-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JMh+uXzq6Eno/50bGIIXBeF4WUx/91OCjYhyHudanKDrUBkJ1JWQ1Vc/tIcppiw4 V4odjylVjLGHdVRekz4YcA== 0001054522-98-000022.txt : 19981109 0001054522-98-000022.hdr.sgml : 19981109 ACCESSION NUMBER: 0001054522-98-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S WEST INC /DE/ CENTRAL INDEX KEY: 0001054522 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840953188 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14087 FILM NUMBER: 98739947 BUSINESS ADDRESS: STREET 1: 1801 CALIFORNIA STREET STREET 2: SUITE 390 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3036722700 MAIL ADDRESS: STREET 1: 1801 CALIFORNIA STREET STREET 2: SUITE 390 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: USW-C INC DATE OF NAME CHANGE: 19980204 10-Q 1 THIRD QUARTER FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 1-14087 U S WEST, Inc. A Delaware Corporation IRS Employer No. 84-0953188 1801 California Street, Denver, Colorado 80202 Telephone Number 303-672-2700 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X_ No __ At October 31, 1998, 502,510,651 shares of common stock were outstanding. ================================================================================ U S WEST, INC. FORM 10-Q TABLE OF CONTENTS
Item Page PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Income - Three and Nine Months Ended September 30, 1998 and 1997 3 Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 PART II - OTHER INFORMATION 1. Legal Proceedings 27 2. Changes in Securities and Use of Proceeds 27 5. Other Information 28 6. Exhibits and Reports on Form 8-K 33
Form 10-Q - Part I CONSOLIDATED STATEMENTS OF INCOME (Unaudited) U S WEST, Inc.
- ------------------------------------------------------- ---------------------------- ---------------------------- Three Months Ended Nine Months Ended September 30, September 30, Dollars in millions (except per share 1998 1997 1998 1997 amounts) - ------------------------------------------------------- -------------- ------------- ------------- -------------- Operating revenues: Local service $1,398 $1,314 $4,117 $3,739 Interstate access service 693 663 2,102 2,028 Intrastate access service 208 208 616 608 Long-distance network services 199 231 595 721 Directory services 315 296 935 879 Other services 299 248 809 682 -------------- ------------- ------------- -------------- Total operating revenues 3,112 2,960 9,174 8,657 Operating expenses: Employee-related expenses 1,104 1,018 3,179 2,915 Other operating expenses 567 539 1,798 1,517 Taxes other than income taxes 84 106 274 320 Depreciation and amortization 558 541 1,625 1,616 -------------- ------------- ------------- -------------- Total operating expenses 2,313 2,204 6,876 6,368 -------------- ------------- ------------- -------------- Operating income 799 756 2,298 2,289 Interest expense 172 100 378 304 Gains on sales of rural telephone exchanges - 30 - 77 Other expense - net 19 12 77 51 -------------- ------------- ------------- -------------- Income before income taxes and extraordinary item 608 674 1,843 2,011 Provision for income taxes 229 251 703 752 -------------- ------------- ------------- -------------- Income before extraordinary item 379 423 1,140 1,259 Extraordinary item - early extinguishment of debt - net of tax - (3) - (3) ============== ============= ============= ============== NET INCOME $379 $420 $1,140 $1,256 ============== ============= ============= ============== EARNINGS PER SHARE: Basic - before extraordinary item $0.76 $0.88 $2.32 $2.61 Extraordinary item - (0.01) - (0.01) ============== ============= ============= ============== Basic earnings per share $0.76 $0.87 $2.32 $2.60 ============== ============= ============= ============== Diluted - before extraordinary item $0.75 $0.87 $2.30 $2.58 Extraordinary item - (0.01) - (0.01) ============== ============= ============= ============== Diluted earnings per share $0.75 $0.86 $2.30 $2.57 ============== ============= ============= ============== Average shares outstanding (000s): Basic 501,807 483,218 491,608 482,374 Diluted 505,949 491,407 495,718 492,528 PRO FORMA EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM: Basic $0.76 $0.77 $2.13 $2.28 Diluted 0.75 0.76 2.11 2.25 Pro forma average shares outstanding (000s): Basic 501,807 499,559 501,545 498,715 Diluted 505,949 507,748 505,655 508,869 DIVIDENDS PER SHARE $0.535 $0.535 $1.605 $1.605
See Notes to Consolidated Financial Statements. Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (Unaudited) U S WEST, Inc.
- --------------------------------------------------------------------- --------------------- ------------------- September 30, December 31, Dollars in millions 1998 1997 - --------------------------------------------------------------------- --------------------- ------------------- ASSETS Current assets: Cash and cash equivalents $22 $ 27 Accounts and notes receivable - net 1,735 1,717 Inventories and supplies 248 150 Deferred directory costs 261 257 Deferred tax asset 205 271 Prepaid and other 82 82 --------------------- ------------------- Total current assets 2,553 2,504 Gross property, plant and equipment 34,840 33,651 Accumulated depreciation 20,342 19,343 --------------------- ------------------- Property, plant and equipment - net 14,498 14,308 Other assets 1,010 855 --------------------- ------------------- Total assets $18,061 $ 17,667 ===================== ===================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc. (Unaudited), continued - ---------------------------------------------------------------------- ------------------- --------------------- September 30, December 31, Dollars in millions, except per share amounts 1998 1997 - ---------------------------------------------------------------------- ------------------- --------------------- LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $1,913 $497 Old U S WEST debt - 198 Accounts payable 1,121 1,377 Employee compensation 414 412 Dividends payable 269 259 Advanced billings and customer deposits 362 336 Other 1,179 1,120 ------------------- --------------------- Total current liabilities 5,258 4,199 Long-term debt 7,920 5,020 Postretirement and other postemployment benefit obligations 2,556 2,534 Deferred income taxes 822 791 Deferred credits and other 880 756 Contingencies Shareowners' equity Preferred shares -$1.00 per share par value, 200,000,000 shares authorized, none issued and outstanding Common shares - $0.01 per share par value, 2,000,000,000 shares authorized, 502,082,955 and 484,515,415 issued and outstanding at September 30, 1998, and December 31, 1997, respectively 625 - Pre-recapitalization equity - 4,367 ------------------- --------------------- Total shareowners' equity 625 4,367 ------------------- --------------------- Total liabilities and shareowners' equity $18,061 $ 17,667 =================== =====================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) U S WEST, Inc. - --------------------------------------------------------------------------------------- ------------ ------------ Nine Months Ended September 30, 1998 1997 - --------------------------------------------------------------------------------------- ------------ ------------ (Dollars in millions) OPERATING ACTIVITIES Net income $1,140 $1,256 Adjustments to net income: Depreciation and amortization 1,625 1,616 Gains on sales of rural telephone exchanges - (77) Deferred income taxes and amortization of investment tax credits 102 7 Changes in operating assets and liabilities: Accounts receivable (18) 40 Inventories, supplies and other current assets (49) (75) Accounts payable and accrued liabilities 116 245 Other - net 34 141 ----------- ------------ Cash provided by operating activities 2,950 3,153 ----------- ------------ INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,937) (1,322) Proceeds from (payments on) disposals of property, plant and equipment (14) 27 Purchase of PCS licenses (18) (57) Proceeds from sales of rural telephone exchanges - 51 Other (39) - ----------- ------------ Cash used for investing activities (2,008) (1,301) ----------- ------------ FINANCING ACTIVITIES Net proceeds from (repayments of) short-term debt 1,519 (701) Net (repayments of) proceeds from issuance of Old U S WEST debt (198) 303 Proceeds from issuance of long-term debt 3,066 - Repayment of Old U S WEST debt in connection with the Dex Alignment (3,829) - Repayments of long-term debt (411) (412) Dividends paid on common stock (787) (733) Dividends paid to Old U S WEST (194) (243) Payment to Old U S WEST for debt refinancing costs (140) - Return of capital from Old U S WEST 13 - Proceeds from issuance of common stock 60 50 Purchases of treasury stock (46) - ----------- ------------ Cash used for financing activities (947) (1,736) ----------- ------------ CASH AND CASH EQUIVALENTS Increase (decrease) (5) 116 Beginning balance 27 80 ----------- ------------ Ending balance $22 $196 =========== ============
