Liabilities shall
cease to be Liabilities of the MBAT and Life Insurance Trust. The
Media VEBA shall comply with Code Sections 419, 419A, 501(a) and
501(c)(9).
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(d) As soon as practicable after the Separation Time, New U S WEST shall
cause a transfer of assets from the MBAT and Life Insurance Trust to
the Media VEBA in the manner and at the times specified in paragraph
(f) below. For purposes of this Section, the following definitions
shall apply:
(i) "Total Economic APBO" shall be the accumulated
postretirement benefit obligation (as defined in SFAS No.
106) of the MBAT and Life Insurance Trust (excluding
liabilities for supplemental and dependent life insurance),
as calculated by the Actuaries, as of the Separation Time
using actuarial methods and assumptions mutually agreeable
to the parties.
(ii) "Actuaries" refer to the actuaries for the MBAT and Life
Insurance Trust at the Separation Time.
(iii) "Media Economic APBO" shall mean the portion of the
Total Economic APBO attributable to the Media Employees
and Terminated Media Employees, as calculated by the
Actuaries.
(iv) "Media Fraction" shall mean (1) the Media Economic APBO,
divided by (2) the Total Economic APBO.
(v) "Media Asset Share" shall mean the product of: (1) the fair
market value of the assets of the MBAT and Life Insurance
Trust as of the end of the month coinciding with or
immediately preceding the Separation Time BUT excluding
Supplemental and Dependent Life Assets, and (2) the Media
Fraction; increased or decreased by an amount to be agreed
to by New U S WEST and MediaOne to reflect the rate of
return of the MBAT and Life Insurance Trust (or any other
mutually agreeable rate) during the period, if any,
commencing immediately after the end of the month coinciding
with or immediately preceding the Separation Time and ending
on the Separation Time.
(vi) "Supplemental and Dependent Life Assets" shall mean any
assets which are
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segregated for the purpose of providing supplemental and
dependent life insurance.
Notwithstanding the above, the Total Economic APBO, the Media
Economic APBO and the Media Asset Share shall be determined
separately for the MBAT and the Life Insurance Trust. In
addition, in order to determine the Media Asset Share, the
provisions of Section 5(c) shall apply.
(e) Within nine months after the Separation Time, Multimedia shall cause
to be filed with the IRS a request for a determination that the Media
VEBA is tax-exempt under Section 501(c)(9) of the Code (unless the New
VEBA is the existing U S WEST VEBA Trust and New U S WEST agrees no
such filing is required). Multimedia agrees to make all reasonable
amendments requested by the IRS to obtain such letter. New U S WEST
and Multimedia agree to cooperate with each other to fulfill any
filing and/or regulatory reporting obligations with respect to such
transfers.
(f) New U S WEST shall cause the following asset transfers from the MBAT
and Life Insurance Trust to the Media VEBA and Multimedia shall cause
the Media VEBA to accept such asset transfers:
(1) Immediately after the Separation Time or as soon as reasonably
practicable thereafter, an amount equal to 98% of the Media Asset
Share, as estimated by the Actuaries in writing (immediately
prior to the Separation Time) to Multimedia and New U S WEST.
(2) Immediately after the Separation Time or as soon as reasonably
practicable thereafter, an amount equal to the Supplemental and
Dependent Life Assets multiplied by a fraction, the numerator of
which is the amount of premiums paid by Media Employees and
Terminated Media Employees for supplemental and dependent life
insurance during the last full calendar month prior to the
Separation Time and the denominator of which is the total
premiums for such coverage paid by all Employees and Terminated
Employees during that month.
(3) As soon as practicable after the value of the assets as of the
Separation Time is determined and the Media Asset Share is
determined by the
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Actuaries in writing to Multimedia and New U S WEST (but not
later than 30 days after such writing is provided), the excess
of the Media Asset Share over the sum of the interim transfer
under (1) above and any benefit payments to Terminated Media
Employees by the MBAT and Life Insurance Trust after the
Separation Time. (If such amount is a negative number, such
amount shall be transferred from the Media VEBA to the MBAT and
Life Insurance Trust.)
(4) In the event there is any litigation or claims that the amount
transferred from the MBAT and Life Insurance Trusts to the Media
VEBA should be larger or smaller, the amount transferred shall be
adjusted in accordance with all of the provisions set forth in
Section 5 of this EM Agreement relating to a Contingent Amount
and claims over the amount of the transfer. In addition, the
parties agree that, to the extent permitted by law, any costs of
defending any such claims and any Liabilities arising out of such
claims shall be borne by the MBAT, Life Insurance Trust and the
Media VEBA. Any such Liability for a transfer or arising out of
any claims that a transfer is payable which cannot be borne by
the MBAT, Life Insurance Trust or the Media VEBA shall be borne
by New U S WEST or Multimedia in accordance with the last
paragraph of Section 5(g) of this EM Agreement.
To the extent any of the foregoing amounts is paid after the
Separation Time, such amount shall be increased or decreased by
interest from the Separation Time to the date of payment (to the
extent not paid or previously advanced) at a rate to be agreed to by
New U S WEST and MediaOne to reflect the rate of return of the MBAT
and Life Insurance Trust or the Media VEBA, whichever is applicable
(or any other mutually agreeable rate), during the period commencing
with the Separation Time and ending with the date of payment; provided
that no interest shall be paid with respect to the amounts in clause
(4) above if the Final Determination already provides for an
adjustment reflecting interest or plan earnings.
With respect to all of the foregoing transfers and any transfer
required by subsection (g) below, the specific assets to be
transferred shall be agreed upon by New U S WEST and Multimedia in
good faith so as to not treat the MBAT, Life Insurance Trust and Media
VEBA unfairly in any material respect.
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(g) As soon as practicable after the Separation Time, MediaOne shall cause
a transfer of assets from the U S WEST VEBA Trust to the MBAT in an
amount equal to the balance in the U S WEST VEBA Trust immediately
prior to the Separation Time (and before any transfers described in
paragraph (f) above) multiplied by a fraction, the numerator of which
is the amount of contributions made to that trust for calendar year
1998 (up through the Separation Time) on behalf of the New U S WEST
Group and the denominator of which is the total amount of all
contributions made to that trust for 1998 (up through the Separation
Time), increased by interest on the unpaid amount due from the
Separation Time to the date of payment at the rate of (8%) per annum.
In lieu of these transfers, the parties may agree to offset the amount
to be transferred against the transfers required in subsection (f)
above.
9. INCENTIVE COMPENSATION.
(a) Stock Options. Options to purchase shares of Communications Stock
("Communications Options") and shares of Media Stock ("Media Options")
which are unexercised as of the Separation Time and which were issued
pursuant to the terms of the Amended U S WEST 1994 Stock Plan, the U S
WEST Media Group 1996 Stock Option Plan, the U S WEST Media Group 1997
Stock Option Plan and the U S WEST Communications Group 1997 Stock
Option Plan (collectively the "Option Plans") shall be treated as
follows:
(1) New U S WEST shall assume the U S WEST Communications Group 1997
Stock Option Plan and all obligations under such plan.
(2) MediaOne shall retain the U S WEST Media Group 1996 Stock Option
Plan and the U S WEST Media Group 1997 Stock Option Plan and all
obligations under such plans.
(3) MediaOne shall retain the Amended U S WEST 1994 Stock Plan and
all obligations with respect to Media Options under such plan.
(4) New U S West shall establish a new stock plan to be effective as
of the Separation Time and shall assume, under such plan, all
obligations with respect to Communications Options issued under
the Amended U S WEST 1994 Stock Plan.
(5) Unexercised options issued under any of the Option Plans shall
continue in effect for their
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original term subject to paragraph (6) below and the following
adjustments to reflect the transactions contemplated by the
Separation Agreement.
(i) No Media Dividend shall be distributed with respect to any
Media Options. However, in accordance with the following
sentence, the number of Media Options held by any person shall be
converted into a higher number of options to purchase shares of
MediaOne Common Stock and the exercise price of each such option
shall be decreased. The number of options shall be increased and
the exercise price of each share under each option shall be
decreased to reflect the Media Dividend in a manner consistent
with Accounting Rule EITF 90-9 in order to preserve the economic
value of the options.
(ii) The Communications Options shall be converted to options to
purchase shares of New U S WEST Common Stock on a one for one
basis; the exercise price shall not change.
(6) Vested options under any of the Option Plans shall be exercised
on and after the Separation Time by an Employee by contacting the
stock plan administrator for his or her employer or former
employer. New U S WEST and MediaOne each agrees to act as agent
(the "crossover agent") for the other in the case of an exercise
of an option by an Employee of the crossover agent under an
Option Plan of the non-employing company. The crossover agent
for the non-employing company shall, by itself and/or through its
own third-party arrangements (i) effect an option exercise of the
applicable shares; (ii) report such exercise to the non-employing
company on a timely basis, not to exceed 30 days after the
exercise; (iii) collect from the Employee, and remit and/or
report to the Employee and/or the appropriate tax authorities, as
applicable, all taxes incurred by the crossover agent (as the
employing company) resulting from the exercise of an option under
the non-employing company's Option Plan, and all taxes required
to be withheld from the Employee's proceeds as a result of the
exercise of an option under the non-employing company's Option
Plan; (iv) deliver the stock to the Employee or pay the Employee
the excess of the sales proceeds of
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the applicable shares over the sum of the exercise price and all
taxes required to be withheld from the Employee's proceeds as a
result of the exercise; and (v) pay the non-employing company an
amount equal to the exercise price of such option on a timely
basis, not to exceed 30 days after the exercise. In addition,
the non-employing company agrees to honor the separation
policies adopted by the crossover agent (or its subsidiaries)
for purposes of determining if a separated Employee is eligible
to exercise an option under the non-employing company's Option
Plan. New U S WEST and MediaOne shall agree on the treatment of
options exercised by Terminated Employees after the Separation
Time.
(b) Restricted Stock. Communications Stock and Media Stock issued to
Employees or Terminated Employees under the Amended U S WEST 1994
Stock Plan which has not become vested under the terms of that plan as
of the Separation Time ("Restricted Communications Stock" and
"Restricted Media Stock" respectively) shall be treated as follows:
(1) Immediately prior to the Separation Time, Media Employees and
Terminated Media Employees shall surrender any Restricted
Communications Stock they hold and receive Restricted Media Stock
in exchange. The number of shares of Restricted Media Stock
received by each such individual shall equal the number of shares
of Restricted Communications Stock surrendered by such individual
multiplied by 1.0645 and further multiplied by the ratio of the
Average Value of the Communications Stock to the Average Value of
the Media Stock.
(2) Immediately prior to the Separation Time, Communications
Employees, Terminated Communications Employees and Terminated
Inc. Employees shall surrender any Restricted Media Stock they
hold as of the Separation Time and receive Restricted
Communications Stock in exchange. The number of shares of
Restricted Communications Stock received by each such individual
shall equal that number of shares of Restricted Media Stock
surrendered by such individual multiplied by 1.0645 and further
multiplied by the ratio of the Average Value of the Media Stock
to the Average Value of the Communications Stock.
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(3) Following the adjustments in paragraphs (1) and (2) above,
MediaOne shall retain the Amended U S WEST 1994 Stock Plan and
all obligations under such plan with respect to Media Restricted
Stock and shall amend such plan to provide for restricted stock
("Restricted MediaOne Common Stock") after the Separation Time.
In order to reflect the transactions contemplated by the
Separation Agreement, the Restricted Media Stock shall be subject
to the following adjustments. Following the adjustments in
paragraphs (1) and (2) above, (i) the Restricted Media Stock
shall be converted to Restricted MediaOne Common Stock on a one
for one basis and (ii) each share of Restricted Media Stock,
including shares described in paragraph (1) above but not those
described in paragraph (2) above, shall receive the Media
Dividend, provided that such Media Dividend shall be free of all
restrictions under the plan.
(4) Following the adjustments in paragraphs (1) and (2) above, New U
S WEST shall assume, under the new stock plan adopted pursuant to
subsection (a)(4) above, all obligations under the Amended U S
WEST 1994 Stock Plan with respect to Restricted Communications
Stock and shall amend such plan to provide for restricted stock
("Restricted New U S WEST Common Stock") after the Separation
Time. In order to reflect the transactions contemplated by the
Separation Agreement, following the adjustments in paragraphs (1)
and (2) above, the Restricted Communications Stock shall be
converted to Restricted New U S WEST Common Stock on a one for
one basis.
(5) Except for the Media Dividend set forth in paragraph (3) above,
each share of Restricted New U S WEST Common Stock and Restricted
MediaOne Common Stock outstanding after the application of the
foregoing paragraphs of this subsection (b) ("Post-Separation
Restricted Stock") shall vest in accordance with the vesting
period applicable to the grant of restricted stock to which each
share of Post-Separation Restricted Stock is attributable.
(c) LTIP. The U S WEST Communications Long-Term Incentive Plan ("LTIP")
shall be terminated as of the Separation Time and a new long-term
incentive plan (the "Communications LTIP") shall be established by
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New U S WEST. Awards under the LTIP to Communications Employees
shall be assumed by the Communications LTIP and shall continue under
their original terms subject to adjustment to reflect the transactions
contemplated by the Separation Agreement; MediaOne shall cease to have
any Liability with respect to such awards. The measurement period for
awards under the LTIP to Media Employees shall terminate as of the
Separation Time and the awards shall be calculated and paid out in
Restricted MediaOne Group Common Stock as of that time.
(d) ESTIP. The U S WEST, Inc. Executive Short Term Incentive Plan
("ESTIP") shall be retained by MediaOne and a new executive incentive
plan (the "Communications ESTIP") shall be established by New U S
WEST. Awards under the ESTIP to Communications Employees shall be
assumed by the Communications ESTIP and shall continue under their
original terms subject to adjustment to reflect the transactions
contemplated by the Separation Agreement; MediaOne shall cease to have
any Liability with respect to such awards.
(e) Phantom Stock. The units issued under the Amended U S WEST 1994 Stock
Plan which are valued in accordance with Communications Stock
("Phantom Communications Stock") and the units issued under the
Amended U S WEST 1994 Stock Plan which are valued in accordance with
Media Stock ("Phantom Media Stock") shall be treated as follows:
(1) The Phantom Communications Stock of a Media Employee or a Media
Director (as defined in Section 10(g) below) prior to the
Separation Time shall be converted into Phantom Media Stock
immediately prior to the Separation Time. The number of units of
Phantom Media Stock received by each such individual shall equal
the number of units of Phantom Communications Stock surrendered
by such individual multiplied by the ratio of the Average Value
of the Communications Stock to the Average Value of the Media
Stock.
(2) The Phantom Media Stock of a Communications Employee or
Communications Director (as defined in Section 10(g) below) prior
to the Separation Time shall be converted into Phantom
Communications Stock immediately prior to the Separation Time.
The number of units of Phantom Communications Stock received by
each such individual shall equal the number of units
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of Phantom Media Stock surrendered by such individual multiplied
by the ratio of the Average Value of the Media Stock to the
Average Value of the Communications Stock.
(3) Following the adjustments in paragraphs (1) and (2) above,
MediaOne shall retain the Amended U S WEST 1994 Stock Plan and
all obligations under such plan with respect to Phantom Media
Stock and shall amend such plan to provide for units which are
valued in accordance with MediaOne Common Stock ("Phantom
MediaOne Common Stock") after the Separation Time. In order to
reflect the transactions contemplated by the Separation
Agreement, following the adjustments in paragraphs (1) and (2)
above, the Phantom Media Stock, including units described in
paragraph (1) above but not those described in paragraph (2)
above, shall be converted to Phantom MediaOne Common Stock on the
following basis. The number of units of Phantom MediaOne Common
Stock credited shall equal the number of units of Phantom Media
Stock surrendered by such individual multiplied by the ratio of
the Average Value of the Media Stock to the excess of the Average
Value of the Media Stock over the product of the Dividend Number
multiplied by the Average Value of the Communications Stock.
(4) Following the adjustments in paragraphs (1) and (2) above, New U
S WEST shall assume, under the new stock plan adopted pursuant to
subsection (a)(4) above, all obligations under the Amended U S
WEST 1994 Stock Plan with respect to Phantom Communications Stock
and shall amend such plan to provide for units which are valued
in accordance with New U S WEST Common Stock ("Phantom New U S
WEST Common Stock") after the Separation Time. In order to
reflect the transactions contemplated by the Separation
Agreement, following the adjustments in paragraphs (1) and (2)
above, the Phantom Communications Stock shall be converted to
Phantom New U S WEST Common Stock on a one for one basis.
(5) MediaOne and New U S WEST shall cause all plans referred to in
this subsection (e) to be amended, as appropriate, to effect the
changes described herein as of the Separation Time.
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10. OTHER BENEFITS.
(a) Top-hat plans. As of the Separation Time:
(1) New U S WEST or a Subsidiary shall assume all plans maintained by
the Existing U S WEST Group prior to the Separation Time which
are intended to be described in Section 201(2) of ERISA ("Top-hat
Plans") and all Liabilities and obligations with respect to
Communications Employees, Terminated Communications Employees and
Terminated Inc. Employees under such plans. Such Top-hat Plans
shall include, without limitation, the U S WEST Nonqualified
Pension Plan and the U S WEST Deferred Compensation Plan. All
such plans shall be Communications Employee Benefit Plans. The
MediaOne Group shall have no Liabilities with respect to such
plans.
(2) MediaOne or a Subsidiary shall establish new Top-hat Plans
corresponding to the Top-hat Plans maintained by the Existing U S
WEST Group before the Separation Time and shall assume, under
such plans, all Liabilities and obligations with respect to Media
Employees and Terminated Media Employees under the Top-hat Plans
maintained by the Existing U S WEST Group prior to the Separation
Time. All such plans shall be Media Employee Benefit Plans. All
such Liabilities and obligations shall cease to be Liabilities or
obligations of the Top-hat Plans assumed by New U S WEST pursuant
to the preceding paragraph (1).
(3) Subject to paragraph (4) below, any trusts maintained by Existing
U S WEST or its Subsidiaries for the purpose of providing
benefits under a Top-hat Plan (the "Existing U S WEST Rabbi
Trusts") shall be transferred to and assumed by New U S WEST.
(4) MediaOne or a Subsidiary shall establish prior to the Separation
Time one or more trusts (the "MediaOne Rabbi Trusts") for the
purpose of providing benefits under its Top-hat Plans which
correspond to the Existing U S WEST Rabbi Trusts. As of the
Separation Time, Existing U S West shall cause the trustee or
trustees of the Existing U S WEST Rabbi Trusts to transfer to the
trustee or trustees of the MediaOne Rabbi Trusts any amounts held
in the Existing U
40
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S WEST Rabbi Trusts attributable to the benefits of Terminated
Media Employees.
(b) Employment contracts. Except for the severance agreements with
members of the Executive Group, all individual employment contracts,
including but not limited to severance agreements, retention
agreements, change-of-control agreements and letter agreements,
entered into by a member of the Existing U S WEST Group and a single
Communications Employee or a Terminated Communications Employee shall
be retained by, or assigned to and assumed by, as applicable, the New
U S WEST Group, provided they do not expire by their own terms as of
the Separation Time. The MediaOne Group shall have no Liabilities
with respect to such agreements. Any such employment contracts, other
than agreements described in paragraph (d) below, entered into by any
member of the Existing U S WEST Group and a single Media Employee or a
Terminated Media Employee shall be retained by, or assigned to and
assumed by, as applicable, the MediaOne Group, provided they do not
expire by their own terms as of the Separation Time. The New U S WEST
Group shall have no Liabilities with respect to such agreements. Any
Liability under such employment contracts, other than the severance
agreements with members of the Executive Group, entered into by any
member of the Existing U S WEST Group and a single Terminated Inc.
Employee shall be borne in accordance with Section 2(c) and (f) of
this EM Agreement.
(c) Split-dollar contracts. All split-dollar insurance contracts entered
into by the Existing U S WEST Group for the benefit of a
Communications Employee or a Terminated Communications Employee shall
be retained by, or assigned to and assumed by, as applicable, New U S
WEST; the MediaOne Group shall have no interest in, or Liabilities
with respect to, such contracts. Any such split-dollar insurance
contracts entered into by the Existing U S WEST Group for the benefit
of a Media Employee or a Terminated Media Employee shall be retained
by, or assigned to and assumed by, as applicable, MediaOne; the New U
S WEST Group shall have no interest in, or Liabilities with respect
to, such contracts. In order to assign and assume any such split
dollar life policies, the parties agree to accept any collateral
assignments, policy endorsements or such other documentation executed
by or on behalf of the applicable employees or terminated employees,
or any trustee of any trust to which such policy rights or incidents
of ownership under the policies have been assigned, as well as
41
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entering into any such agreements as may be necessary to fulfill
obligations to any insurance company or insurance agent or broker
under the policies to be assigned.
(d) Ex-Pat Employees. This sub-section applies to Employees ("Ex-Pat
Employees") currently employed by International who have entered into
agreements with Existing U S WEST or a Subsidiary which give such
Employees re-employment rights with Existing U S WEST or a domestic
Subsidiary thereof. If an Ex-Pat Employee notifies Existing U S WEST
in writing prior to May 1, 1998 that he wishes to exercise his right
to return to domestic employment prior to the Separation Time, the
Communications Business will either: (1) re-employ the Ex-Pat
Employee in accordance with his re-employment right; or (2) enter into
a new agreement with the Ex-Pat Employee terminating his re-employment
right. Any costs associated with re-employing the Ex-Pat Employee or
terminating his re-employment right in accordance with the prior
sentence shall be borne by the Communications Business. If an Ex-Pat
Employee does not notify Existing U S WEST in writing prior to May 1,
1998 that he wishes to exercise his right to return to domestic
employment prior to the Separation Time, all obligations under the
agreement which provides the re-employment right shall be assumed by
MediaOne. Any costs associated with assuming the re-employment right
of the Ex-Pat Employee in accordance with the prior sentence shall be
borne by New U S WEST and/or MediaOne as determined by the parties
through good faith negotiations to be completed prior to the
Separation Time.
(e) Vail Trust. The Theodore N. Vail Memorial Fund shall be transferred
to and assumed by New U S WEST as of the Separation Time.
(f) Leaves of Absence. Each member of the MediaOne Group and the New U S
WEST Group shall honor all terms and conditions of leaves of absence
that have been granted to any Employee before the Separation Time,
including such leaves that are commenced after the Separation Time, to
the extent that such Employees are assigned to that entity. Each such
entity shall be solely responsible for administering such leaves of
absence and compliance with all applicable laws relating to leaves of
absence, including the Family Medical Leave Act. Unless members of
the New U S WEST Group or MediaOne Group adopt other policies prior to
the Separation Time, each shall be considered to have adopted leave of
absence programs,
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effective as of the Separation Time, which are substantially
identical in all material respects to the leave of absence programs
in effect at the respective entities at the Separation Time.
(g) Non-Employee Director Plans.
(1) As of the Separation Time, New U S WEST shall assume the
Non-Employee Director Plans and all Liabilities and obligations
under such plans with respect to individuals who will be
directors of New U S WEST immediately after the Separation Time
and Retired Non-Employee Directors (collectively referred to as
"Communications Directors"). The MediaOne Group shall have no
Liabilities with respect to such agreements.
(2) As of the Separation Time, MediaOne shall establish new plans for
its non-employee directors ("Media Non-Employee Director Plans")
corresponding to the Non-Employee Director Plans maintained by U
S WEST before the Separation Time and shall assume, under such
plans, all Liabilities and obligations under the Non-Employee
Director Plans with respect to individuals who will be directors
of MediaOne ("Media Directors") immediately after the Separation
Time. All such Liabilities and obligations shall cease to be
Liabilities or obligations of the Non-Employee Director Plans
assumed by New U S WEST pursuant to paragraph (1) above. The New
U S WEST Group shall have no Liabilities with respect to such
agreements.
(3) MediaOne and New U S WEST shall cause all plans referred to in
this sub-section (g) to be amended, as appropriate, to effect the
changes described herein as of the Separation Time.
(h) Non-Employee State Executive Board Plan. As of the Separation Time,
New U S WEST shall assume the U S WEST Communications, Inc.
Non-Employee State Executive Board Deferred Compensation Plan (and any
predecessor plan) and be solely responsible for all Liabilities
thereunder. New U S WEST shall cause such plan to be amended, as
appropriate, to effect the changes described herein as of the
Separation Time.
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11. PORTABILITY.
Existing U S WEST and, if necessary after the Separation Time, MediaOne and
New U S WEST shall use reasonable best efforts to seek an amendment of the
Mandatory Portability Agreement established as of January 1, 1985, as
referenced in the U S WEST Pension Plan (the "MPA"), to allow New U S WEST
to become a "Tier II Signatory Company" under the MPA with the same rights
and obligations as have been granted to AirTouch Communications, Inc. as a
Tier II Signatory Company. MediaOne and New U S WEST may mutually agree to
additional situations where service credit would be granted for employees
transferring between one another (or their Subsidiaries) with associated
trust asset transfers after the Separation Time.
12. FURTHER AGREEMENTS.
(a) From and after the Separation Time, MediaOne shall, and shall cause
its Subsidiaries and successors to, provide credit under all Media
Employee Arrangements and Media Employee Benefit Plans to Media
Employees and Terminated Media Employees for service with the Existing
U S WEST Group prior to the Separation Time for purposes of
eligibility to participate, vesting and eligibility to retire, and for
purposes of calculating any severance benefits, to the same extent
such credit was provided under Employee Arrangements and Employee
Benefit Plans prior to the Separation Time.
(b) From and after the Separation Time, New U S WEST shall, and shall
cause its Subsidiaries and successors to, provide credit under all
Communications Employee Arrangements and Communications Employee
Benefit Plans to Communications Employees, Terminated Communications
Employees and Terminated Inc. Employees for service with the Existing
U S WEST Group prior to the Separation Time for purposes of
eligibility to participate, vesting and eligibility to retire, and for
purposes of calculating any severance benefits, to the same extent
such credit was provided under Employee Arrangements and Employee
Benefit Plans prior to the Separation Time.
(c) MediaOne and New U S WEST shall promptly reimburse each other for all
valid liability and expenses addressed in this EM Agreement which are
paid by the other and that constitutes a liability of MediaOne or New
U S WEST, as the case may be, upon presentation of an invoice thereon.
In the event that payment in full is not received within 45 days from
the date of
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the invoice, interest shall accrue at the rate of 7% per annum from
the date of the invoice.
13. COOPERATION.
(a) MediaOne, New U S WEST and their Subsidiaries shall cooperate with
each other in carrying out, implementing and defending the terms of
this EM Agreement, including cooperating with each other with respect
to any claims or litigation challenging the terms of the EM Agreement.
(b) Each party shall exchange such information with the other party and
their respective agents and vendors (without obtaining releases), as
may be reasonably requested by the other party, with respect thereto.
MediaOne and New U S WEST and their respective authorized agents
shall, subject to applicable laws on confidentiality, be given
reasonable and timely access to, and may make copies of, all
information relating to the subjects of this EM Agreement in the
custody of the other party, to the extent reasonably requested by the
other party. If any provision of this Agreement is dependent on the
consent of any third party (such as a vendor or a union) and such
consent is withheld, MediaOne and New U S WEST shall use their
reasonable best efforts to implement the applicable provisions of this
Agreement to the full extent practicable. If any provision of this
Agreement cannot be implemented due to the failure of such third party
to consent, MediaOne and New U S WEST shall negotiate in good faith to
implement the provision in a mutually satisfactory manner. The phrase
"reasonable best efforts" as used herein shall not be construed to
require the incurrence of any non-routine or unreasonable expense or
liability or the waiver of any right of MediaOne and New U S WEST (and
their respective Subsidiaries).
(c) MediaOne and New U S WEST agree to good faith mutual cooperation in
any investigation, inquiry or litigation which jointly involves them
or in which either party makes a reasonable request for such
cooperation. Each party will make its Employees available on a
reasonable basis to give testimony and assistance in connection with
any lawsuit, dispute, investigation or proceeding involving the other
party and arising out of activities for which the Employee had
responsibility prior to the Separation Time. The party requesting
such availability (the "Requesting Party") shall reimburse the
Employee for all reasonable out-of-pocket travel and other expenses
incurred in so cooperating, including without
45
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limitation airplane fare, hotel accommodations, meal charges and
other similar expenses, as well as reasonable fees and
disbursements for independent counsel for the Employee, if the
matter requires that the Employee have independent representation.
Such expenses will be reimbursed promptly after Employee's
submission to the Requesting Party of statements and such
reasonable detail as the Requesting Party may require. Any
request for cooperation, and the degree of cooperation provided,
pursuant to this paragraph will take into account (1) the
significance of the matters at issue in the lawsuit, dispute,
investigation or proceeding, and (ii) the Employee's other
personal and business commitments. In any case in which either
MediaOne or New U S WEST becomes aware that one of its Employees
is called (except by the other party) as a witness to testify in
any discovery or court proceeding relating to the other party, the
party employing such individual will notify the other party
immediately in order to give the other party a reasonable
opportunity to appear and/or assert any privilege to which it may
be entitled.
14. NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES.
(a) No provision of this EM Agreement or the Separation Agreement shall be
construed to create any right, or accelerate entitlement, to any
compensation or benefit whatsoever on the part of any Employee or
Terminated Employee or other future, present or former employee of
MediaOne, New U S WEST, or their respective Subsidiaries under any
Employee Benefit Plan or Employee Arrangement maintained by any of
such entities or otherwise.
(b) Without limiting the generality of the foregoing provisions of
subsection 14(a) above, except for the severance agreements applicable
to the Executive Group, neither (1) the transactions described in the
Separation Agreement including without limitation the Reorganization,
Contribution and Separation, (2) the termination of the Participating
Company status of New U S WEST or a New U S WEST Subsidiary, (3) the
transfer of sponsorship of any Employee Benefit Plans or Employee
Arrangements to New U S WEST, (4) the transfer of an Employee from one
member of the Existing U S WEST Group to another member in connection
with or in anticipation of the Reorganization, Contribution or
Separation at any time on or before the Separation Time nor (5) the
assignment and transfer of an Employee to the New U S
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WEST Group or MediaOne Group, shall cause any Employee to be
deemed to have incurred a termination of employment which entitles
such individual to the commencement of benefits under any Employee
Benefit Plan or Employee Arrangement maintained by MediaOne, New U
S WEST, or their respective Subsidiaries; nor shall any of the
events set forth in clauses (1) through (5) of this subsection
14(b) be treated as, or result in, a change in control under any
such Employee Benefit Plan or Employee Arrangement.
(c) To the extent applicable, each Employee Benefit Plan and Employee
Arrangement is hereby amended (without the need for further action) to
incorporate the provisions stated in subsection 14(b).
(d) Except as expressly provided in this Agreement, nothing in this
Agreement shall preclude New U S WEST or MediaOne or their respective
Subsidiaries, at any time after the Separation Time, from amending,
merging, modifying, terminating, eliminating, reducing, or otherwise
altering in any respect any Employee Benefit Plan or Employee
Arrangement maintained by such party, any benefit under any such plan
or arrangement, or any trust, insurance policy or funding vehicle
related to any such plan or arrangement.
(e) No provision in this EM Agreement or in the Separation Agreement shall
confer upon any person other than the signatories hereto any rights or
remedies with respect to the employment, compensation, benefits, or
other terms and conditions of employment of any persons.
15. MISCELLANEOUS.
(a) Payment of 1998 Administrative Costs and Expenses. Each member of the
Existing U S WEST Group shall be responsible for their allocable share
of the budgeted costs for benefits in 1998 until the Separation Time,
as well as their allocable share of unanticipated expenses incurred
prior to the Separation Time. In addition, MediaOne shall pay New
U S WEST for all expenses and costs relating to benefits incurred
after the Separation Time to the extent that the additional
expenses are (i) reasonable and necessary and (ii) incurred as a
result of, and for the purpose of, the normal administration of the
Media Employee Benefit Plans or Employee Arrangements after the
Separation Time. If any expenses are incurred at the request of
MediaOne, they shall be the sole responsibility of MediaOne.
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(b) Audit Rights.
(1) Information Provided. Each of MediaOne and New U S WEST, and
their duly authorized representatives, shall have the right to conduct
audits with respect to all information provided to it by the other
party. The party conducting the audit (the "Auditing Party") shall
have the sole discretion to determine the procedures and guidelines
for conducting audits and the selection of audit representatives under
this paragraph (1); provided, that no audits shall be permitted with
respect to the allocation or transfer of plan assets and liabilities.
The Auditing Party shall have the right to make copies of any records
at its expense, subject to the confidentiality provisions set forth in
the Separation Agreement, which are incorporated by reference herein.
The party being audited shall provide the Auditing Party's
representatives with reasonable access during normal business hours to
its operations, computer systems and paper and electronic files, and
provide workspace to its representatives. After any audit is
completed, the party being audited shall have the right to review a
draft of the audit findings and to comment on those findings in
writing within five business days after receiving such draft.
The Auditing Party's audit rights under this paragraph (1) shall
include the right to audit, or participate in an audit facilitated by
the party being audited, of any Subsidiaries and Affiliates of the
party being audited and of any benefit providers and third parties
with whom the party being audited has a relationship, or agents of
such party, to the extent any such persons are affected by or
addressed in this Agreement (collectively, the "Non-parties"). The
party being audited shall, upon written request from the Auditing
Party, provide an individual (at the Auditing Party's expense) to
supervise any audit of a Non-party. The Auditing Party shall be
responsible for supplying, at the Auditing Party's expense, additional
personnel sufficient to complete the audit in a reasonably timely
manner. The responsibility of the party being audited shall be
limited to providing, at the Auditing Party's expense, a single
individual at each audited site for purposes of facilitating the
audit.
(2) Vendor Contracts. After the Separation Time, MediaOne and New U
S WEST and their duly authorized representatives shall have the right
to conduct joint audits with respect to any Provider Contracts that
relate to both the MediaOne Welfare Plans and the New
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<PAGE>
U S WEST Welfare Plans. The scope of such audits shall encompass
the review of all correspondence, account records, claim forms,
cancelled drafts (unless retained by the bank), provider bills,
medical records submitted with claims, billing corrections,
vendor's internal corrections of previous errors and any other
documents or instruments relating to the services performed by the
vendor under the applicable vendor contracts. MediaOne and New U S
WEST shall agree on the performance standards, audit methodology,
auditing policy and quality measures and reporting requirements
relating to the audits described in this paragraph (2) and the
manner in which costs incurred in connection with such audits will
be shared.
(c) Beneficiary Designations. All beneficiary designations made under the
Employee Benefit Plans or Employee Arrangements prior to the
Separation Time shall be transferred to and be in full force and
effect under the corresponding new Communications or Media Employee
Benefit Plans or Employee Arrangements until such beneficiary
designations are replaced or revoked by the individual who made the
beneficiary designation.
(d) Effect If Separation Does Not Occur. If the Separation does not
occur, then all actions and events that are, under this EM Agreement,
to be taken or occur effective as of the Separation Time, immediately
after the Separation Time, or otherwise contingent upon or in
connection with the Separation, shall not be taken or occur. In
addition, to the extent actions are taken or events occur prior to the
Separation Time in connection with the Reorganization or Contribution
or in anticipation of the Separation, then such events or actions
shall be reversed or deemed null and void.
(e) Provisions of Separation Agreement. The provisions of Articles X -
XII of the Separation Agreement shall, to the extent applicable and
not inconsistent with this EM Agreement, shall also apply to this EM
Agreement.
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IN WITNESS WHEREOF, each of the parties has caused this EM Agreement to be
duly executed on its behalf by its officers thereunto duly authorized, all as
of the day and year first above written.
U S WEST, Inc.
By:
-------------------------------------
Name:
Title:
USW-C, Inc.
By:
-------------------------------------
Name:
Title:
U S WEST Multimedia Communications,
Inc., plan sponsor of the:
Media Pension Plan
Media Savings Plan
Media VEBA
Other Media Employee Benefit Plans
By:
-------------------------------------
Name:
Title:
USW-C, Inc., plan sponsor of the:
U S WEST Pension Plan
U S WEST Savings Plan
MBAT and Life Insurance Trust
Other Communications Employee Benefit Plans
By:
-------------------------------------
Name:
Title:
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TAX SHARING AGREEMENT
between
U S WEST, INC.
(to be renamed MEDIAONE GROUP, INC.)
and
USW-C, Inc.
(to be renamed U S WEST, INC.)
Dated as of , 1998
--------- ----
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
----
<S> <C>
ARTICLE I
Definitions; Certain Operating Conventions . . . . . . . . . . . . . . 2
ARTICLE II
Allocation and Payment . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III
Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IV
Preparation and Filing of Tax Returns,
Cooperation and Record Retention . . . . . . . . . . . . . . . . . . . 10
ARTICLE V
Refunds, Audits and Adjustments. . . . . . . . . . . . . . . . . . . . 11
ARTICLE VI
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
<PAGE>
TAX SHARING AGREEMENT
TAX SHARING AGREEMENT, dated as of _____________, by and between U S
WEST, Inc., a Delaware corporation ("U S WEST") to be renamed MediaOne Group,
Inc. and USW-C, Inc., a Delaware corporation and wholly owned subsidiary of
U S WEST ("New U S WEST") to be renamed U S WEST, Inc.
W I T N E S S E T H
WHEREAS, New U S WEST and its subsidiaries are currently members of the
U S WEST Consolidated Group (as defined herein);
WHEREAS, pursuant to the Separation Agreement entered into between U S
WEST and New U S WEST dated _________ (the "Separation Agreement"), (a) U S
WEST shall effect a restructuring of certain of its assets, liabilities and
businesses, as a result of which New U S WEST shall own the Directories
Business and the businesses currently attributed to the Communications Group
(each as defined in the Separation Agreement) (the "Reorganization") and (b)
U S WEST shall distribute all of the outstanding capital stock of New U S
WEST to its stockholders (the "Separation");
WHEREAS, the parties intend that for United States federal income tax
purposes the Reorganization and the Separation shall qualify as tax-free
transactions pursuant to Sections 332, 368(a) and 355 of the Code (as defined
herein);
WHEREAS, the parties wish to (a) provide for the payment of tax
liabilities and entitlement to refunds thereof, allocate responsibility for,
and cooperation in, the filing of tax returns and provide for certain other
matters relating to taxes and (b) set forth certain covenants and indemnities
relating to the preservation of the tax-free status of the Reorganization and
the Separation.
NOW, THEREFORE, in consideration of the mutual promises and undertakings
contained herein and in any other document executed in connection with this
Agreement, the parties agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS; CERTAIN OPERATING CONVENTIONS
1.1 For the purposes of this Agreement, the following terms shall have
the meanings set forth below:
ADJUSTMENTS shall mean any proposed or final change in the Tax Liability
of a taxpayer.
CODE shall mean the Internal Revenue Code of 1986, as amended.
COMBINED RETURN shall mean any combined, unitary, or consolidated State
Income Tax return that includes one or more members of the MediaOne Group and
one or more members of the New U S WEST Group (as hereinafter defined).
COMBINED RETURN TAX SAVINGS shall mean, with respect to a Taxable Year
in which one or more Combined Returns were filed or required to be filed in
the Communications Group Region, the excess of the State Income Tax that
would have been payable to all Tax Authorities in the Communications Group
Region if the MediaOne Group had not been included in such Combined Returns
for such Taxable Year over the actual State Income Tax paid to such Tax
Authorities in respect of such Combined Returns.
COMMUNICATIONS GROUP REGION shall mean the 14-state region comprised of
the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska,
New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming.
CONTRIBUTED MEDIA GROUP SUBSIDIARIES shall mean each of U S WEST Media
Group, Inc. and U S WEST Capital Funding, Inc., and each of their respective
subsidiaries.
CONTRIBUTED SUBSIDIARIES shall mean each of U S WEST Foundation, U S
WEST Educational Foundation, U S WEST Investment Management Company, U S WEST
SPF, Co., U S WEST Federal Relations, Inc., and U S WEST IP Holdings, Inc.,
and each of their respective subsidiaries.
FEDERAL INCOME TAX shall mean federal Taxes determined on the basis of
net income or profits (including, but not limited to, any alternative minimum
tax, capital gains and any Tax on items of Tax preferences) but excluding
non-income Taxes such as federal payroll and excise Taxes.
2
<PAGE>
INDEMNIFYING PARTY shall mean any Person from which an Indemnified Party
is seeking indemnification pursuant to the provisions of this Agreement.
INDEMNIFIED PARTY shall mean any Person which is seeking indemnification
from an Indemnifying Party pursuant to the provisions of this Agreement.
IRS shall mean the United States Internal Revenue Service.
MEDIAONE GROUP shall mean, individually and collectively, as the case
may be, each member of the U S WEST Consolidated Group, other than any member
of the New U S WEST Group.
NEW U S WEST GROUP shall mean, individually and collectively, as the
case may be, New U S WEST and its present and future direct and indirect
subsidiaries; provided, however, that on or prior to the Separation Date,
none of the Contributed Subsidiaries or the Contributed Media Group
Subsidiaries shall be included as a member of the New U S WEST Group.
PERSON shall mean and includes any individual, corporation, company,
association, partnership, joint venture, limited liability company, joint
stock company, trust, unincorporated organization, or other entity.
POST-SEPARATION TAXABLE PERIOD shall mean a taxable period that begins
after the Separation Date.
PRE-SEPARATION TAXABLE PERIOD shall mean a taxable period that ends on
or before the Separation Date.
PRESENT VALUE BENEFIT shall mean the present value (based on a discount
rate equal to the short-term applicable federal rate as determined under
Section 1274(d) of the Code at the time of determination, and assuming that
the Indemnified Party will be liable for Taxes at all relevant times at the
maximum marginal rates) of any income tax benefit.
PROCEEDING shall mean any audit or other examination, or any judicial or
administrative proceeding, relating to liability for or refunds or
Adjustments with respect to Taxes.
REFUND shall mean any refund of Taxes, including any reduction in
liability for such Taxes by means of a credit, offset or otherwise.
3
<PAGE>
RULING REQUEST shall mean the request by U S WEST for an advance letter
ruling from the IRS with respect to certain Tax aspects of the Reorganization
and the Separation.
SEPARATE RETURN shall mean any Tax Return, including any consolidated,
combined or unitary Tax Return, filed by either the New U S WEST Group or the
MediaOne Group but excluding any Tax Return filed which includes one or more
members of both groups.
SEPARATION DATE shall mean the date the Separation is effected.
STATE INCOME TAX shall mean any state or local jurisdiction Taxes
imposed on or measured by gross or net income, value added, net worth or
capital stock. State Income Taxes do not include business and occupation
taxes, gross receipts taxes, excise, sales or use taxes, real property gains,
real or personal property, transfer or similar taxes.
STRADDLE PERIOD shall mean a taxable period that includes, but does not
end on, the Separation Date.
TAX OR TAXES shall mean all taxes, charges, fees, imposts, levies or
other assessments, including, without limitation, all net income, gross
receipts, capital, sales, use, gains, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp,
occupation, property and estimated taxes, custom duties, fees, assessments
and charges of any kind whatsoever, together with any interest and any
penalties, fines, additions to tax or additional amounts imposed by any
taxing authority (domestic or foreign) and shall include any transferee
liability in respect of Taxes.
TAX AUTHORITY shall mean the IRS and any other domestic or foreign
governmental authority responsible for the administration and collection of
Taxes.
TAX LIABILITIES shall mean all liabilities for Taxes.
TAX RETURNS shall mean all reports, returns, declaration forms and
statements filed or required to be filed with respect to Taxes.
TAX-TIMING ADJUSTMENT shall mean any Adjustment in one Taxable Year
which will result in an offsetting Adjustment or Adjustments (including an
Adjustment to the basis of an asset not eligible for depreciation or
amortization) in another Taxable Year.
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TAXABLE YEAR shall mean the year on the basis of which taxable income is
computed.
TREASURY shall mean the United States Department of the Treasury.
U S WEST CONSOLIDATED GROUP shall mean the affiliated group of
corporations, within the meaning of Section 1504(a) of the Code, of which U S
WEST is the common parent, and any member of such group.
1.2 OTHER DEFINITIONAL PROVISIONS. (a) Capitalized terms not
otherwise defined in this Agreement shall have the meaning ascribed to them
in the Separation Agreement.
(b) The words "hereof", "herein", and "hereunder" and words of similar
import, when used in this Agreement, shall refer to this Agreement as a whole
and not to any particular provision of this Agreement.
(c) The terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
1.3 TERMINATION OF TAXABLE YEARS. For Federal Income Tax purposes, the
Taxable Year of each member of the New U S WEST Group (including the
Contributed Subsidiaries and the Contributed Media Group Subsidiaries) shall
end as of the close of the Separation Date. New U S WEST and U S WEST shall,
unless prohibited by applicable law, take all action necessary or appropriate
to close the taxable period of each member of the New U S WEST Group for all
Tax purposes as of the close of the Separation Date.
ARTICLE II
ALLOCATION AND PAYMENT
2.1 ALLOCATION OF TAXES. U S WEST and New U S WEST each agrees, on its
own behalf and on behalf of the MediaOne Group and the New U S WEST Group,
respectively, to allocate and pay its respective share of Taxes as provided
in this Agreement.
(a) Except as provided in Section 2.1(e), the Federal Income Tax
liability (including Refunds and deficiencies) of the U S WEST Consolidated
Group for any Pre-Separation Taxable Period and any Straddle Period shall be
allocated between the New U S WEST Group and the MediaOne Group in accordance
with Treasury Regulations Sections
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1.1552-1(a)(3) and 1.1502-33(d)(3). The fixed percentage under
Treasury Regulations Section 1.1502-33(d)(3) shall be 100 percent.
(b) Except as provided in Section 2.1(e), the State Income Tax
liability of the New U S WEST Group and the MediaOne Group for any
Pre-Separation Taxable Period and any Straddle Period in any state included
in the Communications Group Region in which a Combined Return is or is
required to be filed shall be allocated between the New U S WEST Group and
the MediaOne Group in proportion to the state taxable income (positive or
negative) of each member of each group included in such Combined Return, or,
where the basis is other than net income, in proportion to each member's
respective Tax base. Each group shall appropriately compensate the other
group for any reduction in State Income Tax liability resulting from the
other group's having negative state taxable income.
(c) Except as provided in Section 2.1(e), the State Income Tax
liability of the New U S WEST Group and the MediaOne Group for any
Pre-Separation Taxable Period and any Straddle Period in any state not
included in the Communications Group Region in which a Combined Return is or
is required to be filed shall be allocated between the New U S WEST Group and
the MediaOne Group as follows:
(i) For the Taxable Years ended December 31, 1996, December 31,
1997 and on the Separation Date, all such State Income Tax liability for
each such Taxable Year shall be allocated to the New U S WEST Group to
the extent such State Income Tax liability does not exceed the Combined
Return Tax Savings actually realized by the New U S WEST Group for each
such Taxable Year. Any excess State Income Tax liability shall be
allocated 66.6% to the New U S WEST Group and 33.4% to the MediaOne Group.
(ii) For Taxable Years ended on or prior to December 31, 1995,
all such State Income Tax liability shall be allocated 66.6% to the
New U S WEST Group and 33.4% to the MediaOne Group.
(iii) Notwithstanding the foregoing, any liability arising solely
out of the inclusion of the New U S WEST Group in a Tax Return which was
originally filed as a Separate Return by a member of the affiliated group
(as defined in Section 1504(a) of the Code) of which Continental
Cablevision, Inc. was the common parent corporation for the Taxable Year
ended December 31, 1996 shall be allocated 50% to the New U S WEST Group
and 50% to the MediaOne Group.
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(d) Except as provided in Sections 2.1(c)(iii) and 2.1(e), all Tax
Liabilities of the New U S WEST Group and the MediaOne Group for any
Pre-Separation Taxable Period and any Straddle Period arising out of the
filing of a Separate Return shall be allocated to the member to which such
Tax Liabilities relate.
(e) Any Tax Liability which is a Shared Liability (as defined in the
Separation Agreement), shall be allocated in the following manner:
(i) Any Tax Liability of U S WEST arising out of operations
conducted directly by it and any Tax Liability of the Contributed
Subsidiaries for any Pre-Separation Taxable Period or any Straddle Period
shall be allocated 58% to the New U S WEST Group and 42% to the MediaOne
Group.
(ii) Any Tax Liability arising out of Transaction Costs (as defined
in the Separation Agreement) shall be allocated as the underlying costs are
allocated pursuant to Section 1.1(l) of the Separation Disclosure Schedule.
2.2 TAX ATTRIBUTES. Tax attributes for Pre-Separation Taxable Periods
and any Straddle Period shall be allocated to the New U S WEST Group and the
MediaOne Group in accordance with the Code and Treasury Regulations (and any
applicable state, local and foreign laws or regulations). U S WEST and New U
S WEST shall jointly determine the amounts of such attributes as of the
Separation Date and hereby agree to compute all Tax Liabilities for Taxable
Years ending after the Separation Date consistently with that determination.
2.3 TAX-TIMING ADJUSTMENTS. To the extent that any portion of any Tax
Liability (or Tax benefit) allocated under Section 2.1 relates to a
Tax-timing Adjustment, that portion of such Tax Liability (or Tax benefit)
shall be allocated to the entity that will receive the benefit (or detriment)
of that Tax-timing Adjustment. For purposes of this Agreement, the fact that
the period or periods in which offsetting Adjustments will arise is unknown
or not determinable shall not be taken into account.
2.4 PENALTIES, ADDITIONS TO TAX AND INTEREST. Penalties, additions to
Tax and interest on any Tax deficiencies or overpayments will be allocated as
the underlying deficiencies or overpayments are allocated under this
Agreement.
2.5 PAYMENT OF TAXES. U S WEST and New U S WEST each agrees to pay or
cause to be paid their respective shares of Taxes as allocated and provided
in this Agreement.
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(a) For the Taxable Year ended December 31, 1997 and any Straddle
Period, New U S WEST shall timely pay to U S WEST an amount equal to the
allocable Federal Income Tax liability of the New U S WEST Group determined
under Section 2.1(a) and (e), including the New U S WEST Group's share of
estimated Federal Income Taxes. U S WEST shall be responsible for the
payment to the IRS of the Federal Income Tax liability of the U S WEST
Consolidated Group for such Taxable Years.
(b) For the Taxable Year ended December 31, 1997 and any Straddle
Period, New U S WEST shall timely pay to U S WEST an amount equal to the
allocable State Income Tax liability of the New U S WEST Group determined
under Sections 2.1(b), (c) and (e), including the New U S WEST Group's share
of estimated State Income Taxes. U S WEST shall be responsible for the
payment to the applicable Tax Authority of such State Income Tax liabilities.
2.6 CHARACTERIZATION OF PAYMENTS. For all Tax purposes, the New U S
WEST Group and the MediaOne Group agree to treat (i) any payment required by
this Agreement as either a contribution by U S WEST to New U S WEST or a
distribution by New U S WEST to U S WEST, as the case may be, occurring
immediately prior to the Separation Date and (ii) any payment of interest or
non-federal Taxes by or to a Tax Authority as taxable or deductible, as the
case may be, to the party entitled under this Agreement to retain such
payment or required under this Agreement to make such payment, in either case
except as otherwise mandated by applicable law.
ARTICLE III
INDEMNIFICATION
3.1 INDEMNIFICATION BY U S WEST. U S WEST shall pay, and shall
indemnify and hold the New U S WEST Group and their respective shareholders,
directors, officers, employees, affiliates, agents and successors harmless
from and against, without duplication, (i) all Tax Liabilities allocable to
the MediaOne Group under Article II, (ii) all Tax Liabilities attributable to
Tax Returns required to be filed by the MediaOne Group for any
Post-Separation Taxable Period, (iii) all Tax Liabilities incurred by the New
U S WEST Group by reason of the breach by U S WEST of any of its covenants
hereunder, and (iv) any costs and expenses related to the foregoing
(including, without limitation, reasonable attorneys' fees and expenses).
3.2 LIABILITY OF MEDIAONE GROUP FOR UNDERTAKING CERTAIN TRANSACTIONS.
Notwithstanding any other provision of this Agreement to the contrary, if, as
a result of any
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event, action, or failure to act wholly or partially within the control of
the MediaOne Group (including, without limitation, any event, action, or
failure to act that results in a breach of any representation or in the
inaccuracy of any statement made to the IRS in connection with, the Ruling
Request), or any other event related to the acquisition of U S WEST stock,
any Taxes are imposed on the New U S WEST Group with respect to any action
taken pursuant to the Separation and the Reorganization, including, without
limitation, the transactions that were intended to be tax-free under Sections
332, 355 and 368 of the Code, then U S WEST shall indemnify and hold harmless
the New U S WEST Group with respect to any such Taxes on an after-tax basis.
3.3 INDEMNIFICATION BY NEW U S WEST. New U S WEST shall pay, and shall
indemnify and hold the MediaOne Group and their respective shareholders,
directors, officers, employees, affiliates, agents and successors harmless
from and against, without duplication, (i) all Tax Liabilities allocable to
the New U S WEST Group under Article II, (ii) all Tax Liabilities
attributable to Tax Returns required to be filed by the New U S WEST Group
for any Post-Separation Taxable Period, (iii) all Tax Liabilities incurred by
the MediaOne Group by reason of the breach by New U S WEST of any of its
covenants hereunder and (iv) any costs and expenses related to the foregoing
(including, without limitation, reasonable attorneys' fees and expenses).
3.4 LIABILITY OF NEW U S WEST GROUP FOR UNDERTAKING CERTAIN
TRANSACTIONS. Notwithstanding any other provision of this Agreement to the
contrary, if, as a result of any event, action, or failure to act wholly or
partially within the control of the New U S WEST Group (including, without
limitation, any event, action or failure to act that results in a breach of
any representation or in the inaccuracy of any statement made to the IRS in
connection with, the Ruling Request), or any other event related to the
acquisition of New U S WEST stock, any Taxes are imposed on the MediaOne
Group with respect to any action taken pursuant to the Separation and the
Reorganization, including, without limitation, the transactions that were
intended to be tax-free under Sections 332, 355 and 368 of the Code, then New
U S WEST shall indemnify and hold harmless the MediaOne Group with respect to
any such Taxes on an after-tax basis.
3.5 PAYMENT. If the Indemnifying Party is required to indemnify the
Indemnified Party pursuant to this Article III, the Indemnified Party shall
submit its calculations of the amount required to be paid pursuant to this
Article IV (which shall be net of the Present Value Benefit realized or
realizable by the Indemnified Party), showing such calculations in sufficient
detail so as to permit the Indemnifying Party to understand the calculations.
Subject to the following sentence, the Indemnifying Party shall pay to the
Indemnified Party, no later than ten (10) business days after the
Indemnifying Party receives
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the Indemnified Party's calculations, the amount that the Indemnifying Party
is required to pay the Indemnified Party under this Article III. If the
Indemnifying Party disagrees with such calculations, it must notify the
Indemnified Party of its disagreement in writing within ten (10) business
days of receiving such calculations. Any dispute regarding such calculations
shall be resolved in accordance with Section 6.13 of this Agreement.
3.6 TIME LIMITS. Any claim under this Article III with respect to a
Tax Liability must be made no later than thirty (30) days after the
expiration of the applicable statute of limitations for assessment of such
Tax Liability.
ARTICLE IV
PREPARATION AND FILING OF TAX RETURNS, COOPERATION
AND RECORD RETENTION
4.1 FEDERAL TAX RETURNS. New U S WEST and U S WEST hereby agree to
cooperate fully with each other to meet filing requirements for the U S WEST
Consolidated Group Tax Returns for any Pre-Separation Taxable Period and any
Straddle Period. New U S WEST, as agent for the U S WEST Consolidated Group,
will be responsible for the filing of such Tax Returns for the Taxable Years
ended December 31, 1997 and ending December 31, 1998, and, at the request of
U S WEST, shall use its best efforts to file the Tax Return for the Taxable
Year ending December 31, 1998 by its original due date. For purposes of this
Section 4.1, cooperation includes making available all instructions,
workpapers, research, data and notes of any kind required for the completion
of the Tax Return, as well as making available personnel to assist in the
consolidation effort. Personnel requirements, including the use of third
party contractors, will be negotiated and agreed upon between U S WEST and
New U S WEST. Interviewing and hiring of third-party contractors will be
done jointly, and costs of these contractors will be shared equally. Any
software license costs specifically related to a separate entity shall be
borne by that entity. Where software license costs are not discernible as
separate entity costs, such software license costs will be shared equally.
Due dates for information required for the U S WEST Consolidated Group Tax
Returns will be negotiated between U S WEST and New U S WEST and good faith
efforts will be made to meet those dates.
4.2 COMBINED RETURNS. New U S WEST and U S WEST hereby agree to
cooperate fully with each other to meet filing requirements for Combined
Returns for any Pre-Separation Taxable Period and any Straddle Period. New U
S WEST, as agent for U S WEST, will be responsible for the filing of the
Combined Returns for the Taxable Years ended December 31, 1997 and ending
December 31, 1998 and, at the request of U S WEST, shall
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use its best efforts to file any Combined Returns for the Taxable Year ending
December 31, 1998 by their original due date. For purposes of this Section
4.2, cooperation includes making available all instructions, workpapers,
research, data and notes of any kind required for the completion of the
Combined Return, as well as making available personnel to assist in the
combination effort. Personnel requirements, including the use of third party
contractors, will be negotiated and agreed upon between U S WEST and New U S
WEST. Interviewing and hiring of third-party contractors will be done
jointly, and costs of these contractors will be shared equally. Any software
license costs specifically related to a separate entity shall be borne by
that entity. Where software license costs are not discernible as separate
entity costs, such software license costs will be shared equally. Due dates
for information required for Combined Returns will be negotiated between U S
WEST and New U S WEST and good faith efforts will be made to meet those dates.
4.3 SEPARATE RETURNS. Any Separate Return shall be prepared and caused
to be filed by the entity required by law to file such Separate Return.
4.4 COOPERATION; MAINTENANCE AND RETENTION OF RECORDS. U S WEST and
New U S WEST shall, and shall cause the MediaOne Group and the New U S WEST
Group respectively to, provide the requesting party with such assistance and
documents as may be reasonably requested by such party in connection with (i)
the preparation of any Tax Return, (ii) the conduct of any Proceeding, (iii)
any matter relating to Taxes of any member of the U S WEST Consolidated
Group, the New U S WEST Group or the MediaOne Group and (iv) any other matter
that is a subject of this Agreement. New U S WEST and U S WEST shall retain
or cause to be retained all Tax Returns, schedules and workpapers, and all
material records or other documents relating thereto, until the expiration of
the statute of limitations (including any waivers or extensions thereof) of
the Taxable Years to which such Tax Returns and other documents relate or
until the expiration of any additional period that any party reasonably
requests, in writing, with respect to specific material records or documents.
A party intending to destroy any material records or documents shall provide
the other party with reasonable advance notice and the opportunity to copy or
take possession of such records and documents. The parties hereto will
notify each other in writing of any waivers or extensions of the applicable
statute of limitations that may affect the period for which the foregoing
records or other documents must be retained.
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ARTICLE V
REFUNDS, AUDITS AND ADJUSTMENTS
5.1 REFUNDS OF TAXES. Except as provided in Section 5.2 below, New U S
WEST shall be entitled to all Refunds relating to Taxes (plus any interest
thereon received with respect thereto from the applicable Tax Authority) for
which New U S WEST is or may be liable pursuant to Articles II and III of
this Agreement, and U S WEST shall be entitled to all Refunds relating to
Taxes (plus any interest thereon received with respect thereto from the
applicable Tax Authority) for which U S WEST is or may be liable pursuant to
the provisions of Articles II and III of this Agreement. A party receiving a
Refund to which another party is entitled pursuant to this Agreement shall
pay the amount to which such other party is entitled (plus any interest
thereon received with respect thereto from the applicable Tax Authority)
within ten (10) days after the receipt of the Refund.
5.2 CARRYBACKS. (a) The carryback of any loss, credit or other Tax
attribute in any Post-Separation Taxable Period shall be in accordance with
the provisions of the Code and Treasury Regulations (and any applicable
state, local or foreign laws or regulations).
(b) In the event that the New U S WEST Group realizes any loss, credit
or other Tax attribute in any Post-Separation Taxable Period, such group may
elect to carry back such loss, credit or Tax attribute to a Pre-Separation
Taxable Period. U S WEST shall cooperate with New U S WEST in seeking from
the appropriate Tax Authority any Refund that reasonably would result from
such carryback. New U S WEST shall be entitled to any Refund (or other Tax
benefit) realized by the MediaOne Group (including any interest thereon
received from such Tax Authority) attributable to such carryback, within ten
(10) business days after such Refund (or other Tax benefit) is received;
PROVIDED, HOWEVER, that U S WEST shall be entitled to any Refund (or other
Tax benefit) that results from the carryback of a loss, credit or other Tax
attribute by the MediaOne Group from a Post-Separation Taxable Period to a
Pre-Separation Taxable Period.
(c) Except as otherwise provided by applicable law, if the MediaOne
Group and the New U S WEST Group both may carry back a loss, credit or other
Tax attribute to the same Pre-Separation Taxable Period, any Refund (or other
Tax benefit) resulting therefrom shall be allocated between U S WEST and New
U S WEST proportionately based on the relative amounts of the Refunds (or
other Tax benefits) to which the MediaOne Group and the New U S WEST Group,
respectively, would have been entitled had its carrybacks been the only
carrybacks to such Taxable Year.
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(d) To the extent that the amount of a Refund to which a party is
entitled under this Section 5.2 is reduced by the applicable Tax Authority as
a result of the offset of such amount against a Tax Liability of the other
party, as allocated under this Agreement, the party which receives the
benefit of such offset shall appropriately compensate the other party within
ten (10) days of receipt of such benefit.
5.3 FEDERAL AUDITS AND ADJUSTMENTS.
(a) NOTIFICATION OF AUDIT. Each of U S WEST and New U S WEST shall
give written notice to the other party of any audit of the U S WEST
Consolidated Group Tax Return for any Pre-Separation Taxable Period or
Straddle Period within ten (10) business days after receipt of written
notification of such audit from the IRS. Such notice shall include a copy of
the notification received from the IRS.
(b) STATUTE OF LIMITATIONS. Any extension of the statute of
limitations for any Pre-Separation Taxable Period or Straddle Period shall be
with the mutual agreement of U S WEST and New U S WEST. Any dispute
regarding the extension of the statute of limitations shall be resolved in
accordance with Section 6.13 of this Agreement.
(c) AUDIT ACTIVITY. Each of U S WEST and New U S WEST will coordinate
its respective efforts with respect to audits of any Pre-Separation Taxable
Period and any Straddle Period and will furnish the other with all necessary
workpapers and records to respond to audit inquiries. New U S WEST will be
responsible as agent for the U S WEST Consolidated Group for day-to-day
contact with IRS agents assigned to such audits. U S WEST will be
responsible for responding to audit inquiries regarding issues primarily
affecting Tax Liabilities of the MediaOne Group, but will act through New U S
WEST, rather than directly contacting the IRS with respect to such matters.
(d) NOTIFICATION. New U S WEST will provide timely reports to U S WEST
detailing significant activities, information requests, issues raised or
resolved, and any other relevant information, such reports to be no less
frequent than quarterly.
(e) PROPOSED ADJUSTMENTS. New U S WEST shall notify U S WEST of any
Adjustment to the U S WEST Consolidated Group Tax Returns within ten (10)
business days after receipt of notification of such Adjustment from the IRS.
New U S WEST shall include in its notice to U S WEST a copy of the
notification received from the IRS.
(i) AGREED ISSUES. New U S WEST will not enter into any agreement
with the IRS as agent for the U S WEST Consolidated Group with respect to any
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Adjustment without the written consent of U S WEST, in those cases where the
MediaOne Group would be liable for more than 50% of the proposed Tax
Liability (as allocated under this Agreement) attributable to such
Adjustment. For purposes of this paragraph, all determinations shall be made
separately for each Adjustment.
(ii) UNAGREED ISSUES. In the event U S WEST and New U S WEST, as
the case may be, do not agree to all Adjustments for a Taxable Year,
decisions regarding the procedures and preferred forum for contesting
Adjustments on unagreed issues shall be made by whichever of the MediaOne
Group or the New U S WEST Group is responsible for more than 50% of the
cumulative Tax Liability attributable to such Adjustments. The party making
the decision shall consult in good faith with the other party and shall
promptly notify the other party of its decision.
(iii) CONSENT NOT REQUIRED. Notwithstanding any other provision
of this Agreement, if the IRS notifies U S WEST that the IRS will deal
directly with the MediaOne Group with respect to its Tax Liability, U S WEST
shall have full authority to act for the MediaOne Group and resolve any issue
affecting its Tax Liability without the consent of New U S WEST. U S WEST
will provide New U S WEST with a timely report summarizing any such audit
activity, such report to be no less frequent than quarterly.
(f) FEDERAL REFUND CLAIMS. If the New U S WEST Group desires to file a
claim for Refund with respect to a Taxable Year for which it was a member of
the U S WEST Consolidated Group, it shall prepare and submit to U S WEST the
claim for Refund and a statement specifying the date on which the statute of
limitations for filing the Refund claim will expire. U S WEST will file the
Refund claim prior to the date specified as the last day to claim the Refund
if such a filing is commercially reasonable, and will take any other
appropriate action at New U S WEST's request necessary to secure the Refund.
(g) LITIGATION. Subject to the balance of this Section 5.3(g), U S
WEST and New U S WEST jointly shall conduct all Proceedings relating to
Adjustments of the MediaOne Group and the U S WEST Group as allocated under
this Agreement. U S WEST shall have the ability to control the conduct of
such Proceedings with respect to issues relating to an Adjustment for which
the MediaOne Group would be liable for more than 50% of the proposed Tax
Liability (as allocated under this Agreement) attributable to such
Adjustment. New U S WEST shall have the ability to control the conduct of
such Proceedings with respect to issues relating to an Adjustment for which
the New U S WEST Group would be liable for more than 50% of the proposed Tax
Liability (as allocated under this Agreement) attributable to such
Adjustment. The party with the ability to control the conduct of all or a
portion of the Proceedings pursuant to this Section 5.3(g) shall consult in
good faith with the other party,
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which other party shall be entitled to participate in all conferences,
meetings, and other matters related to the resolution of such Proceedings.
5.4 AUDITS AND ADJUSTMENTS RELATED TO COMBINED RETURNS.
(a) NOTIFICATION OF AUDIT. Each of U S WEST and New U S WEST shall
give written notice to the other party of any audit of a Combined Return for
any Pre-Separation Taxable Period or Straddle Period within ten (10) business
days after receipt of written notification of such audit from a Tax
Authority. Such notice shall include a copy of the notification received
from the relevant Tax Authority.
(b) STATUTE OF LIMITATIONS. Any extension of the statute of
limitations for any Pre-Separation Taxable Period or Straddle Period shall be
with the mutual agreement of U S WEST and New U S WEST. Any dispute
regarding the extension of the statute of limitations shall be resolved in
accordance with Section 6.13 of this Agreement.
(c) AUDIT ACTIVITY. Each of U S WEST and New U S WEST will coordinate
its respective efforts with respect to audits of Combined Returns of any
Pre-Separation Taxable Period and any Straddle Period and will furnish the
other with all necessary workpapers and records to respond to audit
inquiries. New U S WEST will be responsible as agent for any Combined Return
for day-to-day contact with state Tax Authorities regarding such audits. U S
WEST will be responsible for responding to audit inquiries regarding issues
primarily affecting Tax Liabilities of the MediaOne Group, but will act
through New U S WEST, rather than directly contacting the appropriate Tax
Authorities with respect to such matters.
(d) NOTIFICATION. With respect to a Combined Return, New U S WEST will
provide timely reports to U S WEST detailing significant activities,
information requests, issues raised or resolved, and any other relevant
information, such reports to be no less frequent than quarterly.
(e) PROPOSED ADJUSTMENTS. New U S WEST shall notify U S WEST of any
Adjustment to a Combined Return within ten (10) business days after receipt
of notification of such Adjustment from the applicable state Tax Authority.
New U S WEST shall include in its notice to U S WEST a copy of the
notification received from such Tax Authority.
(i) AGREED ISSUES. New U S WEST will not enter into any agreement
with a state Tax Authority as agent for U S WEST with respect to any
Adjustment in connection with a Combined Return without the written consent
of U S WEST in such cases
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where the MediaOne Group would be liable for more than 50% of the proposed
Tax Liability (as allocated under this Agreement) at issue. For purposes of
this paragraph, all determinations shall be made separately for each
Adjustment.
(ii) UNAGREED ISSUES. In the event U S WEST and New U S WEST, as
the case may be, do not agree to all Adjustments with respect to a Combined
Return for a Taxable Year, decisions regarding the procedures and preferred
forum for contesting Adjustments on unagreed issues shall be made by
whichever of the MediaOne Group or the New U S WEST Group is responsible for
more than 50% of the cumulative Tax Liability attributable to such
Adjustments. The party making the decision shall consult in good faith with
the other party and shall promptly notify the other party of its decision.
(f) STATE REFUND CLAIMS. If the New U S WEST Group desires to file a
claim for Refund with respect to a Taxable Year for which it filed a Combined
Return, it shall prepare and submit to U S WEST the claim for Refund and a
statement specifying the date on which the statute of limitations for filing
the Refund claim will expire. U S WEST will file the Refund claim prior to
the date specified if such filing is commercially reasonable and will take
any other appropriate action at New U S WEST's request necessary to secure
the Refund.
(g) STATE TAX LITIGATION. Subject to the balance of this Section
5.4(g), U S WEST and New U S WEST jointly shall conduct all Proceedings
relating to Adjustments of the MediaOne Group and the New U S WEST Group
allocated under this Agreement in connection with a Combined Return. U S
WEST shall have the ability to control the conduct of such Proceedings with
respect to issues relating to an Adjustment for which the MediaOne Group
would be liable for more than 50% of the proposed Tax Liability (as allocated
under this Agreement) attributable to such Adjustment. New U S WEST shall
have the ability to control the conduct of such Proceedings with respect to
issues relating to an Adjustment for which the New U S WEST Group would be
liable for more than 50% of the proposed Tax Liability (as allocated under
this Agreement) attributable to such Adjustment. The party with the ability
to control the conduct of all or a portion of the Proceedings pursuant to
this Section 5.4(g) shall consult in good faith with the other party, which
other party shall be entitled to participate in all conferences, meetings,
and other matters related to the resolution of such Proceedings.
5.5 SEPARATE RETURN MATTERS. The New U S WEST Group and the MediaOne
Group will be responsible for and manage their respective Separate Return
Proceedings.
5.6 PAYMENT OF COSTS. All costs incurred, whether external or internal
(such as in-house tax and legal department salaries and other personnel),
with respect to a Proceeding
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shall be borne by the party with respect to which the costs relate. All
other costs relating to Tax Returns or Proceedings not otherwise provided for
in this Agreement shall be allocated 50% to the New U S WEST Group and 50% to
the MediaOne Group.
ARTICLE VI
MISCELLANEOUS
6.1 COVENANTS RELATING TO RULING REQUEST.
(a) U S WEST AND THE MEDIAONE GROUP. (i) U S WEST shall comply and
shall cause the MediaOne Group to comply with and otherwise not take any
action inconsistent with each representation and statement made to the IRS in
connection with the Ruling Request and (ii) until two (2) years after the
Separation Date, U S WEST will remain engaged in the active conduct of a
trade or business, as defined in Section 355(b) of the Code.
(b) NEW U S WEST AND THE NEW U S WEST GROUP. (i) New U S WEST shall
comply and shall cause the New U S WEST Group to comply with and otherwise
not take any action inconsistent with each representation and statement made
to the IRS in connection with the Ruling Request and (ii) until two (2) years
after the Separation Date, New U S WEST will remain engaged in the active
conduct of a trade or business, as defined in Section 355(b) of the Code.
6.2 TERMINATION OF PRIOR TAX SHARING AGREEMENTS. This Agreement shall
take effect on the Separation Date and shall replace all other agreements,
whether or not written, in respect of any Taxes between or among the MediaOne
Group on the one hand and the New U S WEST Group on the other. All such
replaced agreements shall be canceled as of the Separation Date to the extent
they relate to the New U S WEST Group, and any rights or obligations of the
MediaOne Group or the New U S WEST Group existing thereunder thereby shall be
fully and finally settled without any payment by any party thereto.
6.3 MERGER OR CONSOLIDATION. Neither New U S WEST nor U S WEST (in
either case, the "Transaction Party") shall (i) consolidate with or merge
into any Person or permit any Person to consolidate with or merge into the
Transaction Party (other than a merger or consolidation in which the
Transaction Party is the surviving or continuing corporation) or (ii) sell,
assign, transfer, lease or otherwise dispose of, in one transaction or a
series of related transactions, all or substantially all of the assets of the
Transaction Party, unless the resulting, surviving or transferee Person shall
expressly assume, by instrument in
17
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form and substance reasonably satisfactory to the other party, all of the
obligations of the Transaction Party under this Agreement.
6.4 SUBSIDIARIES. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party or by any entity that is contemplated to be a Subsidiary (as defined in
the Separation Agreement) of such party on or after the Separation Date.
6.5 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of Colorado, without reference to choice of law
principles, including matters of construction, validity and performance.
6.6 AMENDMENT. This Agreement may be amended, modified or supplemented
only by a written Agreement signed by all of the parties hereto.
6.7 NOTICES. Notices, requests, permissions, waivers, referrals and
all other communications hereunder shall be in writing and shall be deemed to
have been duly given if signed by the respective persons giving them (in the
case of any corporation, the signature shall be by an officer thereof) and
delivered by hand or by telecopy or on the date of receipt indicated on the
return receipt if mailed (registered or certified, return receipt requested,
properly addressed and postage prepaid):
If to U S WEST, to:
U S WEST, Inc.
(to be renamed "MEDIAONE
GROUP, INC.")
188 Inverness Drive West
Englewood, Colorado 80112
Attention: Director of Taxes
Telephone: 303-
Telecopy: 303-
18
<PAGE>
If to New U S WEST, to:
USW-C, Inc.
(to be renamed "U S WEST, INC.")
6300 South Syracuse Way
Suite 700 North
Englewood, Colorado 80111
Attention: Director of Taxes
Telephone: 303-850-3900
Telecopy: 303-850-3959
Such names and addresses may be changed by notice given in accordance with
this Section 6.7.
6.8 ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter
contained herein, and supersedes and cancels all prior agreements,
negotiations, correspondence, undertakings and communications of the parties,
oral or written, respecting such subject matter.
6.9 HEADINGS; REFERENCES. The article, section and paragraph headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. All
references herein to "Articles" or "Sections" shall be deemed to be
references to Articles or Sections hereof unless otherwise indicated.
6.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original, but all
of which shall constitute one and the same original.
6.11 PARTIES IN INTEREST; ASSIGNMENT; SUCCESSOR. Neither this
Agreement nor any of the rights, interest or obligations hereunder shall be
assigned by any of the parties hereto without the prior written consent of
the other parties. Subject to the preceding sentence, this Agreement shall
inure to the benefit of and be binding upon U S WEST and New U S WEST and
their respective successors and permitted assigns. Nothing in this
Agreement, express or implied, is intended to confer upon any other Person
any rights or remedies under or by reason of this Agreement.
6.12 CONFIDENTIALITY. Each of New U S WEST and U S WEST shall hold,
and each of the New U S WEST Group and the MediaOne Group shall use its
reasonable best
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efforts to hold, in strict confidence all information concerning the other
party obtained by it prior to the Separation Date or furnished to it by such
other party pursuant to this Agreement pursuant to and in accordance with the
terms of Section 10.5 of the Separation Agreement.
6.13 ARBITRATION. Resolution of any and all disputes arising from or
in connection with this Agreement, whether based on contract, tort, statute
or otherwise, including, but not limited to, disputes over arbitrability and
disputes in connection with claims by third parties shall be exclusively
governed by and settled in accordance with the provisions of Section 12.2 of
the Separation Agreement, provided, however, that nothing contained in
Section 12.2 of the Separation Agreement shall preclude either party from
seeking or obtaining injunctive relief or equitable or other judicial relief
to enforce such Section 12.2, or, pending resolution of Disputes (as defined
in the Separation Agreement) under such Section, to preserve the status quo
or to enforce an arbitral award rendered pursuant to such Section.
6.14 SEVERABILITY; ENFORCEMENT. The invalidity of any portion hereof
shall not affect the validity, force or effect of the remaining portions
hereof. If it is ever held that any restriction hereunder is too broad to
permit enforcement of such restriction to its fullest extent, each party
agrees that a court of competent jurisdiction may enforce such restriction to
the maximum extent permitted by law, and each party hereby consents and
agrees that such scope may be judicially modified accordingly in any
proceeding brought to enforce such restriction.
6.16 EFFECTIVE DATE. This Agreement shall become effective only upon
the occurrence of the Separation.
IN WITNESS WHEREOF, each of the Parties has caused this Tax Sharing
Agreement to be executed on its behalf by its officers thereunto duly
authorized, all as of the day and year first written above.
U S WEST, Inc.
By:
-------------------------------------
Name:
Title:
USW-C, Inc.
20
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By:
-------------------------------------
Name:
Title:
21
<PAGE>
EXHIBIT 3-B
BYLAWS
OF
U S WEST, INC.
AS ADOPTED ON NOVEMBER 1, 1995
AND AMENDED ON MARCH 13, 1998
<PAGE>
BYLAWS
OF
U S WEST, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of U S WEST,
Inc. (the "Corporation") in the State of Delaware shall be at 1209 Orange
Street, in the City of Wilmington, County of New Castle, 19801 and its
registered agent at such address shall be The Corporation Trust Company, or
such other office or agent as the Board of Directors of the Corporation (the
"Board") shall from time to time select.
SECTION 2. OTHER OFFICES. The Corporation may also have an office
or offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board may from time to time determine
or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the stockholders of
the Corporation shall be held at the office of the Corporation or at such
other places, within or without the State of Delaware, as may from time to
time be fixed by the Board.
SECTION 2. ANNUAL MEETINGS. The annual meeting of stockholders
for the election of directors and for the transaction of such other business
as may properly come before the meeting shall be held on the first Friday of
June in each year, or on such other date that the Board or its authorized
designee shall determine, at an hour to be named in the notice of the
meeting, unless such day should fall on a legal holiday in the state where
such meeting is to be held, in which event the meeting shall be held on the
next succeeding business day that is not a legal holiday. Any previously
scheduled annual meeting of the stockholders may be postponed by action of
the Board or its authorized designee taken prior to the time previously
scheduled for such annual meeting of stockholders.
SECTION 3. SPECIAL MEETINGS. Except as otherwise required by law
or the Certificate of Incorporation of the Corporation (the "Certificate"),
special meetings of the
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stockholders for any purpose or purposes may be called by the Chairman of the
Board or a majority of the entire Board. Only such business as is specified
in the notice of any special meeting of the stockholders shall come before
such meeting.
SECTION 4. NOTICE OF MEETINGS. Except as otherwise provided by
law, written notice of each meeting of the stockholders, whether annual or
special, shall be given, either by personal delivery or by mail, not less
than 10 nor more than 60 days before the date of the meeting to each
stockholder of record entitled to notice of the meeting. If mailed, such
notice shall be deemed given when deposited in the United States mail,
postage prepaid, directed to the stockholder at such stockholder's address as
it appears on the records of the Corporation. Each such notice shall state
the place, date and hour of the meeting, and the purpose or purposes for
which the meeting is called. Notice of any meeting of stockholders shall not
be required to be given to any stockholder who shall attend such meeting in
person or by proxy without protesting, prior to or at the commencement of the
meeting, the lack of proper notice to such stockholder, or who shall sign a
written waiver of notice thereof, whether before or after such meeting.
Notice of adjournment of a meeting of stockholders need not be given if the
time and place to which it is adjourned are announced at such meeting, unless
the adjournment is for more than 30 days or, after adjournment, a new record
date is fixed for the adjourned meeting.
SECTION 5. QUORUM. Except as otherwise provided by law or by the
Certificate, the holders of a majority of the votes entitled to be cast by
the stockholders entitled to vote generally, present in person or by proxy,
shall constitute a quorum for the transaction of business at any meeting of
the stockholders; PROVIDED, HOWEVER, that in the case of any vote to be taken
by classes, the holders of a majority of the votes entitled to be cast by the
stockholders of a particular class shall constitute a quorum for the
transaction of business by such class.
SECTION 6. ADJOURNMENTS. The chairman of the meeting or the
holders of a majority of the votes entitled to be cast by the stockholders
who are present in person or by proxy may adjourn the meeting from time to
time whether or not a quorum is present. In the event that a quorum does not
exist with respect to any vote to be taken by a particular class, the
chairman of the meeting or the holders of a majority of the votes entitled to
be cast by the stockholders of such class who are present in person or by
proxy may adjourn the meeting with respect to the vote(s) to be taken by such
class. At such adjourned meeting at which a quorum may be present, any
business may be transacted which might have been transacted at the meeting as
originally called.
SECTION 7. ORDER OF BUSINESS. (a) At each meeting of the
stockholders, the Chairman of the Board or, in the absence of the Chairman of
the Board, such person as shall be selected by the Board shall act as
chairman of the meeting. The order of business at each such meeting shall be
as determined by the chairman of the meeting. The chairman of the meeting
shall have the right and authority to prescribe such rules, regulations and
procedures and to do all such acts and things as are necessary or desirable
for the proper conduct of the meeting, including, without limitation, the
establishment of procedures for the maintenance of order and safety,
limitations on the time allotted to questions or comments on the affairs of
the Corporation,
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<PAGE>
restrictions on entry to such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls.
(b) At any annual meeting of stockholders, only such business
shall be conducted as shall have been brought before the annual meeting (i)
by or at the direction of the chairman of the meeting, (ii) pursuant to the
notice provided for in this Section 4 of this Article II or (iii) by any
stockholder who is a holder of record at the time of the giving of such
notice provided for in this Section 7, who is entitled to vote at the meeting
and who complies with the procedures set forth in this Section 7.
(c) For business properly to be brought before an annual meeting
by a stockholder, the stockholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation (the "Secretary").
To be timely, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation not less than
90 days prior to the date of an annual meeting of stockholders. (Amended
8-2-96) To be in proper written form, a stockholder's notice to the
Secretary shall set forth in writing as to each matter the stockholder
proposes to bring before the annual meeting: (i) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting; (ii) the name and address of
the stockholder proposing such business and all persons or entities acting in
concert with the stockholder; (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder and all persons
or entities acting in concert with such stockholder; and (iv) any material
interest of the stockholder in such business. The foregoing notice
requirements shall be deemed satisfied by a stockholder if the stockholder
has notified the Corporation of his or her intention to present a proposal at
an annual meeting and such stockholder's proposal has been included in a
proxy statement that has been prepared by management of the Corporation to
solicit proxies for such annual meeting; PROVIDED, HOWEVER, that if such
stockholder does not appear or send a qualified representative to present
such proposal at such annual meeting, the Corporation need not present such
proposal for a vote at such meeting, notwithstanding that proxies in respect
of such vote may have been received by the Corporation. Notwithstanding
anything in the bylaws to the contrary, no business shall be conducted at any
annual meeting except in accordance with the procedures set forth in this
Section 7. The chairman of an annual meeting shall, if the facts warrant,
determine that business was not properly brought before the annual meeting in
accordance with the provisions of this Section 7 and, if the chairman should
so determine, the chairman shall so declare to the annual meeting and any
such business not properly brought before the annual meeting shall not be
transacted.
SECTION 8. LIST OF STOCKHOLDERS. It shall be the duty of the
Secretary or other officer who has charge of the stock ledger to prepare and
make, at least 10 days before each meeting of the stockholders, a complete
list of the stockholders entitled to vote thereat, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in such stockholder's name. Such list shall be produced and kept
available at the times and places required by law.
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<PAGE>
SECTION 9. VOTING. (a) Except as otherwise provided by law or by
the Certificate, each stockholder of record of any class or series of capital
stock of the Corporation shall be entitled at each meeting of stockholders to
such number of votes for each share of such stock as may be fixed in the
Certificate or in the resolution or resolutions adopted by the Board
providing for the issuance of such stock, registered in such stockholder's
name on the books of the Corporation:
(1) on the date fixed pursuant to Section 6 of Article VII of these
bylaws as the record date for the determination of stockholders entitled
to notice of and to vote at such meeting; or
(2) if no such record date shall have been so fixed, then at the
close of business on the day next preceding the day on which notice of
such meeting is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held.
(b) Each stockholder entitled to vote at any meeting of
stockholders may authorize not in excess of three persons to act for such
stockholder by proxy. Any such proxy shall be delivered to the secretary of
such meeting at or prior to the time designated for holding such meeting. No
such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period.
(c) At each meeting of the stockholders, all corporate actions to
be taken by vote of the stockholders (except as otherwise required by law and
except as otherwise provided in the Certificate or these bylaws) shall be
authorized by a majority of the votes cast by the stockholders entitled to
vote thereon who are present in person or represented by proxy, and where a
separate vote by class is required, a majority of the votes cast by the
stockholders of such class who are present in person or represented by proxy
shall be the act of such class.
(d) Unless required by law or determined by the chairman of the
meeting to be advisable, the vote on any matter, including the election of
directors, need not be by written ballot. In the case of a vote by written
ballot, each ballot shall be signed by the stockholder voting, or by such
stockholder's proxy.
SECTION 10. INSPECTORS. The chairman of the meeting shall appoint
one or more inspectors to act at any meeting of stockholders. Such
inspectors shall perform such duties as shall be specified by the chairman of
the meeting. Inspectors need not be stockholders. No director or nominee for
the office of director shall be appointed such inspector.
5
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board, which
may exercise all such powers of the Corporation and do all such lawful acts
and things as are not by law or by the Certificate directed or required to be
exercised or done by the stockholders.
SECTION 2. NUMBER, QUALIFICATION AND ELECTION. (a) Except as
otherwise fixed by or pursuant to the provisions of Article V of the
Certificate relating to the rights of the holders of any class or series of
stock having preference over the common stock of the corporation as to
dividends or upon liquidation, the number of directors of the Corporation
shall be determined from time to time by the Board by the affirmative vote of
directors constituting at least a majority of the entire Board; provided that
the number thereof may not be less than six nor more than seventeen.
(b) The directors, other than those who may be elected by the
holders of shares of any class or series of stock having a preference over
the common stock of the Corporation as to dividends or upon liquidation
pursuant to the terms of Article V of the Certificate or any resolution or
resolutions providing for the issuance of such stock adopted by the Board,
shall be classified, with respect to the time for which they severally hold
office, into three classes as nearly equal in number as possible, with each
class to hold office until its successors are elected and qualified. Subject
to the rights of the holders of any class or series of stock having a
preference over the common stock of the Corporation as to dividends or upon
liquidation, at each such annual meeting of the stockholders, the successors
of the class of directors whose term expires at that meeting shall be elected
to hold office for a term expiring at the annual meeting of stockholders held
in the third year following the year of their election.
(c) Each director shall be at least 21 years of age. Directors
need not be stockholders of the Corporation.
(d) In any election of directors held at a meeting of
stockholders, the persons receiving a plurality of the votes cast by the
stockholders entitled to vote thereon at such meeting who are present or
represented by proxy, up to the number of directors to be elected in such
election, shall be deemed elected.