See Notes to Consolidated Financial Statements. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Nine Months Ended September 30, 1998 (Dollars in millions, except per share amounts) (Unaudited) A. U S WEST Separation On October 25, 1997, the Board of Directors of the former parent of U S WEST, Inc., herein referred to as "Old U S WEST," adopted a proposal to separate Old U S WEST into two independent companies (the "Separation"). Old U S WEST conducted its businesses through two groups: the U S WEST Communications Group (the "Communications Group"), which included the communications businesses of Old U S WEST, and the U S WEST Media Group (the "Media Group"), which included the multimedia businesses of Old U S WEST. On June 4, 1998, shareholders of Old U S WEST voted in favor of the Separation, which became effective June 12, 1998 (the "Separation Date"). At that time, the Communications Group became an independent public company renamed "U S WEST, Inc." ("U S WEST" or the "Company") and Media Group's directory business known as U S WEST Dex, Inc. ("Dex") was aligned with U S WEST (the "Dex Alignment"). Old U S WEST has continued as an independent public company comprised of the current businesses of Media Group other than Dex and has been renamed "MediaOne Group, Inc." ("MediaOne Group"). The Separation was implemented pursuant to the terms of a separation agreement (the "Separation Agreement") between U S WEST and MediaOne Group. In connection with the Dex Alignment, (i) U S WEST distributed, as a dividend to holders of MediaOne Group common stock, an aggregate of $850 in value of U S WEST common stock and (ii) $3.9 billion of Old U S WEST debt, formerly allocated to Media Group, was refinanced by U S WEST (the "Dex Indebtedness"). The Consolidated Financial Statements include the consolidated historical results of operations, balance sheets and cash flows of the businesses that comprise the Communications Group and Dex, as if such businesses operated as a separate entity for all periods and as of all dates presented. However, certain of the financial effects of the Separation and the Dex Alignment, including interest expense associated with the refinancing of $3.9 billion of Dex Indebtedness and the dilutive effects of the issuance of $850 of U S WEST common stock, are not reflected in the accompanying Consolidated Statements of Income prior to the Separation Date. These Consolidated Financial Statements should be read in conjunction with the U S WEST, Inc. Unaudited Pro Forma Condensed Combined Statements of Income which have been separately presented under Part II - - Item 5(C) - "Other Information - Pro Forma Financial Information." Further information about the Separation is contained in Old U S WEST's proxy statement mailed to all Old U S WEST shareowners on April 20, 1998. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) B. Summary of Significant Accounting Policies Basis of Presentation. U S WEST is incorporated under the laws of the State of Delaware. The Consolidated Financial Statements include the accounts of U S WEST and its majority-owned subsidiaries. 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. The Consolidated Financial Statements have been prepared pursuant to the interim reporting rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally accompanying financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the Consolidated Financial Statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial information set forth therein. It is suggested that these Consolidated Financial Statements be read in conjunction with the 1997 U S WEST Combined Financial Statements and notes thereto included in Annex G of Old U S WEST's proxy statement mailed to all Old U S WEST shareowners on April 20, 1998. C. Debt Refinancing In connection with the Separation, U S WEST and MediaOne Group refinanced substantially all of the indebtedness issued or guaranteed by Old U S WEST through a combination of tender offers, prepayments, consent solicitations and exchange offers (the "Refinancing"). In connection with the Refinancing and the Dex Alignment, in June 1998 U S WEST Capital Funding, Inc. ("Capital Funding"), a wholly-owned financing subsidiary of U S WEST, issued approximately $4.1 billion in new debt securities, of which approximately $1.0 billion is commercial paper with an average rate of 5.82% and $3.1 billion is long-term debt having the following rates and maturities:
---------------------- ------------------------ ------------------------ Effective Interest Term Amount Rate (%) ---------------------- ------------------------ ------------------------ 4 year $ 500 6.31 % 7 year 500 6.41 % 10 year 600 6.55 % 30 year 1,500 6.98 % ---------------------- ------------------------ ------------------------
Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) Approximately $3.83 billion in proceeds from the issuance of these securities were used to repay Old U S WEST debt in connection with Dex Alignment. The remaining proceeds were primarily used to fund U S WEST's share of operating expenses and debt refinancing costs incurred by Old U S WEST that were directly attributable to the Separation. The Company additionally refinanced approximately $200, including $70 of Dex debt assumed in connection with the Dex Alignment. The Company and U S WEST Communications, Inc. ("U S WEST Communications"), a wholly-owned subsidiary of the Company that provides telecommunications services, maintain commercial paper programs to finance short-term cash flow requirements as well as to maintain a presence in the short-term debt market. In addition, U S WEST Communications, which conducts its own borrowing activities, is permitted to borrow up to $700 under short-term lines of credit, all of which was available at September 30, 1998. U S WEST is permitted to borrow and has available up to approximately $2.4 billion under lines of credit to meet the combined business needs of its nonregulated subsidiaries at September 30, 1998. D. Asset Impairment During second-quarter 1998, the Company recorded a non-cash charge of $21 (net of a $14 tax benefit) related to the impairment of certain long-lived assets associated with the Company's video operations in Omaha, Nebraska, which are included in the communications and related services segment. The impaired assets primarily consist of underground cable and hardware. Recent technological advances have permitted the Company to pursue and use more economical Video Digital Subscriber Line ("VDSL") technology in cable overbuild situations. Because the projected future cash flows were less than the carrying values an impairment loss was recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The amount of impairment was determined based on the net present value of the future cash flows of the business, discounted at the Company's cost of capital. The pretax charge is recorded in "other operating expenses" within the Consolidated Statements of Income. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) E. Earnings Per Share Certain of the financial effects of the Separation and the Dex Alignment, including interest expense associated with the refinancing of $3.9 billion of Dex Indebtedness by U S WEST and the dilutive effects of the issuance of $850 of U S WEST common stock, are not reflected in the historical Consolidated Statements of Income prior to the Separation Date. As a result, earnings per share for the nine months ended September 30, 1998, and for the three and nine months ended September 30, 1997, are presented on both a pro forma and historical basis. The following reflects the computation of basic and diluted earnings per share on a historical and pro forma basis. The unaudited pro forma earnings per share amounts for the nine months ended September 30, 1998 and the three and nine months ended September 30, 1997, give effect to the Dex Indebtedness and the issuance of shares in connection with the Dex Alignment as if such transactions had been consummated as of January 1, 1998 and 1997, respectively. For a full presentation of these pro forma adjustments please see Part II Item 5(C) - "Other Information - Pro Forma Financial Information." Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited)
- --------------------------------------------------- ------------------------------ ---------------------------- Three Months Ended Nine Months Ended September 30, September 30, Basic Earnings Per Share (1) 1998 1997 1998 1997 - --------------------------------------------------- --------------- -------------- -------------- ------------- Reported net income $379 $423 $1,140 $1,259 Pro forma adjustment (2) - (40) (72) (121) =============== =============== ============== ============= Pro forma income $379 $383 $1,068 $1,138 =============== =============== ============== ============= Basic average shares (thousands) (3) 501,807 483,218 491,608 482,374 Pro forma adjustment (4) - 16,341 9,937 16,341 =============== ============== ============== ============= Pro forma basic average shares 501,807 499,559 501,545 498,715 =============== ============== ============== ============= Basic earnings per share (1) $0.76 $0.88 $2.32 $2.61 Pro forma basic earnings per share (1) 0.76 0.77 2.13 2.28 =================================================== =============== ============== ============== ============= - -------------------------------------------------- ------------------------------- ----- ---------------------------- Three Months Ended Nine Months Ended September 30, September 30, Diluted Earnings Per Share (1) 1998 1997 1998 1997 - -------------------------------------------------- ---------------- --------------- ---- -------------- -------------- Reported net income $379 $423 $1,140 $1,259 Interest on convertible zero coupon subordinated notes, net of tax - 2 - 9 ---------------- --------------- -------------- -------------- Income used for diluted earnings per share 379 425 1,140 1,268 Pro forma adjustment (2) - (40) (72) (121) ---------------- --------------- -------------- -------------- Pro forma income used for diluted earnings per share $379 $385 $1,068 $1,147 ================ =============== ============== ============== Basic average shares (thousands) (3) 501,807 483,218 491,608 482,374 Effect of dilutive securities: Stock options 4,142 2,474 4,110 2,005 Convertible zero coupon notes 5,715 - 8,149 --------------- --------------- -------------- -------------- Diluted average shares 505,949 491,407 495,718 492,528 Pro forma adjustment (4) - 16,341 9,937 16,341 =============== =============== ============== ============== Pro forma diluted average shares 505,949 507,748 505,655 508,869 =============== =============== ============== ============== Diluted earnings per share (1) $0.75 $0.87 $2.30 $2.58 Pro forma diluted earnings per share (1) 0.75 0.76 2.11 2.25 =================================================== =============== =============== ============== ============== (1) Before extraordinary item of $3, or $0.01 per share, related to a 1997 early extinguishment of debt. (2) Reflects incremental (after-tax) interest expense associated with the Dex Indebtedness from the beginning through the end of each period presented up to the Separation Date. (3) Historical average shares assume a one-for-one conversion of historical Communications Group common stock outstanding into shares of U S WEST as of the Separation Date. (4) Reflects the issuance of approximately 16,341,000 shares (net of the redemption of approximately 305,000 fractional shares) issued on June 15, 1998 in connection with the Dex Alignment as if the shares had been issued at the beginning of each period indicated.
Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) The dilutive securities represent the incremental weighted-average shares from the assumed exercise of stock options and the assumed conversion of the zero coupon subordinated notes, which were redeemed in August 1997. F. Contingencies U S WEST Communications has pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. 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 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 appealed to the Oregon Court of Appeals on March 19, 1998, and the appeal is pending. U S WEST Communications continues to charge interim rates, subject to refund, during the pendency of that appeal. The potential refund exposure, including interest, at September 30, 1998, is not expected to exceed $280. Utah. 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 interexchange carriers ("IXCs") and other parties related to the Tax Reform Act of 1986. The potential exposure, including interest, at September 30, 1998, is not expected to exceed $170. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) New Mexico. The New Mexico State Corporation Commission ("NMSCC") issued an order on May 29, 1998, requiring U S WEST Communications to reduce its annual revenues by approximately $22. U S WEST Communications sought a rehearing before the NMSCC which was denied. The NMSCC's order was then removed to the New Mexico Supreme Court for review which effectively stays the order. The potential for retroactive exposure, at September 30, 1998, is remote. State Regulatory Accruals. U S WEST Communications has accrued $200 at September 30, 1998, which represents its estimated liabilities for all state regulatory proceedings, predominately the items discussed above. It is possible that the ultimate liabilities could exceed the amounts accrued by up to approximately $265. 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. In addition to its estimated liabilities for state regulatory proceedings, U S WEST Communications has an accrued liability of approximately $160 at September 30, 1998 related to refunds in the state of Washington. Approximately $80 was refunded to IXCs and independent local exchange carriers during the nine-month period ended September 30, 1998. The remaining liability is expected to be refunded to ratepayers by the first half of 1999, with the majority of the refunds occurring in fourth-quarter 1998. G. Shareholder Rights Plan The U S WEST Board of Directors 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 June 1, 2008 and are redeemable by the Company at any time prior to the date they would become effective. H. New Accounting Standards On January 1, 1999, the Company will adopt the accounting provisions required by the AICPA Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," 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. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) Based on information currently available, adoption of the SOP may result in an initial increase in net income in 1999 of approximately $100-$150, or $0.20 - $0.30 per share. Thereafter, in periods after adoption, if software expenditures remain level, earnings will decline until the amortization expense related to the capitalized software equals the software costs expensed prior to the accounting change. The estimated net income impact for 1999 and thereafter may be subject to change as further information becomes available. Please see Part I - - Item II- "Forward-Looking Information." On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires, among other things, that all derivative instruments be recognized at fair value as either assets or liabilities on the balance sheet and that changes in fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Standard is effective for fiscal years beginning after June 15, 1999, though earlier adoption is permitted. The financial statement impacts of the Company's adoption of the new standard are dependent upon the amount and nature of future use of derivative instruments, and their relative changes in valuation over time. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts) Forward-Looking Information 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, 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 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 that could adversely affect the level of demand for 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 wireless services, (xi) delays in the Company's ability to begin offering interLATA long-distance services, (xii) consumer acceptance of broadband services, including telephony, data, and wireless services, or (xiii) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Results of Operations - Three and Nine Months Ended September 30, 1998 Compared with 1997 Net Income Following are details of the Company's reported and pro forma net income, and pro forma diluted earnings per share, normalized to exclude the effects of certain nonrecurring and nonoperating items.
- ---------------------------------- ------------------------- ---------------- - ----------------------- -------------- Three Months Increase Nine Months Ended Increase Ended (Decrease) September (Decrease) September 30, 30, 1998 1997 $ % 1998(1) 1997(1) $ % - ----------------------------------- ---------- ----------- ------- --------- ---------- --------- -------- -------- Reported net income (2) $379 $423 $(44) (10.4) $1,140 $1,259 $(119) (9.5) Pro forma adjustment (3) - (40) 40 - (72) (121) 49 40.5 ---------- ----------- ------- -------- ---------- --------- --------- ------- Pro forma income 379 383 (4) (1.0) 1,068 1,138 (70) (6.2) Adjustments: Separation costs - - - - 68 - 68 - Asset impairment - - - - 21 - 21 - Gains on sales of rural telephone exchanges - (19) 19 - - (48) 48 - ========== ========== ======== ======== ========== ========= ========= ======= Normalized pro forma income $379 $364 $15 4.1 $1,157 $1,090 $67 6.1 ========== ========== ======== ======== ========== ========= ========= ======= Pro forma diluted average shares outstanding (4) 505.9 507.7 (1.8) (0.4) 505.7 508.9 (3.2) (0.6) ========== ========== ======== ======== ========== ========= ========= ======= Pro forma diluted earnings Per share (2) $0.75 $0.76 $(0.01) (1.3) $2.11 $2.25 $(0.14) (6.2) Adjustments: Separation costs - - - - 0.13 - 0.13 - Asset impairment - - - - 0.04 - 0.04 - Gains on sales of rural Telephone exchanges - (0.04) 0.04 - - (0.10) 0.10 - ========== ========== ======== ======== ========== ========= ========= ======= Normalized pro forma diluted earnings per share $0.75 $0.72 $0.03 4.2 $2.29 $2.16 $0.13 6.0 =================================== ========== ========== ======== ======== ========== ========= ========= ======= (See "Note E - Earnings Per Share" - to the Consolidated Financial Statements.) (1) Diluted pro forma earnings per share does not foot due to rounding. (2) Before extraordinary item of $3, or $0.01 per share, related to a 1997 early extinguishment of debt. (3) Reflects incremental (after-tax) interest expense associated with the Dex Indebtedness from the beginning through the end of each period presented up to the Separation Date. (4) Average shares assume a one-for-one conversion of historical Communications Group common shares outstanding into shares of U S WEST as of the Separation Date, adjusted to reflect the issuance of approximately 16,341,000 shares (net of the redemption of approximately 305,000 fractional shares) issued on June 15, 1998, in connection with the Dex Alignment as if the shares had been issued at the beginning of each period indicated.
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued U S WEST normalized pro forma income increased by $15, or 4.1 percent, to $379, and by $67, or 6.1 percent, to $1,157, during the three- and nine-month periods ended September 30, 1998, respectively. Normalized pro forma diluted earnings per share increased by $0.03, or 4.2 percent, to $0.75, and by $0.13, or 6.0 percent, to $2.29, during the same periods, respectively. A pension credit adjustment relating to the first half of 1998 contributed $12, or $0.02 per share, to third quarter earnings. The remaining increase in third quarter net income is primarily due to higher demand for services partially offset by interstate access rate reductions and higher operating costs, including increased start-up costs associated with growth initiatives and higher expenses related to interconnection. Operating Revenues
- --------------------------------- ----------------------- ---------------- -- ----------------------- -------------- Three Months Ended Increase Nine Months Ended Increase September (Decrease) September (Decrease) 30, 30, 1998 1997 $ % 1998 1997 $ % - ------------------------------------ --------- --------- -------- -------- --------- ---------- -------- -------- Local service $1,398 $1,314 $84 6.4 $4,117 $3,739 $378 10.1 Interstate access service 693 663 30 4.5 2,102 2,028 74 3.6 Intrastate access service 208 208 - - 616 608 8 1.3 Long-distance network services 199 231 (32) (13.9) 595 721 (126) (17.5) Other services 309 257 52 20.2 837 707 130 18.4 --------- --------- -------- -------- --------- ---------- -------- -------- Communications and related services 2,807 2,673 134 5.0 8,267 7,803 464 5.9 Directory services 315 296 19 6.4 935 879 56 6.4 Intersegment eliminations (10) (9) (1) 11.1 (28) (25) (3) 12.0 --------- --------- -------- -------- --------- ---------- -------- -------- Total $3,112 $2,960 $152 5.1 $9,174 $8,657 $517 6.0 ==================================== ========= ========= ======== ======== == ========= ========== ======== ========
Communications and Related Services Local Service Revenues. Local service revenues increased $84, or 6.4 percent, to $1,398, and $378, or 10.1 percent, to $4,117, during the three- and nine-month periods, respectively. Excluding the non-recurring impact of a regulatory charge in last year's second quarter, local services revenues increased by 8.2 percent for the nine-month period. Local service revenues increased primarily as a result of access line growth and increased demand for new products and services, and existing central office features. Total reported access lines increased 579,000, or 3.7 percent, during the past 12 months, of which 243,000 was attributable to second lines. Second line installations increased 19.4 percent. Also contributing to the increase in revenues were the effects of rate increases in various jurisdictions aggregating $14 in the third quarter and $45 for the nine months. Interim compensation revenues from IXCs as a result of Federal Communications Commission ("FCC") payphone orders, which took effect in April 1997, also contributed to revenue growth in the first nine months of the year. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Interstate Access Service Revenues. Interstate access service revenues increased $30, or 4.5 percent, to $693, and $74, or 3.6 percent, to $2,102, during the three- and nine-month periods, respectively. The increases are primarily due to the effects of a change in the classification of universal service fundings, which increased revenues by $23 in the third quarter and $61 in the nine-month period. In 1997 these fundings were offset against interstate access service revenues. Beginning in 1998 these fundings are recorded as access expense within other operating expenses. Excluding the effects of the reclassification, interstate access revenues during third quarter increased $7, or 1.1 percent, and nine-month revenues increased $13, or 0.6 percent. Increased demand for interstate access services, as evidenced by increases of 6.9 percent and 6.8 percent in billed interstate access minutes of use during the three- and nine-month periods, respectively, was largely offset by price reductions. Intrastate Access Service Revenues. Intrastate access service revenues were unchanged from last year's third quarter and increased by $8, or 1.3 percent, during the nine-months ended September 30. During third quarter, the effects of rate decreases offset increased demand. The increase for the nine months was primarily due to higher demand, including increased demand for private line services, partially offset by net rate reductions. Net rate reductions aggregated $9 and $23 in the three- and nine-month periods, respectively, the majority of which were in the state of Washington. Competitive effects have also adversely impacted intrastate access revenue growth. Intrastate billed access minutes of use increased by 5.0 and 5.8 percent during each respective period. Long Distance Network Services Revenues. Long-distance network services revenues decreased by $32, or 13.9 percent, in the third quarter and by $126, or 17.5 percent, in the first nine months of 1998. The decreases were primarily due to the effects of competition and rate reductions of $10 in the third quarter and $37 in the first nine months of 1998 in several jurisdictions, most significantly in the state of Washington. Also contributing to the decline in the nine-month period were the implementation of multiple toll carrier plans ("MTCPs") in various jurisdictions in 1997. The MTCPs essentially allow independent telephone companies to act as toll carriers and are net income neutral to the Company, with the reduction in toll revenues largely offset by increased intrastate access service revenues and lower access expense. Other Services Revenues. Revenues from other services increased by $52, or 20.2 percent, in the third quarter and by $130, or 18.4 percent, in the first nine months of 1998, as a result of greater sales of wireless communications services and inside wire maintenance. Interconnection rent revenues, continued market penetration in voice messaging services and increased sales of other unregulated products and services also contributed to the increase. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Directory Services Revenues related to directory services increased by $19, or 6.4 percent, and $56, or 6.4 percent in the three- and nine-month periods, respectively. The increases are driven by an average 8.7 percent increase in revenue per local advertiser primarily resulting from price increases of 4.7 percent and an increase in volume and complexity of advertisements sold. Intersegment Eliminations Intersegment eliminations consist primarily of sales of customer lists, billing and collection services and other services by U S WEST Communications to Dex at market price. Also included are commercial property management services provided by U S WEST Business Resources, Inc. to Dex. Costs and Expenses
- ----------------------------------- ----------------------- --------------- --- ---------------------- ------------ Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September (Decrease) 30, 1998 1997 $ % 1998 1997 $ % - ------------------------------------- --------- --------- -------- -------- --------- -------- -------- -------- Employee-related expenses $1,104 $1,018 $86 8.4 $3,179 $2,915 $264 9.1 Other operating expenses (1) 567 539 28 5.2 1,798 1,517 281 18.5 Taxes other than income taxes 84 106 (22) (20.8) 274 320 (46) (14.4) Depreciation and amortization 558 541 17 3.1 1,625 1,616 9 0.6 Interest expense (as reported) 172 100 72 72.0 378 304 74 24.3 Pro forma adjustment - 65 (65) - 117 196 (79) (40.3) --------- --------- -------- -------- -------- --------- -------- -------- Interest expense (pro forma) 172 165 7 4.2 495 500 (5) 1.0 Gains on sales of rural telephone Exchanges - 30 (30) - - 77 (77) - Other expense - net 19 12 7 58.3 77 51 26 51.0 - ------------------------------------- --------- --------- -------- -------- --- -------- --------- -------- -------- (1) Includes separation expenses of $94 and an asset impairment charge of $35 during second-quarter 1998.
Employee-Related Expenses. Total employee-related expenses increased $86, or 8.4 percent, and $264, or 9.1 percent, during the three-and nine-month periods, respectively. Employee-related expenses include $21 of net costs incurred in conjunction with the 1998 third-quarter work stoppage. These work stoppage costs include incremental travel costs, contract labor costs and employee bonus costs paid to management employees for work performed during the strike. Partially offsetting these additional costs were lower salaries and wages and overtime savings associated with occupational employees not working during the work stoppage. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Excluding these costs, employee-related expenses increased $65, or 6.4 percent, and $243, or 8.3 percent, during the three- and nine-month periods, respectively. The increases were primarily due to higher contract labor costs and increased salaries and wages. The higher contract labor costs were largely a result of systems development work (which includes expenses related to interconnection and year 2000 costs) and marketing and sales efforts. Higher salaries and wages were a result of increases in wages and the number of employees, including the effects of transferring approximately 530 employees from Old U S WEST in connection with the Separation. Prior to the third quarter, costs related to these employee transfers were allocated to the Company by Old U S WEST and included in other operating expenses. Partially offsetting these increases during the three- and nine-month periods were pension credits, which include a third-quarter $20 pension credit adjustment relating to the first half of 1998. Other Operating Expenses. Excluding nonrecurring charges as described in Note 1 to the above table, other operating expenses increased by $28, or 5.2 percent, and by $152, or 10.0 percent, during the three- and nine-month periods, respectively. The increases are primarily due to increased costs associated with growth initiatives including, wireless handset costs, marketing and advertising costs, and higher interconnection costs. The aforementioned change in classification of universal service funding expenses increased other operating expenses by $23 in the third quarter and $61 in the first half of 1998 as compared to the same periods in 1997. The effects of the transfer of approximately 530 employees from Old U S WEST resulted in a reduction of costs formerly allocated to the Company by Old U S WEST which partially offset the increase in other operating expenses. A 1997 reserve adjustment associated with billing and collection activities performed for IXCs also partially offset the nine-month period increase. Other operating expenses for the nine-month period include $94 in costs incurred during second quarter that are directly attributable to the Separation. These Separation costs include executive severance, legal and financial advisory fees, securities registration fees, printing and mailing costs, and internal systems and rearrangement costs. During second quarter of 1998, U S WEST also recorded in other operating expenses a pretax charge of $35 related to the impairment of certain long-lived assets associated with the Company's video operations in Omaha, Nebraska. Recent technological advances have permitted the Company to pursue and use more economical VDSL technology in cable overbuild situations. Because the projected future cash flows were less than the carrying values, an impairment loss was recognized in accordance with SFAS No. 121. (See "Note D Asset Impairment" - to the Consolidated Financial Statements.) Taxes Other Than Income Taxes. Taxes other than income taxes decreased primarily because of a third quarter property tax settlement in addition to adjustments related to the 1997 property tax accrual. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Interest Expense. The increase in interest expense as reported reflects the impact of the Dex Indebtedness incurred since the Separation Date, partially offset by the effects of lower average debt levels. Pro forma interest expense reflects the full effects of the Dex Indebtedness as if such indebtedness had occurred at the beginning of each period indicated. On a pro forma basis, the increase in interest expense for the three-month period was primarily a result of higher quarterly average debt levels. The decline in interest expense for the nine-month period was primarily a result of lower average debt levels. Gains On Sale of Rural Telephone Exchanges. During the nine-month period ended September 30, 1997, the Company sold selected rural telephone exchanges in Minnesota, Iowa, Nebraska, and South Dakota for pretax gains of $77. Other Expense - Net. Other expense increased primarily due to additional interest expense associated with the Company's state regulatory liabilities. Provision for Income Taxes The effective tax rate for the first nine months of 1998 is 38.1 percent as compared to 37.3 percent on a pro forma basis during the first nine months of 1997. The increase in the effective tax rate is primarily due to the impact of certain expenses related to the Separation, which are not deductible for tax purposes, and the effects of lower amortization of investment tax credits. The effective tax rate is expected to approximate 38 percent for the twelve months ended December 31, 1998. Liquidity and Capital Resources Operating Activities Cash provided by operating activities was $2,950 and $3,153 during the first nine months of 1998 and 1997, respectively. The decrease in operating cash flow primarily reflects a reduction in accounts payable financing, the effect of refunds in regulatory jurisdictions and lower accounts receivable collections. Partially offsetting the decreases were the effects of business growth in both the core communications and directory businesses. The Company's operating cash flow during fourth-quarter 1998 and the first half of 1999 will be affected by the payment of approximately $160 of rate refunds in the state of Washington. The rate refunds are for revenues that were collected subject to refund (with interest) from May 1, 1996 through January 31, 1998. (See "Note F - Contingencies" - to the Consolidated Financial Statements.) Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Investing Activities Total capital expenditures, on a cash basis, were $1,937 during the first nine months of 1998, of which the majority related to access line growth and continued improvement of the telecommunications network. Expenditures associated with entering wireless communications markets and meeting the requirements of the Telecommunications Act of 1996, including interconnection and local number portability, also impacted capital expenditures. In 1998, capital expenditures are expected to approximate $2.9 billion. During the first nine months of 1998, the Company paid $18 to purchase PCS licenses in connection with its launch of PCS service in various markets. Financing Activities Debt Activity Total debt increased by $4,118 as compared to December 31, 1997, of which approximately $3.9 billion is attributable to the Dex Indebtedness. The Dex Indebtedness was incurred at the Separation Date, with proceeds used to repay Old U S WEST debt, offset by a reduction of shareowners' equity. Debt financing was also the source of funds used for approximately $140 in debt refinancing costs paid to Old U S WEST in addition to certain operating costs related to the Separation. Higher capital expenditures also contributed to the increase in debt. The nonregulated activities of U S WEST, including Dex, are funded with short-term advances. The net repayments on and proceeds from such short-term advances were $(198) and $303 during the first nine months of 1998 and 1997, respectively. Prior to the Separation Date, these short-term advances were provided by Old U S WEST. Prior to the Separation, Dex paid dividends to Old U S WEST equal to its net income adjusted for the amortization of intangibles. These dividends totaled $194 and $243 during the first nine months of 1998 and 1997, respectively. Year 2000 Costs During 1997 U S WEST conducted a comprehensive high level review of its computer systems and related software to ensure that systems properly recognize the year 2000 and continue to process data. The systems evaluated include (i) the Public Switched Telephone Network (the "Network"), (ii) Information Technologies ("IT") and (iii) individual Business Units (the "Business Units"). The Network, which processes voice and data information relating to the core communications business, relies on remote switches, central office and interoffice equipment, and loop transport equipment that is predominately provided by telecommunications network vendors. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued IT is comprised of the Company's internal business systems that employ hardware and software with an enterprise-wide scope, including operational, financial and administrative functions. The Business Units, which include internal organizations such as finance, procurement, Yellow Pages, operator services, wireless, data networks, real estate, etc., employ systems that support desktop and departmental applications that relate specifically to their business and are not generally part of the Network or IT. The Company's approach to year 2000 remediation activities is broken down into five general phases: (i) inventory/assessment, (ii) planning, (iii) conversion, (iv) testing/certification and (v) implementation. With regard to the Network, the Company is working with telecommunications network vendors to obtain compliant releases of hardware and software. The Company is also working on a focused testing approach given the requirement that Network testing must be done over multiple equipment configurations involving a broad spectrum of services. The inventory/assessment and planning phases for the Network are complete and management expects that the testing/certification phases will be completed by December 1998, with implementation completed by July 1999. To facilitate Network testing, the Company participates, along with other major wireline providers of telecommunications services, as a member of the Telco Year 2000 Forum (the "Forum"), an organization that addresses the year 2000 readiness of network elements and network interoperability. The Forum has contracted with Bellcore, a former affiliate engaged in telecommunications industry research, development and maintenance activities, to engage in inter-region interoperability testing. The Company is also participating in the FCC's Network Reliability and Interoperability Council IV working group, which is tasked to evaluate the Year 2000 readiness of the public telecommunications network. Within IT, the Company has identified the applications that support its critical business processes such as billing and collections, network monitoring, repair and ordering. The inventory/assessment and planning phases for IT are complete and management expects that conversion will be completed by the end of 1998 or shortly thereafter, with testing and implementation continuing through 1999. Within the Business Units, the Company is generally in the inventory/assessment phase, though some Business Units have completed this phase and are into the planning, conversion and testing/certification phases. Accordingly, a majority of the Business Units have established project plans and associated schedules to accomplish the remaining phases. The objective is to complete any major conversions or upgrades by third-quarter 1999. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued The Company has spent approximately $90 through the third quarter of 1998 on year 2000 projects and activities. The estimated total incremental costs for year 2000 related projects and activities are approximately $200 through 1999, excluding capital expenditures. Additional incremental capital expenditures over the same period will approximate $50-$80. Virtually all expenditures relate to U S WEST Communications and are being funded through operations. Though year 2000 costs will directly impact the reported level of future net income, the Company intends to manage its total cost structure, including deferral of non-critical projects, in an effort to mitigate the impact of year 2000 costs on its historical rate of earnings growth. The estimate stated above may be subject to change. Management cannot provide assurance that the result of its year 2000 compliance efforts or the cost of such efforts will not differ materially from estimates. Accordingly, year 2000 specific business continuity and contingency plans are being developed to address high risk areas as they are identified. These year 2000 specific contingency plans will conform to detailed Company-wide requirements now being established by the Company's Year 2000 Program Office. These plans will be in place no later than third-quarter 1999. In addition, the Company has in place its standard overall business continuity, contingency and disaster recovery plans (such as diesel generator back-up power supply sources for its Network, Network rerouting capabilities, and computer back-up and recovery procedures) which will be verified, and if required, augmented for specific year 2000 scenarios. Within Network, the Company is highly dependent on the telecommunications network vendors to provide compliant hardware and software in a timely manner, and on third parties that are assisting the Company in the focused testing of the Network. Because of these dependencies, the Company has developed and implemented a vendor compliance process whereby the Company has obtained written assurances of timely year 2000 compliance from most of its critical vendors (not only for Network, but also for IT and the Business Units). The Company continues to pursue such assurances from the remaining critical vendors. In addition, the Company monitors and actively participates in coordinated Network testing activities, as discussed above, with respect to the Forum and Bellcore. Within IT, the Company is dependent on the development of software by experts, both internal and external, and the availability of critical resources with the requisite skill sets. Because of this dependency, the Company has developed detailed timetables, resource plans and standardized year 2000 testing requirements for all identified critical applications (irrespective of whether these applications are used primarily by IT, the Network or the Business Units). Within the Business Units, the Company is dependent on vendor supplied goods and services, and operability of the Network, critical IT and business unit specific applications. Because of these dependencies, the Company is implementing the same type of vendor compliance process and application planning and testing process at the Business Units, as discussed above with respect to the Network and IT. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued In management's view, the most reasonable worst case scenario for year 2000 failure prospects faced by the Company is that a limited number of important IT and/or Business Unit specific applications may unexpectedly fail. In addition, no assurance can be given that there may not be problems with the Network relating to year 2000. Failure by the Company or by certain of its vendors to remediate year 2000 compliance issues in advance of the year 2000 and to execute appropriate contingency plans in the event that a critical failure is experienced, could result in disruption of the Company's operations, possibly impacting the Network and impairing the Company's ability to bill or collect revenues. However, management believes that its efforts at advance remediation and testing, obtaining written vendor assurances and advance vendor remediation, year 2000 specific contingency planning, and overall business continuity, contingency and disaster recovery planning will be successful, and that the aforementioned "worst case scenario" is unlikely to develop or significantly disrupt the Company's financial operations. The above discussion regarding year 2000 contains statements that are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its estimates are based on reasonable assumptions, there can be no assurance that actual results will not differ materially from these estimates. Union Contracts On October 9, 1998, the Communications Workers of America ("CWA") informed the Company that a majority of its voting members ratified new three-year contracts for U S WEST Communications and U S WEST Business Resources, Inc. employees. The contracts provide for salary increases of 10.9 percent over three years, effective in August of each year, and pension increases totaling 21 percent over three years. The contract also provides employees with a $500 ratification bonus in lieu of additional future wage increases. The agreement covers approximately 33,000 CWA members. On October 15, 1998, Dex and CWA union members tentatively agreed upon a new three-year contract. The agreement covers approximately 1,900 sales, operations and customers service employees. Other Items U S WEST from time to time engages in discussions regarding restructurings, dispositions, acquisitions and other similar transactions. Any such transaction may include, among other things, the transfer, sale or acquisition of significant assets, businesses or interests, including joint ventures, or the incurrence, assumption or refinancing 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. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Contingencies U S WEST Communications has pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. (See "Note F - Contingencies" - to the Consolidated Financial Statements.) Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. 