SECTION 3. NOTIFICATION OF NOMINATION. Subject to the rights of
the holders of any class or series of stock having a preference over the
common stock as to dividends or upon liquidation, nominations for the
election of directors may be made by the Board or by any stockholder who is a
stockholder of record at the time of giving of the notice of nomination
provided for in this Section 3 of this Article III and who is entitled to
vote for the election of directors. Any stockholder of record entitled to
vote for the election of directors at a meeting may nominate persons for
election as directors only if timely written notice of such stockholder's
intent to make such nomination is given, either by personal delivery or by
United States mail, postage
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<PAGE>
prepaid, to the Secretary. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation (i) with respect to an election to be held at an annual meeting
of stockholders, not less than 60 days prior to the date of such annual
meeting and (ii) with respect to an election to be held at a special meeting
of stockholders for the election of directors, not less than 15 days
following the public announcement of the date of such special meeting. Each
such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination, of all persons or entities acting in concert
with the stockholder, and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice; (c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or entities acting in
concert with the stockholder (naming such person or entities) pursuant to
which the nomination or nominations are to be made by the stockholder; (d)
such other information regarding each nominee proposed by the stockholder as
would have been required to be included in a proxy statement filed pursuant
to the proxy rules of the Securities and Exchange Commission had each nominee
been nominated, or intended to be nominated, by the Board; (e) the class and
number of shares of the Corporation that are beneficially owned by the
stockholder and all persons or entities acting in concert with the
stockholder; and (f) the consent of each nominee to being named in a proxy
statement as nominee and to serve as a director of the Corporation if so
elected. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made after compliance with the foregoing
procedure. Only such persons who are nominated in accordance with the
procedures set forth in this Section 3 of this Article III shall be eligible
to serve as directors of the Corporation.
SECTION 4. QUORUM AND MANNER OF ACTING. Except as otherwise
provided by law, the Certificate or these bylaws, a majority of the entire
Board shall constitute a quorum for the transaction of business at any
meeting of the Board, and, except as so provided, the vote of a majority of
the directors present at any meeting at which a quorum is present shall be
the act of the Board. The chairman of the meeting or a majority of the
directors present may adjourn the meeting to another time and place whether
or not a quorum is present. At any adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at
the meeting as originally called.
SECTION 5. PLACE OF MEETING. The Board may hold its meetings at
such place or places within or without the State of Delaware as the Board may
from time to time determine or as shall be specified or fixed in the
respective notice or waivers of notice thereof.
SECTION 6. REGULAR MEETINGS. Regular meetings of the Board shall
be held at such times and places as the Chairman of the Board or the Board
shall from time to time by resolution determine. If any day fixed for a
regular meeting shall be a legal holiday under the laws of the place where
the meeting is to be held, the meeting which would otherwise be held on that
day shall be held at the same hour on the next succeeding business day.
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SECTION 7. SPECIAL MEETINGS. Special meetings of the Board shall
be held whenever called by the Chairman of the Board or by a majority of the
directors.
SECTION 8. NOTICE OF MEETINGS. Notice of regular meetings of the
Board or of any adjourned meeting thereof need not be given. Notice of each
special meeting of the Board shall be given by overnight delivery service or
mailed to each director, in either case addressed to such director at such
director's residence or usual place of business, at least two days before the
day on which the meeting is to be held or shall be sent to such director at
such place by telegraph or telecopy or be given personally or by telephone,
not later than the day before the meeting is to be held, but notice need not
be given to any director who shall, either before or after the meeting,
submit a signed waiver of such notice or who shall attend such meeting
without protesting, prior to or at its commencement, the lack of notice to
such director. Every such notice shall state the time and place but need not
state the purpose of the meeting.
SECTION 9. RULES AND REGULATIONS. The Board may adopt such rules
and regulations not inconsistent with the provisions of law, the Certificate
or these bylaws for the conduct of its meetings and management of the affairs
of the Corporation as the Board may deem proper.
SECTION 10. PARTICIPATION IN MEETING BY MEANS OF COMMUNICATION
EQUIPMENT. Any one or more members of the Board or any committee thereof may
participate in any meeting of the Board or of any such committee by means of
conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other, and such
participation in a meeting shall constitute presence in person at such
meeting.
SECTION 11. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any meeting of the Board or any committee thereof
may be taken without a meeting if all of the members of the Board or of any
such committee consent thereto in writing and the writing or writings are
filed with the minutes or proceedings of the Board or of such committee.
SECTION 12. RESIGNATIONS. Any director of the Corporation may at
any time resign by giving written notice to the Board, the Chairman of the
Board, the President or the Secretary. Such resignation shall take effect at
the time specified therein or, if the time be not specified therein, upon
receipt thereof; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 13. REMOVAL OF DIRECTORS. Directors may be removed only as
provided in Section 5 of Article VI of the Certificate.
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SECTION 14. VACANCIES. Subject to the rights of the holders of
any class or series of stock having a preference over the common stock of the
Corporation as to dividends or upon liquidation, any vacancies on the Board
resulting from death, resignation, removal or other cause shall only be
filled by the Board by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board, or by
a sole remaining director, and newly created directorships resulting from any
increase in the number of directors shall be filled by the Board, or if not
so filled, by the stockholders at the next annual meeting thereof or at a
special meeting called for that purpose in accordance with Section 3 of
Article II of these bylaws. Any director elected in accordance with the
preceding sentence of this Section 14 of this Article III shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
SECTION 15. COMPENSATION. Each director, in consideration of such
person serving as a director, shall be entitled to receive from the
Corporation such amount per annum and such fees for attendance at meetings of
the Board or of committees of the Board, or both, as the Board shall from
time to time determine. In addition, each director shall be entitled to
receive from the Corporation reimbursement for the reasonable expenses
incurred by such person in connection with the performance of such person's
duties as a director. Nothing contained in this Section 15 of this Article
III shall preclude any director from serving the Corporation or any of its
subsidiaries in any other capacity and receiving proper compensation therefor.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. ESTABLISHMENT OF COMMITTEES OF THE BOARD OF DIRECTORS;
ELECTION OF MEMBERS OF COMMITTEES OF THE BOARD OF DIRECTORS; FUNCTIONS OF
COMMITTEES OF THE BOARD OF DIRECTORS. The Board may, in accordance with and
subject to the General Corporation Law of the State of Delaware, from time to
time establish committees of the Board to exercise such powers and
authorities of the Board, and to perform such other functions, as the Board
may from time to time determine.
SECTION 2. PROCEDURE; MEETINGS; QUORUM. Regular meetings of
committees of the Board, of which no notice shall be necessary, may be held
at such times and places as shall be fixed by resolution adopted by a
majority of the members thereof. Special meetings of any committee of the
Board shall be called at the request of a majority of the members thereof.
Notice of each special meeting of any committee of the Board shall be given
by overnight delivery service or mailed to each member, in either case
addressed to such member at such member's residence or normal place of
business, at least two days before the day on which the meeting is to be held
or shall be sent to such members at such place by telegraph or telecopy or be
given personally or by telephone, not later than the day before the meeting
is to be held, but notice need not be given to any member who shall, either
before or after the meeting, submit a signed waiver of such notice or
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who shall attend such meeting without protesting, prior to it or at its
commencement, the lack of such notice to such member. Any special meeting of
any committee of the Board shall be a legal meeting without any notice
thereof having been given, if all the members thereof shall be present
thereat. Notice of any adjourned meeting of any committee of the Board need
not be given. Any committee of the Board may adopt such rules and
regulations not inconsistent with the provisions of law, the Certificate or
these bylaws for the conduct of its meetings as such committee of the Board
may deem proper. A majority of the members of any committee of the Board
shall constitute a quorum for the transaction of business at any meeting, and
the vote of a majority of the members thereof present at any meeting at which
a quorum is present shall be the act of such committee. Each committee of
the Board shall keep written minutes of its proceedings and shall report on
such proceedings to the Board.
ARTICLE V
OFFICERS
SECTION 1. NUMBER; TERM OF OFFICE. The officers of the
Corporation shall be such officers, which may include a Chairman of the
Board, Chief Executive Officer, President, Chief Financial Officer, General
Counsel and one or more Vice Presidents (including, without limitation,
Assistant, Executive and Senior Vice Presidents) and a Treasurer, Secretary
and Controller and such other officers or agents with such titles and such
duties as the Board may from time to time determine, each to have such
authority, functions or duties as provided in these bylaws or as the Board
may from time to time determine, and each to hold office for such term as may
be prescribed by the Board and until such person's successor shall have been
chosen and shall qualify, or until such person's death or resignation, or
until such person's removal in the manner hereinafter provided. One person
may hold the offices and perform the duties of any two or more of said
officers; PROVIDED, HOWEVER, that no officer shall execute, acknowledge or
verify any instrument in more than one capacity if such instrument is
required by law, the Certificate or these bylaws to be executed, acknowledged
or verified by two or more officers. The Board may from time to time
authorize any officer to appoint and remove any such other officers and
agents and to prescribe their powers and duties. The Board may require any
officer or agent to give security for the faithful performance of such
person's duties.
SECTION 2. REMOVAL. Any officer may be removed, either with or
without cause, by the Board at any meeting thereof or, except in the case of
any officer elected by the Board, by any superior officer upon whom such
power may be conferred by the Board.
SECTION 3. RESIGNATION. Any officer may resign at any time by
giving notice to the Board, the Chairman of the Board or the Secretary. Any
such resignation shall take effect at the date of receipt of such notice or
at any later date specified therein; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it
effective.
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SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired
portion of the term in the manner prescribed in these bylaws for election to
such office.
SECTION 5. CHAIRMAN OF THE BOARD; POWERS AND DUTIES. The Chairman
of the Board shall be the chief executive officer of the Corporation.
Subject to the control of the Board, the Chairman of the Board shall
supervise and direct generally all the business and affairs of the
Corporation. The Chairman of the Board shall preside at all meetings of the
stockholders and the Board. Any document may be signed by the Chairman of the
Board or any other person who may be thereunto authorized by the Board or the
Chairman of the Board. The Chairman of the Board may appoint such assistant
officers as are deemed necessary.
SECTION 6. PRESIDENT, EXECUTIVE VICE PRESIDENTS, SENIOR VICE
PRESIDENTS AND VICE PRESIDENTS; POWERS AND DUTIES. The President shall be
the chief operating officer of the Corporation. The President and each
Executive Vice President, each Senior Vice President, and each Vice President
shall have such powers and perform such duties as may be assigned by the
Board of Directors or the Chairman of the Board. In case of the absence or
disability of the Chairman of the Board or a vacancy in the office, the
President, an Executive Vice President, a Senior Vice President, or a Vice
President designated by the Chairman of the Board or the Board shall exercise
all the powers and perform all the duties of the Chairman of the Board.
SECTION 7. SECRETARY AND ASSISTANT SECRETARIES; POWERS AND DUTIES.
The Secretary shall attend all meetings of the stockholders and the Board and
shall keep the minutes for such meetings in one or more books provided for
that purpose. The Secretary shall be custodian of the corporate records,
except those required to be in the custody of the Treasurer or the
Controller, shall keep the seal of the Corporation, and shall execute and
affix the seal of the Corporation to all documents duly authorized for
execution under seal on behalf of the Corporation, and shall perform all of
the duties incident to the office of Secretary, as well as such other duties
as may be assigned by the Chairman of the Board or the Board.
The Assistant Secretaries shall perform such of the Secretary's
duties as the Secretary shall from time to time direct. In case of the
absence or disability of the Secretary or a vacancy in the office, an
Assistant Secretary designated by the Chairman of the Board or by the
Secretary, if the office is not vacant, shall perform the duties of the
Secretary.
SECTION 8. CHIEF FINANCIAL OFFICER; POWERS AND DUTIES. The Chief
Financial Officer shall be responsible for maintaining the financial
integrity of the Corporation, shall prepare the financial plans for the
Corporation, and shall monitor the financial performance of the Corporation
and its subsidiaries, as well as performing such other duties as may be
assigned by the Chairman of the Board or the Board.
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SECTION 9. TREASURER AND ASSISTANT TREASURERS; POWERS AND DUTIES.
The Treasurer shall have care and custody of the funds and securities of the
Corporation, shall deposit such funds in the name and to the credit of the
Corporation with such depositories as the Treasurer shall approve, shall
disburse the funds of the Corporation for proper expenses and dividends, and
as may be ordered by the Board, taking proper vouchers for such
disbursements. The Treasurer shall perform all of the duties incident to the
office of Treasurer, as well as such other duties as may be assigned by the
Chairman of the Board or the Board.
The Assistant Treasurers shall perform such of the Treasurer's
duties as the Treasurer shall from time to time direct. In case of the
absence or disability of the Treasurer or a vacancy in the office, an
Assistant Treasurer designated by the Chairman of the Board or by the
Treasurer, if the office is not vacant, shall perform the duties of the
Treasurer.
SECTION 10. GENERAL COUNSEL; POWERS AND DUTIES. The General
Counsel shall be a licensed attorney at law and shall be the chief legal
officer of the Corporation. The General Counsel shall have such power and
exercise such authority and provide such counsel to the Corporation as deemed
necessary or desirable to enforce the rights and protect the property and
integrity of the Corporation, shall also have the power, authority, and
responsibility for securing for the Corporation all legal advice, service,
and counseling, and shall perform all of the duties incident to the office of
General Counsel, as well as such other duties as may be assigned by the
Chairman of the Board or the Board.
SECTION 11. CONTROLLER AND ASSISTANT CONTROLLERS; POWERS AND
DUTIES. The Controller shall be the chief accounting officer of the
Corporation and shall keep and maintain in good and lawful order all accounts
required by law and shall have sole control over, and ultimate responsibility
for, the accounts and accounting methods of the Corporation and the
compliance of the Corporation with all systems of accounts and accounting
regulations prescribed by law. The Controller shall audit, to such extent
and at such times as may be required by law or as the Controller may think
necessary, all accounts and records of corporate funds or property, by
whomsoever kept, and for such purposes shall have access to all such accounts
and records. The Controller shall make and sign all necessary and proper
accounting statements and financial reports of the Corporation, and shall
perform all of the duties incident to the office of Controller, as well as
such other duties as may be assigned by the Chairman of the Board or the
Board.
The Assistant Controllers shall perform such of the Controller's
duties as the Controller shall from time to time direct. In case of the
absence or disability of the Controller or a vacancy in the office, an
Assistant Controller designated by the Chairman of the Board or the
Controller, if the office is not vacant, shall perform the duties of the
Controller.
SECTION 12. SALARIES. The salaries of all officers of the
Corporation shall be fixed by or in the manner provided by the Board. If
authorized by a resolution of the Board, the salary of any officer other than
the Chairman of the Board may be fixed by the Chairman of the Board or a
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Committee of the Board. No officer shall be disqualified from receiving a
salary by reason of also being a director of the Corporation.
ARTICLE VI
INDEMNIFICATION
SECTION 1. SCOPE OF INDEMNIFICATION. (a) The Corporation shall
indemnify an indemnified representative against any liability incurred in
connection with any proceeding in which the indemnified representative may be
involved as a party or otherwise, by reason of the fact that such person is
or was serving in an indemnified capacity, except to the extent that any such
indemnification against a particular liability is expressly prohibited by
applicable law or where a judgment or other final adjudication adverse to the
indemnified representative establishes, or where the Corporation determines,
that his or her acts or omissions (i) were in breach of such person's duty of
loyalty to the Corporation or its stockholders, (ii) were not in good faith
or involved intentional misconduct or a knowing violation of law, or (iii)
resulted in receipt by such person of an improper personal benefit. The
rights granted by this Article shall not be deemed exclusive of any other
rights to which those seeking indemnification, contribution, or advancement
of expenses may be entitled under any statute, certificate of incorporation,
agreement, contract of insurance, vote of stockholders or disinterested
directors, or otherwise. The rights of indemnification and advancement of
expenses provided by or granted pursuant to this Article shall continue as to
a person who has ceased to be an indemnified representative in respect of
matters arising prior to such time and shall inure to the benefit of the
heirs, executors, administrators and personal representatives of such a
person.
(b) If an indemnified representative is not entitled to
indemnification with respect to a portion of any liabilities to which such
person may be subject, the Corporation shall nonetheless indemnify such
indemnified representative to the maximum extent for the remaining portion of
the liabilities.
(c) The termination of a proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the indemnified
representative is not entitled to indemnification.
(d) To the extent permitted by law, the payment of indemnification
provided for by this Article, including the advancement of expenses pursuant
to Section 2 of this Article VI, with respect to proceedings other than those
brought by or in the right of the Corporation, shall be subject to the
conditions that the indemnified representative shall give the Corporation
prompt notice of any proceeding, that the Corporation shall have complete
charge of the defense of such proceeding and the right to select counsel for
the indemnified representative, and that the indemnified representative shall
assist and cooperate fully in all matters respecting the proceeding and its
defense or settlement. The Corporation may waive any or all of the
conditions set forth in the preceding sentence. Any such waiver shall be
applicable only to the specific payment for which the waiver is made and
shall not in any way obligate the Corporation to grant such waiver at any
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future time. In the event of a conflict of interest between the indemnified
representative and the Corporation that would disqualify the Corporation's
counsel from representing the indemnified representative under the rules of
professional conduct applicable to attorneys, it shall be the policy of the
Corporation to waive any or all of the foregoing conditions subject to such
limitations or conditions as the Corporation shall deem to be reasonable in
the circumstances.
(e) For purposes of this Article:
(1) "indemnified capacity" means any and all past, present, or
future services by an indemnified representative in one or more capacities as
a director, officer, employee, or agent of the Corporation or, at the request
of the Corporation, as a director, officer, employee, agent, fiduciary, or
trustee of another corporation, partnership, joint venture, trust, employee
benefit plan, or other entity or enterprise; any indemnified representative
serving an affiliate of the Corporation in any capacity shall be deemed to be
doing so at the request of the Corporation;
(2) an "affiliate of the Corporation" means an entity that
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, the Corporation;
(3) "indemnified representative" means any and all directors,
officers, and employees of the Corporation and any other person designated as
an indemnified representative by the Board;
(4) "liability" means any damage, judgment, amount paid in
settlement, fine, penalty, punitive damage, excise tax assessed with respect
to an employee benefit plan, or cost or expense of any nature (including,
without limitation, expert witness fees, costs of investigation, litigation
and appeal costs, attorneys' fees, and disbursements); and
(5) "proceeding" means any threatened, pending, or completed
action, suit, appeal, or other proceeding of any nature, whether civil,
criminal, administrative, or investigative, whether formal or informal,
whether external or internal to the Corporation, and whether brought by or in
the right of the Corporation, a class of its security holders or otherwise.
SECTION 2. ADVANCING EXPENSES. All reasonable expenses incurred
in good faith by an indemnified representative in advance of the final
disposition of a proceeding described in Section 1 of this Article VI shall
be advanced to the indemnified representative by the Corporation. Before
making any such advance payment of expenses, the Corporation shall receive an
undertaking by or on behalf of the indemnified representative to repay such
amount if it shall ultimately be determined that such indemnified
representative is not entitled to be indemnified by the Corporation pursuant
to this Article VI. No advance shall be made by the Corporation if a
determination is reasonably and promptly made by a majority vote of
disinterested directors, even if the disinterested directors constitute less
than a quorum, or (if such a quorum is not obtainable or, even if obtainable,
a quorum of disinterested directors so directs) by independent legal counsel
in a written opinion, that, based upon the facts known to the Board or
counsel at the time such
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determination is made, the indemnified representative has acted in such a
manner as to permit or require the denial of indemnification pursuant to the
provisions of Section 1 of this Article VI.
ARTICLE VII
CAPITAL STOCK
SECTION 1. SHARE OWNERSHIP. (a) Holders of shares of stock of
each class of the Corporation shall be recorded on the books of the
Corporation and ownership of such stock shall be evidenced by a certificate
or other form as shall be approved by the Board. Certificates representing
shares of stock of each class shall be signed by, or in the name of, the
Corporation by the Chairman of the Board or the President, any Vice President
and by the Secretary or any Assistant Secretary or the Treasurer or any
Assistant Treasurer of the Corporation, and sealed with the seal of the
Corporation, which may be a facsimile thereof. Any or all such signatures
may be facsimiles if countersigned by a transfer agent or registrar.
Although any officer, transfer agent or registrar whose manual or facsimile
signature is affixed to such a certificate ceases to be such officer,
transfer agent or registrar before such certificate has been issued, it may
nevertheless be issued by the Corporation with the same effect as if such
officer, transfer agent or registrar were still such at the date of its issue.
(b) The stock ledger and blank share certificates shall be kept by
the Secretary or by a transfer agent or by a registrar or by any other
officer or agent designated by the Board.
SECTION 2. TRANSFER OF SHARES. Transfers of shares of stock of
each class of the Corporation shall be made only on the books of the
Corporation by the holder thereof, or by such holder's attorney thereunto
authorized by a power of attorney duly executed and filed with the Secretary
or a transfer agent for such stock, if any, and on surrender of the
certificate or certificates, if any, for such shares properly endorsed or
accompanied by a duly executed stock transfer power (or by proper evidence of
succession, assignment or authority to transfer) and the payment of any taxes
thereon; PROVIDED, HOWEVER, that the Corporation shall be entitled to
recognize and enforce any lawful restriction on transfer. The person in
whose name shares are registered on the books of the Corporation shall be
deemed the owner thereof for all purposes as regards the Corporation;
PROVIDED, HOWEVER, that whenever any transfer of shares shall be made for
collateral security and not absolutely, and written notice thereof shall be
given to the Secretary or to such transfer agent, such fact shall be stated
in the entry of the transfer. No transfer of shares shall be valid as against
the Corporation, its stockholders and creditors for any purpose, except to
render the transferee liable for the debts of the Corporation to the extent
provided by law, until it shall have been entered in the stock records of the
Corporation by an entry showing from and to whom transferred.
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SECTION 3. REGISTERED STOCKHOLDERS AND ADDRESSES OF STOCKHOLDERS.
(a) The Corporation shall be entitled to recognize the exclusive right of a
person registered on its records as the owner of shares of stock to receive
dividends and to vote as such owner, shall be entitled to hold liable for
calls and assessments a person registered on its records as the owner of
shares of stock, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares of stock on the part of any
other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of Delaware.
(b) Each stockholder shall designate to the Secretary or transfer
agent of the Corporation an address at which notices of meetings and all
other corporate notices may be delivered or mailed to such person, and, if
any stockholder shall fail to designate such address, corporate notices may
be delivered to such person by mail directed to such person at such person's
post office address, if any, as the same appears on the stock record books of
the Corporation or at such person's last known post office address.
SECTION 4. LOST, DESTROYED AND MUTILATED CERTIFICATES. The
Corporation may issue to any holder of shares of stock the certificate for
which has been lost, stolen, destroyed or mutilated a new certificate or
certificates for shares, upon the surrender of the mutilated certificate or,
in the case of loss, theft or destruction of the certificate, upon
satisfactory proof of such loss, theft or destruction. The Board, or a
committee designated thereby, or the transfer agents and registrars for the
stock, may, in their discretion, require the owner of the lost, stolen or
destroyed certificate, or such person's legal representative, to give the
Corporation a bond in such sum and with such surety or sureties as they may
direct to indemnify the Corporation and said transfer agents and registrars
against any claim that may be made on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
SECTION 5. REGULATIONS. The Board may make such additional rules
and regulations as it may deem expedient concerning the issue and transfer of
certificates representing shares of stock of each class of the Corporation
and may make such rules and take such action as it may deem expedient
concerning the issue of certificates in lieu of certificates claimed to have
been lost, destroyed, stolen or mutilated.
SECTION 6. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
or any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any other action. A determination of stockholders entitled to notice
of or to vote at a meeting of the stockholders shall apply to any adjournment
of the meeting; PROVIDED, HOWEVER, that the Board may fix a new record date for
the adjourned meeting.
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SECTION 7. TRANSFER AGENTS AND REGISTRARS. The Board may appoint,
or authorize any officer or officers to appoint, one or more transfer agents
and one or more registrars.
ARTICLE VIII
SEAL
The Board shall provide a corporate seal, which shall be in the
form of a circle and shall bear the full name of the Corporation and the
words and figures of "Corporate Seal Delaware", or such other words or
figures as the Board may approve and adopt. The seal may be used by causing
it or a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of
December in each year.
ARTICLE X
AMENDMENTS
Any bylaw may be adopted, repealed, altered or amended by
two-thirds of the entire Board at any meeting thereof. The stockholders of
the Corporation shall have the power to amend, alter or repeal any provision
of these bylaws only to the extent and in the manner provided in the
Certificate.
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================================================================================
AGREEMENT AND PLAN OF MERGER
among
U S WEST, INC.,
U S WEST MEDIA GROUP, INC.,
U S WEST NEWVECTOR GROUP, INC.,
U S WEST PCS HOLDINGS, INC.
and
AIRTOUCH COMMUNICATIONS, INC.
Dated as of January 29, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . 1
1.1 General. . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Terms Defined Elsewhere in the Agreement . . . . . . . . 17
1.3 Other Definitional Provisions. . . . . . . . . . . . . . 19
ARTICLE II THE MERGER . . . . . . . . . . . . . . . . . . . . . . . 19
2.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . 19
2.3 Effective Time . . . . . . . . . . . . . . . . . . . . . 19
2.4 Effects of the Merger. . . . . . . . . . . . . . . . . . 19
2.5 Certificate of Incorporation and Bylaws. . . . . . . . . 20
2.6 Directors. . . . . . . . . . . . . . . . . . . . . . . . 20
2.7 Officers . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE III EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; CERTIFICATES . . . . . . . . . 20
3.1 Effect on Capital Stock. . . . . . . . . . . . . . . . . 20
3.2 Determination of Common Consideration. . . . . . . . . . 21
3.3 Post-Closing Adjustments to Merger Consideration . . . . 24
3.4 Surrender and Exchange . . . . . . . . . . . . . . . . . 26
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF U S WEST . . . . . . . 27
4.1 Organization and Qualification . . . . . . . . . . . . . 27
4.2 Capitalization; Subsidiaries . . . . . . . . . . . . . . 27
4.3 Corporate Authority. . . . . . . . . . . . . . . . . . . 29
4.4 Consents and Approvals . . . . . . . . . . . . . . . . . 30
4.5 Non-Contravention. . . . . . . . . . . . . . . . . . . . 30
4.6 Financial Statements; Undisclosed Liabilities. . . . . . 31
4.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . 32
4.8 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 33
4.9 ERISA Compliance . . . . . . . . . . . . . . . . . . . . 35
4.10 Compliance with Laws . . . . . . . . . . . . . . . . . . 35
4.11 Employment and Non-Competition Agreements. . . . . . . . 35
4.12 Domestic Wireless Assets . . . . . . . . . . . . . . . . 36
4.13 Intellectual Property. . . . . . . . . . . . . . . . . . 36
4.14 Labor Matters. . . . . . . . . . . . . . . . . . . . . . 37
4.15 Environmental Compliance and Liabilities . . . . . . . . 37
4.16 Licenses . . . . . . . . . . . . . . . . . . . . . . . . 38
4.17 Material Contracts . . . . . . . . . . . . . . . . . . . 38
4.18 Insurance. . . . . . . . . . . . . . . . . . . . . . . . 39
4.19 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 39
4.20 Nature of Acquisition. . . . . . . . . . . . . . . . . . 39
4.21 Ownership of AirTouch Capital Stock. . . . . . . . . . . 40
ARTICLE V REPRESENTATIONS AND WARRANTIES OF AIRTOUCH . . . . . . . 40
5.1 Organization and Qualification . . . . . . . . . . . . . 40
5.2 Capitalization . . . . . . . . . . . . . . . . . . . . . 40
5.3 Corporate Power and Authorization. . . . . . . . . . . . 41
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5.4 Consents . . . . . . . . . . . . . . . . . . . . . . . . 42
5.5 Non-Contravention. . . . . . . . . . . . . . . . . . . . 42
5.6 AirTouch SEC Documents; Undisclosed Liabilities. . . . . 42
5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . 43
5.8 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.9 Compliance with Laws . . . . . . . . . . . . . . . . . . 44
5.10 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE VI COVENANTS RELATING TO CONDUCT OF BUSINESS. . . . . . . . 45
6.1 Conduct of Business of NV and PCS Holdings. . . . . . . 45
6.2 Conduct of Business of AirTouch. . . . . . . . . . . . . 46
6.3 Access to Information. . . . . . . . . . . . . . . . . . 50
ARTICLE VII ADDITIONAL AGREEMENTS. . . . . . . . . . . . . . . . . . 51
7.1 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . 51
7.2 Reasonable Best Efforts. . . . . . . . . . . . . . . . . 51
7.3 Antitrust Notification; FCC and State Regulatory
Approvals. . . . . . . . . . . . . . . . . . . . . . . . 52
7.4 Supplemental Disclosure. . . . . . . . . . . . . . . . . 52
7.5 Announcements. . . . . . . . . . . . . . . . . . . . . . 52
7.6 NYSE Listing . . . . . . . . . . . . . . . . . . . . . . 53
7.7 Settlements for Cash Collections and Disbursements
After the Effective Time . . . . . . . . . . . . . . . . 53
7.8 Use of U S WEST Name . . . . . . . . . . . . . . . . . . 54
7.9 Intellectual Property. . . . . . . . . . . . . . . . . . 54
7.10 Insurance. . . . . . . . . . . . . . . . . . . . . . . . 56
7.11 Third Party Rights . . . . . . . . . . . . . . . . . . . 57
7.12 Intercompany Agreements. . . . . . . . . . . . . . . . . 57
7.13 Joint Agreements; Joint Assets . . . . . . . . . . . . . 58
7.14 Transaction Agreements . . . . . . . . . . . . . . . . . 60
7.15 Undertakings with respect to Scheduled Properties. . . . 60
7.16 Pre-Closing Capital Contributions to PCS Nucleus by
AirTouch . . . . . . . . . . . . . . . . . . . . . . . . 61
7.17 Assumption of Guarantee Obligations with respect to
Leveraged Leases . . . . . . . . . . . . . . . . . . . . 61
7.18 Repayment of Assumed NV Debt and Assumed PCS Debt. . . . 61
7.19 AirTouch Class D and Class E Preferred Stock . . . . . . 61
ARTICLE VIII EMPLOYEE MATTERS . . . . . . . . . . . . . . . . . . . . 61
8.1 Employees. . . . . . . . . . . . . . . . . . . . . . . . 61
8.2 Employee Benefit Plans and Arrangements. . . . . . . . . 62
8.3 Other Employee Matters . . . . . . . . . . . . . . . . . 62
8.4 Cooperation. . . . . . . . . . . . . . . . . . . . . . . 67
ARTICLE IX CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . 67
9.1 Conditions to Each Party's Obligations to Effect the
Merger . . . . . . . . . . . . . . . . . . . . . . . . . 67
9.2 Conditions to Obligation of AirTouch . . . . . . . . . . 68
9.3 Conditions to Obligations of U S WEST, Media, NV and
PCS Holdings . . . . . . . . . . . . . . . . . . . . . . 69
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ARTICLE X TERMINATION AND AMENDMENT. . . . . . . . . . . . . . . . 70
10.1 Termination. . . . . . . . . . . . . . . . . . . . . . . 70
10.2 Effect of Termination. . . . . . . . . . . . . . . . . . 70
10.3 Amendment. . . . . . . . . . . . . . . . . . . . . . . . 70
10.4 Extension; Waiver. . . . . . . . . . . . . . . . . . . . 70
ARTICLE XI INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . 71
11.1 Indemnification by U S WEST. . . . . . . . . . . . . . . 71
11.2 Indemnification by AirTouch. . . . . . . . . . . . . . . 73
11.3 Procedures Relating to Indemnification . . . . . . . . . 75
11.4 Miscellaneous Indemnification Provisions . . . . . . . . 77
11.5 Contribution . . . . . . . . . . . . . . . . . . . . . . 78
11.6 Tax Indemnification. . . . . . . . . . . . . . . . . . . 78
11.7 Payments Adjustments to Merger Consideration . . . . . . 79
ARTICLE XII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . 79
12.1 Survival of Representations. . . . . . . . . . . . . . . 79
12.2 Legends. . . . . . . . . . . . . . . . . . . . . . . . . 79
12.3 Removal of Legends . . . . . . . . . . . . . . . . . . . 80
12.4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . 80
12.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . 80
12.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 80
12.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . 81
12.8 Disclosure Schedules . . . . . . . . . . . . . . . . . . 82
12.9 Headings; References . . . . . . . . . . . . . . . . . . 82
12.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . 82
12.11 Parties in Interest; Assignment; Successors. . . . . . . 82
12.12 Severability . . . . . . . . . . . . . . . . . . . . . . 83
12.13 Enforcement. . . . . . . . . . . . . . . . . . . . . . . 84
12.14 Dispute Resolution . . . . . . . . . . . . . . . . . . . 84
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit A-1 - Certificate of Designation, Preferences and Rights of AirTouch
Class D Preferred Stock
Exhibit A-2 - Certificate of Designation, Preferences and Rights of AirTouch
Class E Preferred Stock
Exhibit B - New Investment Agreement
Exhibit C - Patent License Agreement
Exhibit D - Software License Agreement
Exhibit E - Tax Sharing Agreement
Exhibit F - Calculation of Value Adjustment
Exhibit G-1 - Form of AirTouch Representations Letter - NV Merger
Exhibit G-2 - Form of AirTouch Representations Letter - PCS Merger
Exhibit H-1 - Form of U S WEST Representations Letter - NV Merger
Exhibit H-2 - Form of U S WEST Representations Letter - PCS Merger
Exhibit I - Resources Agreement
Exhibit J - Exceptions to Restrictions on Non-Solicitation
Exhibit K-1 - Form of MediaCo Assignment and Assumption Agreement
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Exhibit K-2 - Form of CommunicationsCo Assignment and Assumption Agreement
Exhibit K-3 - Form of NV/PCS Transferee Assignment and Assumption Agreement
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of January 29, 1998, among
U S WEST, INC., a Delaware corporation ("U S WEST"), U S WEST MEDIA GROUP,
INC., a Delaware corporation and wholly owned direct subsidiary of U S WEST
("Media"), U S WEST NEWVECTOR GROUP, INC., a Colorado corporation and wholly
owned direct subsidiary of Media ("NV"), U S WEST PCS HOLDINGS, INC., a
Delaware corporation and wholly owned direct subsidiary of Media ("PCS
Holdings"), and AIRTOUCH COMMUNICATIONS, INC., a Delaware corporation
("AirTouch").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of U S WEST, Media, NV and AirTouch
each have determined that it is in the best interests of their respective
stockholders for NV to merge with and into AirTouch (the "NV Merger");
WHEREAS, the Boards of Directors of U S WEST, Media, PCS Holdings and
AirTouch each have determined that it is in the best interests of their
respective stockholders for PCS Holdings to merge with and into AirTouch (the
"PCS Holdings Merger," and collectively with the NV Merger, the "Merger");
WHEREAS, Media, as sole shareholder of NV and PCS Holdings, has approved
the Merger;
WHEREAS, for United States Federal income tax purposes, it is intended
that the NV Merger and the PCS Merger each shall qualify as a tax-free
reorganization under Section 368(a) of the Internal Revenue Code of 1986, as
amended, together with the rules and regulations promulgated thereunder (the
"Code"); and
WHEREAS, U S WEST, Media, NV, PCS Holdings and AirTouch desire to make
certain representations, warranties, covenants and agreements in connection
with the Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 GENERAL. For purposes of this Agreement, the following terms shall
have the meanings set forth below:
"ACTION" shall mean any action, claim, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental Authority or any
arbitration tribunal.
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"AFFECTED EMPLOYEES" shall mean the employees of NV and the Domestic
Wireless Subsidiaries and PCS Employees, including those employees among them
who are absent from employment due to illness, injury, military service or
other authorized absence and those employees who are disabled within the
meaning of the short-term disability plans currently applicable to NV and the
Domestic Wireless Subsidiaries; PROVIDED, HOWEVER, that "Affected Employees"
shall not include (i) employees who are disabled within the meaning of the
long-term disability plans currently applicable to the NV and the Domestic
Wireless Subsidiaries, (ii) former employees and (iii) retired employees.
"AFFILIATE" shall mean, with respect to any specified Person, any other
Person directly or indirectly controlling, controlled by or under common
control with such specified Person.
"AGREED VALUE" shall mean, for a class or series of capital stock, on
any applicable date, the average of the daily Volume-Weighted Average Trading
Prices per share of such class or series of capital stock for the ten
consecutive Trading Days beginning on the 40th Trading Day following the
issuance of such class or series of capital stock; PROVIDED, HOWEVER, that if
the Closing Date were to occur prior to the end of such ten consecutive
Trading Day period, such period shall commence on the 15th Trading Day
immediately preceding the Closing Date.
"AGREEMENT" shall mean this Agreement and Plan of Merger, together with
all exhibits and schedules hereto, as the same may be amended from time to
time in accordance with the terms hereof.
"AIRTOUCH" shall have the meaning set forth in the preamble to this
Agreement.
"AIRTOUCH CLASS D PREFERRED STOCK" shall mean the AirTouch Class D
Preferred Stock, par value $.01 per share, to be issued pursuant to the
Certificate of Designation, Preferences and Rights attached hereto as Exhibit
A-1.
"AIRTOUCH CLASS E PREFERRED STOCK" shall mean the AirTouch Class E
Preferred Stock, par value $.01 per share, to be issued pursuant to the
Certificate of Designation, Preferences and Rights attached hereto as Exhibit
A-2.
"AIRTOUCH DETERMINATION PRICE" shall mean the average of the
Volume-Weighted Average Trading Prices of AirTouch Common Stock for the 30
consecutive Trading Days (the "Averaging Period") ending on the fifth Trading
Day immediately prior to the Closing Date, rounded to the nearest one-hundred
thousandth (or if there shall not be a nearest one-hundred thousandth, to the
next higher one-hundred thousandth); PROVIDED THAT if the Board of Directors
of AirTouch declares a dividend (other than dividends for which adjustments
have been provided pursuant to Section 3.2) on the outstanding shares of
AirTouch Common Stock having a record date before the Effective Time and an
ex-dividend date (based on
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"regular way" trading on the NYSE of shares of AirTouch Common Stock) (the
"Ex-Date") that occurs during the Averaging Period, then for purposes of
computing the AirTouch Determination Price, the Volume-Weighted Average
Trading Price on any Trading Day before the Ex-Date will be adjusted by
subtracting therefrom the amount of such dividend.
"AIRTOUCH GROUP" shall mean, at and after the Effective Time, AirTouch,
the Domestic Wireless Subsidiaries and the Domestic Wireless Investments and
their respective Affiliates.
"AIRTOUCH MERGER DISCLOSURE SCHEDULE" shall mean the Disclosure
Schedule, dated as of the date hereof, delivered by AirTouch to U S WEST.
"AIRTOUCH RIGHTS AGREEMENT" shall mean the Rights Agreement between
AirTouch and Bank of New York, as Right's Agent, dated as of September 19,
1994, as amended.
"AIRTOUCH STOCK" shall mean the AirTouch Common Stock, the AirTouch
Class D Preferred Stock and the AirTouch Class E Preferred Stock.
"APPLICABLE LAWS" shall mean, with respect to any Person, all statutes,
laws, ordinances, rules, orders and regulations of any Governmental Authority
applicable to such Person and its business, properties and assets.
"ARBITRATION AGREEMENT" shall mean the Arbitration Agreement, dated as
of September 30, 1995, by and between AirTouch and U S WEST Colorado.
"ASSUMED NV DEBT" shall mean indebtedness (including accrued but unpaid
interest) of NV to a Subsidiary of U S WEST outstanding as of the Closing
Date; PROVIDED, HOWEVER, that the sum of the Assumed NV Debt and the Assumed
PCS Debt shall not be less than $1.3 billion nor more than $1.5 billion as of
the Closing Date.
"ASSUMED PCS DEBT" shall mean indebtedness (including accrued but unpaid
interest) of PCS Holdings to a Subsidiary of U S WEST outstanding as of the
Closing Date; PROVIDED, HOWEVER, that the sum of the Assumed NV Debt and the
Assumed PCS Debt shall not be less than $1.3 billion nor more than $1.5
billion as of the Closing Date.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday or other
day on which banks located in New York City or San Francisco are authorized
or required by law to close.
"CBCA" shall mean the Colorado Business Corporation Act.
"CELLULAR SERVICE" shall mean any commercial mobile radio service, and the
resale of such service, provided by a radio
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<PAGE>
communications system authorized under the rules for the domestic public
cellular radio telecommunications service designated as Subpart H of Part 22
of the FCC's rules in effect on July 25, 1994, or any revision thereto or
successor thereof, which may be in effect from time to time, including the
network, marketing, distribution, sales, customer interfaces, and operations
function relating thereto.
"CODE" shall have the meaning set forth in the recitals to this
Agreement.
"COMMON VALUE" shall mean the result of (i) the Transaction Value, MINUS
(ii) the Preferred Value, MINUS (iii) the amount of the Assumed NV Debt and
the Assumed PCS Debt.
"COMMUNICATIONSCO" shall mean an independent company to which the
businesses of the U S WEST Communications Group and the directory businesses
of the U S WEST Media Group may be transferred by U S WEST in connection with
the U S WEST Separation.
"COMMUNICATIONS WIRELESS BUSINESS" shall mean the businesses of USWCG
and its Subsidiaries engaged in the provision of any wireless services.
"CONFIDENTIAL INFORMATION" shall mean all confidential information,
including all knowhow, discoveries, inventions (excluding subject matter
covered by patents or patent applications), improvements, processes,
formulae, specifications, trade secrets (whether patentable or not but
excluding subject matter covered by patents or patent applications), business
plans, marketing data, software, tools and documentation (other than the
software, tools and documentation identified in item 1 of Section 1.1 of the
U S WEST Merger Disclosure Schedule) and all drawings, records, books or
indicia, however evidenced, of the foregoing.
"CONSENT" shall mean any approval, consent or waiver required to be
obtained from any Third Party for the consummation of a specified
transaction, including (without limitation) any option, right of first
refusal, right of first offer or other similar right of a Third Party
triggered by a specified transaction.
"CONTRACT" shall mean any contract, agreement, lease, license, sales
order, purchase order, instrument or other commitment that is binding on any
Person or any part of its property under Applicable Law.
"CURRENT MARKET PRICE", for a class or series of capital stock, on any
applicable date, shall mean the average of the daily Volume-Weighted Average
Trading Prices per share of such class or series of capital stock for the ten
consecutive Trading
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<PAGE>
Days ending on the third Trading Day immediately preceding such date.
"DGCL" shall mean the Delaware General Corporation Law.
"DISPOSED ASSET" shall mean each Scheduled Property as to which, as of
or at any time following the Closing Date, either of the following conditions
shall apply:
(a) AirTouch or any Subsidiary thereof shall have sold, assigned,
exchanged, transferred or otherwise disposed of such Scheduled Property in
connection with any court order with respect to, or any Settlement (in
whole or in part) of, any Scheduled Property Claim (for purposes of this
definition, the dissolution, liquidation and winding up of any partnership
underlying a Scheduled Property (including, without limitation, occurring
as a result of a withdrawal by AirTouch or any Subsidiary thereof as a
partner of such partnership) shall be considered a disposition of such
Scheduled Property); or
(b) In the case of any Scheduled Property of which, as of the date
hereof, NV or any Subsidiary thereof is a general partner or which is
otherwise managed by NV or any Subsidiary thereof, AirTouch shall not
obtain or shall lose the right to manage such Scheduled Property prior to
or on the first anniversary of the Closing Date (or if, as of such first
anniversary, a Scheduled Property Claim shall be pending which relates to
AirTouch's right to manage such Scheduled Property, the date that such
Scheduled Property Claim is finally resolved) pursuant to any court order
with respect to, or any Settlement (in whole or in part) of, any Scheduled
Property Claim; PROVIDED that such Scheduled Property shall cease to be a
Disposed Asset if AirTouch shall regain the right to manage such Scheduled
Property prior to or on the second anniversary of the Closing Date (or if,
as of such second anniversary, a Scheduled Property Claim shall be pending
which relates to AirTouch's right to manage such Scheduled Property, the
date that such Scheduled Property Claim is finally resolved).