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 "Note F - Contingencies" - to the Consolidated Financial Statements. Item 2. Changes in Securities and Use of Proceeds (a) On June 12, 1998, the Company was separated from Old U S WEST in accordance with the terms of the Separation Agreement dated as of June 5, 1998, by and between the Company and Old U S WEST. Pursuant to the Separation Agreement, Old U S WEST redeemed each outstanding share of U S WEST Communications Group Common Stock for one share of Common Stock of the Company. The Common Stock of the Company was registered with the SEC on Form S-4 filed on February 6, 1998, as amended, and declared effective on April 10, 1998 (File No. 333-45765). The Separation was approved by shareholders of Old U S WEST on June 4, 1998. For a further discussion of the Separation, please refer to the Company's Form 8-K/A filed with the SEC on June 26, 1998. (b) On June 29, 1998, Capital Funding issued $3.1 billion of Notes and Debentures which were guaranteed as to principal and interest by U S WEST. The Notes and Debentures were registered with the SEC on Form S-3 on May 6, 1998, as amended, and declared effective on May 22, 1998 (File Nos. 333-51907 and 333-51907-01) (the "Capital Funding Form S-3"). The Notes and Debentures were issued on June 29, 1998 with net proceeds of $3,065,632,000. The underwriting discount was $22,900,000. The remaining difference represents the discounted price to the public. The Company estimates its expenses at $1,270,000 ($1,032,500 of which relates to the SEC filing fee). The net proceeds from the issuance of the Notes and Debentures were used to repay existing commercial paper indebtedness (which was issued in accordance with Section 4(2) of the Securities Act of 1933, as amended). For a listing of the managing underwriters, please refer to the Company's Form 424(b)(2) filed with the SEC on June 26, 1998. Some of those underwriters acted as dealers in the issuance of the commercial paper indebtedness. The Capital Funding Form S-3 has approximately $400 million in remaining debt capacity, all or a portion of which may be issued from time to time for the purposes described therein. U S WEST Communications has approximately $320 million of remaining debt capacity on its Form S-3 registration statement, all or a portion of which may be issued from time to time for the purposes described therein. Form 10-Q - Part II Item 5. Other Information A. Advance Notice Bylaw Procedure The Company's Bylaws have an advance notice procedure for stockholders to bring business before an annual meeting of stockholders. The advance notice procedure requires that a stockholder interested in presenting a proposal for action at an annual meeting of stockholders must deliver a written notice of the proposal, together with certain specified information relating to such stockholder's stock ownership and identity, to the Secretary of the Company at least 90 days before the annual meeting. A copy of the Company's Bylaws was filed as an exhibit to its Form 8-K/A dated June 26, 1998 and is available on the Securities and Exchange Commission's web site at http://www.sec.gov. Stockholder proposals intended for inclusion in the Company's 1999 Proxy Statement should be sent to the Secretary of the Company at 1801 California Street, Suite 5100, Denver, Colorado 80202, and must be received by December 21, 1998. B. Union Contract On October 9, 1998 the Communications Workers of America informed the Company that a majority of its voting members ratified both of the contracts for U S WEST Communications and U S WEST Business Resources, Inc. employees. Both contracts are effective August 16, 1998 and will continue in effect until August 18, 2001. C. Pro Forma Financial Information The consolidated historical financial statements of U S WEST included herein reflect the historical results of operations, balance sheets and cash flows of the businesses that comprise Communications Group and Dex as if such businesses operated as a separate entity for all periods presented. The financial effects of the Dex Alignment, including the refinancing of the Dex Indebtedness and the issuance of approximately 16,341,000 shares (net of the redemption of approximately 305,000 fractional shares) of U S WEST common stock in connection with the Dex Alignment, are reflected in the consolidated financial statements since the Separation Date. Form 10-Q - Part II Item 5. Other Information (continued) The following unaudited pro forma condensed combined statements of income of U S WEST for the nine months ended September 30, 1998 and 1997, and years ended December 31, 1997 and 1996, give effect to the refinancing by U S WEST of the Dex Indebtedness and the issuance of shares in connection with the Dex Alignment (the "Separation Adjustments") as if such transactions had been consummated as of the beginning of each period indicated. The pro forma adjustments included herein are based on available information and certain assumptions as of the Separation Date that management believes are reasonable and are described in the accompanying notes. The unaudited pro forma financial statements do not necessarily represent what U S WEST's financial position or results of operations would have been had the transactions occurred at such dates or to project U S WEST's results of operations at or for any future date or period. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma financial information have been made. The unaudited pro forma financial statements should be read in conjunction with the historical financial statements of U S WEST. Form 10-Q - Part II Item 5. Other Information (continued) U S WEST, Inc. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME Dollars in millions (except per share amounts)
Nine Months Ended Nine Months Ended September 30, 1998 September 30, 1997 U S WEST Separation U S WEST U S WEST Separation U S WEST Historical Adjustments Pro forma Historical Adjustments Pro forma Operating revenues $9,174 - $9,174 $8,657 - $8,657 Operating expenses 6,876 - 6,876 6,368 - 6,368 --------------- ------------ ------------ ------------- ----------- ------------ Operating income 2,298 2,298 2,289 2,289 Interest expense 378 $117(A) 495 304 $196(A) 500 Gains on sales of rural telephone exchanges - - - 77 - 77 Other expense - net 77 - 77 51 - 51 - --------------- ------------ ------------ ------------- ----------- ------------ Income (loss) before income taxes(E) 1,843 (117) 1,726 2,011 (196) 1,815 Provision (benefit) for income taxes 703 (45)(B) 658 752 (75)(B) 677 --------------- ------------ ------------ ------------- ----------- ------------ Income (loss) (E) $1,140 $(72) $1,068 $1,259 $(121) $1,138 =============== ============ ============ ============= =========== ============ Basic earnings per share(C, E) $2.32 - $2.13 $2.61 - $2.28 Average basic shares outstanding (millions)(D) 491.6 9.9 501.5 482.4 16.3 498.7 Diluted earnings per share(C, E) $2.30 - $2.11 $2.58 - $2.25 Average diluted shares outstanding (millions)(D) 495.7 9.9 505.7 492.5 16.3 508.9
Shares may not foot due to rounding See Notes to Unaudited Pro Forma Condensed Combined Statements of Income. Form 10-Q - Part II Item 5. Other Information (continued) U S WEST, Inc. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME Dollars in millions (except per share amounts)
Year Ended Year Ended December 31, 1997 December 31, 1996 U S WEST Separation U S WEST U S WEST Separation U S WEST Historical Adjustments Pro forma Historical Adjustments Pro forma Operating revenues $11,479 - $11,479 $11,168 - $11,168 Operating expenses 8,703 - 8,703 8,356 - 8,356 --------------- ------------- --------------- ----------- -------------- ----------- Operating income 2,776 2,776 2,812 - 2,812 Interest expense 405 $262(A) 667 448 $262(A) 710 Gains on sales of rural telephone exchanges 77 - 77 59 - 59 Gain on sale of investment in Bellcore 53 - 53 - - - Other expense - net 72 - 72 46 - 46 --------------- ------------- --------------- ----------- -------------- ----------- Income (loss) before income taxes(E) 2,429 (262) 2,167 2,377 (262) 2,115 Provision (benefit) for income taxes 902 (100)(B) 802 876 (100)(B) 776 --------------- ------------- --------------- ----------- -------------- ----------- Income (loss)(E) $1,527 $(162) $1,365 $1,501 $(162) $1,339 =============== ============= =============== =========== ============== =========== Basic earnings per share(C, E) $3.16 - $2.73 $3.14 - $2.71 Average basic shares outstanding (millions)(D) 482.8 16.3 499.1 477.6 16.3 493.9 Diluted earnings per share(C, E) $3.13 - $2.71 $3.10 - $2.68 Average diluted shares outstanding (millions)(D) 491.3 16.3 507.6 488.6 16.3 504.9
See Notes to Unaudited Pro Forma Condensed Combined Statements of Income. Form 10-Q - Part II Item 5. Other Information (continued) U S WEST, Inc. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME Dollars in millions A. Reflects incremental interest expense associated with the Dex Indebtedness from the beginning through the end of each period presented up to the Separation Date. B. Reflects the estimated income tax effects of the pro forma adjustments. C. The financial effects of the Dex Alignment, including interest expense associated with the refinancing of $3.9 billion of Dex Indebtedness by U S WEST and the dilutive effects of the issuance of $850 of U S WEST common stock, are reflected in the U S WEST historical Consolidated Statements of Income since the Separation Date June 12, 1998. D. Represents historical Communications Group average common shares outstanding, adjusted to reflect the incremental impact of the issuance of approximately 16,341,000 shares (net of the redemption of approximately 305,000 fractional shares) issued on June 15, 1998, in connection with the Dex Alignment. E. Amounts are before an extraordinary item in 1997 and the cumulative effect of a change in accounting principle in 1996. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(i) Restated Certificate of Incorporation of U S WEST, Inc. *3(ii) Bylaws of U S WEST, Inc. (formerly "USW-C, Inc."), effective as of June 12, 1998 (Exhibit 3(ii) to Form 8-K/A dated June 26, 1998, File No. 1-14087). *4(a) Form of Rights Agreement between U S WEST, Inc. (formerly "USW-C, Inc.") and State Street Bank and Trust Company, as Rights Agent (Exhibit 4-A to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). *4(b) Form of Indenture among U S WEST Capital Funding, Inc., USW-C (renamed "U S WEST, Inc.") and First National Bank of Chicago, as Trustee, (Exhibit 4-A to Form S-3 Registration Statement No. 333-51907, filed May 6, 1998, as amended). *10(a) Separation Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated June 5, 1998 (Exhibit 99.1 to Form 8-K/A dated June 26, 1998, File No. 1-14087). *10(b) Employee Matters Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated June 5, 1998 (Exhibit 99.2 to Form 8-K/A dated June 26, 1998, File No. 1-14087). *10(c) Tax Sharing Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated June 5, 1998 (Exhibit 99.3 to Form 8-K/A dated June 26, 1998, File No. 1-14087). *10(d) 364-Day $3.5 Billion Credit Agreement, dated May 8, 1998, with Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 10A to Form 10-Q for the quarter ended March 31, 1998, File No. 1-14087). *10(e) Five-Year $1.0 Billion Credit Agreement, dated May 8, 1998, with Morgan Guaranty Trust Company of New York as Administrative Agent (Exhibit 10B to Form 10-Q for the quarter ended March 31, 1998, File No. 1-14087). 