"DISPOSED ASSET VALUE" shall mean:
(a) In the case of any Disposed Asset by operation of clause (a) of
the definition thereof, the result of:
(i) the excess, if any, of (x) the Allocated Value (as set
forth in item 2 of Section 1.1 of the U S WEST Merger Disclosure
Schedule) of such Disposed Asset (accreted at a rate of 12% per
annum from the Closing Date), over (y) the after-Tax net proceeds
received by AirTouch or any Subsidiary thereof from the sale,
assignment,
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<PAGE>
exchange, transfer or other disposition of such Disposed Asset; PLUS
(ii) the aggregate amount of expenditures made by AirTouch
or any Subsidiary thereof with respect to such Disposed Asset
following the Closing Date (accreted at a rate of 12% per annum
from the time such expenditures are made); MINUS
(iii) the aggregate amount of distributions received by
AirTouch or any Subsidiary thereof with respect to such Disposed
Asset following the Closing Date (accreted at a rate of 12% per
annum from the time such distributions are received); and
(b) In the case of any Disposed Asset solely by operation of clause
(b) of the definition thereof, 20% of the Allocated Value of such Disposed
Asset (accreted at the rate of 12% per annum from the Closing Date).
"DISPUTE" shall mean all disputes, controversies or claims arising from
or in connection with this Agreement or any other Transaction Agreement,
whether based on contract, tort, statute or otherwise, including but not
limited to, interpretation or enforcement of such agreements, or any breach,
termination or claim of invalidity of such agreements.
"DOJ" shall mean the United States Department of Justice.
"DOMESTIC WIRELESS BUSINESS" shall mean, collectively, the businesses of
NV, the Domestic Wireless Subsidiaries, the Domestic Wireless Investments and
PCS Holdings.
"DOMESTIC WIRELESS INTELLECTUAL PROPERTY" shall mean the items set forth
in item 3 of Section 1.1 of the U S WEST Merger Disclosure Schedule.
"DOMESTIC WIRELESS INVESTMENTS" shall mean the Investments held by NV or
its Subsidiaries other than, as of the Closing Date, Investments that are
Excluded Assets.
"DOMESTIC WIRELESS SUBSIDIARIES" shall mean the Subsidiaries of NV other
than, as of the Closing Date, Subsidiaries that are Excluded Assets.
"EMPLOYEE ARRANGEMENTS" shall mean all employment and consulting
agreements, and all bonus and other incentive compensation, deferred
compensation, disability, severance, change in control, stock award, stock
option, stock purchase, collective bargaining agreements, plans, programs,
policies and arrangements with respect to the employment or termination of
employment of any employee, officer, director or other individual
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<PAGE>
who is or was employed at any time by U S WEST or any of its Subsidiaries.
"EMPLOYEE BENEFIT PLAN" shall mean all "employee benefit plans," as
defined in Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended, which U S WEST or any of its Subsidiaries maintains or to
which U S WEST or any of its Subsidiaries has an obligation to make
contributions.
"ENCUMBRANCES" shall mean any and all mortgages, security interests,
liens, claims, pledges, restrictions, charges or other encumbrances.
"ENVIRONMENTAL LAWS" shall mean all Applicable Laws relating to
pollution or protection of human health or the environment (including,
without limitation, ambient air, surface water, ground water, wetlands, land
surface, subsurface strata, and indoor and outdoor workplace), including,
without limitation, (a) laws and regulations relating to emissions,
discharges, releases or threatened releases of any Substance of Concern or
otherwise relating to the importation, manufacture, processing, formulation,
testing, distribution, use, treatment, storage, disposal, transport or
handing of any Substance of Concern, and (b) common law principles of tort
liability related to the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA AFFILIATE" shall mean each member of a controlled group of
corporations within the meaning of section 414(b) of the Code and each member
of a group of trades or businesses under common control within the meaning of
section 414(c) of the Code.
"ESMR SERVICE" shall mean any commercial mobile radio service, and the
resale of such service, provided by radio communications system authorized
under the rules for Enhanced Specialized Mobile Radio services designated
under Subpart S of Part 90 of the FCC's rules in effect on July 25, 1994, or
any revision thereto or successor thereof, which may be in effect from time
to time, including the network, marketing, distribution, sales, customer
interfaces, and operations function relating thereto.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"EXCHANGE AGREEMENT" shall mean the Amended and Restated Agreement of
Exchange, dated as of September 30, 1995, by and between U S WEST Colorado
and AirTouch.
"EXCLUDED ASSET" shall mean each Scheduled Property as to which any of
the following shall apply as of the Closing Date:
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(a) NV or any Subsidiary thereof shall have sold, assigned, exchanged,
transferred or otherwise disposed of such Scheduled Property either (i)
pursuant to a right of first refusal made in accordance with Section
7.15(a), (ii) in fulfillment of U S WEST's obligations under Section
7.15(b) or (iii) pursuant to other written agreement of the parties hereto;
or
(b) NV or any Subsidiary thereof shall have withdrawn (voluntarily or
pursuant to a court order) as a partner of the partnership underlying such
Scheduled Property and such partnership shall have been dissolved.
"EXCLUDED ASSETS VALUE" shall equal the sum (for all Excluded Assets) of
the Allocated Value (as set forth in item 2 of Section 1.1 of the U S WEST
Merger Disclosure Schedule) of each such Excluded Asset.
"EXCLUDED CLAIM" shall mean any claim or demand made by any Person or
any Action (in each case, which is made, instituted or commenced before the
Effective Time) to the extent such claim, demand or Action (a) arises out of,
relates to or results from, directly or indirectly, (i) any actual or alleged
violation of, or seeks to enforce compliance with, any law, rule or
regulation of any Governmental Authority in respect of antitrust, consumer
disclosure or unfair competition or (ii) any actual or alleged wrongful
termination, or other actual or alleged breach or violation, of any
distribution or agent relationship (excluding any claim or demand made by any
Person or any Action which arises out of, relates to or results from solely a
claim of breach of contract) and (b) arises out of, relates to or results
from, directly or indirectly, the conduct of the Domestic Wireless Business
or any part thereof before or at the Effective Time; PROVIDED, HOWEVER, that
any claim or demand made by any Person or any Action shall not be an
"Excluded Claim" to the extent such claim, demand or Action arises out of,
relates to or results from, directly or indirectly, the conduct of WMC in
respect of any of the businesses of AirTouch or its Subsidiaries or any part
thereof before or at the Effective Time. For purposes of this definition,
the term "Subsidiary" shall not include WMC.
"EXCLUDED EMPLOYEES" shall mean all employees, former employees and
retired employees of U S WEST and its Subsidiaries and Affiliates other than
the Affected Employees.
"EXCLUDED SETTLEMENTS" shall mean all Settlements made or entered into
prior to the Effective Time to the extent such Settlements arise out of,
relate to or result from, directly or indirectly, the conduct of the Domestic
Wireless Business or any part thereof (to the extent not satisfied in full by
U S WEST, NV, a Domestic Wireless Subsidiary or a Domestic Wireless
Investment prior to the Effective Time).
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<PAGE>
"EXTRAORDINARY CASH DISTRIBUTIONS" shall mean with respect to any
consecutive 12-month period, all cash dividends and cash distributions on the
outstanding shares of AirTouch Common Stock during such period (other than
cash dividends or cash distributions for which a prior adjustment to the
Merger Consideration was previously made) to the extent such cash dividends
and cash distributions exceed, on a per share of AirTouch Common Stock basis,
5% of the average Volume-Weighted Average Trading Price of the AirTouch
Common Stock over such period.
"FAIR VALUE" shall mean (i) with respect to shares of capital stock
which is traded on an exchange or in the over-the-counter market, the average
of the Volume-Weighted Average Trading Prices per share of such class or
series of capital stock for the 30 consecutive Trading Days ending on the
fifth Trading Day immediately prior to the Closing Date, (ii) with respect to
cash, the amount of cash distributed and (iii) with respect to evidences of
indebtedness or assets or capital stock which is not traded on an exchange or
in the over-the-counter market, the value of such evidences of indebtedness
or assets or such capital stock as determined by an investment banking firm
jointly selected by AirTouch and U S WEST.
"FCC" shall mean the United States Federal Communications Commission.
"FTC" shall mean the United States Federal Trade Commission.
"GAAP" shall mean generally accepted accounting principles in effect in
the United States of America.
"GOVERNMENTAL AUTHORITY" shall mean any foreign, federal, state or local
government, court, agency or commission or other governmental or regulatory
body or authority.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations issued pursuant thereto.
"INDEMNIFIABLE LOSSES" shall mean, with respect to any claim by an
Indemnified Party for indemnification under this Agreement, any and all
damages, losses, deficiencies, Liabilities, obligations, penalties,
judgments, settlements, claims, payments, fines, interest, costs and expenses
(including, without limitation, the costs and expenses of any and all
Actions, demands, assessments, judgments, settlements and compromises
relating thereto and the costs and expenses of attorneys', accountants',
consultants' and other professionals' fees and expenses incurred in the
investigation or defense thereof or the enforcement of rights thereunder).
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<PAGE>
"INDEMNIFIED PARTY" shall mean any Person that is seeking
indemnification from an Indemnifying Party pursuant to the provisions of this
Agreement.
"INDEMNIFYING PARTY" shall mean any party hereto from which any
Indemnified Party is seeking indemnification pursuant to the provisions of
this Agreement.
"INFORMATION" shall mean all records, books, Contracts, instruments,
computer data and other data and information.
"INSURANCE ARRANGEMENT" shall mean insurance policies and insurance
Contracts of any kind, including, without limitation, primary and excess
policies, commercial general liability policies, automobile policies, product
liability policies, directors' and officers' liability policies, fiduciary
liability policies, workmens' compensation policies, and self-insurance
programs and captive insurance company arrangements, together with the
rights, benefits and privileges thereunder.
"INTELLECTUAL PROPERTY" shall mean all Trademarks, Trade Names,
copyrights or copyright registrations, and patents or patents pending,
including any Contracts, licenses or other legal arrangements granting rights
or privileges to use any Trademark, Trade Name, copyright or patent.
"INTER-EXCHANGE CARRIER AGREEMENT" shall mean an agreement between NV or
any Domestic Wireless Subsidiary and any inter-exchange carrier relating to
the conduct of the operations of the Domestic Wireless Business.
"INVESTMENT AGREEMENT" shall mean the Amended and Restated Investment
Agreement dated as of September 30, 1995, by and between U S WEST Colorado
and AirTouch.
"INVESTMENT" shall mean, with respect to any Person, any equity interest
held by such Person or its Subsidiaries in another Person (other than a
Subsidiary); PROVIDED, HOWEVER, that Time Warner Entertainment Company, L.P.
shall not be deemed to be an Investment of U S WEST or of any of its
Subsidiaries.
"IRS" shall mean the United States Internal Revenue Service.
"JOINT VENTURE ORGANIZATION AGREEMENT" shall mean the Amended and
Restated Joint Venture Organization Agreement dated as of September 30, 1995
by and between U S WEST Colorado and AirTouch, as amended.
"LEGAL PROCEEDINGS" shall mean any judicial, administrative or arbitral
actions, suits, investigations, proceedings (public or private) or
governmental proceedings.
"LEVERAGED LEASES" shall mean all of the Japanese leveraged leases
entered into by PrimeCo as of the Closing Date.
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"LIABILITY" shall mean, with respect to any Person, except as expressly
provided herein, any direct or indirect liability (whether absolute, accrued
or unaccrued, contingent, liquidated or unliquidated, matured or unmatured,
reflected on a balance sheet (or in the notes thereto) or otherwise, and
whether known or unknown, fixed or contingent), indebtedness, obligation,
expense, claim, deficiency, guarantee or endorsement of or by such Person
(including, without limitation, those arising under any Applicable Law or
Action or under any award of any court, tribunal or arbitrator of any kind,
and those arising under any Contract).
"LICENSE" shall mean any permit, license, waiver or authorization from
any Governmental Authority having jurisdiction over a Person required or
advisable for the conduct of an activity, including, without limitation, any
license or authorization or certificate of public convenience and necessity
from the FCC.
"MATERIAL ADVERSE EFFECT" shall mean, with respect to any Person or
business, any change or effect that is materially adverse to the business,
assets, financial condition or results of operations of such Person and its
Subsidiaries taken as a whole or to such business taken as a whole; PROVIDED
that a failure to include the business of any Excluded Asset in the Domestic
Wireless Business shall not be deemed to constitute a Material Adverse Effect
with respect to the Domestic Wireless Business.
"MATERIAL CONTRACT" shall mean any Contract made in conjunction with or
related to the operations of the Domestic Wireless Business (including,
without limitation, Contracts with customers or suppliers, Resale Agreements,
Roaming Agreements, Inter-Exchange Carrier Agreements, and similar
agreements) that (a) is reasonably anticipated by the party making a
representation with respect thereto to involve, in any given year, an
aggregate payment by any party thereto in excess of $5,000,000; (b) in the
case of any Resale Agreement, Roaming Agreement, Inter-Exchange Carrier
Agreement or network or subscriber equipment purchase Contract, is reasonably
anticipated by the party making a representation with respect thereto to
involve aggregate payments by all parties thereto in excess of $15,000,000 in
any five-year period; (c) has a term of five years or more and involves, in
any given year, an aggregate payment by any party thereto in excess of
$1,000,000; or (d) that any party thereto would be required to file as an
exhibit to its Annual Report on Form 10-K if such Person were a registrant
under Section 12 of the Exchange Act.
"MEDIA" shall have the meaning set forth in the preamble to this
Agreement.
"MEDIACO" shall mean an independent company to which the cable and
international businesses of the U S WEST Media Group
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may be transferred by U S WEST in connection with the U S WEST Separation.
"MERGER" shall have the meaning set forth in the recitals to the
Agreement.
"NEW INVESTMENT AGREEMENT" shall mean the Amended and Restated
Investment Agreement attached hereto as Exhibit B.
"NV" shall have the meaning set forth in the preamble to this Agreement.
"NV/PCS TRANSFEREE" shall mean (i) if the U S WEST Separation is
consummated prior to the Effective Time, the Subsidiary of U S WEST (or
MediaCo, as applicable) to which the NV Stock and the PCS Holdings Stock will
be transferred in connection with the U S WEST Separation and (ii) if the
U S WEST Separation is consummated following the Effective Time, the Subsidiary
of U S WEST (or MediaCo, as applicable) to which the AirTouch Stock received
by Media in connection with the Merger will be transferred in connection with
the U S WEST Separation; PROVIDED that, in either such case, the NV/PCS
Transferee shall remain an Affiliate of the domestic cable businesses of the
U S WEST Media Group following the consummation of the U S WEST Separation.
"NYSE" shall mean the New York Stock Exchange, Inc.
"ORDER" shall mean action by the FCC or a state regulatory authority, as
applicable, granting the FCC's or such state regulatory authority's Consent
to the transactions contemplated hereby without any conditions which either U
S WEST or AirTouch reasonably deems to be materially adverse to it and as to
which no stay by the FCC or such state regulatory authority, as applicable,
or other Governmental Authority, is in effect.
"PATENT LICENSE AGREEMENT" shall mean the Patent License Agreement
between U S WEST and AirTouch in the form attached hereto as Exhibit C, as
the same may be amended from time to time.
"PCS EMPLOYEES" shall mean the employees identified in item 4 of Section
1.1 of the U S WEST Merger Disclosure Schedule who are employed in the
Domestic Wireless Business at the Effective Time.
"PCS HOLDINGS" shall have the meaning set forth in the preamble to this
Agreement.
"PCS NUCLEUS" shall mean PCS Nucleus, L.P., a Delaware limited
partnership.
"PCS NUCLEUS AGREEMENT" shall mean the Amended and Restated Agreement of
Limited Partnership of PCS Nucleus, dated as of
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September 30, 1995, between AirTouch PCS Holdings, Inc. and PCS Holdings.
"PCS PARTNERSHIP INTERESTS" shall mean a 10.1% general partner's
interest and a 39.9% limited partner's interest in PCS Nucleus.
"PCS SERVICE" shall mean any broadband radio communications service
authorized under the rules for personal communications services designated as
Subpart E of Part 24 of the FCC's rules in effect on July 25, 1994, or any
revision thereto or successor thereof which may be in effect from time to
time, including the network, marketing, distribution, sales, customer
interface and operations functions relating thereto.
"PERMITTED ENCUMBRANCE" shall mean (a) a statutory Encumbrance not yet
due and payable or (b) any other Encumbrance that, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse Effect
with respect to the Domestic Wireless Business.
"PERSON" or "PERSON" shall mean and includes any individual,
partnership, limited liability company, joint venture, corporation,
association, joint stock company, trust, unincorporated organization or
similar entity.
"PREFERRED SHARE NUMBER" shall mean the quotient of (a) the Preferred
Value, DIVIDED BY (b) $1,000 (rounded to the nearest whole even number).
"PREFERRED VALUE" shall mean (a) $1,600,000,000, PLUS (b) the excess, if
any, of (i) $1,400,000,000, over (ii) the sum of the amounts of the Assumed
NV Debt and the Assumed PCS Debt.
"PRIMECO" shall mean PrimeCo Personal Communications, L.P., a Delaware
limited partnership.
"PRIMECO AGREEMENT" shall mean the Agreement of Limited Partnership of
PrimeCo, dated as of October 20, 1994, as amended.
"RELATED PARTY AGREEMENT" shall mean any Contract between or among NV or
any Domestic Wireless Subsidiary, on the one hand, and U S WEST, Media or any
of their respective Affiliates (other than NV or any Domestic Wireless
Subsidiary), on the other hand; PROVIDED, HOWEVER, that (i) all Employee
Arrangements and Employee Benefit Plans and (ii) all administrative services
agreements (including accounting, legal, insurance and tax services and other
similar agreements) shall not be deemed to be Related Party Agreements.
"RESALE AGREEMENT" shall mean any agreement entered into by NV or a
Domestic Wireless Subsidiary with any Third Party with respect to the resale of
any Cellular Service.
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"ROAMING AGREEMENT" shall mean any agreement entered into by NV or a
Domestic Wireless Subsidiary with any Third Party relating to a roaming
arrangement with respect to customers of any Cellular Service, PCS Service,
ESMR Service or satellite service.
"SCHEDULED PROPERTIES" shall mean the Domestic Wireless Subsidiaries and
Domestic Wireless Investments listed in item 5 of Section 1.1 of the U S WEST
Merger Disclosure Schedule.
"SCHEDULED PROPERTY CLAIM" means any claim or demand made by any Person
or any Action (in either case, whether or not pending at the Effective Time
and whether or not the basis for which is known to AirTouch at the Effective
Time) that the execution, delivery or performance by AirTouch, U S WEST, NV
or any Domestic Wireless Subsidiary or any Domestic Wireless Investment
managed by NV or any Domestic Wireless Subsidiary of (A) the Joint Venture
Organization Agreement and the related agreements referred to therein or the
consummation of the transactions contemplated thereby or (B) any Transaction
Agreement to which it is or will be a party or the consummation of the
transactions contemplated thereby, has resulted or results in a violation or
breach of, or has constituted or constitutes a default, withdrawal or
impermissible transfer under, or has given or gives rise to any right of
purchase, conversion of interest, dissolution, termination, first refusal,
notice or consent under or has given or gives rise to any right of amendment,
cancellation or acceleration of material benefit under, any partnership
agreement or other formative agreement or management or similar agreement
relating to a Scheduled Property.
"SEC" shall mean the United States Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"SETTLEMENTS" shall mean any and all agreements or commitments to
settle, compromise or otherwise resolve in whole or in part any claim or
demand of any Person or any Action.
"SOFTWARE LICENSE AGREEMENT" shall mean the Software License Agreement
between U S WEST and AirTouch in the form attached hereto as Exhibit D, as
the same may be amended from time to time.
"SUBSTANCE OF CONCERN" shall mean any chemical, pollutant, contaminant,
waste, toxic substance, industrial substance, noxious substance, hazardous
substance, radioactive material, asbestos, genetically modified organism,
petroleum or petroleum product.
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"SPECIFIED ACTION" shall mean any action, claim, suit, arbitration or
proceeding which has been brought before or filed by any Governmental
Authority or arbitration tribunal which (a) arises out of, relates to or
results from, directly or indirectly, (i) any actual or alleged violation of,
or seeks to enforce compliance with, any law, rule or regulation of any
Governmental Authority in respect of antitrust, consumer disclosure or unfair
competition or (ii) any actual or alleged wrongful termination, or other
actual or alleged breach or violation, of any distribution or agent
relationship (excluding any Action which arises out of, relates to or results
from solely a claim of breach of contract) and (b) arises out of, relates to
or results from, directly or indirectly, the conduct of the Domestic Wireless
Business or any part thereof before or at the Effective Time, but
specifically excluding any such action, claim, suit, arbitration or
proceeding to the extent that it (x) constitutes an Excluded Claim or (y)
arises out of, relates to or results from, directly or indirectly, the
conduct of WMC in respect of the business of AirTouch or its Subsidiaries or
any part thereof before or at the Effective Time. For purposes of this
definition, the term "Subsidiary" shall not include WMC.
"SUBSIDIARY" shall mean, with respect to any Person, (a) each
corporation, partnership, joint venture or other legal entity of which such
Person owns, either directly or indirectly, 50% or more of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or similar governing body of such
corporation, partnership, joint venture or other legal entity and (b) each
partnership in which such Person or another Subsidiary of such Person is the
general partner or otherwise controls such partnership; PROVIDED, HOWEVER,
that PCS Nucleus shall not be deemed to be a Subsidiary of AirTouch or
U S WEST.
"TAX" or "TAXES" shall mean all taxes, charges, fees, imposts, levies or
other assessments, including, without limitation, all net income, gross
receipts, capital, sales, use, gains ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp,
occupation, property and estimated taxes, customs duties, fees, assessments
and charges of any kind whatsoever, whether computed on a separate,
consolidated, unitary, combined or any other basis, together with any
interest (including interest that would have accrued absent a netting of
Taxes) and any penalties, fines, additions to tax or additional amounts
imposed by any taxing authority (domestic or foreign) and shall include any
transferee liability in respect of Taxes.
"TAX SHARING AGREEMENT" shall mean the Tax Sharing Agreement between U S
WEST, Media, NV, PCS Holdings and AirTouch in the form attached hereto as
Exhibit E, as the same may be amended from time to time.
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"THIRD PARTY" shall mean, with respect to U S WEST, Media or AirTouch, a
party or parties which is or are not an Affiliate of either U S WEST, Media
or AirTouch, respectively.
"TOMCOM AGREEMENT" shall mean the Agreement of Limited Partnership of
Tomcom, L.P., a Delaware limited partnership, dated as of October 20, 1994,
as amended.
"TRADEMARK" shall mean any federal or state service mark, trademark,
trade name, trademark registration or application, and all common law rights
therein.
"TRADE NAME" shall mean any trade name, corporate name, business name,
commercial name, and any registration or application therefor or any other
name used to identify a business.
"TRADING DAY" shall mean a day on which the NYSE is open for the
transaction of business.
"TRANSACTION AGREEMENTS" shall mean this Agreement, the Tax Sharing
Agreement, the Software License Agreement, the Patent License Agreement, the
Resources Agreement and the New Investment Agreement, and all agreements,
instruments, schedules, exhibits and annexes attached hereto or thereto or
delivered pursuant hereto or thereto.
"TRANSACTION VALUE" shall equal (a) $5,685,000,000, PLUS (b) the amount,
if any, of the Base Adjustment (as defined below), MINUS (c) the amount, if
any, of the Excluded Assets Value, PLUS (d) the amount of any positive Value
Adjustment (or, MINUS, the amount of any negative Value Adjustment)
calculated as of the Closing Date. The "Base Adjustment" shall equal:
AirTouch
$50,000,000, multiplied by ( Determination Price - $40 )
------------- -------------------------
$5
; provided that, for purposes of the foregoing calculation, (i) if the
AirTouch Determination Price is less than $40 per share, the Base Adjustment
shall equal zero and (ii) if the AirTouch Determination Price is greater than
$45 per share, the Base Adjustment shall equal $50,000,000.
"TRUST EXCHANGE AGREEMENT" shall mean the Amended and Restated Trust
Agreement of Exchange dated as of September 30, 1995 by and between U S WEST
Colorado and AirTouch.
"U S WEST" shall have the meaning ascribed to such term in the preamble
to this Agreement.
"U S WEST COLORADO" shall mean U S WEST, Inc., a Colorado corporation
and the predecessor of U S WEST.
"U S WEST GROUP" shall mean, after the Effective Time, U S WEST, Media
and their respective Affiliates.
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"U S WEST INSURANCE ARRANGEMENTS" shall mean the Insurance Arrangements
of U S WEST existing at the Effective Time or prior thereto which are owned
or maintained by or on behalf of U S WEST or any of its predecessors.
"U S WEST INTELLECTUAL PROPERTY" shall mean all Intellectual Property of
the U S WEST Group and its Affiliates (which Affiliates exist as of the date
hereof) other than the Domestic Wireless Intellectual Property.
"U S WEST MERGER DISCLOSURE SCHEDULE" shall mean the Disclosure
Schedule, dated as of the date hereof, delivered by U S WEST to AirTouch.
"U S WEST SEPARATION" shall mean a transaction in which the businesses
of the U S WEST Communications Group and the businesses of the U S WEST Media
Group are separated into two independent companies.
"VALUE ADJUSTMENT" shall mean the result calculated in accordance with
Exhibit F hereto.
"VOLUME-WEIGHTED AVERAGE TRADING PRICE" shall mean, for any Trading Day,
an amount equal to (a) the cumulative sum, for each trade of AirTouch Common
Stock (or other class or series of capital stock) during such Trading Day on
the NYSE (or, if such security is not listed on the NYSE, such other
principal exchange or over-the-counter market on which such security is
listed), of the product of: (i) the sale price times (ii) the number of
shares of AirTouch Common Stock (or such other class or series of capital
stock) sold at such price, divided by (b) the total number of shares of
AirTouch Common Stock (or such other class or series of capital stock) so
traded during the Trading Day.
"WMC" shall mean WMC Partners, L.P., a Delaware limited partnership.
"WMC AGREEMENT" shall mean the Amended and Restated Agreement of Limited
Partnership of WMC, dated as of September 30, 1995.
1.2 TERMS DEFINED ELSEWHERE IN THE AGREEMENT. For purposes of this
Agreement, the following terms have the meanings set forth in the Sections
indicated:
<TABLE>
<CAPTION>
TERM SECTION
---- --------
<S> <C>
AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.14(a)
Accounting Referee. . . . . . . . . . . . . . . . . . . . . . . . 3.3(c)
Acquiring Person. . . . . . . . . . . . . . . . . . . . . . . . . 6.2(d)
Adjusted Cap Price. . . . . . . . . . . . . . . . . . . . . . . . 3.2(e)
Adjusted Floor Price. . . . . . . . . . . . . . . . . . . . . . . 3.2(e)
AirTouch Affiliated Group . . . . . . . . . . . . . . . . . . . . 5.8(a)
AirTouch Common Stock . . . . . . . . . . . . . . . . . . . . . . 3.1(b)
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AirTouch Consents . . . . . . . . . . . . . . . . . . . . . . . . 5.4
AirTouch Indemnified Parties. . . . . . . . . . . . . . . . . . . 11.1
AirTouch Pension Plan . . . . . . . . . . . . . . . . . . . . . . 8.3(b)
AirTouch Retirement Plan. . . . . . . . . . . . . . . . . . . . . 8.3(h)
AirTouch Rights Agreement . . . . . . . . . . . . . . . . . . . . 5.2(a)
AirTouch SEC Documents. . . . . . . . . . . . . . . . . . . . . . 5.6(a)
Articles of Merger. . . . . . . . . . . . . . . . . . . . . . . . 2.3
Cap Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(e)
Cap Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(a)
Certificate of Merger . . . . . . . . . . . . . . . . . . . . . . 2.3
Claim Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3(a)
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2
Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2
Common Consideration. . . . . . . . . . . . . . . . . . . . . . . 3.1(b)
Confidentiality Agreements. . . . . . . . . . . . . . . . . . . . 6.3(c)
Core Intellectual Property. . . . . . . . . . . . . . . . . . . . 7.9(d)
Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.14(a)
Domestic Wireless Financial Statements. . . . . . . . . . . . . . 4.6(a)
Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . 2.3
Employee Communication Materials. . . . . . . . . . . . . . . . . 8.3(m)
Extraordinary Dividend. . . . . . . . . . . . . . . . . . . . . . 6.2(a)
FCC/State Orders. . . . . . . . . . . . . . . . . . . . . . . . . 4.4
Floor Number. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(e)
Floor Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(a)
Gains Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4
Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(n)
Joint Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 7.13(a)
Joint Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.13(b)
Joint Venture Agreements. . . . . . . . . . . . . . . . . . . . . 12.7(b)
Merger Consideration. . . . . . . . . . . . . . . . . . . . . . . 3.1(b)
Merger Consideration Value. . . . . . . . . . . . . . . . . . . . 6.2(d)
Modified Accrual Participant. . . . . . . . . . . . . . . . . . . 8.3(c)
Non-Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . 8.3(n)
Non-solicitation Period . . . . . . . . . . . . . . . . . . . . . 8.3(l)
Notice Period . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3(b)
NV/PCS Affiliated Group . . . . . . . . . . . . . . . . . . . . . 4.8(a)
NV Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1(b)
Operating Subsidiary. . . . . . . . . . . . . . . . . . . . . . . 6.2(a)
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(o)
Parent Transaction. . . . . . . . . . . . . . . . . . . . . . . . 6.2(a)
PCS Holdings Stock. . . . . . . . . . . . . . . . . . . . . . . . 3.1(b)
Planned Capital Expenditures. . . . . . . . . . . . . . . . . . . 6.1(a)
Preferred Consideration . . . . . . . . . . . . . . . . . . . . . 3.1(b)
Recalculation Differential. . . . . . . . . . . . . . . . . . . . 3.3(b)
Recourse Right. . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
Restricted Action . . . . . . . . . . . . . . . . . . . . . . . . 6.2(a)
Services Agreement. . . . . . . . . . . . . . . . . . . . . . . . 11.1(b)
Solicit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(l)
Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . 2.1
Termination Date. . . . . . . . . . . . . . . . . . . . . . . . . 10.1(d)
Third Party Claim . . . . . . . . . . . . . . . . . . . . . . . . 11.3
Transferred Benefit Assets. . . . . . . . . . . . . . . . . . . . 8.3(b)
Transferred Benefit Liabilities . . . . . . . . . . . . . . . . . 8.3(b)
USWCG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9(c)
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U S WEST Consents . . . . . . . . . . . . . . . . . . . . . . . . 4.4
U S WEST Indemnified Parties. . . . . . . . . . . . . . . . . . . 11.2
U S WEST Pension Plan . . . . . . . . . . . . . . . . . . . . . . 8.3(b)
U S WEST Savings Plan . . . . . . . . . . . . . . . . . . . . . . 8.3(i)
</TABLE>
1.3 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein",
and "hereunder" and words of similar import, when used in this Agreement,
shall refer to this Agreement as a whole and not to any particular provision
of this Agreement.
(b) The terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
ARTICLE II
THE MERGER
2.1 MERGER. Upon the terms and subject to the conditions set forth in
this Agreement and in accordance with the CBCA and DGCL, NV and PCS Holdings
shall be merged with and into AirTouch at the Effective Time. At the
Effective Time, the separate corporate existences of NV and PCS Holdings
shall cease and AirTouch shall continue as the surviving corporation (the
"Surviving Corporation").
2.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to
Section 10.1, the closing of the Merger (the "Closing") will take place at
10:00 a.m. (San Francisco time), on the second Business Day following the
date on which the last of the conditions set forth in Article IX is fulfilled
or waived (the "Closing Date"), at the offices of Pillsbury Madison & Sutro
LLP, 235 Montgomery Street, San Francisco, California, unless another date,
time or place is agreed to by the parties hereto.
2.3 EFFECTIVE TIME. The parties hereto shall cause the Merger to be
consummated by filing a certificate of merger with the Secretary of State of
the State of Delaware (the "Certificate of Merger"), as provided in the DGCL,
and articles of merger with the Secretary of State of the State of Colorado
(the "Articles of Merger"), as provided in the CBCA, in each case, as soon as
practicable on or after the Closing Date. The Merger shall become effective
at such time as is provided in the Certificate of Merger and the Articles of
Merger (the "Effective Time").
2.4 EFFECTS OF THE MERGER. The Merger shall have the effects
prescribed by Applicable Laws.
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2.5 CERTIFICATE OF INCORPORATION AND BYLAWS. (a) At the Effective
Time, in accordance with the DGCL, the Certificate of Incorporation of
AirTouch, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation after the Effective
Time, until duly amended in accordance with its terms and the DGCL.
(b) The Bylaws of AirTouch, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation, until duly
amended in accordance with their terms, the DGCL and the Certificate of
Incorporation of the Surviving Corporation.
2.6 DIRECTORS. The directors of AirTouch immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, until the
earlier of their resignations or removal or until their respective successors
are duly elected and qualified, as the case may be.
2.7 OFFICERS. The officers of AirTouch immediately prior to the
Effective Time shall be the officers of the Surviving Corporation, until the
earlier of their resignations or removal or until their respective successors
are duly elected and qualified, as the case may be.
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; CERTIFICATES
3.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of
capital stock:
(a) CAPITAL STOCK OF AIRTOUCH. Each share of each class of capital
stock of AirTouch issued and outstanding immediately prior to the Effective
Time shall remain an issued and outstanding share of the same class of
capital stock of the Surviving Corporation.
(b) CAPITAL STOCK OF NV AND PCS HOLDINGS. The common stock, no par
value, of NV (the "NV Stock") and the common stock, no par value, of PCS
Holdings (the "PCS Holdings Stock") issued and outstanding immediately prior
to the Effective Time shall be canceled and extinguished and converted
automatically into the right to receive (i) a number of shares of common
stock, par value $.01 per share, of AirTouch (the "AirTouch Common Stock"),
together with the corresponding rights to purchase AirTouch Series A
Preferred Stock pursuant to the AirTouch Rights Agreement, determined in
accordance with Section 3.2 (the "Common Consideration"), (ii) a number of
shares of AirTouch Class D Preferred Stock equal to 50% of the Preferred
Share Number and (iii) a number of shares of AirTouch Class E Preferred Stock
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equal to 50% of the Preferred Share Number (such shares of AirTouch Class D
Preferred Stock and AirTouch Class E Preferred Stock are referred to herein
as the "Preferred Consideration", and collectively with the Common
Consideration, as the "Merger Consideration").
3.2 DETERMINATION OF COMMON CONSIDERATION.
(a) Subject to the provisions of Section 6.2, if the AirTouch
Determination Price is greater than or equal to $40.00 (the "Floor Price")
and less than or equal to $45.00 (the "Cap Price"), the number of shares of
AirTouch Common Stock that constitute the Common Consideration shall equal
the quotient of the Common Value, divided by the AirTouch Determination Price
(rounded to the nearest whole number).
(b) Subject to the provisions of Section 6.2, if the AirTouch
Determination Price is less than the Floor Price, the number of shares of
AirTouch Common Stock that constitute the Common Consideration shall equal
the quotient of the Common Value, divided by the Floor Price (rounded to the
nearest whole number).
(c) Subject to the provisions of Section 6.2, if the AirTouch
Determination Price is greater than the Cap Price, the number of shares of
AirTouch Common Stock that constitute the Common Consideration shall equal
the quotient of Common Value, divided by the Cap Price (rounded to the
nearest whole number).
(d) Subject to the provisions of Section 6.2, the Cap Price and Floor
Price shall be adjusted from time to time as follows for events occurring
prior to the Effective Time:
(i) If AirTouch shall (A) pay a dividend, or make a distribution, in
shares of AirTouch Common Stock, (B) subdivide or split its outstanding
AirTouch Common Stock into a greater number of shares, or (C) combine the
outstanding shares of AirTouch Common Stock into a smaller number of shares,
then, in any such event, the Cap Price and Floor Price shall each be adjusted
by multiplying each of the Cap Price and the Floor Price in effect
immediately prior to such date of issuance by a fraction, the numerator of
which shall be one and the denominator of which shall be the number of shares
or fractions of a share of AirTouch Common Stock that a holder of one share
of AirTouch Common Stock immediately prior to any such event would hold
immediately after such event (assuming the issuance of fractional shares).
(ii) If AirTouch shall issue rights, warrants or options for, or
securities convertible or exchangeable into or exercisable for, shares of
AirTouch Common Stock entitling the holders to subscribe for or purchase
shares of AirTouch Common Stock at a price per share that, together with the
consideration paid to AirTouch upon the issuance of such securities, is lower
than the Current Market Price both as of the date on which a
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definitive agreement is entered into with respect to such issuance or (if
there is no such agreement) the date on which such issuance is announced and
at the record date for or (if there is no record date) the date of such
issuance (other than pursuant to any existing employee benefit plan or
employee arrangement or pursuant to the AirTouch Rights Agreement), then, in
any such event, the Cap Price and the Floor Price shall each be adjusted by
multiplying each of the Cap Price and the Floor Price in effect immediately
prior to such record date or date of issuance by a fraction, the numerator of
which shall be the number of shares of AirTouch Common Stock outstanding on
such record date or date of issuance plus the maximum number of additional
shares of AirTouch Common Stock which the aggregate offering price of the
maximum number of shares of AirTouch Common Stock so offered for subscription
or purchase pursuant to such rights, warrants, options or securities would
purchase at the Current Market Price on such record date or date of issuance
(determined by multiplying such maximum number of shares by the exercise
price of such rights, warrants or options or the conversion price of such
securities (plus any other consideration received by AirTouch upon the
issuance, exercise or conversion of such rights, warrants, options or
securities) and dividing the product so obtained by the Current Market Price
on such record date or date of issuance) and the denominator of which shall
be the number of shares of AirTouch Common Stock outstanding on such date of
issuance plus the maximum number of additional shares of AirTouch Common
Stock offered for subscription pursuant to such rights, warrants, options or
securities.
(iii) If AirTouch shall issue or sell shares of AirTouch Common Stock at
a price per share that is lower both at the date on which a definitive
agreement is entered into with respect to such issuance or sale and at the
date of such issuance or sale than the Current Market Price as of the Trading
Day immediately preceding such dates (other than pursuant to any bona fide
underwritten public offering or offering pursuant to Rule 144A under the
Securities Act, pursuant to the terms of existing options or benefit plans or
upon conversion of shares of preferred stock), then, in any such event, the
Cap Price and the Floor Price shall each be adjusted by multiplying each of
the Cap Price and the Floor Price in effect immediately prior to such date of
issuance by a fraction, the numerator of which shall be the number of shares
of AirTouch Common Stock outstanding on such date of issuance plus the number
of additional shares of AirTouch Common Stock which the aggregate price of
the number of shares of AirTouch Common Stock so issued or sold would
purchase at the Current Market Price on such date of issuance (determined by
multiplying such number of shares by the purchase price of such shares and
dividing the product so obtained by the Current Market Price on such date of
issuance) and the denominator of which shall be the number of shares of
AirTouch Common Stock outstanding on such date of issuance plus the number of
additional shares of AirTouch Common Stock issued.
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(iv) If AirTouch shall pay a dividend or make a distribution to all
holders of outstanding shares of AirTouch Common Stock, of capital stock,
cash, evidence of its indebtedness or other assets of AirTouch (but excluding
(x) any cash dividends or distributions (other than Extraordinary Cash
Distributions) and (y) dividends or distributions referred to in Section
3.2(d)(i) or 3.2(e)), then the Cap Price and the Floor Price shall each be
adjusted by multiplying each of the Cap Price and the Floor Price 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) less either (A) the Fair
Value of the portion of the capital stock, assets or evidences of
indebtedness to be so distributed applicable to one share of AirTouch Common
Stock or (B), if applicable, the amount of the Extraordinary Cash
Distribution to be distributed per share of AirTouch Common Stock, and the
denominator of which shall be such Current Market Price.
In addition, to the extent that any of the events set forth in this Section
3.2(d) occurs during the period in which the AirTouch Determination Price is
determined, then the Volume-Weighted Average Trading Prices for Trading Days
prior to the occurrence of such event used in determining the AirTouch
Determination Price shall be adjusted in a manner consistent with the
adjustments set forth in Section 3.2(d).
(e) Subject to the provisions of Section 6.2, if prior to the Effective
Time AirTouch shall pay a dividend or make a distribution to all holders of
outstanding shares of AirTouch Common Stock of shares of a class or series of
capital stock of AirTouch other than AirTouch Common Stock, then (i) Media
(or the NV/PCS Transferee) shall be entitled to receive pursuant to Section
3.1(b), in addition to the number of shares of AirTouch Common Stock which it
is entitled to receive pursuant to Section 3.1(b), a number of shares of such
class or series of capital stock equal to the number of shares of such class
or series of capital stock which it would have been entitled to receive upon
or by reason of such event if the shares of AirTouch Common Stock issuable
pursuant to Section 3.1(b) had been received immediately before the record
date (or, if no record date, the effective date) for such event and (ii) the
Cap Price and the Floor Price shall each be adjusted by multiplying each of
the Cap Price and the Floor Price in effect immediately prior to the opening
of business on such record date or effective date by a fraction, the
numerator of which shall be the Current Market Price (determined as of such
record date or effective date) less the Agreed Value of the shares of capital
stock so paid or distributed, and the denominator of which shall be such
Current Market Price (such adjusted Cap Price and adjusted Floor Price being
the "Adjusted Cap Price" and "Adjusted Floor Price"). In addition, to the
extent such event occurs during the period in which the AirTouch
Determination Price is determined, then the Volume-Weighted
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Average Trading Prices for Trading Days prior to the occurrence of such event
used in determining the AirTouch Determination Price shall be adjusted in a
manner consistent with the foregoing adjustment. In the event of such a
dividend or distribution, the number of shares of AirTouch Common Stock that
constitute the Common Consideration shall be determined in the following
manner:
(A) If the AirTouch Determination Price is less than the
Adjusted Floor Price, the number of shares of AirTouch Common Stock
that constitute the Common Consideration shall equal the quotient of
(1) the Common Value, divided by (2) the Floor Price (the "Floor
Number").
(B) If the AirTouch Determination Price is greater than the
Adjusted Cap Price, the number of shares of AirTouch Common Stock that
constitute the Common Consideration shall equal the quotient of
(1) the Common Value, divided by (2) the Cap Price (the "Cap Number").
(C) If the AirTouch Determination Price is greater than or equal
to the Adjusted Floor Price and less than or equal to the Adjusted Cap
Price, the number of shares of AirTouch Common Stock that constitute
the Common Consideration shall equal the difference between (x) the
Floor Number and (y) the product of (i) the difference between the
Floor Number and the Cap Number multiplied by (ii) a fraction, the
numerator of which shall be the difference between the AirTouch
Determination Price and the Adjusted Floor Price and the denominator
of which shall be the difference between the Adjusted Cap Price and
the Adjusted Floor Price.
(f) Any adjustments under Section 3.2(d) and (e) shall be made
successively whenever an event requiring such an adjustment occurs.