10(e)(1) Amendment No. 1 to Credit Agreements dated as of June 30, 1998 to the 364-Day $3.5 Billion Credit Agreement and the Five-Year $1.0 Billion Credit Agreement, each dated as of May 8, 1998, among U S WEST Capital Funding, Inc.; U S WEST, Inc.; the Banks listed on the signature pages thereto and Morgan Guaranty Trust Company of New York. Form 10-Q - Part II Item 6. Exhibits and Reports on Form 8-K (continued) *10(f) Change of Control Agreement for the President and Chief Executive Officer (Exhibit 10(f) to Form 10-Q for the quarter ended June 30, 1998, File No. 1-14087). *10(g) Form of Change of Control Agreement for Tier II Executives (Exhibit 10(g) to Form 10-Q for the quarter ended June 30, 1998, File No. 1-14087). *10(h) Form of Executive Severance Agreement (Exhibit 10(g) to Form 10-Q for the quarter ended June 30, 1998, File No. 1-14087). *10(i) 1998 U S WEST Stock Plan (Exhibit 10-A to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). *10(j) U S WEST Long-Term Incentive Plan (Exhibit 10-D to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). *10(k) U S WEST Executive Short-Term Incentive Plan (Exhibit 10-E to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). 10(l) U S WEST 1998 Broad Based Stock Option Plan dated June 12, 1998. 10(m) U S WEST Deferred Compensation Plan, amended and restated effective as of June 12, 1998. 10(n) U S WEST 1998 Stock Plan, as amended June 22, 1998. 12 Statement regarding computation of earnings to fixed charges ratio of U S WEST, Inc. 27 Financial Data Schedule - ------------------- * Previously filed. (b) Reports on Form 8-K filed during the Third Quarter of 1998 (i) Form 8-K dated July 15, 1998 concerning a press released reporting certain one-time charges for the second quarter of 1998. (ii) Form 8-K dated July 28, 1998 concerning the Company's second quarter results of operations. Form 10-Q - Part II Item 6. Exhibits and Reports on Form 8-K (continued) (iii Form 8-K/A dated July 29, 1998, amending Form 8-K dated July 28, 1998, concerning the Company's second quarter earnings results. (iv) Form 8-K dated August 16, 1998 concerning a press release announcing the work stoppage commenced by clerical and technical employees represented by the Communications Workers of America. (v) Form 8-K dated August 31, 1998 concerning a press release announcing a tentative agreement reached on the Labor Contract between the Company and the Communications Workers of America. (vi) Form 8-K dated October 21, 1998 concerning the Company's third quarter results of operations. (vii) Form 8-K dated October 27, 1998 reiterating the Company's earnings projections. (viii) Form 8-K dated November 2, 1998 concerning a press release announcing the naming of a new member to the Company's board of directors. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. U S WEST, Inc. /s/ ALLAN R. SPIES By:___________________________________ Allan R. Spies Executive Vice President and Chief Financial Officer November 6, 1998 EX-3 2 RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3(i) RESTATED CERTIFICATE OF INCORPORATION OF U S WEST, INC. (Originally Incorporated on December 23, 1997 Under the Name U S WEST COMMUNICATIONS GROUP, INC.) ARTICLE I NAME The name of the corporation is U S WEST, Inc. (the "Corporation"). ARTICLE II ADDRESS OF REGISTERED OFFICE; NAME OF REGISTERED AGENT The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801. The name of its registered agent at that address is The Corporation Trust Company. ARTICLE III PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law (the "Corporation Law"). ARTICLE IV POWERS The Corporation shall have all powers that may now or hereafter be lawful for a corporation to exercise under the Corporation Law. 1 ARTICLE V CAPITAL STOCK SECTION 1. Authorization. The aggregate number of shares of stock which the Corporation shall have authority to issue is two billion two hundred million (2,200,000,000) shares, of which two billion (2,000,000,000) shares shall be shares of common stock having a par value of $0.01 per share (the "Common Stock"), and two hundred million (200,000,000) shares shall be shares of a class of preferred stock having a par value of $1.00 per share (the "Preferred Stock") and issuable in one or more series as hereinafter provided. For purposes of this Article V, references to the "Board of Directors" shall refer to the Board of Directors of the Corporation, as established in accordance with Article VI of the Certificate of Incorporation of the Corporation and references to "the Certificate of Incorporation of the Corporation" shall refer to this Restated Certificate of Incorporation as the same may be amended from time to time. SECTION 2. Common Stock. The shares of Common Stock of the Corporation shall be of one and the same class. The holders of Common Stock shall have one vote per share of Common Stock on all matters on which holders of Common Stock are entitled to vote. Except as otherwise provided by law or by the terms of any outstanding series of Preferred Stock, the entire voting power of the stockholders of the Corporation shall be vested in the holders of Common Stock of the Corporation, who shall be entitled to vote on any matter on which the holders of stock of the Corporation shall, by law or by the provisions of the Certificate of Incorporation or bylaws of the Corporation, be entitled to vote. SECTION 3. Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. Except as provided by subsection 3.1 with respect to the Series A Preferred Stock (as hereinafter defined), the Board of Directors is authorized, by resolution adopted and filed in accordance with law, to fix the number of shares in each series, the designation thereof, the voting powers, preferences and relative, participating, optional or other special rights thereof, and the qualifications or restrictions thereon, of each series and the variations in such voting powers and preferences and rights as between series. Any shares of any series of Preferred Stock 2 purchased, exchanged, converted or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock, without designation as to series, and may be reissued as part of any series of Preferred Stock created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth in this Certificate of Incorporation or in such resolution or resolutions. 3.1. Series A Junior Preferred Stock. There is hereby created a series of Preferred Stock, designated Series A Junior Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock"), of 10,000,000 shares having the following voting powers, preferences and rights, and qualifications and restrictions thereon provided by this subsection 3.1: 3.1.1 Dividends and Distributions. A. Subject to the provisions for adjustment here inafter set forth, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all cash dividends declared or paid on the Common Stock, and (ii) a preferential cash dividend (the "Preferential Dividends"), if any, in preference to the holders of Common Stock, on the first day of February, May, August and November of each year (each a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, payable in an amount (except in the case of the first Quarterly Dividend Payment if the date of the first issuance of Series A Preferred Stock is a date other than a Quarterly Dividend Payment date, in which case such payment shall be a prorated amount of such amount) equal to $25 per share of Series A Preferred Stock less the per share amount of all cash dividends declared on the Series A Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event 3 the Corporation shall, at any time after the issuance of any share or fraction of a share of Series A Preferred Stock, make any distribution on the shares of Common Stock, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Corporation or otherwise, which is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to the immediately preceding sentence, a distribu- tion of shares of Common Stock or other capital stock of the Corporation or a distribution of rights or warrants to acquire any such share, including any debt security convert- ible into or exchangeable for any such share, at a price less than the Fair Market Value (as hereinafter defined) of such share), then, and in each such event, the Corporation shall simultaneously pay on each then outstanding share of Series A Preferred Stock a distribution, in like kind, of 100 times such distribution paid on a share of Common Stock (subject to the provisions for adjustment hereinafter set forth). The dividends and distributions on the Series A Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and pursuant to the second sentence of this para- graph are hereinafter referred to as "Dividends" and the multiple of such cash and non-cash dividends on the Common Stock applicable to the determination of the Dividends, which shall be 100 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple". In the event the Corporation shall at any time after June 1, 1998 (the "Effective Date") declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or re- verse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of Dividends which holders of shares of Series A Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. B. The Corporation shall declare each Dividend at the same time it declares any cash or non-cash dividend or distribution on the Common Stock in respect of which a 4 Dividend is required to be paid. No cash or non-cash dividend or distribution on the Common Stock in respect of which a Dividend is required to be paid shall be paid or set aside for payment on the Common Stock unless a Dividend in respect of such dividend or distribution on the Common Stock shall be simultaneously paid, or set aside for payment, on the Series A Preferred Stock. C. Preferential Dividends shall begin to accrue on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of any shares of Series A Preferred Stock. Accrued but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. 3.1.2 Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the holders of the Common Stock. The number of votes which a holder of Series A Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple". In the event the Corporation shall at any time after the Effective Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series A Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 5 (B) Except as otherwise provided herein, in the Certificate of Incorporation or bylaws of the Corporation, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) In the event that the Preferential Dividends accrued on the Series A Preferred Stock for four or more quarterly dividend periods, whether consecutive or not, shall not have been declared and paid or irrevocably set aside for payment, the holders of record of Preferred Stock of the Corporation of all series (including the Series A Preferred Stock), other than any series in respect of which such right is expressly withheld by the Certificate of Incorporation or the authorizing resolutions included in any Certificate of Designations therefor, shall have the right, at the next meeting of stockholders called for the election of directors, to elect two members to the Board of Directors, which directors shall be in addition to the number required by the bylaws of the Corporation prior to such event, to serve until the next Annual Meeting and until their successors are elected and qualified or their earlier resignation, removal or incapacity or until such earlier time as all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or irrevocably set aside for payment) in full. The holders of shares of Series A Preferred Stock shall continue to have the right to elect directors as pro- vided by the immediately preceding sentence until all accrued and unpaid Preferential Dividends upon the out- standing shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full. Such directors may be removed and replaced by such stockholders, and vacancies in such directorships may be filled only by such stockholders (or by the remaining director elected by such stockholders, if there be one) in the manner permitted by law; provided, however, that any such action by stockholders shall be taken at a meeting of stockholders and shall not be taken by written consent thereto. (D) Except as otherwise required by the Certificate of Incorporation or bylaws of the Corporation or set forth herein, holders of Series A Preferred Stock shall have no other special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. 