3.3 POST-CLOSING ADJUSTMENTS TO MERGER CONSIDERATION.
(a) At any time following the date that any Scheduled Property shall
become a Disposed Asset, AirTouch shall deliver to U S WEST a statement
setting forth its calculation of the Disposed Asset Value with respect
thereto. U S WEST shall, within 15 Business Days following the delivery of
such statement, notify AirTouch in writing of any dispute regarding
AirTouch's calculation of such Disposed Asset Value. Any such dispute shall
be resolved in the manner set forth in Section 3.3(c). Within five Business
Days following the later to occur of (i) the 15th Business Day following
delivery of AirTouch's calculation of such Disposed Asset Value (if such
calculation shall not have been disputed by U S WEST) and (ii) the resolution
of any dispute regarding the calculation of such Disposed Asset Value
pursuant
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to Section 3.3(c), Media (or the NV/PCS Transferee) shall return a portion of
the Merger Consideration to AirTouch by delivering to AirTouch a number of
shares of AirTouch Common Stock equal to the quotient of (i) the amount of
the Disposed Asset Value, divided by (ii) the Current Market Price of the
AirTouch Common Stock as of the date of such delivery. If following the date
of any adjustment to the Merger Consideration made pursuant to the preceding
sentence, any Scheduled Property (which was a Disposed Asset solely by
operation of clause (b) of the definition thereof) shall cease to be a
Disposed Asset, then no later than 20 Business Days following the date on
which such Scheduled Property shall so cease to be a Disposed Asset, AirTouch
shall deliver to Media (or the NV/PCS Transferee) a number of shares of
AirTouch Common Stock equal to the quotient of (i) the amount of the Disposed
Asset Value with respect thereto, divided by (ii) the Current Market Price of
the AirTouch Common Stock as of the date of such delivery.
(b) No later than 15 Business Days following the occurrence of any event
that would result in the recalculation of the Value Adjustment in accordance
with Exhibit G, AirTouch shall deliver to U S WEST a statement setting forth
its recalculation of the Value Adjustment and its calculation of the amount
equal to the difference of the Value Adjustment as so recalculated, minus the
Value Adjustment calculated as of the Closing Date (or as of the most recent
date on which the Value Adjustment shall have been recalculated pursuant to
this Section 3.3(b)) (such difference referred to herein as the
"Recalculation Differential"). U S WEST shall, within 15 Business Days
following the delivery of such statement, notify AirTouch in writing of any
dispute regarding AirTouch's calculation of the Recalculation Differential.
Any such dispute shall be resolved in the manner set forth in Section 3.3(c).
Within five Business Days following the later to occur of (i) the 15th
Business Day following delivery of AirTouch's calculation of such
Recalculation Differential (if such calculation shall not have been disputed
by U S WEST) and (ii) the resolution of any dispute regarding the calculation
of such Recalculation Differential pursuant to Section 3.3(c), either (A) if
the Recalculation Differential shall be positive, AirTouch shall deliver to
Media (or the NV/PCS Transferee) a number of shares of AirTouch Common Stock
equal to the quotient of the positive amount of the Recalculation
Differential, divided by the Current Market Price of the AirTouch Common
Stock as of the date of such delivery or (B) if the Recalculation
Differential shall be negative, Media (or the NV/PCS Transferee) shall return
a portion of the Merger Consideration to AirTouch by delivering to AirTouch a
number of shares of AirTouch Common Stock equal to the quotient of the
negative amount of the Recalculation Differential, divided by the Current
Market Price of the AirTouch Common Stock as of the date of such delivery.
(c) AirTouch and U S WEST shall meet following the delivery by U S WEST
of any notice of dispute (with respect to the
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calculation of a Disposed Asset Value or a Recalculation Differential) to
discuss in good faith, and to use best efforts to resolve, all disputed
matters. If ten Business Days following the delivery by U S WEST of any such
notice of dispute, a dispute remains as to the calculation of such Disposed
Asset Value or Recalculation Differential, as the case may be, such dispute
shall be determined by a firm of independent nationally recognized
accountants chosen and mutually accepted by AirTouch and U S WEST (the
"Accounting Referee"), which determination shall be final and conclusive.
The Accounting Referee shall resolve the dispute as promptly as practicable
(but in no event later than 20 Business Days) after having the item referred
to it. The costs, fees and expenses of the Accounting Referee shall be borne
equally by AirTouch and U S WEST.
3.4 SURRENDER AND EXCHANGE.
(a) From and after the Effective Time, Media (or the NV/PCS
Transferee), as sole holder of all of the issued and outstanding shares of NV
Stock and PCS Holdings Stock, shall be entitled to receive, upon surrender of
all the certificates representing such shares, the Merger Consideration
payable in respect of such shares as provided for in Section 3.1(b). After
the Effective Time, such certificates shall, until so surrendered, represent
for all purposes only the right to receive such Merger Consideration. From
and after the Effective Time, there shall be no further registration of the
transfer on the stock transfer books of the Surviving Corporation of shares
of NV Stock or PCS Holdings Stock which were outstanding immediately prior to
the Effective Time.
(b) No dividends, interest or other distributions with respect to the
Merger Consideration shall be paid to Media (or the NV/PCS Transferee) as the
holder of any unsurrendered certificates representing the NV Stock or the PCS
Holdings Stock outstanding prior to the Effective Time, until all such
certificates are surrendered as provided in this Section 3.4. Upon surrender
of all such certificates (or, if later, the appropriate payment date), there
shall be paid, without interest, to Media (or the NV/PCS Transferee) as the
Person in whose name the certificates representing the Merger Consideration
into which such shares were converted are registered, all dividends, interest
and other distributions payable in respect of such securities on a date
subsequent to, and in respect of a record date after, the Effective Time.
(c) AirTouch shall be entitled to deduct and withhold from the Merger
Consideration otherwise payable pursuant to this Agreement to Media (or the
NV/PCS Transferee) as the holder of the shares of NV Stock and PCS Holdings
Stock such amounts, if any, as are required to be deducted and withheld with
respect to the making of such payment under the Code, or any provision of
state, local or foreign Tax law. To the extent that amounts are so withheld
by AirTouch such withheld amounts shall be treated
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for all purposes of this Agreement as having been paid to Media (or the
NV/PCS Transferee) as the holder of the shares of NV Stock and PCS Holdings
Stock.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF U S WEST
U S WEST hereby represents and warrants to AirTouch as follows:
4.1 ORGANIZATION AND QUALIFICATION. Each of U S WEST, Media, NV, PCS
Holdings and the Domestic Wireless Subsidiaries is, and the NV/PCS Transferee
will be, a corporation, partnership or other entity duly organized or formed,
validly existing and in good standing under the laws of its jurisdiction of
organization or formation and has all requisite power and authority to own,
lease and operate its assets and properties and to carry on its business as
currently conducted. Each of U S WEST, Media, NV, PCS Holdings and the
Domestic Wireless Subsidiaries is, and the NV/PCS Transferee will be, duly
qualified to do business and is in good standing in each jurisdiction where
the ownership or operation of its assets and properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or in good standing, as the case may be, would not reasonably be
expected to have a Material Adverse Effect with respect to the Domestic
Wireless Business. Complete and correct copies of the Articles of
Incorporation and Bylaws of NV and the Certificate of Incorporation and
Bylaws of PCS Holdings, each as amended to date, have been delivered to
AirTouch. Such Articles and Certificate of Incorporation and Bylaws are in
full force and effect.
4.2 CAPITALIZATION; SUBSIDIARIES. (a) The authorized capital stock of
NV consists of 43,000,000 shares of NV Stock, of which 42,150,273 shares are
issued and outstanding, and all of which are duly authorized, validly issued,
fully paid and non-assessable and not subject to preemptive rights. The
authorized capital stock of PCS Holdings consists of one share of PCS
Holdings Stock, which share is issued and outstanding and is duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights. Media is the owner of all of the issued and outstanding shares of NV
Stock and PCS Holdings Stock, free and clear of all Encumbrances; PROVIDED,
that if the U S WEST Separation is consummated prior to the Closing Date, the
NV/PCS Transferee will be the owner of all of the issued and outstanding
shares of NV Stock and PCS Holdings Stock as of the Closing Date, free and
clear of all Encumbrances.
(b) Section 4.2(b) of the U S WEST Merger Disclosure Schedule sets
forth, as of the date hereof, a true and complete list of all of the Domestic
Wireless Subsidiaries and Domestic Wireless Investments, including the
jurisdiction of incorporation
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or organization of each Domestic Wireless Subsidiary and Domestic Wireless
Investment, the authorized capital stock or other ownership interests of each
Domestic Wireless Subsidiary and Domestic Wireless Investment, the percentage
of each Domestic Wireless Subsidiary's outstanding capital stock or other
ownership interests owned by NV or a Subsidiary of NV or by any other Person
and the percentage of each Domestic Wireless Investment's capital stock or
other ownership interests owned by NV or, to the knowledge of U S WEST, by
any other Person. All of the outstanding shares of capital stock of, or
other ownership interests in, each Domestic Wireless Subsidiary and Domestic
Wireless Investment directly or indirectly owned by NV are duly authorized,
validly issued, fully paid and non-assessable and, except as set forth in
Section 4.2(b) of the U S WEST Merger Disclosure Schedule, are owned by NV or
a Subsidiary of NV, free and clear of all Encumbrances. NV does not,
directly or indirectly, own any capital stock of or other ownership interests
in any corporation, partnership or other Person, other than the Domestic
Wireless Subsidiaries and Domestic Wireless Investments or, except as set
forth in Section 4.2(b) of the U S WEST Merger Disclosure Schedule, have any
Contract relating to the issuance, sale or purchase of any ownership interest
in any such Person. Except as set forth in Section 4.2(b) of the U S WEST
Merger Disclosure Schedule, none of NV, any Domestic Wireless Subsidiary or,
to the knowledge of U S WEST, any Domestic Wireless Investment has engaged or
currently engages, directly or indirectly, in the conduct or ownership of any
business or activity other than the provision in the United States of
Cellular Services. Neither U S WEST nor any Affiliate thereof (other than
the Communications Wireless Business and the business of any Excluded Assets)
directly or indirectly engages in the provision in the United States of
Cellular Services, ESMR services or PCS Services other than through the
Domestic Wireless Business.
(c) PCS Holdings does not, directly or indirectly, own any capital stock
or other ownership interests in any corporation, partnership or other Person,
other than PCS Nucleus and PrimeCo. PCS Holdings is the sole owner of the
PCS Partnership Interests, free and clear of all Encumbrances, other than as
expressly provided under the PCS Nucleus Agreement. Immediately following
the Effective Time, AirTouch will be the sole owner of all right, title and
interest to and in the PCS Partnership Interests. The PCS Partnership
Interests owned by PCS Holdings constitute the entirety of any interest in
PCS Nucleus held directly or indirectly by U S WEST or any Affiliate thereof.
(d) Other than as set forth in Sections 4.2(a) and 4.2(b) or in Section
4.2(d) of the U S WEST Merger Disclosure Schedule, (i) no shares of the
capital stock or other ownership interests of NV, PCS Holdings or any of the
Domestic Wireless Subsidiaries are authorized, issued or outstanding, or
reserved for any other purpose, and there are no options, warrants,
convertible or exchangeable securities or other rights (including
registration
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rights), agreements, arrangements or commitments of any character to which
NV, PCS Holdings or any of the Domestic Wireless Subsidiaries is a party
relating to or based upon the issued or unissued capital stock or other
ownership interests of NV, PCS Holdings or any of the Domestic Wireless
Subsidiaries or any obligation of NV or PCS Holdings or any of the Domestic
Wireless Subsidiaries to grant, issue or sell any shares of capital or other
ownership interests, of NV, PCS Holdings or any of the Domestic Wireless
Subsidiaries by sale, lease, license or otherwise and (ii) none of NV, PCS
Holdings and any of the Domestic Wireless Subsidiaries has any outstanding
bonds, debentures, notes or other obligations the holders of which have the
right to vote or which are convertible into or exercisable for securities
having the right to vote with the stockholders of NV, PCS Holdings or any of
the Domestic Wireless Subsidiaries on any matter. Except as set forth in
Section 4.2(d) of the U S WEST Merger Disclosure Schedule, there are no
voting trusts or other agreements or understandings with respect to the
voting of the capital stock or other ownership interests of NV, PCS Holdings
or any of the Domestic Wireless Subsidiaries.
4.3 CORPORATE AUTHORITY. Each of U S WEST, Media, NV and PCS Holdings
has, and, in the event that the NV/PCS Transferee shall become a party
hereto, the NV/PCS Transferee will have, the requisite corporate power and
authority to execute and deliver this Agreement and each other Transaction
Agreement to which it is a party and to perform its respective obligations
hereunder and thereunder and to consummate the transactions contemplated
hereby and thereby. The execution, delivery and performance by each of
U S WEST, Media, NV and PCS Holdings of this Agreement and each other
Transaction Agreement to which it is a party and the consummation by each of
U S WEST, Media, NV and PCS Holdings of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate action on
the part of each of U S WEST, Media, NV and PCS Holdings. In the event that
the NV/PCS Transferee shall become a party hereto, the execution, delivery
and performance by the NV/PCS Transferee of this Agreement and each other
Transaction Agreement to which it becomes a party and the consummation by the
NV/PCS Transferee of the transactions contemplated hereby and thereby will be
duly authorized by all necessary corporate action on the part of the NV/PCS
Transferee. This Agreement and each other Transaction Agreement to which it
is a party has been duly executed and delivered by each of U S WEST, Media,
NV and PCS Holdings and constitutes the legal, valid and binding obligation
of each of U S WEST, Media, NV and PCS Holdings (and will be duly executed
and delivered by the NV/PCS Transferee and constitute the legal, valid and
binding obligation of the NV/PCS Transferee) enforceable against each of them
in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles.
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4.4 CONSENTS AND APPROVALS. Except (a) as set forth in Section 4.4(a)
of the U S WEST Merger Disclosure Schedule, (b) for compliance with and
filings under the HSR Act, (c) for the receipt of the Orders of the FCC and
state regulatory authorities set forth in Section 4.4(b) of the U S WEST
Merger Disclosure Schedule (the "FCC/State Orders"), (d) for the filing of
the Certificate of Merger with the Secretary of State of the State of
Delaware, the Articles of Merger with the Secretary of State of the State of
Colorado and appropriate documents with the relevant authorities of other
states in which either NV or PCS Holdings is qualified to do business, and
(e) for such filings in connection with any state or local Tax which is
attributable to the beneficial ownership of the owned or leased property used
in the operation of the Domestic Wireless Business, if any (collectively,
"Gains Taxes") (the items in clauses (a) through (e) being collectively
referred to herein as "U S WEST Consents"), no Consents, approvals, licenses,
permits, orders or authorizations of, or registrations, declarations, notices
or filings with, any Governmental Authority or any Third Party are required
to be obtained or made by or with respect to U S WEST, Media, NV, PCS
Holdings or any of the Domestic Wireless Subsidiaries (or will be required to
be obtained or made by or with respect to the NV/PCS Transferee) on or prior
to the Closing Date in connection with (A) the execution, delivery and
performance of this Agreement or any of the other Transaction Agreements, the
consummation of the transactions contemplated hereby and thereby or the
taking by U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) of
any other action contemplated hereby or thereby, (B) the continuing validity
and effectiveness of, the prevention of any material default or event of
withdrawal or dissolution under or the violation of the terms of (i) any
material License or Material Contract relating to the operation of NV, PCS
Holdings, any Domestic Wireless Subsidiary or, to the knowledge of U S WEST,
any Domestic Wireless Investment or (ii) any partnership, joint venture or
similar agreement of NV, PCS Holdings or any Domestic Wireless Subsidiary or
Domestic Wireless Investment or (C) the operation of the Domestic Wireless
Business following the Closing as conducted on the date hereof, other than,
in the case of clauses (A) and (C), Consents that, if not obtained or made,
would not reasonably be expected to have a Material Adverse Effect with
respect to the Domestic Wireless Business or materially impair or delay the
ability of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to
perform their respective obligations under this Agreement and the other
Transaction Agreements or consummate the transactions contemplated hereby and
thereby.
4.5 NON-CONTRAVENTION. Except as set forth in Section 4.5 of the
U S WEST Merger Disclosure Schedule, the execution, delivery and performance by
each of U S WEST, Media, NV and PCS Holdings (and the NV/PCS Transferee) of
this Agreement and each other Transaction Agreement to which it is a party,
and the consummation by U S WEST, Media, NV and PCS Holdings (and the NV/PCS
Transferee) of the transactions contemplated hereby and
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thereby, do not and will not (a) violate any provision of the Certificates of
Incorporation or Bylaws of U S WEST, Media (or the NV/PCS Transferee) or PCS
Holdings, the Articles of Incorporation or Bylaws of NV or, subject to
obtaining the U S WEST Consents, the certificate of incorporation or bylaws
or comparable organizational document of any of the Domestic Wireless
Subsidiaries or Domestic Wireless Investments; (b) subject to obtaining the
U S WEST Consents, conflict with, or result in the breach of, or constitute a
default or an event of withdrawal or dissolution under, or result in the
termination, modification, cancellation or acceleration (whether after the
filing of notice or the lapse of time or both) of any right or obligation of
U S WEST, Media, NV, PCS Holdings or any of the Domestic Wireless
Subsidiaries (or the NV/PCS Transferee) under, any note, mortgage, indenture,
lease, Material Contract, agreement or other obligation or instrument of
U S WEST, Media, PCS Holdings or any of the Domestic Wireless Subsidiaries (or
the NV/PCS Transferee); (c) subject to obtaining the U S WEST Consents, give
rise to any option, right of first refusal or similar right of any Third
Party with respect to any interest in any Domestic Wireless Subsidiary or
Domestic Wireless Investment; or (d) subject to obtaining the U S WEST
Consents, violate, or result in a breach of or constitute a default under any
Applicable Law in relation to the operation of the Domestic Wireless
Business, other than, in the case of clauses (b) and (d), any conflict,
breach, termination, modification, default, cancellation, acceleration, loss
or violation that, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect with respect to the Domestic
Wireless Business or materially impair or delay the ability of U S WEST,
Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform its
obligations under this Agreement and the other Transaction Agreements or
consummate the transactions contemplated hereby and thereby.
4.6 FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES.
(a) Section 4.6(a) of the U S WEST Merger Disclosure Schedule contains
the audited consolidated balance sheet of NV and its Subsidiaries as of
December 31, 1996; the audited consolidated statements of operations and cash
flows of NV and its Subsidiaries for the year ended December 31, 1996; the
unaudited consolidated balance sheet of NV and its Subsidiaries as of
September 30, 1997; and the unaudited consolidated statements of operations
and cash flows of NV and its Subsidiaries for the nine months ended September
30, 1997 (collectively, the "Domestic Wireless Financial Statements").
Except as set forth in the Domestic Wireless Financial Statements or in the
notes thereto, or otherwise in this Section 4.6(a) or in Section 4.6(a) of
the U S WEST Merger Disclosure Schedule, the Domestic Wireless Financial
Statements have been prepared in accordance with GAAP, applied on a
consistent basis for all periods presented and fairly present, in all
material respects (subject, in the case of unaudited financial statements, to
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normal recurring audit adjustments), the consolidated financial position of
NV and its Subsidiaries as of the dates set forth therein and the
consolidated results of operations and cash flows of NV and its Subsidiaries
for the periods then ended.
(b) Except (i) as set forth in the Domestic Wireless Financial
Statements or in the notes thereto, (ii) as set forth in Section 4.6(b) of
the U S WEST Merger Disclosure Schedule, (iii) for liabilities and obligations
in respect of Excluded Claims and Excluded Settlements and (iv) for
liabilities and obligations incurred since September 30, 1997 in the ordinary
course of business of the Domestic Wireless Business, neither NV nor any of
the Domestic Wireless Subsidiaries has any outstanding claims, indebtedness,
obligations or liabilities of any kind (whether accrued, absolute, contingent
or otherwise) that relate to the operations of the Domestic Wireless Business
that would be required by GAAP to be reflected in the consolidated balance
sheet of NV and its Subsidiaries or in the notes or schedules thereto.
(c) PCS Holdings has as its only assets the PCS Partnership Interests
and the contract rights under this Agreement and the PCS Nucleus Agreement.
PCS Holdings has no Liabilities of any nature, other than the principal
amount outstanding under the (i) Assumed PCS Debt, (ii) guarantees executed
in respect of the Leveraged Leases, (iii) Tax liabilities under Treasury
Regulation section 1.1502-6 resulting from PCS Holdings being a member of the
NV/PCS Affiliated Group and ERISA, environmental and other liabilities
resulting from PCS Holdings being a Subsidiary of U S WEST (all of which
shall be the sole responsibility of the U S WEST Group) and (iv) those
Liabilities expressly contemplated by or arising solely out of actions
pursuant to and not inconsistent with this Agreement or the PCS Nucleus
Agreement. Since the date of PCS Holdings' organization, neither PCS
Holdings nor any Person to which it is the successor in interest, by
operation of law or otherwise, has engaged in any business or operations
other than the ownership of the PCS Partnership Interests.
(d) Except as set forth in Section 4.6(d) of the U S WEST Merger
Disclosure Schedule or as contemplated by this Agreement, since December 31,
1996, the Domestic Wireless Business has been conducted only in the ordinary
course consistent with past practice and in the manner required by Sections
3.1(b) and 3.1(d) of the Joint Venture Organization Agreement, and there has
not been any event, change or development, other than an event, change or
development resulting from general economic or industry-wide conditions,
that, individually or in the aggregate, would reasonably be expected to have
a Material Adverse Effect with respect to the Domestic Wireless Business or
materially impair or delay the ability of U S WEST to perform its obligations
under this Agreement or the other Transaction Agreements or consummate the
transactions contemplated hereby or thereby.
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4.7 LITIGATION. Except as set forth in Section 4.7 of the U S WEST
Merger Disclosure Schedule and for investigations by Governmental Authorities
as to which U S WEST has received no notice and otherwise has no knowledge,
there are no Legal Proceedings relating to the operation of the Domestic
Wireless Business pending or, to the knowledge of U S WEST, threatened
against NV, PCS Holdings or any of the Domestic Wireless Subsidiaries, except
Legal Proceedings which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect with respect to the
Domestic Wireless Business or materially impair or delay the ability of U S
WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform its
obligations under this Agreement or consummate the transactions contemplated
hereby. Except as set forth in Section 4.7 of the U S WEST Merger Disclosure
Schedule, there is no order, judgment, injunction or decree of any
Governmental Authority outstanding against U S WEST, Media (or the NV/PCS
Transferee), NV, PCS Holdings or any of the Domestic Wireless Subsidiaries
or, to the knowledge of U S WEST, any Domestic Wireless Investments that,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect with respect to the Domestic Wireless Business or
materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings
(or the NV/PCS Transferee) to perform its obligations under this Agreement
and the other Transaction Agreements or consummate the transactions
contemplated hereby and thereby. None of NV, the Domestic Wireless
Subsidiaries and, to the knowledge of U S WEST, the Domestic Wireless
Investments is a party to or otherwise bound by the terms of any Settlement
the terms of which, or obligations under which, AirTouch, any Domestic
Wireless Subsidiary or any Domestic Wireless Investment would be bound by or
obligated to perform following the Effective Time.
4.8 TAXES. (a) NV, PCS Holdings, each of the Domestic Wireless
Subsidiaries, and each consolidated, combined, affiliated or unitary group of
which NV, PCS Holdings, any of the Domestic Wireless Subsidiaries, is or has
ever been a member (together, the "NV/PCS Affiliated Group") has timely filed
all federal income tax returns and all other material Tax returns and reports
required to be filed by it. All such returns are complete and correct in all
material respects. NV, PCS Holdings and each of the Domestic Wireless
Subsidiaries has paid (or U S WEST or Media or, if applicable, the NV/PCS
Transferee has paid on NV's or the Domestic Wireless Subsidiaries' or PCS
Holdings' behalf) all Taxes shown due on such returns, the Domestic Wireless
Financial Statements reflect an adequate reserve for all Taxes payable by NV
and the Domestic Wireless Subsidiaries and the financial statements of PCS
Holdings reflect an adequate reserve for all Taxes payable by PCS Holdings,
in each case, for all taxable periods and portions thereof through the date
of such financial statements. No liens for Taxes exist with respect to any
of the assets or properties of NV, PCS Holdings or any of the Domestic
Wireless Subsidiaries, except for
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statutory liens for Taxes not yet due. All federal income Tax returns filed
by or on behalf of the NV/PCS Affiliated Group have been examined by and
settled with the IRS or the statute of limitations with respect to the
relevant Tax liability has expired, for all taxable periods through and
including the period ended December 31, 1987. All Taxes due with respect to
any completed and settled audit, examination or deficiency litigation with
any taxing authority have been paid in full. Except as set forth in Section
4.8(a) of the U S WEST Merger Disclosure Schedule, there is no audit,
examination, deficiency or refund litigation pending, with respect to any
Taxes for which NV, PCS Holdings or the Domestic Wireless Subsidiaries is or
might be liable and no taxing authority has given written notice of the
commencement of any audit, examination or deficiency litigation with respect
to any such Taxes. Except as set forth in Section 4.8(a) of the U S WEST
Merger Disclosure Schedule, none of NV, PCS Holdings or any of the Domestic
Wireless Subsidiaries is a party to a Tax allocation or sharing agreement or
any agreement pursuant to which NV, PCS Holdings or any of the Domestic
Wireless Subsidiaries has indemnified another party with respect to Taxes.
Except as set forth in Section 4.8(a) of the U S WEST Merger Disclosure
Schedule, none of NV, PCS Holdings or any of the Domestic Wireless
Subsidiaries shall be required to include in a taxable period ending after
the date on which the Effective Time occurs taxable income attributable to
income that economically accrued in a prior taxable year with respect to
Section 481 of the Code or any comparable provision of state or local Tax
law. No Person has made with respect to NV, PCS Holdings or any of the
Domestic Wireless Subsidiaries, or with respect to any property held by NV,
PCS Holdings or any of the Domestic Wireless Subsidiaries, any consent under
Section 341 of the Code. Except as set forth in Section 4.8(a) of the U S
WEST Merger Disclosure Schedule, there is no agreement or other document
extending, or having the effect of extending, the period of assessment or
collection of any Taxes for which NV, PCS Holdings or any of the Domestic
Wireless Subsidiaries is or might be liable. The NV/PCS Affiliated Group is
the only affiliated group of corporations, within the meaning of Section
1504(a) of the Code, of which the NV/PCS Transferee has ever been a member.
(b) (i) There is no excess loss account in the stock of any Domestic
Wireless Subsidiary, (ii) there is no deferred income or gain arising from
deferred intercompany transactions allocable to NV, PCS Holdings or any
Domestic Wireless Subsidiary and (iii) no overall foreign loss is allocable
to NV, PCS Holdings or any Domestic Wireless Subsidiary.
(c) None of U S WEST, Media, the NV/PCS Transferee, NV, PCS Holdings or
any of their Subsidiaries has taken or agreed to take any action that would
prevent the NV Merger or the PCS Holdings Merger from, in each case,
constituting a reorganization qualifying under the provisions of Section
368(a) of the Code. None of U S WEST, Media or the NV/PCS Transferee has any
plan, intention, or arrangement to dispose of any of the AirTouch Stock
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received in the NV Merger or the PCS Holdings Merger in a manner that would
cause the NV Merger or the PCS Holdings Merger, respectively, to violate the
continuity of shareholder interest requirements set forth in Treas. Regs.
Section 1.368-1.
4.9 ERISA COMPLIANCE. Except as described in the Domestic Wireless
Financial Statements, as set forth in Section 4.9 of the U S WEST Merger
Disclosure Schedule or as would not reasonably be expected to have a Material
Adverse Effect with respect to the Domestic Wireless Business, (i) all
Employee Benefit Plans and Employee Arrangements are in compliance with all
applicable requirements of law, including ERISA and the Code, and (ii)
neither NV nor any of its Subsidiaries nor PCS Holdings has any Liabilities
or obligations with respect to any such employee benefit plans or
arrangements, whether accrued, contingent or otherwise, nor to the knowledge
of U S WEST are any such Liabilities or obligations expected to be incurred.
Except as set forth in Section 4.9 of the U S WEST Merger Disclosure
Schedule, all Employee Benefit Plans in which Affected Employees participate
are sponsored by U S WEST or Media, and AirTouch shall not assume sponsorship
of any such Employee Benefit Plans as a consequence of the transactions
contemplated by this Agreement. Section 4.9 of the U S WEST Merger Disclosure
Schedule identifies all Employee Arrangements in which Affected Employees
participate.
4.10 COMPLIANCE WITH LAWS. Except as set forth in Section 4.10 of the
U S WEST Merger Disclosure Schedule, U S WEST, Media, NV, PCS Holdings and each
of the Domestic Wireless Subsidiaries is (and the NV/PCS Transferee will be)
in compliance with all Applicable Laws that relate to the operation of the
Domestic Wireless Business, except where the failure so to comply,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect with respect to the Domestic Wireless Business or
materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings
(or the NV/PCS Transferee) to perform its obligations under this Agreement
and the other Transaction Agreements or consummate the transactions
contemplated hereby and thereby.
4.11 EMPLOYMENT AND NON-COMPETITION AGREEMENTS.
(a) Except as set forth in Section 4.11 of the U S WEST Merger
Disclosure Schedule, neither NV nor any Domestic Wireless Subsidiary is a
party to, or otherwise bound by, any executive employment agreement,
secondment agreement or other similar employment agreement involving annual
payments exceeding $250,000 or any non-competition, non-solicitation or other
similar agreement that would similarly restrict or impair the operations or
businesses of AirTouch or its Subsidiaries following the Effective Time.
(b) PCS Holdings has, and at the Effective Time will have, no
employees. PCS Holdings is not, and at the Effective Time
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will not be, a party to or otherwise bound by, any employment, secondment or
other similar employment agreement or any non-competition, non-solicitation
or other similar agreement that would similarly restrict or impair the
operations or businesses of AirTouch or its Subsidiaries following the
Effective Time.
4.12 DOMESTIC WIRELESS ASSETS. (a) Each of NV and the Domestic Wireless
Subsidiaries has, and immediately after the Merger each of the Surviving
Corporation (with respect to the property and assets of NV immediately prior
to the Effective Time) and the Domestic Wireless Subsidiaries will have, good
and valid title to its properties and assets (other than properties or assets
as to which it is lessee or licensee), and valid and subsisting leasehold
interests in all properties or assets of which it is lessee or licensee,
except for such defects which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect with respect to the
Domestic Wireless Business, in each case free and clear of Encumbrances other
than Permitted Encumbrances.
(b) Subject to the rights of Third Parties existing as of the date
hereof which, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect with respect to the Domestic
Wireless Business, NV and the Domestic Wireless Subsidiaries have, and
immediately after the Merger the Surviving Corporation and the Domestic
Wireless Subsidiaries will have, all right, title and interest (including
minority interests) in and to (i) all of their assets that are used or held
for use in, or that are otherwise necessary for, the operation, as currently
conducted, of the Domestic Wireless Business, (ii) whether or not included
within the assets referred to in clause (i) above, all assets (including,
without limitation, capital stock and partnership interests) reflected in the
Domestic Wireless Financial Statements, in each case, as such assets may have
been added to, sold or otherwise changed in the ordinary course of business
since September 30, 1997 or in accordance with this Agreement, and (iii) all
assets of U S WEST or Media and their respective Subsidiaries primarily used
by, or held for use primarily by, the Domestic Wireless Business (other than
Intellectual Property, the U S WEST Insurance Arrangements and cash and cash
equivalents).
4.13 INTELLECTUAL PROPERTY. Except as provided in Section 4.13 of the
U S WEST Merger Disclosure Schedule, NV owns the entire right, title and
interest in and to or has the right to use (pursuant to valid and defensible
license arrangements), all material Intellectual Property used or held for
use in, or otherwise necessary for, the operation of the Domestic Wireless
Business. Except as provided in Section 4.13 of the U S WEST Merger
Disclosure Schedule, there are no pending or, to the knowledge of U S WEST,
threatened proceedings or litigation or other adverse claims affecting or
relating to such Intellectual Property, nor, to the knowledge of U S WEST any
reasonable basis upon which a claim may be asserted by or against NV or any
of the
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Domestic Wireless Subsidiaries for infringement of any such Intellectual
Property, in each case, that, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect with respect to the
Domestic Wireless Business. The Patent License Agreement and the material
Intellectual Property owned by NV or which NV has the right to use will
permit the Domestic Wireless Business to use or hold for use all such
Intellectual Property to the same extent that it is used or held for use, as
of the Effective Time, in the operation of the Domestic Wireless Business.
4.14 LABOR MATTERS. To the knowledge of U S WEST, there are no
threatened labor controversies, strikes or work stoppages with any of the
employees performing work in connection with the operation of NV and the
Domestic Wireless Subsidiaries that, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect with respect to the
Domestic Wireless Business. None of NV or the Domestic Wireless Subsidiaries
is a party to bargaining agreements (whether existing or currently being
negotiated) with respect to the employees of the Domestic Wireless Business.
4.15 ENVIRONMENTAL COMPLIANCE AND LIABILITIES. (a) Except as set forth
in Section 4.15(a) of the U S WEST Merger Disclosure Schedule, to the
knowledge of U S WEST, there exists no fact or condition (i) that would be
reasonably likely to subject NV or any of the Domestic Wireless Subsidiaries
to any liability or damages (including, without limitation, actual,
consequential, exemplary or punitive damages), penalties, injunctive relief
or cleanup costs under any Environmental Law or (ii) that would require or
would be reasonably likely to require cleanup, removal, remedial action or
other response by NV or any of the Domestic Wireless Subsidiaries or any
other Person pursuant to any Environmental Law that (with respect to clauses
(i) and (ii)), individually or in the aggregate, would reasonably be expected
to have a Material Adverse Effect with respect to the Domestic Wireless
Business.
(b) Except as set forth in Section 4.15(b) of the U S WEST Merger
Disclosure Schedule, NV and the Domestic Wireless Subsidiaries are each in
compliance with all applicable Environmental Laws, which compliance includes,
without limitation, the possession by NV and the Domestic Wireless
Subsidiaries of all material Licenses required for the operation of the
Domestic Wireless Business under applicable Environmental Laws and compliance
with the terms and conditions thereof, except where the failure to be in
compliance, individually or in the aggregate, would not reasonably be
expected to have a Material Adverse Effect with respect to the Domestic
Wireless Business.
(c) Except as set forth in Section 4.15(c) of the U S WEST Merger
Disclosure Schedule, all rights to contractual indemnification (other than
insurance policies or arrangements) for the benefit of NV or any Domestic
Wireless Subsidiary
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relating to any Liability resulting from any claim under Environmental Laws
are freely transferable and enforceable in connection with the Merger.
(d) Except as set forth in Section 4.15(d) of the U S WEST Merger
Disclosure Schedule, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Substance of Concern or any violation of any Environmental Laws, that could
form the basis of any claim arising under Environmental Laws against NV or
any of the Domestic Wireless Subsidiaries or against any Person whose
liability for any claim arising under Environmental Laws NV or any of the
Domestic Wireless Subsidiaries has retained or assumed either contractually
or by operation of law, in each case that would reasonably be expected to
have a Material Adverse Effect with respect to the Domestic Wireless Business
or materially impair or delay the ability of U S WEST, Media, NV or PCS
Holdings (or the NV/PCS Transferee) to perform its obligations under this
Agreement and the other Transaction Agreements or consummate the transactions
contemplated hereby and thereby.
4.16 LICENSES. Each of NV and the Domestic Wireless Subsidiaries has
all material Licenses which are necessary to conduct the Domestic Wireless
Business as presently conducted. Without limiting the generality of the
foregoing, NV and the Domestic Wireless Subsidiaries hold the material
Licenses identified in Section 4.16 of the U S WEST Merger Disclosure
Schedule, and all such material Licenses are valid and in full force and
effect. None of U S WEST, Media, NV or the Domestic Wireless Subsidiaries
(or the NV/PCS Transferee) has made any untrue statement of any material
fact, or omitted to disclose any material fact, to any Governmental Authority
or taken or failed to take any action, which misstatements or omissions,
actions or failures to act, individually or in the aggregate, would subject
or could reasonably be expected to subject any of the material Licenses held
by NV and the Domestic Wireless Subsidiaries to revocation or failure to
renew. No event has occurred with respect to any of the material Licenses
which permits, or after notice or lapse of time or both would permit,
revocation or termination thereof or would result in any other material
impairment of the rights of the holder of any of the material Licenses.
U S WEST has no reason to believe that any of the Licenses identified in
Section 4.16 of the U S WEST Merger Disclosure Schedule is not likely to be
renewed in the ordinary course nor that the holder of any such License would
not be entitled to a renewal expectancy as such term is defined in 47 C.F.R.
Section 22.941 or any successor provisions and associated FCC policies.
4.17 MATERIAL CONTRACTS. (a) Section 4.17(a) of the U S WEST Merger
Disclosure Schedule contains a true and complete list of all Material
Contracts (including all Related Party Agreements which are Material
Contracts) to which NV, PCS
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Holdings or any of the Domestic Wireless Subsidiaries is a party as of the
date of this Agreement.
(b) Except as set forth in Section 4.17(b) of the U S WEST Merger
Disclosure Schedule and except (as of the Closing Date) for Material
Contracts relating to the Excluded Assets, each Material Contract listed in
Section 4.17(a) of the U S WEST Merger Disclosure Schedule is valid, binding,
in full force and effect and enforceable by NV, PCS Holdings or one of the
Domestic Wireless Subsidiaries in accordance with its terms (and, at the
Effective Time, will be enforceable by the Surviving Corporation or one of
the Domestic Wireless Subsidiaries, except to the extent terminated in
accordance with its terms (other than by reason of the transactions
contemplated hereby) or in the ordinary course of business consistent with
past practices). There exists no default or event, occurrence, condition or
act (including the consummation of the transactions contemplated hereby)
which, with the giving of notice, the lapse of time or the happening of any
other event or condition, would become a default under any such Material
Contract by NV, PCS Holdings or the Domestic Wireless Subsidiary that is a
party thereto or, to the knowledge of U S WEST, by any other party thereto,
that would reasonably be expected to have a Material Adverse Effect with
respect to the Domestic Wireless Business or materially impair or delay the
ability of U S WEST, Media, NV or PCS Holdings to perform its obligations
under this Agreement and the other Transaction Agreement or consummate the
transactions contemplated hereby and thereby.
4.18 INSURANCE. The conduct of the Domestic Wireless Business and the
assets thereof are adequately self-insured by U S WEST or an Affiliate
thereof or adequately insured (in the manner and to the extent customary for
businesses engaged in the same or similar business).
4.19 BROKERS. Except for Lehman Brothers Inc., whose fees will be paid
by U S WEST, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) who might be
entitled to any fee or commission from NV or PCS Holdings in connection with
the transactions contemplated by this Agreement.
4.20 NATURE OF ACQUISITION. Media (or the NV/PCS Transferee, as
applicable) is acquiring the AirTouch Common Stock, the AirTouch Class D
Preferred Stock and AirTouch Class E Preferred Stock which constitute the
Merger Consideration for its own account, for investment. Media (or the NV
PCS Transferee, as applicable) understands that the shares of AirTouch Common
Stock, AirTouch Class D Preferred Stock and AirTouch Class E Preferred Stock
which constitute the Merger Consideration are characterized as "restricted
securities" under federal securities laws since such shares are being
acquired in a transaction not involving a public offering and that under such
laws and applicable
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regulations such securities may be resold without registration under the
Securities Act only in certain limited circumstances.
4.21 OWNERSHIP OF AIRTOUCH CAPITAL STOCK. Neither U S WEST nor any of
its Subsidiaries owns, or has at any time during the past three years owned,
any shares of capital stock of AirTouch, other than as permitted by agreement
of the parties.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AIRTOUCH
AirTouch hereby represents and warrants to U S WEST and Media as follows:
5.1 ORGANIZATION AND QUALIFICATION. Each of AirTouch and AirTouch's
Subsidiaries is a corporation, partnership or other entity duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization or formation and has all requisite power and authority to own,
lease and operate its assets and properties and to carry on its business as
currently conducted. AirTouch is duly qualified to do business and is in
good standing in each jurisdiction where the ownership or operation of its
assets and properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or in good
standing, as the case may be, has or would be reasonably expected to have a
Material Adverse Effect with respect to AirTouch. Complete and correct
copies of the Certificate of Incorporation and Bylaws of AirTouch, as amended
to date, have been delivered to U S WEST. Such Certificate of Incorporation
and Bylaws are in full force and effect.
5.2 CAPITALIZATION. (a) The authorized capital stock of AirTouch
consists of (i) 1,100,000,000 shares of AirTouch Common Stock of which
504,771,115 shares were issued and outstanding as of September 30, 1997, all
of which are duly authorized, validly issued, fully paid and non-assessable
and not subject to preemptive rights created by statute, AirTouch's
Certificate of Incorporation or Bylaws or any agreement to which AirTouch is
a party or by which AirTouch is bound and (ii) 50,000,000 shares of Preferred
Stock, par value $0.01 per share, of which (A) 6,000,000 shares have been
designated as Series A Preferred Stock, none of which are issued and
outstanding and all of which are reserved for issuance upon exercise of
rights issued pursuant to the Rights Agreement, dated as of September 19,
1994, between AirTouch and The Bank of New York, as Rights Agent (the
"AirTouch Rights Agreement"), (B) 24,000,000 shares have been designated as
6.00% Class B Mandatorily Convertible Preferred Stock, Series 1996 of which
17,238,921 shares were issued and outstanding as of September 30, 1997, all
of which are duly authorized, validly issued, fully paid and non-assessable
and not subject to preemptive rights created by statute, AirTouch's
Certificate of Incorporation or Bylaws or any agreement to which
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AirTouch is a party or by which AirTouch is bound and (C) 19,000,000 shares
have been designated as 4.25% Class C Convertible Preferred Stock, Series
1996 of which 11,070,901 shares were issued and outstanding as of September
30, 1997, all of which are duly authorized, validly issued, fully paid and
non-assessable and not subject to preemptive rights created by statute,
AirTouch's Certificate of Incorporation or Bylaws or any agreement to which
AirTouch is a party or by which AirTouch is bound. The shares of AirTouch
Stock to be issued to Media (or the NV/PCS Transferee) pursuant to Section
3.1(b) shall be duly authorized, validly issued, fully paid and nonassessable
and not subject to preemptive rights created by statute, AirTouch's
Certificate of Incorporation or Bylaws or any agreement to which AirTouch is
a party or by which AirTouch is bound. Upon delivery by AirTouch to Media or
the NV/PCS Transferee of the certificates representing such shares of
AirTouch Stock pursuant to Section 3.4, AirTouch will have transferred to
Media or the NV/PCS Transferee good and valid title to such shares, free and
clear of any and all Encumbrances, other than Encumbrances created or
suffered to exist by Media or the NV/PCS Transferee.
(b) Other than as set forth in Section 5.2(a), or as described in the
AirTouch SEC Documents or in Section 5.2(b) of the AirTouch Merger Disclosure
Schedule, (i) no shares of the capital stock of AirTouch are authorized,
issued or outstanding, or reserved for any other purpose, and there are no
options, warrants or other rights (including registration rights),
agreements, arrangements or commitments of any character to which AirTouch or
any of its Subsidiaries is a party relating to the issued or unissued capital
stock of AirTouch or any obligation of AirTouch to grant, issue or sell any
shares of capital stock of AirTouch by sale, lease, license or otherwise and
(ii) AirTouch has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote or which are
convertible into or exercisable for securities having the right to vote with
the stockholders of AirTouch on any matter. Except as set forth in Section
5.2(b) of the AirTouch Merger Disclosure Schedule, there are no voting trusts
or other agreements or understandings with respect to the voting of the
capital stock of AirTouch.
5.3 CORPORATE POWER AND AUTHORIZATION. AirTouch has the requisite
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement by AirTouch and the consummation by AirTouch of the transactions
contemplated hereby have been duly authorized by all necessary corporate
action on the part of AirTouch. This Agreement constitutes the legal, valid
and binding obligation of AirTouch, enforceable against AirTouch in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
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5.4 CONSENTS. Except (a) as set forth in Section 5.4 of the AirTouch
Merger Disclosure Schedule, (b) for compliance with and filings under the HSR
Act, (c) for receipt of the FCC/State Orders, (d) for the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware,
the Articles of Merger with the Secretary of State of the State of Colorado
and appropriate documents with the relevant authorities of other states in
which AirTouch is qualified to do business, (e) for the filing of the
Certificates of Designation, Preferences and Rights of the AirTouch Class D
Preferred Stock and the AirTouch Class E Preferred Stock with the Secretary
of State of the State of Delaware, and (f) for such filings in connection
with Gains Taxes (the items in clauses (a) through (f) being collectively
referred to herein as "AirTouch Consents"), no Consents, approvals, licenses,
permits, orders or authorizations of, or registrations, declarations, notices
or filings with, any Governmental Authority or any Third Party are required
to be obtained or made by or with respect to AirTouch in connection with the
execution, delivery and performance of this Agreement and the other
Transaction Agreements or the consummation of the transactions contemplated
hereby and thereby or the taking by AirTouch of any other action contemplated
hereby and thereby.
5.5 NON-CONTRAVENTION. The execution, delivery and performance by
AirTouch of this Agreement, and the consummation by AirTouch of the
transactions contemplated hereby, do not and will not (a) violate any
provision of the Certificates of Incorporation or Bylaws of AirTouch; (b)
subject to obtaining the AirTouch Consents, conflict with, or result in the
breach of, or constitute a default under, or result in the termination,
cancellation or acceleration (whether after the filing of notice or the lapse
of time or both) of any material right or obligation of AirTouch or any of
its Subsidiaries under, any material agreement, lease, Contract, note,
mortgage, indenture or other obligation of AirTouch or its Subsidiaries; or
(c) subject to obtaining the AirTouch Consents, violate, or result in a
breach of or constitute a default under any Applicable Law to which AirTouch
or any of its Subsidiaries is subject, other than, in the case of clause (b),
any conflict, breach, termination, default, cancellation, acceleration, loss
or violation that, individually or in the aggregate, would not have a
Material Adverse Effect with respect to AirTouch or materially impair or
delay the ability of AirTouch to perform its obligations under this Agreement
and the other Transaction Agreements or consummate the transactions
contemplated hereby and thereby.
5.6 AIRTOUCH SEC DOCUMENTS; UNDISCLOSED LIABILITIES. (a) AirTouch has
filed all required reports, registration statements, proxy statements, forms
and other documents with the SEC since January 1, 1997 (as such documents
have since the time of their filing been amended or supplemented, the
"AirTouch SEC Documents"). As of their respective dates, (i) the AirTouch
SEC Documents (including any financial statements filed as a part thereof or
incorporated by reference therein) complied in all
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material respects with the requirements of the Securities Act or the Exchange
Act, as applicable, and the rules and regulations of the SEC promulgated
thereunder applicable to such AirTouch SEC Documents, and (ii) at the time
they were filed (and at the time they became effective in the case of
registration statements), none of the AirTouch SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. At their respective dates, the financial statements of AirTouch
included in the AirTouch SEC Documents complied as to form in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, were prepared in accordance
with GAAP (except, in the case of unaudited statements, as permitted by Form
10-Q of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented in all
material respects (subject, in the case of unaudited financial statements, to
normal, recurring audit adjustments) the consolidated financial position of
AirTouch and its consolidated Subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
(b) Except (i) as disclosed in the AirTouch SEC Documents filed and
publicly available prior to the date of this Agreement, and (ii) for
liabilities and obligations incurred in the ordinary course, neither AirTouch
nor its Subsidiaries have any outstanding claims, indebtedness, obligations
or liabilities of any kind (whether accrued, absolute, contingent or
otherwise) required by GAAP to be reflected on a consolidated balance sheet
of AirTouch and its consolidated Subsidiaries or in the notes or schedules
thereto.
(c) Except as set forth in Section 5.6(c) of the AirTouch Merger
Disclosure Schedule, since December 31, 1996, AirTouch and its Subsidiaries
have conducted their respective businesses only in the ordinary course, and
there has not been any event, change or development, other than an event,
change or development resulting from general economic or industry-wide
conditions, that, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect with respect to AirTouch or
materially impair or delay the ability of AirTouch to perform its obligations
under this Agreement or the other Transaction Agreements or consummate the
transactions contemplated hereby or thereby.
5.7 LITIGATION. Except as disclosed in the AirTouch SEC Documents
filed and publicly available prior to the date of this Agreement and for
investigations by Governmental Authorities as to which AirTouch has received
no notice and otherwise has no knowledge, there are no Legal Proceedings
pending or, to the knowledge of AirTouch, threatened against AirTouch or any
of its Subsidiaries that, individually or in the aggregate, would
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reasonably be expected to have a Material Adverse Effect with respect to
AirTouch or materially impair or delay the ability of AirTouch to perform its
obligations under this Agreement or consummate the transactions contemplated
hereby. Except as disclosed in the AirTouch SEC Documents filed and publicly
available prior to the date of this Agreement, there is no order, judgment,
injunction or decree of any Governmental Authority outstanding against
AirTouch or any of its Subsidiaries that, individually or in the aggregate,
would reasonably be expected to have a Material Adverse Effect with respect
to AirTouch or materially impair or delay the ability of AirTouch to perform
its obligations under this Agreement and the other Transaction Agreements or
consummate the transactions contemplated hereby or thereby.
5.8 TAXES. (a) AirTouch and each consolidated, combined, affiliated or
unitary group of which AirTouch is a member (together, the "AirTouch
Affiliated Group") has timely filed all material Tax returns or reports
required to be filed by it or requests for extensions have been timely filed
and any such extensions have been granted and have not expired. All such Tax
returns were complete and correct in all material respects. All Taxes shown
due on such returns have been paid and the most recent financial statements
contained in the AirTouch SEC Documents filed and publicly available prior to
the date of this Agreement reflect an adequate reserve for all Taxes payable
by AirTouch for all taxable periods through the date of such financial
statements.
(b) Neither AirTouch nor any of its Subsidiaries has taken or agreed to
take any action that would prevent the NV Merger or the PCS Holdings Merger
from, in each case, constituting a reorganization qualifying under the
provisions of Section 368(a) of the Code. AirTouch does not have any plan,
intention or arrangement to dispose of any assets of NV, the Domestic
Wireless Subsidiaries or the Domestic Wireless Investments (in each case,
other than any Disposed Asset) or any of the assets of PCS Holdings in a
manner that would cause the NV Merger or the PCS Holdings Merger,
respectively, to violate the continuity of business enterprise requirements
set forth in Treas. Reg. Section 1.368-1 of the Code.
5.9 COMPLIANCE WITH LAWS. AirTouch and each of its Subsidiaries is in
compliance with all Applicable Laws, except where the failure so to comply,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect with respect to AirTouch.
5.10 BROKERS. Except for Morgan Stanley & Co. Incorporated, whose fees
will be paid by AirTouch, there is no investment banker, broker, finder or
other intermediary which has been retained by or is authorized to act on
behalf of AirTouch who might be entitled to any fee or commission from
AirTouch in
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connection with the transactions contemplated by this Agreement and the other
Transaction Agreements.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 CONDUCT OF BUSINESS OF NV AND PCS HOLDINGS. (a) Except as set
forth in item 1 of Section 6.1(a) of the U S WEST Merger Disclosure Schedule
or as otherwise contemplated by this Agreement, during the period from the
date hereof to the Effective Time, NV and PCS Holdings shall, and NV shall
cause the Domestic Wireless Subsidiaries to, except as otherwise expressly
contemplated by this Agreement, (i) conduct the Domestic Wireless Business
only in the ordinary course consistent with past practice (including, without
limitation, not taking any actions out of the ordinary course to generate
cash, such as delaying payables or accelerating receivables) and in the
manner required by Section 3.1(b) of the Joint Venture Organization
Agreement, (ii) make capital expenditures with respect to the Domestic
Wireless Business at the times and in amounts not less than 80% of the
amounts set forth in item 2 of Section 6.1(a) of the U S WEST Merger
Disclosure Schedule ("Planned Capital Expenditures") and (iii) make capital
contributions to PCS Nucleus at the times and in the amounts contemplated by
the business plans and budgets of PCS Nucleus and PrimeCo.
(b) During the period from the date hereof to the Effective Time,
except as set forth in Section 6.1(b) of the U S WEST Merger Disclosure
Schedule or as otherwise expressly contemplated by this Agreement, neither NV
nor PCS Holdings shall (and NV shall cause the Domestic Wireless Subsidiaries
not to), without the written consent of AirTouch, which consent may not be
unreasonably withheld or delayed:
(i) issue, sell, pledge, dispose of or encumber, or authorize or
propose the issuance, sale, pledge, disposition or encumbrance of, any
shares of, or securities convertible or exchangeable for, or options,
puts, warrants, calls, commitments or rights of any kind to acquire,
any shares of capital stock or voting securities of NV or PCS Holdings
or capital stock or other ownership interests of any Domestic Wireless
Subsidiary;
(ii) take any action which would be prohibited under Section 3.1(d) of
the Joint Venture Organization Agreement (treating PCS Holdings for this
purpose as a subsidiary of NV);
(iii) implement any change in its accounting principles, practices or
methods, other than as may be
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required by GAAP and other than transfers of reserves with respect to
Excluded Claims and Excluded Settlements;
(iv) take or agree to take any action that would prevent the NV
Merger, or the PCS Holdings Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code;
(v) terminate, establish, adopt, enter into, amend or otherwise modify
(A) any Employee Arrangement or any employment, independent contractor,
secondment, or similar employment agreement or Employee Arrangement to the
extent any such actions would increase annual payments or contributions (or
both) to be made by NV and the Domestic Wireless Subsidiaries by an amount
in excess of $250,000 or (B) any non-competition, non-solicitation or
similar agreement affecting the Domestic Wireless Business or that would be
binding upon AirTouch or any Subsidiary of AirTouch after the Effective
Time, except for (x) budgeted, scheduled, broad-based compensation
increases implemented in the ordinary course of business consistent with
past practices, (y) amendments or modifications of Employee Arrangements
that are required by Applicable Law and (z) the termination of any non-
competition or non-solicitation agreement that would restrict the business
of AirTouch and its Subsidiaries following the Effective Time;
(vi) terminate, establish, adopt, enter into, make any new grants or
awards under, amend or otherwise modify any Employee Benefit Plans that
would be binding upon AirTouch or any Subsidiary of AirTouch after the
Effective Time, or grant any increase or potential increase in direct or
indirect compensation of any nature affecting any Affected Employee, except
for (A) budgeted, scheduled, broad-based compensation increases implemented
in the ordinary course of business consistent with past practices, and (B)
amendments or modifications of Employee Benefit Plans that are required by
Applicable Law or do not have an aggregate financial impact on Affected
Employees under all such Employee Benefit Plans exceeding $100,000;
(vii) enter into, amend or otherwise modify any Settlement the
terms of which, or obligations under which, AirTouch, any Domestic
Wireless Subsidiary or any Domestic Wireless Investment would be bound
by or obligated to perform following the Effective Time; or
(viii) authorize any of, or commit or agree to take any of, the
actions referred to in clauses (i) through (vii) above.
6.2 CONDUCT OF BUSINESS OF AIRTOUCH. (a) From and after the date hereof
to the Effective Time, except as specifically permitted by the terms of this
Agreement, AirTouch shall not
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(and, as applicable, shall cause its Subsidiaries not to), without the
written consent of U S WEST, which consent may not be unreasonably withheld
or delayed:
(i) issue any shares of AirTouch Common Stock or any option,
warrant or right relating thereto or any securities convertible into
or exchangeable for any shares of AirTouch Common Stock (other than
pursuant to existing agreements or existing options or benefit plans
or upon conversion of outstanding securities) in one or more
transactions to the extent that the number of shares of AirTouch
Common Stock issued (and/or issuable upon exercise of any such option,
warrant or right or upon conversion or exchange of any such security)
would in the aggregate represent more than 20% of the number of shares
of AirTouch Common Stock outstanding immediately prior to such
issuance;
(ii) during the period in which the AirTouch Determination Price
is being calculated, purchase or trade any shares of AirTouch Common
Stock (other than pursuant to the terms of options or benefit plans or
upon conversion, exchange or exercise of outstanding securities);
(iii) amend the Certificate of Incorporation of AirTouch to alter
or change the powers, preferences or special rights of the shares of
AirTouch Common Stock so as to affect them materially adversely, or
amend the Bylaws of AirTouch in a manner materially adverse to the
holders of AirTouch Common Stock;
(iv) effect a reclassification of the shares of AirTouch Common
Stock, or pay any single dividend or other distribution (whether in
cash, capital stock or other assets) to holders of AirTouch Common
Stock where the value of such dividend or distribution (in excess of
the fair market value of any consideration received therefor) together
with the value of all dividends and distributions (in excess of the
fair market value of any consideration received therefor) made to the
holders of AirTouch Common Stock during the period from the date
hereof and prior to such dividend or distribution exceeds 20% of the
product of (A) the Volume-Weighted Average Trading Price on the record
date for determining the stockholders entitled to receive such
dividend or distribution and (B) the number of shares of AirTouch
Common Stock outstanding on such record date (an "Extraordinary
Dividend"), or declare an Extraordinary Dividend having a record date
prior to the Effective Time;
(v) sell or exchange in a single transaction or series of related
transactions shares of capital stock
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of (A) AirTouch International, a California corporation, (B) AirTouch
Cellular of Nevada, a Nevada corporation, (C) AirTouch Cellular, a
California corporation, or (D) AirTouch Cellular, Inc., a Delaware
corporation, (each, an "Operating Subsidiary"), or permit any Operating
Subsidiary to enter into any agreement providing for a single
transaction or series of related transactions that results in the
transfer, sale or other disposition of its assets to the extent that the
shares of capital stock sold or the assets subject to such transfer,
sale or other disposition, as the case may be, in the aggregate would
represent more than 20% of the total fair market value of AirTouch and
its Subsidiaries, taken as a whole, measured on a proportionate basis
immediately prior to such transaction or series of related transactions;
PROVIDED, HOWEVER, that the foregoing shall not apply to (x) any primary
sale of shares of capital stock of any Operating Subsidiary issued after
the date hereof, and (y) any transaction or series of related
transactions in which a majority of the value of the consideration
received in exchange for the assets transferred, sold or otherwise
disposed of consists of assets (or interests in the owner of assets) of
a like kind or nature;
(vi) take or agree to take any action that would prevent the NV
Merger or the PCS Holdings Merger from constituting a reorganization
qualifying under the provisions of Section 368(a) of the Code; or
(vii) publicly announce any intention, commitment or agreement (A) to
effect any of the actions prohibited by clauses (i) through (vi) above
(each, a "Restricted Action") or (B) to merge, amalgamate or consolidate
AirTouch in any transaction in which (x) AirTouch is not the surviving
corporation and (y) the outstanding shares of AirTouch Common Stock are
converted or exchanged into other securities or property (a "Parent
Transaction"), if, in either case, such announcement would reasonably be
expected to materially impair or delay the consummation of the transactions
contemplated hereby or the ability of AirTouch to perform its obligations
under this Agreement.
(b) If prior to the Closing Date, (i) AirTouch shall publicly announce
any intention, commitment or agreement to effect any Restricted Action or a
Parent Transaction and (ii) the Volume-Weighted Average Trading Price of the
AirTouch Common Stock for the ten consecutive Trading Days ending on the 30th
day preceding the date of such public announcement is the Floor Price or
less, then the AirTouch Determination Price shall be deemed for all purposes
of this Agreement to equal the Floor Price.
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(c) (i) If prior to the Closing Date, AirTouch shall publicly announce
any intention, commitment or agreement to effect any Parent Transaction with
any Person who does not have a class of equity securities registered with the
SEC pursuant to Section 12(b) or 12(g) of the Exchange Act having
substantially the same powers, preferences and special rights as AirTouch
Common Stock, this Agreement may be terminated and the Merger abandoned by
U S WEST upon consummation of such Parent Transaction.
(ii) If prior to the Closing Date, AirTouch shall consummate a Parent
Transaction, then this Agreement shall be deemed to be modified to provide
that Media (or the NV/PCS Transferee) shall be entitled to receive: (A) in
lieu of the Common Consideration, the consideration that Media (or the NV/PCS
Transferee) would have been entitled to receive upon consummation of such
Parent Transaction if the Closing had occurred immediately prior to the
consummation of such Parent Transaction and (B) in lieu of the Preferred
Consideration, shares of preferred stock of the surviving corporation in such
Parent Transaction (or the parent of such surviving corporation if the
stockholders of AirTouch receive shares of capital stock of such parent in
connection with such Parent Transaction) having substantially the same
powers, preferences and special rights as the AirTouch Class D Preferred
Stock and AirTouch Class E Preferred Stock.
(d)(i) If prior to the Closing Date, AirTouch shall publicly announce
any intention, commitment or agreement to effect any Parent Transaction with
any Person (an "Acquiring Person") and the Merger Consideration Value (as
defined in (ii) below) to be received by holders of AirTouch Common Stock in
such Parent Transaction is less than the Floor Price, then the number of
shares of AirTouch Common Stock that constitute the Merger Consideration
shall equal the quotient of (A) the Common Value, divided by (B) the Merger
Consideration Value.
(ii) The "Merger Consideration Value," for any Parent Transaction,
shall equal the sum of (A) the amount of cash, if any, to be received per
share of AirTouch Common Stock in such Parent Transaction, PLUS (B) the
number of shares of Acquiring Person common stock, if any, to be received per
share of AirTouch Common Stock in such Parent Transaction, multiplied by the
Volume-Weighted Average Trading Price of Acquiring Person common stock for
the five consecutive Trading Days commencing on the eleventh Trading Day
following such announcement, plus (C) the fair market value of Acquiring
Person preferred stock or other property or securities, if any, to be
received per share of AirTouch Common Stock in such Parent Transaction as
determined by an investment banking firm jointly selected by AirTouch and U S
WEST; PROVIDED that if any such Acquiring Person preferred stock is
convertible into Acquiring Person common stock, such investment banking firm
will use the Volume-Weighted Average Trading Price of Acquiring Person common
stock for the five
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consecutive Trading Days commencing on the eleventh Trading Day following
such announcement in determining the value of such preferred stock.
6.3 ACCESS TO INFORMATION. (a) From the date hereof until the Closing
Date, U S WEST shall permit AirTouch and its representatives to have full
access to the management, facilities, suppliers, accounts, books, records
(including, without limitation, budgets and forecasts), contracts and other
materials of the Domestic Wireless Business reasonably requested by AirTouch
or such representatives and shall make available to AirTouch and its
representatives the directors, officers, employees and independent
accountants (and shall use reasonable best efforts to so make available its
former accountants) of the Domestic Wireless Business for interviews for the
purpose of verifying the information furnished to AirTouch. Such access and
availability shall be subject to existing confidentiality agreements and
shall be conducted by AirTouch and its representatives during normal business
hours, upon reasonable advance notice and in such a manner as not to
interfere unreasonably with the business or operations of the Domestic
Wireless Business or U S WEST.
(b) From the date hereof until the Closing Date, AirTouch shall permit
U S WEST and its representatives to have reasonable access to the management,
accounts, books, records and Material Contracts of AirTouch and its
Subsidiaries reasonably requested by U S WEST or such representatives in view
of the issuance of shares of AirTouch Stock to Media (or the NV/PCS
Transferee) in the Merger and shall make available to U S WEST and its
representatives, as reasonably requested by U S WEST, the officers, employees
and independent accountants of AirTouch and its Subsidiaries for interviews
for the purpose of verifying the information furnished to U S WEST. Such
access and availability shall be consistent generally with the approach taken
by U S WEST and AirTouch (with respect to AirTouch information) prior to the
date of this Agreement, shall be subject to existing confidentiality
agreements and shall be conducted by U S WEST and its representatives during
normal business hours, upon reasonable advance notice and in such a manner as
not to interfere unreasonably with the business or operations of AirTouch and
its Subsidiaries. To the extent that any information requested by U S WEST
pursuant to this Section 6.3(b) relates to any business plans, forecasts,
budgets or other forward-looking information, or to any business of AirTouch
or its Subsidiaries which actually or potentially competes with any
businesses of U S WEST or its Subsidiaries, AirTouch shall only be required
to permit U S WEST'S investment bankers and outside legal advisors to have
access to such information, and such investment bankers and outside legal
advisors shall not distribute, disseminate or disclose such information to U
S WEST or any of its Subsidiaries.
(c) Each of U S WEST and AirTouch agrees that it will not, and will
cause each of its respective Affiliates and representatives not to, use any
information obtained pursuant to this
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Section 6.3 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement and the other Transaction Agreements. The
agreements, dated as of January 10, 1997 and April 4, 1997, between U S WEST
and AirTouch (collectively, the "Confidentiality Agreements"), as well as the
confidentiality obligations set forth in the Joint Venture Organization
Agreement and the WMC Agreement, shall apply with respect to information
furnished thereunder or hereunder and any other activities contemplated
thereby.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 TAX MATTERS. For purposes of the tax opinions to be delivered
pursuant to Sections 9.2(d) and 9.3(d), respectively, (i) AirTouch will
deliver representation letters substantially in the form of Exhibits G-1 and
G-2 attached hereto dated as of the Closing Date, and (ii) U S WEST and Media
and the NV/PCS Transferee shall deliver representation letters substantially
in the form of Exhibits H-1 and H-2 attached hereto, dated as of the Closing
Date, in each case, to Weil, Gotshal & Manges LLP, counsel to U S WEST, Media
and the NV/PCS Transferee, and Pillsbury Madison & Sutro LLP, counsel to
AirTouch.
7.2 REASONABLE BEST EFFORTS. Upon the terms and subject to the
conditions set forth in this Agreement, including, without limitation,
Section 7.3 and except as otherwise agreed to by the parties, each of the
parties agrees to use all reasonable best efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and
cooperate with the other in doing, all things necessary, proper or advisable
to consummate and make effective, in the most expeditious manner practicable,
the Merger and the other transactions contemplated by this Agreement and the
other Transaction Agreements, including (a) the obtaining of all necessary
actions or nonactions, waivers, Consents and approvals from Governmental
Authorities and the making of all necessary registrations and filings with,
and the taking of all reasonable steps as may be necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by, any
Governmental Authority, (b) the obtaining of all necessary Consents,
approvals or waivers from Third Parties, (c) the defending of any lawsuits or
other Legal Proceedings, whether judicial or administrative, challenging this
Agreement or any other Transaction Agreement or the consummation of any of
the transactions contemplated by this Agreement or any other Transaction
Agreement, including seeking to have any stay, temporary restraining order,
decree, injunction or other order entered by any court or other Governmental
Authority vacated or reversed or otherwise modified to allow the transactions
contemplated by this Agreement and the other Transaction Agreements to
proceed and (d) the execution and delivery of any additional instruments
necessary to consummate the transactions
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contemplated by, and to fully carry out the purposes of, this Agreement and
the other Transaction Agreements.
7.3 ANTITRUST NOTIFICATION; FCC AND STATE REGULATORY APPROVALS. (a) U S
WEST and AirTouch shall promptly, and in any event within ten Business Days
following the date hereof, file with the FTC and the DOJ, the notification
and report form required for the transactions contemplated by this Agreement
and any supplemental information requested in connection therewith pursuant
to the HSR Act. Each of U S WEST and AirTouch shall furnish to each other's
counsel such necessary information and reasonable assistance as the other may
request in connection with its preparation of any filing or submission that
is necessary under the HSR Act. Each of U S WEST and AirTouch shall use its
reasonable best efforts to obtain any clearance required under the HSR Act
for the consummation of the Merger and shall keep each other apprised of the
status of any communications with, and any inquiries or requests for
additional information from, the FTC and the DOJ and other Governmental
Authorities and shall comply promptly with any such inquiry or request.
(b) U S WEST and AirTouch shall promptly, and in any event within ten
Business Days following the date hereof, file any required application,
report or other filing or request for approval or notifications with the FCC
and any state regulatory authority from whom Consent or clearance is required
to be obtained in connection with the transactions contemplated hereby. Each
of U S WEST and AirTouch shall furnish to each other's counsel such necessary
information and reasonable assistance as the other may request in connection
with its preparation of any such filing or other submission. Each of U S
WEST and AirTouch shall use its reasonable best efforts to obtain any such
Consent or clearance required for the consummation of the Merger and shall
keep each other apprised of the status of any communications with, and any
inquiries or requests for additional information from, the FCC or any state
regulatory authority and shall comply promptly with any such inquiry or
request.
7.4 SUPPLEMENTAL DISCLOSURE. U S WEST, Media, NV, PCS Holdings (and
the NV/PCS Transferee) shall confer on a regular and frequent basis with
AirTouch, and promptly notify AirTouch of, and furnish AirTouch with, any
information it may reasonably request with respect to any event or condition
or the existence of any fact that would cause any of the conditions to the
obligation of AirTouch to consummate the Merger not to be satisfied, and
AirTouch shall promptly notify U S WEST of, and furnish U S WEST with, any
information it may reasonably request with respect to any event or condition
or the existence of any fact that would cause any of the conditions to the
obligations of U S WEST, Media, NV and PCS Holdings (and the NV/PCS
Transferee) to consummate the Merger not to be satisfied.
7.5 ANNOUNCEMENTS. Prior to the Closing, none of U S WEST, Media (or
the NV/PCS Transferee), NV, PCS Holdings or AirTouch
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will issue any press release or otherwise make any public statement with
respect to this Agreement and the transactions contemplated hereby without
the prior consent of the other parties (which consent shall not be
unreasonably withheld), except as expressly permitted by and in accordance
with terms of the Confidentiality Agreements or as may be required by
Applicable Law or stock exchange regulations (including, without limitation,
pursuant to the United States federal securities laws in connection with any
registration statement or report filed thereunder), in which event the party
required to make the release or announcement shall, if possible, allow the
other parties reasonable time to comment on such release or announcement in
advance of such issuance. The parties agree that the initial press release
to be issued with respect to the transactions contemplated by this Agreement
shall be in the form heretofore agreed to by the parties.
7.6 NYSE LISTING. AirTouch shall use its best efforts to cause the
shares of AirTouch Common Stock to be issued in the Merger to be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time.
7.7 SETTLEMENTS FOR CASH COLLECTIONS AND DISBURSEMENTS AFTER THE
EFFECTIVE TIME. (a) For each calendar month commencing with the month in
which the Effective Time occurs and, unless sooner terminated by agreement of
the parties, continuing for a period of two years thereafter, (i) within 15
Business Days following the end of the month in question, U S WEST shall
prepare and deliver to AirTouch, and AirTouch shall fully cooperate in
preparing, a statement of transactions which shall reflect a complete
analysis of any cash collections and cash disbursements by the U S WEST Group
on behalf of the AirTouch Group during the relevant month or for any prior
month that should have been (but was not) included in a prior statement and
(ii) within 15 Business Days following the end of the month in question,
AirTouch shall prepare and deliver to U S WEST, and U S WEST shall fully
cooperate in preparing, a statement of transactions which shall reflect a
complete analysis of any cash collections and cash disbursements by the
AirTouch Group on behalf of the U S WEST Group during the relevant month or
for any prior month that should have been (but was not) included in a prior
statement; PROVIDED, HOWEVER, in each case that, with respect to the first
such monthly period, such statement shall not reflect any cash collections or
disbursements occurring prior to the Effective Time taken into account in
determining the adjustments to the Merger Consideration.
(b) Not later than five Business Days following delivery of each such
monthly statement, U S WEST shall pay to AirTouch or AirTouch shall pay to
U S WEST, as the case may be, in cash, an amount necessary to eliminate the
account balance as reflected in each such statement (which amounts may be set
off against each other as appropriate). Any Disputes relating to such
amounts payable shall be exclusively governed by and settled in
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accordance with the provisions of Section 12.14. Payments made pursuant to
Section 7.7 shall not, for any purposes of this Agreement, constitute
Indemnifiable Losses under Article XI or be set off against any other
payments to be made (other than as provided in this Section 7.7(b)),
Liabilities asserted or claims made pursuant to this Agreement, unless
AirTouch and U S WEST otherwise agree in writing.
(c) Following the end of the two-year period referred to in Section
7.7(a) (or such earlier period as the parties hereto may agree), AirTouch and
U S WEST shall continue to deliver the statement of transactions referred to
in Section 7.7(a) and pay the amounts necessary to eliminate the account
balance as reflected in such statement in accordance with Section 7.7(b), not
less than once every calendar quarter (or at such other intervals as the
parties may agree).
(d) Each of AirTouch and U S WEST hereby grants the other a limited
irrevocable power-of-attorney to endorse, deposit and negotiate all checks,
drafts or other forms of payment made in respect of any invoice representing
a receivable payable to either of them or any of their Subsidiaries, but
which are sent by the payor to a lock box maintained by the other or is made
payable to either of them or any of their Subsidiaries but which is the
payment of a receivable which is a receivable of the other.
7.8 USE OF U S WEST NAME. Promptly after the Effective Time, AirTouch
shall cause each Domestic Wireless Subsidiary whose name includes the name
"U S WEST" to change its name to delete any reference therein to "U S WEST."
Promptly after the Effective Time, the Surviving Corporation shall, and shall
cause the Domestic Wireless Subsidiaries to, (i) terminate any license to use
the name "U S WEST" with all agents, franchisees and licensees of U S WEST
and the Domestic Wireless Business (to the extent permitted by the terms of
such license) and (ii) not to use the name "U S WEST" in connection with the
operations of the Domestic Wireless Business; PROVIDED, HOWEVER, that for a
period of 90 days after the Effective Time, the Surviving Corporation and the
Domestic Wireless Subsidiaries may continue to use the "U S WEST" name on
signage, business forms, business cards and stationery. Nothing herein shall
require the Surviving Corporation or the Domestic Wireless Subsidiaries to
recall from customers telephones, accessories or other equipment or materials
labeled with the "U S WEST" name and remove such name from such telephones,
accessories or other equipment or materials.
7.9 INTELLECTUAL PROPERTY.
(a) At the Effective Time, the U S WEST Group or a designee of U S WEST
shall retain all right, title and interest in the U S WEST Intellectual
Property and the AirTouch Group shall have all right, title and interest in
the Domestic Wireless Intellectual Property.
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(b) Subject to the Patent License Agreement and the Software License
Agreement, within 180 days following the Effective Time, except as set forth
in Sections 7.9(c) and 7.9(d), the U S WEST Group shall cease using and shall
return to AirTouch all of the Domestic Wireless Intellectual Property, and
the AirTouch Group shall cease using and return to U S WEST any of the
U S WEST Intellectual Property. Each of AirTouch and U S WEST recognize that
certain employees of the Domestic Wireless Business have been and may in the
future be employed at other Subsidiaries of U S WEST, and that certain
employees of the U S WEST and its Subsidiaries have been and may in the
future be employed in the Domestic Wireless Business, and that such employees
may have Information, confidential or otherwise, of their former employers.
The parties agree that neither will bring any Action against the other for
use or disclosure of such Information to the extent that such Information is
based solely on the recollection and knowledge of such employee and is not
contained in any document or software, or otherwise memorialized.
(c) From and after the Effective Time, (i) the U S WEST Group shall
have the right to use all Confidential Information included in the Domestic
Wireless Intellectual Property which is used by Subsidiaries of U S WEST
(other than NV, the Domestic Wireless Subsidiaries and the Domestic Wireless
Investments) as of the date hereof or used by Subsidiaries of U S WEST (other
than NV, the Domestic Wireless Subsidiaries and the Domestic Wireless
Investments) during the period from the date hereof until the Effective Time
in the ordinary course of business consistent with past practice and (ii) the
Domestic Wireless Business shall have the right to use all Confidential
Information included in the U S WEST Intellectual Property which is used by
the Domestic Wireless Business as of the date hereof or used by the Domestic
Wireless Business during the period from the date hereof until the Effective
Time in the ordinary course of business consistent with past practice;
PROVIDED, HOWEVER, that, notwithstanding the foregoing, (A) the U S WEST
Group shall not have the right to use any customer lists or other customer
data, marketing plans or other marketing data, business plans or other
financial data or operating metrics or data relating to marketing, sales and
network performance included in the Domestic Wireless Intellectual Property
and (B) for a period ending 18 months following the Effective Time, U S WEST
Communications Group, Inc. ("USWCG") and its Subsidiaries shall not have the
right to use any Confidential Information included in the Domestic Wireless
Intellectual Property other than (x) Confidential Information used by USWCG
or its Subsidiaries as of the date hereof and (y) Confidential Information
used by USWCG or its Subsidiaries to perform administrative functions
(including employee benefits, payroll, financial, clerical and accounting
functions).
(d) In the event there are any Excluded Assets on the Closing Date,
from and after the Closing Date, the business of the Excluded Assets shall
have the right to use the Domestic
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Wireless Intellectual Property to the extent it is being used by the business
of Excluded Assets as of the Closing Date; PROVIDED, HOWEVER, that, subject
to Section 7.9(c), the business of Excluded Assets shall not have the right
to use any Domestic Wireless Intellectual Property (including customer lists
or other customer data, marketing plans or other marketing data, business
plans or other financial data and operating metrics or data relating to
marketing, sales and network performance) to the extent that such Domestic
Wireless Intellectual Property relates to markets not constituting Excluded
Assets. Notwithstanding the foregoing, and subject to any rights granted
under the Resources Agreement, upon the transfer, sale or other disposition
of an Excluded Asset to a Third Party or a change of control with respect to
an Excluded Asset, any right granted pursuant to this Section 7.9(d) to use
any Core Intellectual Property (as defined below) in the business of such
Excluded Asset shall terminate. The occurrence of any event described in
Section 12.11(b) of this Agreement shall not be deemed to be a change of
control of any Excluded Asset for purposes of this Section 7.9(d). As used
herein, "Core Intellectual Property" shall mean all software, tools and
documentation included in the Domestic Wireless Intellectual Property which
is used or held for use in connection with the performance of any of the
following functions to the extent such software, tools and documentation is
proprietary and not commercially available in the form utilized by the
Domestic Wireless Business: customer billing systems, customer management
systems, customer service systems, enhanced network operations which are not
essential to the basic operation of the network (e.g., RF fingerprinting),
marketing database systems and sales information systems.
(e) For purposes of this Section 7.9 only, "Intellectual Property"
shall mean all registered and unregistered trademarks, service marks, service
names, trade styles and trade names (including, without limitation, trade
dress and other names, marks and slogans) and all associated goodwill, all
statutory, common law and registered copyrights, all patents, all
applications for any of the foregoing together with all rights to use all of
the foregoing, all know-how, inventions, discoveries, improvements,
processes, formulae (secret or otherwise), specifications, trade secrets,
whether patentable or not, licenses and other similar agreements,
confidential information, and all drawings, records, books or other indicia,
however evidenced, of the foregoing.
7.10 INSURANCE. (a) U S WEST shall, and shall cause each of its
Subsidiaries to, make available to AirTouch, the benefit of any and all
U S WEST Insurance Arrangements with respect to insured events or occurrences
prior to the Effective Time which relate to the Domestic Wireless Business
(whether or not claims relating to such events or occurrences are made prior
to or after the Effective Time).
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(b) AirTouch shall be entitled to assert without notice to U S WEST any
claim under the U S WEST Insurance Arrangements by or against the AirTouch
Group as to which the aggregate losses, Liabilities, damages or expenses to
be incurred in connection therewith are not reasonably expected by AirTouch
to exceed $100,000 by notice to the administrator of the applicable Insurance
Arrangement. In respect of any claim under the U S WEST Insurance
Arrangements by or against the AirTouch Group as to which the aggregate
losses, Liabilities, damages or expenses are reasonably expected by AirTouch
to exceed $100,000, AirTouch shall provide U S WEST with prompt notice of
events or occurrences giving rise to such a claim. U S WEST shall be
responsible for asserting, on behalf of the AirTouch Group, and shall use its
reasonable best efforts to assert (or at the option of U S WEST) to assist
AirTouch in asserting, any such claim so reported to U S WEST; PROVIDED that
U S WEST shall not effect a Settlement of any claim by or against the
AirTouch Group without the consent of AirTouch unless the Settlement includes
as an unconditional term thereof the giving by each claimant or plaintiff to
the applicable member of the AirTouch Group of a release from all liability
with respect to such claim.
(c) Nothing in this Section 7.10 shall be construed to limit or
otherwise alter in any way the indemnification obligations of U S WEST,
including those created by Article XI of this Agreement.
7.11 THIRD PARTY RIGHTS. (a) In the event that, after the Effective
Time, U S WEST or its Affiliates holds any right to indemnification or any
other contractual or other right (collectively, a "Recourse Right") with
respect to NV, the Domestic Wireless Subsidiaries or the Domestic Wireless
Investments then U S WEST shall, or shall cause a Subsidiary to, assert or
otherwise make available to the applicable member of the AirTouch Group the
full benefit of such Recourse Right by making a claim on behalf of the
applicable member of the AirTouch Group or taking other steps reasonably
requested by AirTouch.
(b) In the event that, after the Effective Time, AirTouch or the
Domestic Wireless Subsidiaries holds any Recourse Right with respect to
businesses of U S WEST other than the Domestic Wireless Business, then
AirTouch shall, or shall cause a Subsidiary to, assert or otherwise make
available to the applicable member of the U S WEST Group, the full benefit of
such Recourse Right by making a claim on behalf of the applicable member of
the U S WEST Group or taking other steps reasonably requested by U S WEST.
7.12 INTERCOMPANY AGREEMENTS. (a) Prior to the Effective Time, U S WEST
shall cause each member of the U S WEST Group to discharge in full or
otherwise satisfy or terminate any intercompany indebtedness owed by NV, any
Domestic Wireless Subsidiary or any Domestic Wireless Investment or PCS
Holdings to
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such member of the U S WEST Group, other than the Assumed NV Debt and the
Assumed PCS Debt.
(b) Prior to the Effective Time, U S WEST and NV shall discharge in
full or otherwise satisfy or terminate (i) all intercompany receivables
relating to corporate administrative services of any member of the U S WEST
Group from NV, any Domestic Wireless Subsidiary or Domestic Wireless
Investment and (ii) all intercompany receivables relating to corporate
administrative services of NV, any Domestic Wireless Subsidiary or any
Domestic Wireless Investment from any member of the U S WEST Group.
(c) Following the Effective Time, all Contracts, Licenses or other
arrangements, formal or informal, between NV, the Domestic Wireless
Subsidiaries and the Domestic Wireless Investments, on the one hand, and any
member of the U S WEST Group, on the other hand, in existence as of the
Effective Time (other than this Agreement and the other Transaction
Agreements) shall be terminable at the option of AirTouch at any time on 30
Business Days' prior written notice.
7.13 JOINT AGREEMENTS; JOINT ASSETS. (a)(i)Except as otherwise
specifically provided in this Agreement and subject to Sections 7.13(a)(ii)
and 7.13(a)(iii), any Contract to which NV or a Domestic Wireless Subsidiary
is a party that inures to the benefit of both the Domestic Wireless Business
and the business of the Excluded Assets (including, without limitation,
interconnection agreements, purchasing agreements (including rights under
purchasing agreements entered into pursuant to the TOMCOM Agreement),
national retailing contracts, bulk contracts, corporate contracts, roaming
agreements, marketing contracts and other Contracts) ("Joint Agreements")
shall be assigned as of the Closing Date, in part, so that NV or the
applicable Domestic Wireless Subsidiary, on the one hand, and the owner of
the Excluded Assets, on the other hand, each shall be entitled to the rights
and benefits inuring to its business under such agreement.
(ii) If any Joint Agreement can be assigned as a whole, but not in part,
and such Joint Agreement is primarily used by the Domestic Wireless Business,
such Joint Agreement shall be retained by NV or the applicable Domestic
Wireless Subsidiary. In such event, subject to Applicable Laws and the terms
of such Joint Agreement, NV shall (and shall cause the Domestic Wireless
Subsidiaries to) take all reasonable actions to make available to the
business of the Excluded Assets the benefit of such Joint Agreement to the
same extent of the benefit received by the business of the Excluded Assets as
of the Closing Date. To the extent that NV makes the benefits of any Joint
Agreement available to the business of the Excluded Assets, the owner of the
Excluded Assets shall be responsible for fulfilling its proportionate
interest in the obligations under such Joint Agreement. The obligation of NV
to make the benefit of any such Joint Agreement available to the business of
any Excluded Asset
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shall terminate upon the earlier to occur of (1) the expiration of the Joint
Agreement and (2) six months following the transfer, sale or other
disposition of such Excluded Asset to a Third Party or a change of control
with respect to such Excluded Asset (or such earlier date as determined by
the purchaser of such Excluded Asset).
(iii) If any Joint Agreement can be assigned as a whole, but not in
part, and such Joint Agreement is primarily used by the business of the
Excluded Assets, such Joint Agreement shall be assigned by NV or the
applicable Domestic Wireless Subsidiary to the owner of the Excluded Assets
and the Liabilities relating to such Joint Agreement shall be assumed by the
owner of the Excluded Assets. In such event, subject to Applicable Laws and
the terms of such Joint Agreement, the owner of the Excluded Assets shall
take all reasonable actions to make available to the Domestic Wireless
Business the benefit of such Joint Agreement to the same extent of the
benefit received by the Domestic Wireless Business as of the Closing Date.
To the extent that the owner of the Excluded Assets makes the benefits of any
Joint Agreement available to the Domestic Wireless Business, NV (or a
Domestic Wireless Subsidiary) shall be responsible for fulfilling its
proportionate interest in the obligations under such Joint Agreement. The
obligation of the owner of the Excluded Assets to make the benefit of any
such Joint Agreement available to the Domestic Wireless Business shall
terminate upon the earlier to occur of (1) the expiration of the Joint
Agreement and (2) six months following the transfer, sale or other
disposition of the Excluded Asset which is the primary user of such Joint
Agreement to a Third Party or a change of control with respect to such
Excluded Asset (or such earlier date as determined by AirTouch).
(b) (i) Except as otherwise specifically provided in this Agreement,
any asset of NV used in or held for use in both the Domestic Wireless
Business and the business of Excluded Assets (including, without limitation,
inventory) ("Joint Assets") shall, to the extent practicable, be divided as
of the Closing Date between the Domestic Wireless Business and the business
of the Excluded Assets so that each shall receive its proportionate interest
in such Joint Asset based upon relative proportionate subscribers included in
each business. Notwithstanding the foregoing, (A) all assets located at the
current headquarters of the Domestic Wireless Business located in Bellevue,
Washington (other than books and records of the Excluded Assets) shall be
part of the Domestic Wireless Business and shall not be Joint Assets and (B)
all assets owned by partnerships, the interests in which constitute Excluded
Assets shall be part of the Excluded Assets.
(ii) Any Joint Asset which can be assigned or otherwise transferred as
a whole, but not in part, and is primarily related to the Domestic Wireless
Business shall be part of the Domestic Wireless Business. Subject to
Applicable Law, NV shall (and shall cause the Domestic Wireless Subsidiaries
to), except as may
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otherwise be agreed by AirTouch and U S WEST, take such reasonable actions as
the owner of the Excluded Assets may request in order to make available, at
fully loaded cost, to the business of Excluded Assets, the use of any such
Joint Asset to the same extent such Joint Asset was used by the business of
Excluded Assets as of the Closing Date. The obligation of NV to make such
Joint Asset available to the business of any Excluded Asset shall terminate
six months following the transfer, sale or other disposition of such Excluded
Asset to a Third Party or a change of control with respect to such Excluded
Asset (or such earlier date as determined by the purchaser of such Excluded
Asset).
(iii) Any Joint Asset which can be assigned or otherwise transferred as
a whole, but not in part, and is primarily related to the business of
Excluded Assets and any Joint Asset owned by a partnership, an interest in
which constitutes an Excluded Asset, shall be part of the business of
Excluded Assets. Subject to Applicable Law, the owner of the Excluded Assets
shall, except as may otherwise be agreed by AirTouch and U S WEST, take such
reasonable actions as NV may request in order to make available, at fully
loaded cost, to the Domestic Wireless Business, the use of any such Joint
Asset to the same extent such Joint Asset was used by the Domestic Wireless
Business as of the Closing Date. The obligation of the owner of the Excluded
Assets to make such Joint Asset available to the Domestic Wireless Business
shall terminate six months following the transfer, sale or other disposition
of the Excluded Asset in which such asset is included to a Third Party or a
change of control with respect to such Excluded Asset (or such earlier date
as determined by AirTouch).
(c) The occurrence of any event described in Section 12.11(b) of this
Agreement shall not be deemed to be a change of control of any Excluded Asset
for purposes of this Section 7.13.
7.14 TRANSACTION AGREEMENTS. On or prior to the Closing Date, AirTouch
and U S WEST shall enter into the Tax Sharing Agreement, the Patent License
Agreement, the Software License Agreement and the New Investment Agreement.
If, as of the Closing Date, Media (or the NV/PCS Transferee) shall be the
general partner or otherwise manage any Excluded Asset, the owner of the
Excluded Assets and AirTouch Cellular shall enter into a Resources Agreement
in the form of Exhibit I hereto.
7.15 UNDERTAKINGS WITH RESPECT TO SCHEDULED PROPERTIES.
(a) In connection with the transactions contemplated hereby, NV shall
fulfill any and all obligations it may have under the partnership agreements,
other formative agreements and management agreements for each Scheduled
Property, in respect of the Consent requirements, rights of first refusal and
written notification requirements described therein.
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(b) Promptly (and in any event within ten Business Days) following the
satisfaction of the conditions set forth in Sections 9.1(a) and 9.1(e), U S
WEST shall take all actions necessary to effect the separation from the
Domestic Wireless Business of each Scheduled Property as to which a decree,
preliminary or permanent injunction, temporary restraining order or other
order of any nature shall be in effect that restrains, prevents or materially
changes the transactions contemplated hereby.
7.16 PRE-CLOSING CAPITAL CONTRIBUTIONS TO PCS NUCLEUS BY AIRTOUCH. At
such time prior to the Closing as the parties shall agree, AirTouch PCS
Holding, Inc. shall contribute to the capital of PCS Nucleus approximately
$1,600,000.
7.17 ASSUMPTION OF GUARANTEE OBLIGATIONS WITH RESPECT TO LEVERAGED
LEASES. Effective at the time of the Closing, AirTouch will assume all
Liabilities of U S WEST under all guarantees executed by U S WEST in respect
of the Leveraged Leases pursuant to the instrument of assumption attached as
an exhibit to such guarantees.
7.18 REPAYMENT OF ASSUMED NV DEBT AND ASSUMED PCS DEBT. At the time of
the Closing, AirTouch shall repay in full the Assumed NV Debt and the Assumed
PCS Debt. Media (or the NV/PCS Transferee, as applicable) shall not declare
an event of default under the Assumed NV Debt or the Assumed PCS Debt prior
to such repayment.
7.19 AIRTOUCH CLASS D AND CLASS E PREFERRED STOCK. Prior to the
Effective Time, AirTouch shall file with the Secretary of State of the State
of Delaware Certificates of Designation, Preferences and Rights with respect
to the shares of AirTouch Class D and Class E Preferred Stock issuable
pursuant to Section 3.1 in the forms of Exhibits A-1 and A-2, respectively.
ARTICLE VIII
EMPLOYEE MATTERS
8.1 EMPLOYEES. Effective as of the Effective Time, those Affected
Employees who are PCS Employees or who are employed by NV or any Domestic
Wireless Subsidiary immediately prior to the Effective Time shall remain in
the same capacities as then held by such employees (or in such other
capacities as AirTouch shall determine in its sole discretion). The Excluded
Employees shall not become employees of AirTouch or its Subsidiaries or
Affiliates as of the Effective Time, and AirTouch and its Subsidiaries and
Affiliates shall assume no employment-related Liabilities with respect to the
Excluded Employees as a result of the transactions contemplated by this
Agreement. All such Liabilities shall be retained by the U S WEST Group.
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8.2 EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS. (a) Except as set forth
under paragraph (b) below with respect to incurred but unreimbursed claims
relating to Affected Employees and subject to Section 8.3(p) of this
Agreement, all Affected Employees shall cease to actively participate as of
the Effective Time in any Employee Benefit Plan or Employee Arrangement
maintained at the Effective Time by U S WEST, Media or their respective
Affiliates.
(b) AirTouch shall reimburse U S WEST for all incurred but unpaid
claims and obligations as of the Effective Time with respect to Affected
Employees under the Employee Benefit Plans and Employee Arrangements
maintained at the Effective Time by U S WEST, Media and their respective
Affiliates.
8.3 OTHER EMPLOYEE MATTERS.
(a) Except as specifically provided in this Section 8.3, as of the
Effective Time, the Affected Employees shall become eligible to participate
in the employee benefit plans of AirTouch then existing on the same terms as
applicable to similarly situated employees of AirTouch. For purposes of
determining eligibility to participate, vesting, benefit eligibility, and
benefit accrual, AirTouch shall recognize service of each Affected Employee
with U S WEST and its pre-Merger ERISA Affiliates before the Effective Time
as though such service were service with AirTouch and its ERISA Affiliates.
(b) Subject to compliance with Sections 8.3(c), 8.3(d) and 8.3(e), as
soon as reasonably practicable after the Effective Time, (i) U S WEST shall
amend the U S WEST Pension Plan (the "U S WEST Pension Plan") to provide for
the transfer of all liability for the accrued benefits of Affected Employees
(other than PCS Employees) as of the Effective Time (the "Transferred Benefit
Liabilities") and cash equal to the present value of such liabilities
("Transferred Benefit Assets"), and (ii) AirTouch shall amend the AirTouch
Employees Pension Plan (the "AirTouch Pension Plan") to accept the
Transferred Benefit Liabilities and Transferred Benefit Assets. In addition,
U S WEST shall cause the U S WEST Pension Plan to transfer additional assets
to the AirTouch Pension Plan sufficient to fund a lump sum payment option
with respect to the Transferred Benefit Liabilities. AirTouch shall cause
the AirTouch Pension Plan to provide a lump sum payment option with respect
to the transferred benefits. The Transferred Benefit Assets shall be
calculated on the basis of the actuarial assumptions specified in Section
8.3(b) of the U S WEST Merger Disclosure Schedule. The Transferred Benefit
Assets shall be adjusted from the Effective Time to the actual date of
transfer for (i) interest at the rate specified in Section 8.3(b) of the
U S WEST Merger Disclosure Schedule and (ii) benefit payments made during such
interim period.
(c) In connection with the transfer described in Section 8.3(b),
AirTouch shall amend the AirTouch Pension Plan to
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preserve the protected benefits (as defined in regulations under Section
411(d)(6) of the Code) with respect to the transferred accrued benefits and
to ensure that, subject to vesting, benefits paid to an affected participant
from the AirTouch Pension Plan are at least equal to the benefit that would
have been payable from the U S WEST Pension Plan as of the Effective Time,
treating the participant as a "Modified Accrual Participant" under the
AirTouch Pension Plan (with respect to the U S WEST Pension Plan formula
applicable to the participant as of the Effective Time). Participants
referred to in this Section 8.3(c) shall be treated similarly to all other
Modified Accrual Participants under the AirTouch Pension Plan, including with
respect to any amendment to reduce or eliminate the compensation uplift
attributable to Modified Accrual Participant status.
(d) U S WEST's obligation to effectuate the transfer described in
Section 8.3(b) shall be conditioned upon its receipt of a recent IRS
favorable determination letter with respect to the AirTouch Pension Plan.
AirTouch's obligation to receive such transfer shall be conditioned upon its
receipt of a recent IRS favorable determination letter with respect to the
U S WEST Pension Plan. U S WEST represents and warrants that, and covenants to
take all necessary action to ensure that, the U S WEST Pension Plan shall be
qualified under Section 401(a) and related sections of the Code as of the
date of such transfer, and AirTouch represents and warrants that, and
covenants to take all necessary actions to ensure that, the AirTouch Pension
Plan shall be qualified under Section 401(a) and related sections of the Code
as of the date of such transfer. In the event that it is necessary to
increase the Transferred Benefit Liabilities retroactively to the date of
transfer in order to maintain the qualified status of the U S WEST Pension
Plan or the AirTouch Pension Plan, U S WEST shall cause the U S WEST Pension
Plan to transfer cash equal to the present value of such liabilities to the
AirTouch Pension Plan, calculated on the basis of the actuarial assumptions
specified in Section 8.3(b) of the U S WEST Merger Disclosure Schedule.
(e) At least 30 days before the transfer described in Section 8.3(b)
above, U S WEST and AirTouch shall each file Form 5310-A with the IRS with
respect to the transfer unless, in the case of a de minimis transfer, such
filing is not required.
(f) Subject to Section 8.3(p), AirTouch shall provide for participation
of the Affected Employees and their dependents as of the Effective Time in
the AirTouch health and welfare plan(s) applicable to similarly situated
AirTouch employees. AirTouch shall waive any pre-existing condition
exclusion in the AirTouch medical/dental plans for Affected Employees and
their dependents. For purposes of deductible requirements and out-of-pocket
maximums under the applicable AirTouch medical or dental plan, if any,
Affected Employees and their dependents shall receive credit for any medical
or dental deductible payments incurred under the medical and dental plan(s)
of U S WEST during the calendar year
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that includes the date such employees' coverage begins under the AirTouch
medical and dental plan(s). U S WEST shall determine the extent to which
COBRA elections under the medical, dental and vision coverage of the U S WEST
health care plan are required as a result of the Merger and shall be
responsible for any required notification and administration of such
elections and any subsequently elected coverage. From and after the date of
this Agreement and through the period ending 120 days after the Effective
Time, AirTouch shall take no actions, and shall cause its Subsidiaries to
take no actions, that would alter the AirTouch medical or dental plans from
the provisions in effect as of the date of this Agreement in a manner that
would provide incentive for Affected Employees to elect COBRA coverage under
the U S WEST health care plan in lieu of coverage under the AirTouch medical
or dental plans, unless such modifications will apply equally to both
Affected Employees and other AirTouch employees covered by the AirTouch
medical and dental plans.
(g) Affected Employees who have attained the right to four or more weeks
of vacation per year under U S WEST'S vacation policy as of the Effective
Time shall remain eligible to accrue the same amount of vacation under the
applicable AirTouch vacation policy, except to the extent the applicable
AirTouch vacation policy is revised to require additional service for all
employees who have attained the right to four or more weeks of vacation per
year under the vacation policies of either U S WEST or AirTouch as of the
Effective Time.
(h) As soon as reasonably practicable after the Effective Time, U S
WEST shall cause the U S WEST Savings Plan/ESOP (the "U S WEST Savings Plan")
to transfer to the AirTouch Retirement Plan (the "AirTouch Retirement Plan")
the account balances of the Affected Employees who do not elect, under
procedures established by U S WEST that are reasonably acceptable to
AirTouch, to have their account balances retained in the U S WEST Savings
Plan. Any such transfer shall be made in the form of cash to the extent
account balances are not credited with unpaid participant loans, and by a
transfer of loans (in the form of promissory notes and/or transaction
authorization cards) to the extent account balances are credited with unpaid
participant loans. AirTouch shall amend the AirTouch Retirement Plan to
fully vest the transferred account balances.
(i) U S WEST's obligation to effectuate the transfer described in
Section 8.3(h) shall be conditioned upon its receipt of a recent IRS
favorable determination letter with respect to the AirTouch Retirement Plan.
AirTouch's obligation to receive such transfer shall be conditioned upon its
receipt of a recent IRS favorable determination letter with respect to the
U S WEST Savings Plan. U S WEST represents and warrants that the U S WEST
Savings Plan shall be qualified under Section 401(a) and related sections of
the Code as of the date of such transfer, and AirTouch represents and
warrants that the AirTouch Retirement
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Plan shall be qualified under Section 401(a) and related sections of the Code
as of the date of such transfer.
(j) Subject to Section 8.3(p), for any Affected Employee who is
receiving short-term disability benefits under the U S WEST disability plan
immediately prior to the Effective Time, AirTouch shall continue to cover
such employee under the AirTouch disability plan (and any other AirTouch
plans or policies applicable to similarly situated AirTouch employees
receiving benefits under the AirTouch disability plan) without requiring an
intervening return to work; PROVIDED, HOWEVER, that AirTouch shall determine
the extent to which periods of short-term disability under the U S WEST
disability plan will be considered for purposes of determining the length of
coverage under the AirTouch disability plan. U S WEST agrees to cause the
U S WEST disability plan to be amended prior to the Effective Time to provide
that coverage under the U S WEST disability plan for any Affected Employee
shall cease at the Effective Time whether or not the employee is then
receiving short-term disability benefits. U S WEST and AirTouch agree to
cooperate in resolving any claims from Affected Employees related to the
actions taken pursuant to this Section 8.3(j).
(k) Subject to Section 8.3(p), for any Affected Employee who is on an
approved leave of absence immediately prior to the Effective Time, AirTouch
shall continue to cover such employee under the applicable AirTouch leave of
absence policy (and any other AirTouch plans or policies applicable to
similarly situated AirTouch employees on such leave of absence) without
requiring an intervening return to work; PROVIDED, HOWEVER, that AirTouch
shall determine the extent to which the period of leave prior to the
Effective Time will be considered for purposes of determining the length of
leave under the AirTouch policy. U S WEST agrees to cause the leave of
absence policies applicable to Affected Employees prior to the Effective Time
to be amended to provide that a leave of absence for any Affected Employee
shall cease at the Effective Time whether or not the employee is then on
leave. U S WEST, Media and AirTouch agree to cooperate in resolving any
claims from Affected Employees related to the actions taken pursuant to this
Section 8.3(k).
(l) Except as provided in Exhibit J, from the date of this Agreement
until the end of the Non-solicitation Period, neither U S WEST nor any of its
Affiliates will Solicit any person employed by NV or the Domestic Wireless
Subsidiaries to leave his or her employment. For purposes of this Section
8.3(l), the "Non-solicitation Period" ends on the earlier of the first
anniversary of the Effective Time or June 1, 1999, and "Solicit" means any
affirmative recruitment specifically aimed at one or more individuals
identified by name, title or NV affiliation (i.e., beyond advertising job
openings), but "Solicit" shall not include any activities that constitute
follow-up to individuals who respond to job opening advertisements or who
voluntarily initiate employment inquiries.
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(m) U S WEST will provide AirTouch the opportunity to review and
approve, prior to distribution, all "Employee Communication Materials," as
defined herein, developed by U S WEST. For this purpose, "Employee
Communication Materials" means information, published in written or other
tangible form useful for repetitious or mass communication, to the extent
that it: (i) will be distributed at any time after the date of this
Agreement and prior to the Effective Time, and (ii) will explain to Affected
Employees any actions that will be taken to implement the commitments set
forth in this Agreement, provided that such information refers to Employee
Benefit Plans or Employee Arrangements that will be assumed by AirTouch in
whole or in part under Section 8.2, or employee benefit plans or employee
arrangements sponsored by AirTouch or its Subsidiaries that may cover
Affected Employees after the Effective Time.
(n) Prior to the Effective Time, U S WEST will amend the U S WEST
Non-Qualified Pension Plan, the U S WEST Mid-Career Pension Plan and the
Amended U S WEST Deferred Compensation Plan (the "Non-Qualified Plans") to
permit Affected Employees to elect to exclude their employment with AirTouch
or its Subsidiaries resulting from the Merger from being treated as a
termination of employment or separation from service for purposes of the
timing of distributions under the Non-Qualified Plans and to provide for the
transfer of their accrued benefits under the Non-Qualified Plans to the
AirTouch Deferred Compensation Plan. AirTouch shall amend the AirTouch
Deferred Compensation Plan as of the Effective Time to accept the accrued
benefit of any Affected Employee who makes an election as described in the
preceding sentence as a liability under the AirTouch Deferred Compensation
Plan for each such Affected Employee and to treat such accrued benefit as any
other account balance under the AirTouch Deferred Compensation Plan. The
accrued benefit for each employee under the Non-Qualified Plans shall be
determined as of the Effective Time in accordance with the assumptions and
procedures set forth in Section 8.3(n) of the U S WEST Merger Disclosure
Schedule. Notwithstanding any other provisions of any Transaction Agreement,
and without limitation under any provisions of any Transaction Agreement,
AirTouch shall indemnify, defend and hold harmless U S WEST and its
Affiliates (the "Indemnitees") from and against, and in respect of, and pay
or reimburse each Indemnitee for, all Indemnifiable Losses, as incurred,
arising out of, relating to or resulting from, directly or indirectly, the
election or transfer of accrued benefits described in this Section 8.3(n).
(o) Prior to the Effective Time, U S WEST shall provide notice to
AirTouch of its intended treatment of outstanding options to purchase shares
of capital stock of U S WEST ("Options") issued pursuant to the terms of the
Amended U S WEST 1994 Stock Plan and the outstanding Media Options and
Communications Options issued pursuant to the terms of the U S WEST Media
Group 1996 Stock Option Plan, the U S WEST Media Group 1997 Stock Option Plan
and the U S WEST Communications
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Group 1997 Stock Option Plan, in each case, held by Affected Employees as a
class. Following the Effective Time, U S WEST shall provide notice to
AirTouch of any decision to terminate or otherwise materially change the
terms of the Options held by Affected Employees as a class, such notice to be
given at or before the time general notice of such matters is given to
Affected Employees.
(p) As soon as reasonably practicable within 30 Business Days following
the date of this Agreement, U S WEST and AirTouch shall use reasonable best
efforts to agree upon (i) specific methods of transitioning Affected
Employees into employee benefit plans and employee arrangements sponsored by
AirTouch or its Subsidiaries on or after the Effective Time and (ii) a
timeline for sharing data and documents pursuant to Section 8.4.
8.4 COOPERATION. AirTouch and U S WEST shall cooperate with each other
in carrying out the terms of this Article VIII, and each party shall exchange
such information with the other party as may be reasonably required by the
other party, with respect thereto. As soon as reasonably practicable after
the Effective Time, U S WEST shall provide AirTouch a schedule showing the
name, Social Security number, hire date and any other information reasonably
requested by AirTouch with respect to each Affected Employee.
ARTICLE IX
CONDITIONS PRECEDENT
9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger is subject to the
satisfaction or waiver (to the extent permitted under Applicable Laws) on or
prior to the Closing of the following conditions:
(a) HSR ACT. (i) The waiting periods (and any extension thereof)
applicable to the Merger under the HSR Act shall have expired or been
terminated; (ii) neither the FTC nor DOJ shall have authorized the
institution of enforcement proceedings (that have not been dismissed or
otherwise disposed of) to delay, prohibit or otherwise restrain the
transactions contemplated by the Agreement; (iii) no such proceeding shall be
pending as of the Closing Date; and (iv) no injunction or order shall have
been issued by a court of competent jurisdiction and remain in effect as of
the Closing Date.
(b) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation,
decree, preliminary or permanent injunction, temporary restraining order or
other order of any nature of any Governmental Authority shall be in effect
that restrains, prevents or materially changes the transactions contemplated
hereby.
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(c) EXECUTION OF TRANSACTION AGREEMENTS. Each of AirTouch and U S WEST
shall have executed and delivered the Tax Sharing Agreement, the Patent
License Agreement, the Software License Agreement and the New Investment
Agreement.
(d) NYSE LISTING. The shares of AirTouch Common Stock issuable to
Media (or the NV/PCS Transferee) in connection with the Merger shall have
been approved for listing on the NYSE, subject to official notice of issuance.
(e) FCC/STATE ORDERS. The FCC/State Orders shall have been obtained;
PROVIDED that the foregoing condition shall be deemed to have been satisfied
with respect to any Orders of the FCC which constitute FCC/State Orders if
either U S WEST or AirTouch shall have provided to the other an opinion of a
nationally recognized communications law counsel (addressed to U S WEST and
AirTouch) to the effect that the Merger and the other transactions
contemplated hereby may be consummated in compliance with the Communications
Act of 1934, as amended, without obtaining such Orders of the FCC.
9.2 CONDITIONS TO OBLIGATION OF AIRTOUCH. The obligation of AirTouch
to effect the Merger is further subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by AirTouch:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of U S WEST made hereunder (i) that are qualified as to materiality shall be
true and correct and (ii) that are not so qualified shall be true and correct
in all material respects, in each case as of the date of this Agreement and
(unless made as of a specified date) as of the Closing Date as though made on
and as of the Closing Date, and AirTouch shall have received a certificate of
U S WEST to that effect, dated the Closing Date, and signed on behalf of each
by an authorized officer thereof.
(b) AGREEMENTS. Each of U S WEST, Media, NV and PCS Holdings (and the
NV/PCS Transferee) shall have performed in all material respects all of its
obligations required to be performed by it under this Agreement at or prior
to the Closing Date, and AirTouch shall have received certificates of
U S WEST, Media (or the NV/PCS Transferee), NV and PCS Holdings to that effect,
dated the Closing Date, and signed on behalf of each by an authorized officer
thereof.
(c) TAX OPINION. AirTouch shall have received an opinion of Pillsbury
Madison & Sutro LLP, counsel to AirTouch, reasonably satisfactory in form and
substance to AirTouch and dated as of the Closing Date, to the effect that
for federal income tax purposes (i) each of the NV Merger and the PCS
Holdings Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code; (ii) each of AirTouch and NV, in respect of the
NV Merger, and AirTouch and PCS Holdings, in respect of the PCS Holdings
Merger, will be a party to the reorganization within
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the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be
recognized by NV, PCS Holdings or AirTouch as a result of the Merger. In
rendering such opinion, Pillsbury Madison & Sutro LLP shall receive and may
rely upon representations contained in certificates of AirTouch substantially
in the form of Exhibits G-1 and G-2 and of U S WEST, Media, the NV/PCS
Transferee, NV and PCS Holdings substantially in the form of Exhibits H-1 and
H-2.
9.3 CONDITIONS TO OBLIGATIONS OF U S WEST, MEDIA, NV AND PCS HOLDINGS.
The obligations of U S WEST, Media (or the NV/PCS Transferee), NV and PCS
Holdings to effect the Merger are further subject to the satisfaction of the
following conditions, any or all of which may be waived on or prior to the
Closing Date in whole or in part by U S WEST:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of AirTouch made hereunder (i) that are qualified as to materiality shall be
true and correct and (ii) that are not so qualified shall be true and correct
in all material respects, in each case as of the date of this Agreement and
(unless made as of a specified date) as of the Closing Date as though made on
and as of the Closing Date, and U S WEST shall have received a certificate of
AirTouch to that effect, dated the Closing Date, and signed on behalf of
AirTouch by an authorized officer of AirTouch.
(b) AGREEMENTS. AirTouch shall have performed in all material respects
all of its obligations required to be performed by it under this Agreement at
or prior to the Closing Date, and U S WEST shall have received a certificate
of AirTouch to that effect dated the Closing Date and signed on behalf of
AirTouch by an authorized officer of AirTouch.
(c) TAX OPINION. U S WEST shall have received an opinion of Weil,
Gotshal & Manges LLP, counsel to U S WEST, reasonably satisfactory in form
and substance to U S WEST and dated as of the Closing Date, to the effect
that for federal income tax purposes (i) each of the NV Merger and the PCS
Holdings Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code and (ii) each of AirTouch and NV, in respect of
the NV Merger, and AirTouch and PCS Holdings, in respect of the PCS Holdings
Merger, will be a party to the reorganization within the meaning of Section
368(b) of the Code. In rendering such opinion, Weil, Gotshal & Manges LLP
shall receive and may rely upon representations contained in certificates of
AirTouch substantially in the form of Exhibits G-1 and G-2 and of U S WEST,
Media, the NV/PCS Transferee, NV and PCS Holdings substantially in the form
of Exhibits H-1 and H-2.
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ARTICLE X
TERMINATION AND AMENDMENT
10.1 TERMINATION. This Agreement may be terminated and the Merger may
be abandoned at any time prior to the Effective Time:
(a) by mutual written consent of U S WEST, on the one hand, and
AirTouch, on the other hand, or by mutual action of their respective Boards
of Directors;
(b) by AirTouch, if any of the conditions set forth in Section 9.2
shall have become incapable of fulfillment (other than as a result of any
breach by AirTouch of the terms of this Agreement) and shall not have been
waived by AirTouch;
(c) by U S WEST, in accordance with Section 6.2(c)(i) or if any of the
conditions set forth in Section 9.3 shall have become incapable of
fulfillment (other than as a result of any breach by U S WEST, Media, NV or
PCS Holdings of the terms of this Agreement) and shall not have been waived
by U S WEST;
(d) by either AirTouch, on the one hand, or U S WEST, on the other
hand, by giving written notice of such termination to the other, if the
Merger shall not have been consummated on or before June 30, 1998 (the
"Termination Date"); PROVIDED, HOWEVER, that the terminating party is not in
breach of its obligations under this Agreement; or
(e) by either U S WEST or AirTouch, if any of the conditions set forth
in Section 9.1 shall have become incapable of fulfillment (other than as a
result of any breach by the party seeking to terminate the Agreement) and
shall not have been waived in accordance with the terms of this Agreement.
10.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement by U S WEST or AirTouch pursuant to Section 10.1, written notice
thereof shall promptly be given to the other parties and, except as otherwise
provided herein, this Agreement shall be terminated and become void and have
no effect, without further action by any party, other than the provisions of
Section 6.3(c) and Article XII. Nothing in this Section 10.2 shall be deemed
to release any party from any liability for any breach by such party of the
terms and provisions of this Agreement.
10.3 AMENDMENT. Subject to Applicable Laws, this Agreement may be
amended, modified or supplemented only by written agreement of U S WEST,
Media (or the NV/PCS Transferee), NV, PCS Holdings and AirTouch at any time
prior to the Effective Time with respect to any of the terms contained herein.
10.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally
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allowed: (a) extend the time for the performance of any of the obligations
or other acts of the other parties hereto; (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto; and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. The failure of any party hereto
to assert any of its rights hereunder shall not constitute a waiver of such
rights.
ARTICLE XI
INDEMNIFICATION
11.1 INDEMNIFICATION BY U S WEST. (a) Subject to the terms and
conditions of this Agreement, from and after the Effective Time, U S WEST
shall indemnify, defend and hold harmless AirTouch and its Affiliates,
including any of its direct or indirect Subsidiaries, and their respective
directors, officers, employees, representatives, advisors and agents, and
each of the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "AirTouch Indemnified Parties") from, against, and in
respect of, and pay or reimburse any such AirTouch Indemnified Party for, all
Indemnifiable Losses, as incurred, arising out of, relating to or resulting
from, directly or indirectly:
(i) any and all Excluded Claims and Excluded Settlements
(including the failure by U S WEST or any member of the U S WEST Group
to pay, perform or otherwise discharge such Excluded Claims and
Excluded Settlements in accordance with their terms);
(ii) any and all Specified Actions made, instituted or commenced
during the period from and after the Effective Time through and
including the date that is 18 months following the Effective Time;
PROVIDED, HOWEVER, that if a Specified Action arises out of, relates
to or results from, directly or indirectly, the conduct of the
Domestic Wireless Business or any part thereof both before and after
the Effective Time, then U S WEST's obligation under this Section
11.1(a)(ii) shall only be for the portion of such Specified Action
that arises out of, relates to, or results from, directly or
indirectly, the conduct of the Domestic Wireless Business, or any part
thereof, before or at the Effective Time;
(iii) the breach by U S WEST, Media (or the NV/PCS Transferee) or
their respective Affiliates, following the Effective Time, of any
agreement or covenant contained in any Transaction Agreement which
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by its express terms is to be performed or complied with after the
Effective Time;
(iv) any breach of or inaccuracy in any representation or
warranty of U S WEST contained in this Agreement (other than the last
sentence of Section 4.7);
(v) any breach of or inaccuracy in the representation and
warranty of U S WEST set forth in the last sentence of Section 4.7 or
the covenant of U S WEST set forth in Section 6.1(b)(vii).
(vi) the ownership of the Excluded Assets or the conduct of the
business of the Excluded Assets, or any part thereof, before, at or
after the Effective Time;
(vii) any Scheduled Property Claim;
(viii) the enforcement by the AirTouch Indemnified Parties of
their rights to be indemnified, defended and held harmless under this
Agreement; or
(ix) the conduct of the businesses of the U S WEST Group or the
ownership of the assets of the U S WEST Group or any part thereof (other
than the Domestic Wireless Business) in each case before, at or following
the Effective Time.
(b) (i) U S WEST shall not be liable to the AirTouch Indemnified
Parties under Section 11.1(a)(ii) or 11.1(a)(iv), except to the extent (and
then only to the extent) that the aggregate amount of all Indemnifiable
Losses for which U S WEST would, but for this Section 11.1(b), be liable
under Sections 11.1(a)(ii) and 11.1(a)(iv), in the aggregate, exceeds
$40,000,000, and then only for all such Indemnifiable Losses in excess
thereof up to an aggregate amount equal to $750,000,000.
(ii) A notice of any claim for indemnification under Section 11.1(a)(ii)
must be given by an Indemnified Party within 30 days following the 18-month
period set forth therein. A notice of any claim for indemnification under
Section 11.1(a)(iv) must be given by an Indemnified Party within 30 days
following the expiration of the period for which the applicable
representation and warranty survives the Effective Time pursuant to Section
12.1 of this Agreement. In the event notice of any claim for indemnification
under Section 11.1(a)(iv) is given within such period, the representation and
warranty that is the subject of such indemnification claim shall survive with
respect to such claim until such time as such claim is finally resolved.
(iii) U S WEST shall not be liable to the AirTouch Indemnified Parties
in respect of consequential, exemplary,
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special or punitive damages, or lost profits, except under Section 11.1(a)(v)
or to the extent actually paid by an AirTouch Indemnified Party in respect of
a Third Party Claim or an Action brought by a Governmental Authority in
connection with the Indemnifiable Losses covered by Section 11.1(a).
(iv) If any tribunal of competent jurisdiction shall have finally
determined in any Excluded Claim or any Specified Action which is subject to
indemnification under Section 11.1(a)(i) or (ii) that any portion of the
damages or judgment awarded in such Excluded Claim or Specified Action is
attributable to the gross negligence or willful misconduct of WMC in
providing services to the Domestic Wireless Business under the Services
Agreement, dated November 1, 1995, among AirTouch Cellular, AirTouch Cellular
of Nevada, NV and WMC (the "Services Agreement"), but specifically excluding
the actions of any employee of AirTouch seconded to NV, then to the extent
the actions which gave rise to such gross negligence or willful misconduct
were not authorized by, approved by or actually known to U S WEST or any
Subsidiary thereof (other than WMC) or to any Person who at the time of such
actions was an officer, executive employee or market manager of U S WEST or
any Subsidiary thereof (including any of the foregoing seconded to NV from
AirTouch) or was an employee of U S WEST or any Subsidiary thereof seconded
to, or otherwise functioning or serving in any capacity with, WMC, U S WEST
shall not be liable to the AirTouch Indemnified Parties for the amount of
Indemnifiable Losses attributable to such gross negligence or willful
misconduct.
(c) Except for the Disposed Asset Value adjustment under Section 3.3, U
S WEST shall have no liability to the AirTouch Indemnified Parties under
Section 11.1(a)(vii) in respect of any diminution of value of any Scheduled
Property or Taxes incurred in connection with a sale assignment, exchange or
other disposition of a Scheduled Property; PROVIDED that the foregoing shall
in no way limit or restrict the liability of U S WEST to the AirTouch
Indemnified Parties under Section 11.1(a)(vii) for any other Indemnifiable
Losses with respect to any Scheduled Property Claim, including (without
limitation) the costs and expenses of the investigation and defense thereof.
11.2 INDEMNIFICATION BY AIRTOUCH. (a) Subject to the terms and
conditions of this Agreement, from and after the Effective Time, AirTouch
shall indemnify, defend and hold harmless U S WEST and its respective
Affiliates and their respective directors, officers, employees,
representatives, advisors and agents, and each of the heirs, executors,
successors and assigns of any of the foregoing (collectively, the "U S WEST
Indemnified Parties") from, against, and in respect of, and pay or reimburse
any such U S WEST Indemnified Party for, all Indemnifiable Losses, as
incurred, arising out of, relating to or resulting from, directly or
indirectly:
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(i) the breach by AirTouch, following the Effective Time, of any
agreement or covenant contained in any Transaction Agreement which by
its express terms is to be performed or complied with after the
Effective Time;
(ii) any breach of or inaccuracy in any representation or warranty
of AirTouch contained in this Agreement;
(iii) any Excluded Claim or any Specified Action which is subject to
indemnification under Section 11.1(a)(i) or (ii) to the extent of the
portion, if any, of the damages or judgment awarded in such Excluded Claim
or Specified Action that any tribunal of competent jurisdiction shall have
finally determined is attributable to the gross negligence or willful
misconduct of WMC in providing services to the Domestic Wireless Business
under the Services Agreement, but specifically excluding the actions of any
employee of AirTouch seconded to NV, if the actions which gave rise to such
gross negligence or willful misconduct were not authorized by, approved by
or actually known to U S WEST or any Subsidiary thereof (other than WMC) or
to any Person who at the time of such actions was an officer, executive
employee or market manager of U S WEST or any Subsidiary thereof (other
than WMC) (including any of the foregoing seconded to NV from AirTouch) or
was an employee of U S WEST or any Subsidiary thereof (other than WMC)
seconded to, or otherwise functioning or serving in any capacity with, WMC;
(iv) the enforcement by the U S WEST Indemnified Parties of their
rights to be indemnified, defended and held harmless under this
Agreement; or
(v) except as to matters which are subject to indemnification by
U S WEST pursuant to Section 11.1, (A) the conduct of the Domestic Wireless
Business or the businesses of AirTouch and its Subsidiaries or (B) the
ownership of the assets of NV, PCS Holdings or the Domestic Wireless
Subsidiaries or AirTouch or its Subsidiaries or any part thereof, in each
case before, at or following the Effective Time.
(b) (i) AirTouch shall not be liable to the U S WEST Indemnified
Parties under Section 11.2(a)(ii), except to the extent (and then only to the
extent) that the aggregate amount of all Indemnifiable Losses for which
AirTouch would, but for this Section 11.2(b), be liable under Section
11.2(a)(ii), in the aggregate, exceeds $40,000,000, and then only for all
such Indemnifiable Losses in excess thereof up to an aggregate amount equal
to $750,000,000.
(ii) A notice of any claim for indemnification under Section 11.2(a)(ii)
must be given by an Indemnified Party within 30 days
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following the expiration of the period for which the applicable
representation and warranty survives the Effective Time pursuant to Section
12.1 of this Agreement. In the event notice of any claim for indemnification
under Section 11.2(a)(ii) is given within such period, the representation and
warranty that is the subject of such indemnification claim shall survive with
respect to such claim until such time as such claim is finally resolved.
(iii) AirTouch shall not be liable to the U S WEST Indemnified Parties
in respect of consequential, exemplary, special or punitive damages, or lost
profits, except to the extent actually paid by any U S WEST Indemnified Party
in respect of a Third Party Claim or Action brought by a Governmental
Authority in connection with the Indemnifiable Losses covered by Section
11.2(a).
11.3 PROCEDURES RELATING TO INDEMNIFICATION.
(a) In order for an Indemnified Party to be entitled to any
indemnification provided for under this Agreement in respect of, arising out
of or involving a claim or demand made by any Person who is not an
Indemnifying Party against an Indemnified Party (a "Third Party Claim"), such
Indemnified Party must notify the Indemnifying Party in writing of the Third
Party Claim reasonably promptly after receipt by such Indemnified Party of
written notice of the Third Party Claim, specifying in reasonable detail the
nature of such Third Party Claim (the "Claim Notice"); PROVIDED, HOWEVER,
that failure to give such notification shall not affect the indemnification
provided hereunder except to the extent the Indemnifying Party shall have
been actually prejudiced as a result of such failure and that with respect to
any matter for which U S WEST is the Indemnifying Party, U S WEST shall be
deemed to have received notice with respect to all matters by or against the
Domestic Wireless Business as to which any claim or demand to U S WEST or any
of its Subsidiaries shall have been made before or at the Effective Time.
(b) If a Third Party Claim is made against an Indemnified Party, the
Indemnifying Party shall have 30 days (or less if the nature of the Third
Party Claim requires) from its receipt of the Claim Notice (the "Notice
Period") to notify the Indemnified Party whether or not the Indemnifying
Party desires, at the Indemnifying Party's sole cost and expense and by
counsel of its own choosing (and reasonably acceptable to the Indemnified
Party), to defend against such Third Party Claim; PROVIDED, HOWEVER, that if,
under applicable standards of professional conduct a conflict on any
significant issue between the Indemnifying Party and any Indemnified Party
exists in respect of such Third Party Claim, then the Indemnifying Party
shall reimburse the Indemnified Party for the reasonable fees and expenses of
one outside counsel, plus any local counsel, who shall be reasonably
acceptable to the Indemnifying Party. The Indemnifying Party shall be liable
for the fees and expenses of counsel employed by the Indemnified Party for
any period during
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which the Indemnifying Party has not assumed the defense thereof (other than
during any period in which the Indemnified Party shall have failed to give
notice of the Third Party Claim as provided above). Notwithstanding the
foregoing, the Indemnifying Party shall not be entitled to assume the defense
of any Third Party Claim (and shall be liable for the fees and expenses of
counsel, who shall be reasonably acceptable to the Indemnifying Party, and
related expenses incurred by the Indemnified Party in defending such Third
Party Claim) if the Third Party Claim either (i) is a Specified Action and
the Indemnified Party or Indemnifying Party reasonably determines that the
Indemnified Party's residual liability with respect to such Specified Action
(after giving effect to any potential indemnification under Section
11.1(a)(ii)) may exceed 50% of the aggregate liability in respect of such
Specified Action or (ii) seeks an order, injunction or other equitable relief
or relief for other than money damages against the Indemnified Party which
the Indemnified Party reasonably determines cannot be separated from any
related claim for money damages. If such equitable relief or other relief
portion of the Third Party Claim can be so separated from that for money
damages, the Indemnifying Party shall be entitled to assume the defense of
the portion relating to money damages. The indemnification required by
Section 11.1 or 11.2, as the case may be, shall be made by periodic payments
of the amount thereof during the course of the investigation or defense, as
and when bills are received or the Indemnifiable Loss is incurred. If the
Indemnifying Party chooses to defend or prosecute any Third Party Claim (and
is permitted hereunder to do so), the Indemnified Party will agree to any
settlement, compromise or discharge of such Third Party Claim which the
Indemnifying Party may recommend and which by its terms obligates the
Indemnifying Party to pay the full amount of liability in connection with
such Third Party Claim; PROVIDED, HOWEVER, that, without the Indemnified
Party's consent, the Indemnifying Party shall not consent to entry of any
judgment or enter into any settlement (x) that provides for injunctive or
other nonmonetary relief affecting the Indemnified Party or (y) that does not
include as an unconditional term thereof the giving by each claimant or
plaintiff to such Indemnified Party of a release from all liability with
respect to such claim. If the Indemnifying Party elects not to defend
against such Third Party Claim or is not permitted to defend against such
claim in the circumstances described above, then the Indemnifying Party shall
have the right to participate in any such defense at its sole cost and
expense, but the Indemnified Party shall control the investigation, defense
and settlement thereof at the reasonable cost and expense of the Indemnifying
Party. Whether or not the Indemnifying Party shall have assumed or is
permitted to assume the defense of a Third Party Claim, the Indemnified Party
shall not admit any liability with respect to, or settle, compromise or
discharge, such Third Party Claim without the Indemnifying Party's prior
written consent (which consent shall not be unreasonably withheld). The
parties hereto shall cooperate in the defense or prosecution of any Third
Party Claim, which cooperation shall include the retention and (upon
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the Indemnifying Party's request) the provision to the Indemnifying Party of
records and information which are reasonably relevant to such Third Party
Claim, and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. Any Disputes between the Indemnifying Party and the Indemnified
Party under this Section 11.3(b) shall be resolved in the manner provided in
Section 12.14.
(c) In the event that an Indemnified Party should have a claim against
the Indemnifying Party hereunder which does not involve a Third Party Claim,
the Indemnified Party shall send a Claim Notice with respect to such claim to
the Indemnifying Party with reasonable promptness. The failure by any
Indemnified Party so to notify the Indemnifying Party shall not relieve the
Indemnifying Party from any liability which it may have to such Indemnified
Party under this Agreement, except to the extent that the Indemnifying Party
shall have been actually prejudiced by such failure. The Indemnifying Party
shall have 30 days from the date such Claim Notice is delivered during which
to notify the Indemnified Party in writing of any good faith objections it
has to the Indemnified Party's Claim Notice or claims for indemnification,
specifying in reasonable detail each of the Indemnifying Party's objections
thereto. If the Indemnifying Party delivers such written notice of objection
within such 30-day period, the Indemnifying Party and the Indemnified Party
shall attempt in good faith to negotiate a resolution of such Dispute. If
the Indemnifying Party and the Indemnified Party are unable to negotiate a
resolution of such Dispute within 30 days after the delivery by the
Indemnifying Party of such written notice of objection, such Dispute shall be
resolved in the manner provided in Section 12.14. If the Indemnifying Party
does not notify the Indemnified Party within 30 days following its receipt of
such notice that the Indemnified Party disputes its liability with respect to
such claim under Section 11.1 or 11.2, as the case may be, the claim shall be
conclusively deemed a liability of the Indemnifying Party under Section 11.1
or 11.2, as the case may be, and the Indemnifying Party shall pay the amount
of such liability to the Indemnified Party on demand or, in the case of any
notice in which the amount of the claim (or any portion thereof) is
estimated, on such later date when the amount of such claim (or any such
portion thereof) becomes finally determined.
11.4 MISCELLANEOUS INDEMNIFICATION PROVISIONS.
(a) The Indemnifying Party agrees to indemnify any successors of the
Indemnified Party to the same extent and in the same manner and on the same
terms and conditions as the Indemnified Party is indemnified by the
Indemnifying Party under this Article XI, provided that such Indemnified
Party and such successor have complied with the provisions of Section 12.11,
if applicable.
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(b) In determining the amount of any indemnity payable under this
Article XI or the number of shares of AirTouch Common Stock deliverable by U
S WEST to AirTouch pursuant to Section 3.3, such amount shall be (i)
increased to take account of any net Tax cost incurred by the recipient
thereof as a result of the receipt or accrual of payments hereunder
(grossed-up for such increase) and (ii) reduced to take account of any net
Tax benefit realized by the recipient arising from the incurrence or payment
of any such payment, other than any such net Tax benefit to which the
Indemnified Party would be entitled without regard to such item. In
computing the amount of any such Tax cost or Tax benefit, the recipient shall
be deemed to recognize all other items of income, gain, loss, deduction or
credit before recognizing any item arising from the receipt or accrual of any
payment hereunder.
(c) In determining the amount of any indemnity payable under this
Article XI, such amount shall be reduced by any insurance recovery if and
when actually realized or received in each case in respect of such
Indemnifiable Loss. Any such recovery shall be promptly repaid by the
Indemnified Party to the Indemnifying Party following the time at which such
recovery is realized or received pursuant to the previous sentence, minus all
reasonably allocable costs, charges and expenses incurred by the Indemnified
Party in obtaining such recovery.
(d) Notwithstanding the foregoing, if (x) the amount of Indemnifiable
Losses for which the Indemnifying Party is obligated to indemnify the
Indemnified Party is reduced by any Tax benefit or insurance recovery in
accordance with the provisions of this Section 11.4, and (y) the Indemnified
Party subsequently is required to repay the amount of any such Tax benefit or
insurance recovery or such Tax benefit or insurance recovery is disallowed,
then the obligation of the Indemnifying Party to indemnification with respect
to such amounts shall be reinstated immediately and such amounts shall be
paid promptly to the Indemnified Party in accordance with the provisions of
this Agreement.
11.5 CONTRIBUTION. To the extent that any indemnity provided for in
this Article XI is unavailable to an Indemnified Party in respect of any of
the Indemnifiable Losses of such Indemnified Party, then the Indemnifying
Party, in lieu of indemnifying such Indemnified Party hereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a
result of such Indemnifiable Losses in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of
the Indemnified Party on the other hand in connection with the action,
inaction, statements or omissions that resulted in such Indemnifiable Losses
as well as any other relevant equitable considerations.
11.6 TAX INDEMNIFICATION. Notwithstanding anything to the contrary in
this Article XI, all indemnification relating to
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Taxes shall be governed by the Tax Sharing Agreement (except to the extent
that the amount of any Indemnifiable Loss under this Agreement is to be
determined as provided in Section 11.4 hereof). In the event and to the
extent that there shall be a conflict between the provisions of this
Agreement (including, without limitation, the provisions of this Article XI)
and the provisions of the Tax Sharing Agreement, the provisions of the Tax
Sharing Agreement shall control.
11.7 PAYMENTS ADJUSTMENTS TO MERGER CONSIDERATION. It is the intention
of the parties hereto that payments made by the parties to each other after
the Effective Time pursuant to this Article XI or Section 3.3 or otherwise
under the Transaction Agreements are to be treated as relating back to the
Effective Time as an adjustment to the Merger Consideration, and the parties
shall take positions consistent with such intention with any Governmental
Authority, unless with respect to any payment any party receives an opinion
of counsel to the effect that there is no reasonable basis for such position.
ARTICLE XII
GENERAL PROVISIONS
12.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations and warranties in this Agreement shall not survive the
Effective Time; PROVIDED, HOWEVER, that (a) all of the representations and
warranties of U S WEST (other than the last sentence of Section 4.7) and the
representations and warranties of AirTouch contained in the last sentence of
Section 5.2(a) and Sections 5.4 and 5.5 shall survive until the date that is
18 months following the Effective Time and (b) the representation and
warranty of U S WEST set forth in the last sentence of Section 4.7, which
shall survive indefinitely. The covenants contained in this Agreement shall
not survive the Effective Time except to the extent that they provide for or
contemplate performance following the Effective Time and except for the
covenant set forth in Section 6.1(b)(vii), which shall survive indefinitely.
12.2 LEGENDS. All certificates evidencing shares of AirTouch Common
Stock, AirTouch Class D Preferred Stock or AirTouch Class E Preferred Stock
acquired by Media (or the NV/PCS Transferee) directly or indirectly pursuant
to this Agreement shall be endorsed with the legends set forth below:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER
SUCH ACT, OR UNLESS THE COMPANY SHALL HAVE RECEIVED AN OPINION OF
COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO
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THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
12.3 REMOVAL OF LEGENDS. Any legend endorsed on a certificate pursuant
to Section 12.2 shall be removed (a) if the securities represented by such
certificate shall have been effectively registered under the Securities Act
or otherwise lawfully sold in compliance with Rule 144 under the Securities
Act, or (b) if the holder of such securities shall have provided AirTouch
with an opinion of counsel, in form and substance reasonably acceptable to
AirTouch and its counsel stating that a sale, transfer or assignment of the
securities may be made without registration under the Securities Act.
12.4 EXPENSES. Except as otherwise provided herein or in any of the
other Transaction Agreements, each of the parties hereto (except for NV and
PCS Holdings, the fees, expenses and costs of which shall be paid by U S
WEST) shall pay the fees and expenses of its respective counsel, accountants
and other experts and shall pay all other costs and expenses incurred by it
in connection with the negotiation, preparation and execution of this
Agreement and the consummation of the transactions contemplated hereby,
including, without limitation, all costs and expenses incurred by it to
obtain required Consents to the consummation of the transactions contemplated
hereby.
12.5 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without reference to
choice of law principles, except to the extent that the laws of the State of
Colorado are mandatorily applicable to the Merger.
12.6 NOTICES. Notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if signed by the respective parties giving them (in the case of
any corporation the signature shall be by an officer thereof) and delivered
by hand or by telecopy or on the date of receipt indicated on the return
receipt if mailed (registered or certified, return receipt requested,
properly addressed and postage prepaid):
If to U S WEST, Media (or the NV/PCS Transferee),
or NV or PCS Holdings (prior to the Merger), to:
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Attention: General Counsel
Telephone: (303) 793-6500
Telecopy: (303) 793-6707
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with a copy (which shall not constitute notice) to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attention: Dennis J. Block, Esq.
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
If to AirTouch
or NV or PCS Holdings (after the Merger), to:
AirTouch Communications, Inc.
One California Street
San Francisco, California 94111
Attention: Margaret G. Gill, Esq.
Senior Vice President - Legal,
External Affairs and Secretary
Telephone: (415) 658-2000
Telecopy: (415) 658-2551
with a copy (which shall not constitute notice) to:
Pillsbury Madison & Sutro LLP
235 Montgomery Street
San Francisco, California 94101
Attention: Nathaniel M. Cartmell III, Esq.
Telephone: (415) 983-1000
Telecopy: (415) 983-1200
Such names and addresses may be changed by notice given in accordance with this
Section 12.6.
12.7 ENTIRE AGREEMENT.
(a) This Agreement, the Tax Sharing Agreement, the Confidentiality
Agreements, the Patent License Agreement, the Resources Agreement, the
Software License Agreement and the New Investment Agreement, together with
all schedules, exhibits, annexes, certificates, instruments and agreements
delivered pursuant hereto and thereto, contain the entire understanding of
the parties hereto and thereto with respect to the subject matter contained
herein and therein and, except to the extent specifically provided herein or
therein, supersede and cancel all prior agreements, negotiations,
correspondence, undertakings and communications of the parties, oral or
written, respecting such subject matters. There are no restrictions,
promises, representations, warranties, agreements or undertakings of any
party hereto or thereto with respect to the transactions contemplated by this
Agreement or the other agreements referred to above other than those set
forth herein or therein or made hereunder or thereunder.
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(b) The Joint Venture Organization Agreement, the WMC Agreement, the
Investment Agreement, the Exchange Agreement, the Arbitration Agreement, the
PCS Nucleus Agreement, the PrimeCo Agreement, the TOMCOM Agreement and all
letter and other agreements entered into by U S WEST, U S WEST Colorado and
AirTouch and their respective Subsidiaries pursuant thereto or in connection
therewith (the "Joint Venture Agreements") shall remain in full force and
effect, without modification, as a result of the execution of this Agreement;
PROVIDED that the obligation of the parties to proceed with any of the
transactions contemplated under the Joint Venture Agreements shall be
suspended during the period in which this Agreement remains in effect. At
the Effective Time, each of AirTouch and U S WEST (and their respective
successors and assigns and Subsidiaries) shall be released and forever
discharged from any and all obligations and liabilities of any kind at any
time arising under or in relation to the Joint Venture Agreements, and each
of the Joint Venture Agreements (other than the WMC Agreement, the PCS
Nucleus Agreement, the PrimeCo Agreement and the TOMCOM Agreement) shall
terminate.
12.8 DISCLOSURE SCHEDULES. The U S WEST Merger Disclosure Schedule
delivered by U S WEST and Media to AirTouch and the AirTouch Merger
Disclosure Schedule delivered by AirTouch to U S WEST and Media are
incorporated into this Agreement by reference and made a part hereof.
12.9 HEADINGS; REFERENCES. The article, section and paragraph headings
contained herein are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. All references herein
to "Articles", "Sections" or "Exhibits" shall be deemed to be references to
Articles or Sections hereof or Exhibits hereto unless otherwise indicated.
12.10 COUNTERPARTS. This Agreement may be executed in counterparts and
each counterpart shall be deemed to be an original, but all of which shall
constitute one and the same original.
12.11 PARTIES IN INTEREST; ASSIGNMENT; SUCCESSORS.
(a) Subject to Section 12.11(b) and (c), neither this Agreement nor any
of the rights, interest or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties.
Subject to Section 12.11(b), this Agreement shall inure to the benefit of and
be binding upon U S WEST, Media, NV, PCS Holdings and AirTouch and their
respective successors and permitted assigns. Nothing in this Agreement,
express or implied, is intended to confer upon any other Person any rights or
remedies under or by reason of this Agreement.
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(b) (i) If the U S WEST Separation is consummated (whether prior to or
following the Effective Time) and, in connection therewith, U S WEST
distributes to its stockholders (by dividend, redemption, exchange, merger or
otherwise) all of the outstanding capital stock of MediaCo, U S WEST shall
assign to MediaCo all of its rights and obligations under this Agreement,
including but not limited to, its obligations to the AirTouch Indemnified
Parties under Article XI of this Agreement; PROVIDED, HOWEVER, that U S WEST
shall not be required to assign to MediaCo its rights and obligations under
Sections 7.8, 7.9, 7.10, 7.11, 7.12 and Article VIII. Upon such assumption
by MediaCo of the obligations so assigned (by the instrument attached hereto
as Exhibit K-1), U S WEST shall be released from its obligations to AirTouch
to the extent of such assumption by MediaCo. MediaCo's Affiliates shall be
entitled to the benefit of any such rights assigned to MediaCo to the same
extent as such Affiliates are entitled to the benefits of such rights
hereunder as Affiliates of U S WEST.
(ii) If the U S WEST Separation is consummated (whether prior to or
following the Effective Time) and, in connection therewith, U S WEST
distributes to its stockholders (by dividend, redemption, exchange, merger or
otherwise) all of the outstanding capital stock of CommunicationsCo, U S WEST
shall assign to CommunicationsCo (fully or on a shared basis) such of its
rights and obligations under Sections 7.8, 7.9, 7.10, 7.11, 7.12 and Article
VIII as it may determine. Upon such assumption by CommunicationsCo of the
obligations so assigned by the instrument attached hereto as Exhibit K-2), U
S WEST shall be released from its obligations to AirTouch to the extent of
such assumption by CommunicationsCo. CommunicationsCo's Affiliates shall be
entitled to the benefit of any such rights assigned to CommunicationsCo to
the same extent as such Affiliates are entitled to the benefit of such rights
hereunder as Affiliates of U S WEST.
(c) If the U S WEST Separation is consummated prior to the Effective
Time, Media shall assign to the NV/PCS Transferee all of its rights and
obligations under this Agreement. Upon assumption by the NV/PCS Transferee
of the obligations so assigned (by the instrument attached hereto as Exhibit
K-3), Media shall be released from its obligations to AirTouch to the extent
of such assumption.
12.12 SEVERABILITY. If any provision of this Agreement or the
application thereof to any Person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to Persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon
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any such determination, the parties shall negotiate in good faith in an
effort to agree upon a suitable and equitable substitute provision to effect
the original intent of the parties.
12.13 ENFORCEMENT. The parties agree that irreparable damage would
occur and that the parties would not have any adequate remedy at law in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any United States federal court
located in the State of Delaware or in Delaware state court, this being in
addition to any other remedy to which they are entitled at law or in equity.
In addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any United States federal court located in the State
of Delaware or any Delaware state court in the event any dispute arises out
of this Agreement or any of the transactions contemplated by this Agreement,
(b) agrees that only such courts shall have jurisdiction and venue over any
such dispute, (c) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such
court and (d) agrees that it will not bring any action relating to this
Agreement or any of the transactions contemplated by this Agreement in any
court other than a United States federal court sitting in the State of
Delaware or a Delaware state court. The provisions of this Section 12.13
shall not apply to any of the other Transaction Agreements.
12.14 DISPUTE RESOLUTION.
(a) GENERAL ARBITRATION PROVISIONS.
(i) The parties hereto agree that all Disputes shall be resolved by
binding arbitration, which shall be administered by the American
Arbitration Association ("AAA") in Phoenix, Arizona, and, except as
expressly provided in this Agreement, shall be conducted in accordance with
the Commercial Arbitration Rules of the American Arbitration Association,
as such Rules may be amended from time to time, with the hearing locale to
be Phoenix, Arizona.
(ii) A single neutral arbitrator shall preside over the arbitration
and decide the Dispute (the "Decision").
(iii) The Decision shall be binding, and the prevailing party may
enforce such decision in any court of competent jurisdiction.
(iv) The parties shall cooperate with each other in causing the
arbitration to be held in as efficient and expeditious a manner as
practicable.
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(v) The parties have selected arbitration in order to expedite the
resolution of Disputes and to reduce the costs and burdens associated with
litigation. The parties agree that the arbitrator should take these
concerns into account when determining the scope of permissible discovery
and other hearing and pre-hearing procedures.
(vi) Without limiting any other remedies which may be available under
Applicable Law, the arbitrator shall have no authority to award punitive
damages.
(vii) The arbitrator shall render a decision within 120 days after
accepting an appointment to serve as arbitrator unless the parties
otherwise agree or the arbitrator makes a finding that a party has carried
the burden of showing good cause for a longer period.
(viii) Notwithstanding anything herein to the contrary, any party may
seek a temporary restraining order or a preliminary injunction from any
court of competent jurisdiction in order to prevent immediate and
irreparable injury, loss or damage pending the selection of an arbitrator
to render a Decision on the ultimate merits of any Dispute.
(b) SELECTION OF THE ARBITRATOR.
(i) The parties hereto shall cooperate in good faith to select a
mutually agreeable arbitrator. If the parties have not agreed upon an
arbitrator within 30 days of the initiation of the arbitration, then an
arbitrator shall be selected pursuant to the provisions of Section
12.14(b)(ii) of this Agreement.
(ii) If the parties are unable to agree upon an arbitrator pursuant to
the procedures of Section 12.14(b)(i) of this Agreement, then the American
Arbitration Association shall designate an arbitrator pursuant to its
Commercial Arbitration Rules, except that the list of potential arbitrators
from the National Panel of Commercial Arbitrators submitted to the parties
shall be drawn from throughout the United States other than from the State
of Arizona, and shall have expertise in the subject matter or nature of the
Dispute.
(c) CONFIDENTIALITY. All proceedings and decisions of the arbitrator shall
be maintained in confidence, to the extent legally permissible, and shall not be
made public by any party or any arbitrator without the prior written consent of
all parties to the arbitration, except as may be required by law.
(d) FEES AND COSTS. Each party shall bear its own costs and attorneys'
fees in connection with any arbitration, and the parties shall equally bear the
fees, costs and expenses of the
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arbitrator and the arbitration proceedings; provided, however, that the
arbitrator may exercise discretion to award costs, but not attorneys' fees,
to the prevailing party.
(e) AWARD. Any arbitration award shall be binding and enforceable against
the parties hereto, their successors and assigns, and judgment may be entered
thereon in any court of competent jurisdiction.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf by its officers hereunto duly authorized, all as of
the day and year first above written.
U S WEST, INC.
By:
------------------------------------
Name:
Title:
U S WEST MEDIA GROUP, INC.
By:
------------------------------------
Name:
Title:
U S WEST NEWVECTOR GROUP, INC.
By:
------------------------------------
Name:
Title:
U S WEST PCS HOLDINGS, INC.
By:
------------------------------------
Name:
Title:
AIRTOUCH COMMUNICATIONS, INC.
By:
------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 12
U S WEST, INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income before income taxes, extraordinary items and cumulative
effect of changes in accounting principles...................... $ 1,222 $ 1,840 $ 2,154 $ 2,283 $ 745
Interest expense (net of amounts capitalized).................... 1,083 612 527 442 439
Interest factor on rentals (1/3)................................. 104 91 95 96 102
Equity losses in unconsolidated ventures (less than 50% owned)... 690 168 66 -- --
Guaranteed minority interest expense............................. 87 55 14 -- --
--------- --------- --------- --------- ---------
Earnings......................................................... $ 3,186 $ 2,766 $ 2,856 $ 2,821 $ 1,286
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest expense................................................. $ 1,139 $ 680 $ 599 $ 486 $ 439
Interest factor on rentals (1/3)................................. 104 91 95 96 102
Guaranteed minority interest expense............................. 87 55 14 -- --
Preferred stock dividends (pretax equivalent).................... 91 15 -- -- --
--------- --------- --------- --------- ---------
Fixed charges.................................................... $ 1,421 $ 841 $ 708 $ 582 $ 541
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to combined fixed charges and preferred stock
dividends....................................................... 2.24 3.29 4.03 4.85 2.38
</TABLE>
(1) The 1993 ratio is based on earnings from continuing operations and includes
a restructuring charge of $1 billion. Excluding the restructuring charge,
the 1993 ratio of earnings to combined fixed charges and preferred stock
dividends would have been 4.22.
<PAGE>
EXHIBIT 12
U S WEST, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income before income taxes, extraordinary items and cumulative
effect of changes in accounting principles...................... $ 1,222 $ 1,840 $ 2,154 $ 2,283 $ 745
Interest expense (net of amounts capitalized).................... 1,083 612 527 442 439
Interest factor on rentals (1/3)................................. 104 91 95 96 102
Equity losses in unconsolidated ventures (less than 50% owned)... 690 168 66 -- --
Guaranteed minority interest expense............................. 87 55 14 -- --
--------- --------- --------- --------- ---------
Earnings......................................................... $ 3,186 $ 2,766 $ 2,856 $ 2,821 $ 1,286
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest expense................................................. $ 1,139 $ 680 $ 599 $ 486 $ 439
Interest factor on rentals (1/3)................................. 104 91 95 96 102
Guaranteed minority interest expense............................. 87 55 14 -- --
--------- --------- --------- --------- ---------
Fixed charges.................................................... $ 1,330 $ 826 $ 708 $ 582 $ 541
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges............................... 2.40 3.35 4.03 4.85 2.38
</TABLE>
(1) The 1993 ratio is based on earnings from continuing operations and includes
a restructuring charge of $1 billion. Excluding the restructuring charge,
the 1993 ratio of earnings to fixed charges would have been 4.22.
<PAGE>
EXHIBIT 12
U S WEST FINANCIAL SERVICES, INC.
RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Income before income taxes................................ $ 19,874 $ 16,150 $ 9,125 $ 12,217 $ 123,596
Interest expense.......................................... 24,758 21,523 29,091 40,816 144,980
Interest factor on rentals (1/3).......................... 27 56 56 123 789
--------- --------- --------- --------- ----------
Earnings.................................................. $ 44,659 $ 37,729 $ 38,272 $ 53,156 $ 269,365
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Interest expense.......................................... $ 24,758 $ 21,523 $ 29,091 $ 40,816 $ 144,980
Interest factor on rentals (1/3).......................... 27 56 56 123 789
--------- --------- --------- --------- ----------
Fixed charges............................................. $ 24,785 $ 21,579 $ 29,147 $ 40,939 $ 145,769
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Ratio of earnings to fixed charges........................ 1.80 1.75 1.31 1.30 1.85
</TABLE>
A Termination Agreement and Guarantee (the "Agreement") was entered into on June
24, 1994 between U S WEST, Inc. ("U S WEST") and U S WEST Capital Corporation
and U S WEST Financial Services ("USWFS"). The Agreement terminates the Support
Agreement dated January 5, 1990 whereby U S WEST agreed to provide financial
support to USWFS. The Agreement provides replacement financial support in the
form of a direct guarantee by U S WEST of all outstanding indebtedness of USWFS.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF U S WEST, INC.
(A DELAWARE CORPORATION)
AS OF JANUARY 30, 1998
I. U S WEST Capital Funding, Inc., a Colorado corporation
II. U S WEST Communications Group, Inc., a Colorado corporation
A. U S WEST Advanced Technologies, Inc., a Colorado corporation
B. U S WEST Business Resources, Inc., a Colorado corporation
1. U S WEST Business Resources, Inc., a Delaware corporation
2. U S WEST Corporate Transportation, Inc., a Colorado corporation
C. USW-C, Inc., a Delaware corporation
D. U S WEST Communications, Inc., a Colorado corporation
1. Block 142 Parking Garage Association, a Colorado non profit
2. El Paso County Telephone Company, a Colorado corporation
3. Malheur Home Telephone Company, an Oregon corporation
4. Mubeta Development Co., a Colorado corporation
5. Training Partnerships, Inc., a Colorado non profit
6. 1200 Landmark Center Condominium Association, Inc., a Nebraska
non profit
7. U S WEST Wireless, L.L.C., a Delaware limited liability
corporation
E. U S WEST Communications Federal Services, Inc., a Colorado corporation
F. U S WEST Communications Services, Inc., a Colorado corporation
G. U S WEST Enhanced Services, Inc., a Washington corporation
H. U S WEST Interprise America, Inc., a Colorado corporation
I. U S WEST Information Technologies, Inc., a Colorado corporation
J. U S WEST Long Distance, Inc., a Colorado corporation
III. U S WEST Education Foundation, a Washington non profit
IV. U S WEST Federal Relations, Inc., a Delaware corporation
<PAGE>
V. U S WEST Financing I, a Delaware business trust
VI. U S WEST Financing II, a Delaware business trust
VII. U S WEST Financing III, a Delaware business trust
VIII. U S WEST Foundation, a Colorado non profit
IX. U S WEST Investment Management Company, a Colorado corporation
X. U S WEST IP Holdings, Inc., a Delaware corporation
XI. U S WEST Media Group, Inc., a Delaware corporation
A. U S WEST Capital Corporation, a Colorado corporation
1. U S WEST Capital (America) Inc., a Colorado corporation
2. U S WEST Capital, Ltd. (U K)
3. Commercial Reinsurance Company, an Oklahoma corporation
a) CLFG Corporation, a Delaware corporation
b) Financial Security Assurance, Inc., a New York corporation
(1) Financial Security Assurance International, Inc., an
Indiana corporation
(a) Financial Security Assurance of Oklahoma, Inc., an
Oklahoma corporation
(i) Financial Security Assurance (U.K.) Ltd.
c) FSA Portfolio Management Inc., a New York corporation
4. U S WEST Financial Services, Inc., a Colorado corporation
a) Commercial Funding, Inc., a New York corporation
b) U S WEST Delta, Inc., a Colorado corporation
c) USW Finance Corporation, a Colorado corporation
d) U S WEST Financial Services Foreign Sales, Inc.(Virgin
Islands)
e) USWFS Leasing 1995, Inc., a Colorado corporation
f) New York Cogenco, Inc., a Delaware corporation
g) USW Shacres, Inc., a California corporation
h) SIFD ONE, LTD., a Delaware corporation
(1) USW FSC ONE, LTD.(Bermuda)
i) SIFD TWO, LTD., a Delaware limited partnership
(1) USW FSC TWO, LTD.(Bermuda)
<PAGE>
j) SIFD THREE, LTD., a Delaware business trust
(1) USW FSC THREE, LTD. (Bermuda)
k) USWSPE, Inc., a Delaware corporation
l) Valertex, Inc., a Texas corporation
5. U S WEST Services (America) Inc., a Colorado corporation
6. U S WEST Services, Ltd.(U K)
B. U S WEST Cellular Holdings, Inc., a Delaware corporation
C. U S WEST Dex, Inc., a Colorado corporation
1. Interactive Video Enterprises, Inc., a Colorado corporation
2. LOCALTouch Holdings, Inc., a Colorado corporation
a) LOCALTouch Directory Services, Inc, a Colorado corporation
3. Please Hold Promotions, Inc., an Arizona corporation
D. Domestic Cable, Inc., a Colorado corporation
E. Far East Investment Company, a Colorado corporation
F. U S WEST Interactive Services, Inc., a Colorado corporation
G. U S WEST International Holdings, Inc., a Delaware corporation
1. U S WEST Cable Partnership Holdings, Inc., a Colorado corporation
2. U S WEST Cable Programming Corporation, a Colorado corporation
3. U S WEST Czech Cable Company, a Delaware corporation
4. U S WEST Espana Telecommunications, Inc., a Delaware corporation
5. U S WEST Europe, Inc., a Colorado corporation
6. U S WEST Far East Telecommunications, Inc., a Delaware
corporation
7. U S WEST Foreign Investments, Inc., a Colorado corporation
8. U S WEST International, Inc., a Colorado corporation
9. U S WEST International Systems Group, Inc., a Colorado
corporation
a) U S WEST ISG Technologies, Inc., a Colorado corporation
10. Overseas Operations, Inc., a Colorado corporation
11. Overseas Operations II, Inc., a Delaware corporation
12. USW PCN, Inc., a Colorado corporation
13. RTDC Holdings, Inc., a Delaware corporation
a) Russian Telecommunications Development Corporation, a
Delaware corporation
(1) Russian Telecommunications Asset Management
Corporation, a Delaware corporation
<PAGE>
(2) Russian Telecommunications Development Finance
Corporation, a Delaware corporation
(3) Russian Telecommunications Development Holding
Corporation, a Delawarecorporation
(4) Russian Telecommunications Development Holding
Corporation II, a Delaware corporation
(5) Russian Telecommunications Development Management
Corporation, a Delaware corporation
(6) U S WEST Services (Russia)
14. U S WEST U.K. Cable, Inc., a Colorado corporation (
15. U S WEST India B.V. (Netherlands)
16. U S WEST International B.V. (Netherlands)
a) U S WEST Deutschland GmbH (Germany)
b) U S WEST Polska Sp.z.o.o (Poland)
17. U S WEST U.K. Limited (U.K.)
a) U S WEST Cable Partnership Limited (U.K.)
b) U S WEST International Systems Group Limited (U.K.)
c) U S WEST ISG Installation Services Limited (U.K.)
d) U S WEST Marketing Resources (U.K.) Limited
18. U S WEST Westelcom B.V. (Netherlands)
H. U S WEST Investments, Inc., a Colorado corporation
1. U S WEST Real Estate, Inc., a Colorado corporation
a) USW Cardinal I, Inc., an Ohio corporation
b) USW Cardinal II, Inc., an Ohio corporation
c) USW Fresno, Inc., a Colorado corporation
d) USW Lodging, Inc., a Delaware corporation
e) NP, Inc., a Colorado corporation
f) Taurus Laurel, Inc., a Colorado corporation
g) Taurus Properties, Inc., a Colorado corporation
h) Verend, Inc., a Texas corporation
(1) Riverbend West Association, Inc., a Texas non profit
i) Dulles Corner Association, Inc., a Virginia non profit
<PAGE>
I.
MediaOne of Delaware, Inc., a Delaware corporation
1. Continental Cablevision Asia Pacific, Inc., a Massachusetts
corporation
a) Continental Cablevision Singapore Pte Ltd. (Singapore)
2. Continental Cablevision of Minnesota, Inc., a Minnesota
corporation
a) Minnesota Cable Communications Holding Company, Inc., a
Delaware corporation
b) North Central Cable Communications Corporation, a Delaware
corporation
(1) Group W Cable of Burnsville/Eagan, Inc., a Minnesota
corporation
(2) Group W Cable of Columbia Heights/Hilltop, Inc., a
Minnesota corporation
(3) Group W Cable of the North Suburbs, Inc., a Minnesota
corporation
(4) Group W Cable of the North Central Suburbs, Inc., a
Minnesota corporation
(5) Group W Cable of Quad Cities, Inc., a Minnesota
corporation
(6) Group W Cable of Ramsey/Washington, Inc., a Minnesota
corporation
3. Continental Cablevision of St. Paul, Inc., a Minnesota
corporation
4. Continental Cablevision Satellite Company of Northern California,
Inc., a California corporation
a) MediaOne Satellite II, Inc., a Delaware corporation
(1) MediaOne Satellite I, Inc., a Delaware corporation
5. Continental Satellite Company, Inc., a Massachusetts corporation
6. Continental Satellite Company of Chicago, Inc., an Illinois
corporation
7. Continental Satellite Company of Minnesota, Inc., a Minnesota
corporation
8. Continental Satellite Company of New England, Inc., a New
Hampshire corporation
9. Continental Satellite Company of Ohio, Inc., an Ohio corporation
10. Continental Satellite Company of Virginia, Inc., a Virginia
corporation
11. MediaOne Acquisitions of Northern Illinois, Inc., an Illinois
corporation
12. MediaOne Digital Radio, Inc., a Massachusetts corporation
13. MediaOne Enterprises, Inc., a Rhode Island corporation
a) CCF Management Services, Inc., a Florida corporation
b) CCI Management Services, Inc., a California corporation
c) MediaOne of Lakewood, Inc., a California corporation
d) Copley/Colony, Inc., a Delaware corporation
<PAGE>
(1) MediaOne of Costa Mesa, Inc, a California corporation
(2) MediaOne of Cypress, Inc., a California corporation
(3) MediaOne of Harbor, Inc., a California corporation
(4) MediaOne of Lomita, Inc., a California corporation
(5) MediaOne of Los Angeles County, Inc., a California
corporation
(6) MediaOne of Orange County, Inc., a California
corporation
e) King Videocable Company, a Washington corporation
(1) King Videocable Company-Minnesota, a Washington
corporation
(2) King Videocable Company-Twin Falls, an Idaho
corporation
(a) King Videocable Company-Idaho, a Colorado
corporation MediaOne of Newhall, Inc., a
California corporation
(3) MediaOne of North Valley, Inc., a California
corporation
f) MediaOne Interconnects, Inc., a Delaware corporation
g) MediaOne of Greater New York, Inc., a Rhode Island
corporation
h) MediaOne of South Florida, Inc., a Florida corporation
i) MediaOne of Southern New England, Inc., a Massachusetts
corporation
14. MediaOne Holdings 1, Inc., a Delaware corporation
a) MediaOne of Los Angeles, Inc., a California corporation
(1) American Cablesystems of South Central Los Angeles,
Inc., a Delaware corporation
b) MediaOne of Milton, Inc., a Massachusetts corporation
c) MediaOne of New York, Inc., a New York corporation
<PAGE>
15. MediaOne Investments, Inc., a Delaware corporation
a) MediaOne Cable Investments, Inc., a Delaware corporation
b) Fostoria Communications, Inc., a Massachusetts corporation
c) MediaOne Cable News, Inc., a Massachusetts corporation
d) MediaOne of Southeast Michigan, Inc., a Michigan corporation
e) MediaOne Programming Partners 1, Inc., a Massachusetts
corporation
16. MediaOne of Australia, Inc., a Massachusetts corporation
17. MediaOne of Brockton, Inc., a Delaware corporation
18. MediaOne of California, Inc., a California corporation
19. MediaOne of Greater Florida, Inc., a Florida corporation
a) Alrif Co., Inc., a Massachusetts corporation
b) Continental Satellite Company of Florida, Inc., a Florida
corporation
(1) MediaOne Satellite II, Inc., a Delaware corporation
(a) MediaOne Satellite I, Inc., a Delaware corporation
20. MediaOne of Illinois, Inc., a Delaware corporation
21. MediaOne of Massachusetts, Inc., a Massachusetts corporation
22. MediaOne of Metropolitan Detroit, Inc., a Michigan corporation
a) Continental Satellite Company of Michigan, Inc.. a Michigan
corporation
b) MediaOne of Eastern Michigan, Inc., a Delaware corporation
23. MediaOne of Needham, Inc., a Delaware corporation
24. MediaOne of New England, Inc, a New Hampshire corporation
a) MediaOne of New Hampshire, Inc., a Maryland corporation
25. MediaOne of Northern Illinois, Inc., a Delaware corporation
26. MediaOne of Ohio, Inc., an Ohio corporation
27. MediaOne of Sierra Valleys, Inc., a California corporation
a) MediaOne of Fresno, Inc., a California corporation
b) MediaOne of Nevada, Inc., a Nevada corporation
c) MediaOne of Northern California, Inc., a California
corporation
28. MediaOne of Virginia, Inc., a Virginia corporation
a) MediaOne of Pioneer Valley, Inc., a Massachusetts
corporation
b) Continental Cablevision of Richmond, Inc., a Virginia
corporation
29. MediaOne of Western New England, Inc., a Delaware corporation
<PAGE>
30. MediaOne Telecommunications Corp., a Massachusetts corporation
a) Continental Australia Programming, Inc., a Massachusetts
corporation
b) Continental Telecommunications Corp. of Minnesota, a
Minnesota corporation
c) Continental Telecommunications Corp. of Virginia, a
Virginia corporation
d) Continental Teleport Partners, Inc., a Massachusetts
corporation
e) MediaOne Connect, Inc., a Delaware corporation)
f) MediaOne Express Midwest, Inc., an Ohio corporation
g) MediaOne Express of California, Inc., a California
corporation
h) MediaOne Express of Florida, Inc., a Florida corporation
i) MediaOne Express of Illinois, Inc., an Illinois corporation
j) MediaOne Express of New England, Inc., a Massachusetts
corporation
k) MediaOne Express of Virginia, Inc., a Virginia corporation
l) MediaOne Fiber Technologies, Inc., a Florida corporation
m) MediaOne Florida Telecommunications, Inc., a Florida
corporation
n) MediaOne Information Technology Systems, Inc., a
Massachusetts corporation
o) MediaOne International Programming, Inc., a Massachusetts
corporation
p) MediaOne Telecommunications Corp. of New England, a
Massachusetts corporation
q) MediaOne Telecommunications Corp. of Ohio, an Ohio
corporation
r) MediaOne Telecommunications of California, Inc., a
California corporation
s) MediaOne Telecommunications of Illinois, Inc., an Illinois
corporation
t) MediaOne Telecommunications of Massachusetts, Inc., a
Massachusetts corporation
u) MediaOne Telecommunications of Michigan, Inc., a Michigan
corporation
v) MediaOne Telecommunications of New Hampshire, Inc., a New
Hampshire corporation
w) MediaOne Telecommunications of Ohio, Inc., an Ohio
corporation
x) MediaOne Telecommunications of Virginia, Inc., a Virginia
corporation
31. S.A. Ventures, Inc., a Massachusetts corporation
a) S.A. Ventures (Delaware), Inc., a Delaware corporation
32. S.A. Ventures II, Inc., a Massachusetts corporation
<PAGE>
J. U S WEST Multimedia Communications, Inc., a Colorado corporation
1. MediaOne, Inc., a Georgia corporation
a) Atlanta Home Network, Inc., a Georgia corporation
b) MediaOne Business Services, Inc., a Colorado corporation
c) MediaOne of Clayton County, Inc., a Georgia corporation
d) MediaOne of Cobb County, Inc., a Georgia corporation
e) MediaOne of Conyers-Rockdale, Inc., a Georgia corporation
f) MediaOne of Fayette County, Inc., a Georgia corporation
g) MediaOne of Fulton County, Inc., a Georgia corporation
h) MediaOne of Georgia, Inc., a Georgia corporation
i) MediaOne of Henry County, Inc., a Georgia corporation
j) Peachtree SMATV Corp., a Georgia corporation
K. U S WEST PCS Holdings, Inc., a Delaware corporation
L. U S WEST PCS Services, Inc., a Colorado corporation
M. U S WEST NewVector Group, Inc., a Colorado corporation
1. Ardael, Inc., a Washington corporation
2. NewVector Communications, Inc., a Delaware corporation
3. U S WEST NewVector Materials, Inc., a Colorado corporation
4. Pacific Cellular, Inc., a Washington corporation
5. Pacific Telecom Cellular of Colorado, Inc., a Colorado
corporation
XII. MediaOne of Michigan, Inc., a Delaware corporation
XIII. U S WEST SPF Co., a Colorado corporation
XIV. USW, Inc., a Delaware corporation
XV. Western Range Insurance Co., a Vermont corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of U S WEST, Inc. on Form S-3 (File Nos. 33-50047, 33-50047-01, 33-63451 and
33-63087) and Form S-8 (File Nos. 333-01931, 33-63089, 33-63093, 33-63085,
33-63901, 33-24285 and 333-24283) of our reports dated February 12, 1996, on our
audit of the consolidated financial statements and consolidated financial
statement schedule of U S WEST, Inc. for the year ended December 31, 1995, which
reports are included in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Denver, Colorado
March 25, 1998
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated February 12, 1998 on the consolidated financial
statements, the consolidated financial statement schedule and Supplementary
Selected Proportionate Results of Operations of U S WEST, Inc., as of December
31, 1997 and 1996 and for the years then ended included in this Annual Report on
Form 10-K, into U S WEST, Inc.'s previously filed Registration Statement on
Forms S-3 (Nos. 33-50047, 33-50047-01, 33-63451 and 33-63087) and on Forms S-8
(Nos. 333-01931, 33-63089, 33-63093, 33-63085, 33-63091, 333-24285 and
333-24283).
/s/ Arthur Andersen LLP
Denver, Colorado,
March 25, 1998.
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, 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 Exchange Act of 1934, as
amended, an annual report on Form 10-K for the fiscal year ended December 31,
1997; and
WHEREAS, each of the undersigned is a Director of the Company;
NOW THEREFORE, each of the undersigned constitutes and appoints MICHAEL
P. GLINSKY, JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as
attorneys for him or her and in his or her name, place, and stead, and in his
or her capacity as a Director of the Company, to execute and file such annual
report, and thereafter to execute and file any amendment or amendments
thereto on Form 10-K, 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 or she 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 13th day of March 1998.
/s/ ROBERT S. CRANDALL /s/ ALLEN F. JACOBSON
- ---------------------------- ----------------------------
Robert L. Crandall Allen F. Jacobson
/s/ GRANT A. DOVE /s/ CHARLES M. LILLIS
- ---------------------------- ----------------------------
Grant A. Dove Charles M. Lillis
/s/ ALLAN D. GILMOUR /s/ RICHARD D. MCCORMICK
- --------------------------- ---------------------------
Allan D. Gilmour Richard D. McCormick
/s/ PIERSON M. GRIEVE /s/ MARILYN CARLSON NELSON
- --------------------------- ---------------------------
Pierson M. Grieve Marilyn Carlson Nelson
/s/ GEORGE J. HARAD /s/ FRANK POPOFF
- --------------------------- ---------------------------
George J. Harad Frank Popoff
<PAGE>
/s/ CHARLES P. RUSS III /s/ SOLOMON D. TRUJILLO
- --------------------------- ---------------------------
Charles P. Russ III Solomon D. Trujillo
/s/ LOUIS A. SIMPSON /s/ JERRY O. WILLIAMS
- --------------------------- ---------------------------
Louis A. Simpson Jerry O. Williams
/s/ JOHN "JACK" SLEVIN
- ---------------------------
John Jack Slevin
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, 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 Exchange Act of 1934, as
amended, an annual report on Form 10-K for the fiscal year ended December 31,
1997 and
WHEREAS, the undersigned is an officer or Director, or both, of the
Company and holds the office, or offices, in the Company as indicated below
his name;
NOW THEREFORE, the undersigned hereby constitutes and appoints MICHAEL
P. GLINSKY, JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as
attorneys for him and in his name, place, and stead, and in each of his
offices and capacities in the Company, to execute and file such annual
report, and thereafter to execute and file any amendment or amendments
thereto on Form 10-K, 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, the undersigned has executed this Power of Attorney
this 13th day of March, 1998.
/s/ RICHARD D. MCCORMICK
---------------------------
Richard D. McCormick
Chairman of the Board, Chief
Executive Officer and President
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, 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 Exchange Act of 1934, as
amended, an annual report on Form 10-K for the fiscal year ended December 31,
1997 and
WHEREAS, the undersigned is an officer or Director, or both, of the
Company and holds the office, or offices, in the Company as indicated below
his name;
NOW THEREFORE, the undersigned hereby 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 each of his offices and capacities in the
Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto on Form 10-K, 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, the undersigned has executed this Power of Attorney
this 13th day of March, 1998.
/s/ MICHAEL P. GLINSKY
---------------------------
Michael P. Glinsky
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000732718
<NAME> U S WEST, INC.
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996
<CASH> 192 70 127 160
<SECURITIES> 0 0 0 0
<RECEIVABLES> 1,974 1,794 1,872 1,973
<ALLOWANCES> 88 0 0 0
<INVENTORY> 227 237 220 198
<CURRENT-ASSETS> 2,909 2,753 2,835 2,936
<PP&E> 32,884 33,453 33,622 34,265
<DEPRECIATION> 18,207 18,489 18,633 19,038
<TOTAL-ASSETS> 25,071 25,145 25,289 25,583
<CURRENT-LIABILITIES> 5,052 4,900 4,679 4,866
<BONDS> 6,954 7,024 7,360 7,402
651 651 651 651
0 0 0 0
<COMMON> 8,228 8,320 8,373 8,396
<OTHER-SE> (280) (209) (156) (114)
<TOTAL-LIABILITY-AND-EQUITY> 25,071 24,145 25,289 25,583
<SALES> 11,746 3,050 6,174 9,353
<TOTAL-REVENUES> 11,746 3,050 6,174 9,353
<CGS> 0 0 0 0
<TOTAL-COSTS> 9,101 2,325 4,731 7,184
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 527 135 271 411
<INCOME-PRETAX> 2,154 489 1,008 1,502
<INCOME-TAX> 825 192 398 588
<INCOME-CONTINUING> 1,329 297 610 914
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> (12) 0 0 0
<CHANGES> 0 34 34 34
<NET-INCOME> 1,317 331 644 948
<EPS-PRIMARY> 2.50<F1> .69<F1> 1.37<F1>
1.97<F1>
<EPS-DILUTED> 2.46<F2> .68<F2> 1.35<F2>
1.94<F2>
<FN>
<F1>REPRESENTS BASIC EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
<F2>REPRESENTS DILUTED EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000732718
<NAME> U S WEST, INC.
<MULTIPLIER> 1,000,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 201 164 244 259
<SECURITIES> 0 0 0 0
<RECEIVABLES> 2,113 2,059 2,104 2,107
<ALLOWANCES> 125 0 0 0
<INVENTORY> 159 171 218 216
<CURRENT-ASSETS> 3,112 2,979 3,159 3,133
<PP&E> 37,756 38,152 38,547 39,149
<DEPRECIATION> 19,475 19,944 20,261 20,600
<TOTAL-ASSETS> 40,855 40,333 40,366 40,554
<CURRENT-LIABILITIES> 6,074 5,813 5,661 6,565
<BONDS> 14,300 14,260 14,135 13,422
1,131 1,131 1,180 1,180
920 921 921 921
<COMMON> 10,741 10,739 10,776 10,800
<OTHER-SE> (112) (175) (131) (199)
<TOTAL-LIABILITY-AND-EQUITY> 40,855 40,333 40,366 40,554
<SALES> 12,911 3,766 7,553 11,471
<TOTAL-REVENUES> 12,911 3,766 7,553 11,471
<CGS> 0 0 0 0
<TOTAL-COSTS> 10,056 2,944 5,924 9,058
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 612 278 544 823
<INCOME-PRETAX> 1,840 400 815 1,148
<INCOME-TAX> 696 170 350 485
<INCOME-CONTINUING> 1,144 230 465 663
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 3 (3)
<CHANGES> 34 0 0 0
<NET-INCOME> 1,178 230 468 660
<EPS-PRIMARY> 2.62<F1> .70<F1> 1.39<F1>
2.08<F1>
<EPS-DILUTED> 2.58<F2> .70<F2> 1.38<F2>
2.06<F2>
<FN>
<F1>REPRESENTS BASIC EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
<F2>REPRESENTS DILUTED EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
</FN>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000732718
<NAME> U S WEST, INC
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 211
<SECURITIES> 0
<RECEIVABLES> 2,249
<ALLOWANCES> 136
<INVENTORY> 179
<CURRENT-ASSETS> 3,399
<PP&E> 39,223
<DEPRECIATION> 20,643
<TOTAL-ASSETS> 39,740
<CURRENT-LIABILITIES> 6,315
<BONDS> 13,248
1,180
923
<COMMON> 10,876
<OTHER-SE> (475)
<TOTAL-LIABILITY-AND-EQUITY> 39,740
<SALES> 15,235
<TOTAL-REVENUES> 15,235
<CGS> 0
<TOTAL-COSTS> 12,429
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,083
<INCOME-PRETAX> 1,222
<INCOME-TAX> 522
<INCOME-CONTINUING> 700
<DISCONTINUED> 0
<EXTRAORDINARY> (3)
<CHANGES> 0
<NET-INCOME> 697
<EPS-PRIMARY> 2.43<F1>
<EPS-DILUTED> 2.41<F2>
<FN>
<F1>REPRESENTS BASIC EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
<F2>REPRESENTS DILUTED EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
</FN>
</TABLE>