6 3.1.3. Certain Restrictions. (A) Whenever Preferential Dividends or Dividends are in arrears or the Corporation shall be in default of payment thereof, thereafter and until all accrued and unpaid Preferential Dividends and Dividends, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid or set irrevocably aside for payment in full, and in addition to any and all other rights which any holder of shares of Series A Preferred Stock may have in such circumstances, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series A Preferred Stock, unless dividends are paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled if the full dividends accrued thereon were to be paid; (iii) except as permitted by subparagraph (iv) of this paragraph 3.1.3(A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for considera- tion any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock (either as to dividends or upon liqui- dation, dissolution or winding up), except in accordance with a purchase offer made to all holders of such shares upon such terms as the Board of Directors, 7 after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any Sub- sidiary (as hereinafter defined) of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 3.1.3, purchase or otherwise acquire such shares at such time and in such manner. A "Subsidiary" of the Corporation shall mean any corporation or other entity of which securities or other ownership interests having ordinary voting power sufficient to elect a majority of the board of directors of such corporation or other entity or other persons performing similar functions are beneficially owned, directly or indirectly, by the Corporation or by any corporation or other entity that is otherwise controlled by the Corporation. (C) The Corporation shall not issue any shares of Series A Preferred Stock except upon exercise of Rights is- sued pursuant to that certain Rights Agreement, dated as of June 1, 1998, between the Corporation and State Street Bank and Trust Company, as Rights Agent, a copy of which is on file with the Secretary of the Corporation at its principal executive office and shall be made available to stockholders of record without charge upon written request therefor addressed to said Secretary. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Corporation from issuing for any purpose any series of Preferred Stock with rights and privileges similar to, different from, or greater than, those of the Series A Preferred Stock. 3.1.4. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares upon their retirement and cancellation shall become authorized but unissued shares of Preferred Stock, without designation as to series, and such shares may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. 8 3.1.5. Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless the holders of shares of Series A Preferred Stock shall have received for each share of Series A Preferred Stock, subject to adjustment as hereinafter provided, (A) $100 ($1.00 per one one-hundredth of a share) plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment or, (B) if greater than the amount specified in clause (i)(A) of this sentence, an amount equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, as the same may be adjusted as hereinafter provided and (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Series A Preferred Stock are entitled under clause (i)(A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquida- tion, dissolution or winding up. The amount to which holders of Series A Preferred Stock may be entitled upon liquidation, dissolution or winding up of the Corporation pursuant to clause (i)(B) of the foregoing sentence is hereinafter referred to as the "Participating Liquidation Amount" and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Corporation applicable pur- suant to said clause to the determination of the Participating Liquidation Amount, as said multiple may be adjusted from time to time as hereinafter provided, is here- inafter referred to as the "Liquidation Multiple". In the event the Corporation shall at any time after the Effective Date declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then, in each such case, the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series A Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a 9 fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 3.1.6. Certain Reclassifications and Other Events. (A) In the event that holders of shares of Common Stock receive after the Effective Date in respect of their shares of Common Stock any share of capital stock of the Corporation (other than any share of Common Stock), whether by way of reclassification, recapitalization, reorganiza- tion, dividend or other distribution or otherwise (a "Trans- action"), then, and in each such event, the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Corporation of the shares of Series A Preferred Stock shall be adjusted so that after such event the holders of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Corporation as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Corporation by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock receive after the Effective Date in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or ex- changeable for Common Stock) at a purchase price per share 10 less than the Fair Market Value of a share of Common Stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Corporation of the shares of Series A Preferred Stock shall each be adjusted so that after such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Fair Market Value of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In the event that holders of shares of Common Stock receive after the Effective Date in respect of their shares of Common Stock any right or warrant to purchase capital stock of the Corporation (other than shares of Com- mon Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchange- able for capital stock of the Corporation (other than Common Stock), at a purchase price per share less than the Fair Market Value of such shares of capital stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon liquidation, dissolution or winding up of the Corporation of the shares of Series A Preferred Stock shall each be adjusted so that after such event each holder of a share of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such event, to receive (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional dividends to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined) and (ii) such 11 additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction and (iii) such additional distributions upon liquidation, dissolution or winding up of the Corporation as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Corporation upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "Discount Fraction" shall be a fraction the numerator of which shall be the difference between the Fair Market Value of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock of the Corporation as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and the denominator of which shall be the Fair Market Value of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Certificate of Incorporation, the "Fair Market Value" of a share of capital stock of the Corporation (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing price per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that, in the event that such Fair Market Value of any such share of capital stock is determined during a period which includes any date that is within 30 Trading Days after (i) the ex- dividend date for a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) the effective date of any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then, and in each such case, the Fair Market Value shall be appropriately adjusted by the Board of Directors of the Corporation to take into account ex-dividend or post-effective date trading. The closing price for any day shall be the last sale price, regular way, or, in case, no such sale takes place on such day, the average of the closing bid and asked 12 prices, regular way (in either case, as reported in the applicable transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange), or, if the shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the applicable transaction reporting system with respect to securities listed on the principal national secu- rities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors of the Corporation. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to trading on any national securities exchange, on which the New York Stock Exchange or such other national securities exchange as may be selected by the Board of Directors of the Corporation is open. If the shares are not publicly held or not so listed or traded on any day within the period of 30 Trading Days applicable to the determination of Fair Market Value thereof as aforesaid, "Fair Market Value" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors of the Corporation. In either case referred to in the foregoing sentence, the determination of Fair Market Value shall be described in a statement filed with the Secretary of the Corporation. 3.1.7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, com- bination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or secu- rities, cash and/or any other property, then in any such case each outstanding share of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Vote 13 Multiple, the Dividend Multiple or the Liquidation Multiple in effect immediately prior to such event. 3.1.8. Effective Time of Adjustments. (A) Adjustments to the Series A Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustments occurs. (B) The Corporation shall give prompt written notice to each holder of a share of Series A Preferred Stock of the effect of any adjustment to the voting rights, dividend rights or rights upon liquidation, dissolution or winding up of the Corporation of such shares required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Corporation to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. 3.1.9. No Redemption. The shares of Series A Preferred Stock shall not be redeemable at the option of the Corporation or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Corporation may acquire shares of Series A Preferred Stock in any other manner permitted by law, the provisions hereof and the Certificate of Incorporation. 3.1.10. Ranking. Unless otherwise provided in the Certificate of Incorporation or a Certificate of Designations relating to a subsequent series of preferred stock of the Corporation, the Series A Preferred Stock shall rank junior to all other series of the Corporation's preferred stock as to the payment of dividends and the dis- tribution of assets on liquidation, dissolution or winding up and senior to the Common Stock. 3.1.11. Amendment. The provisions hereof and the Certificate of Incorporation shall not be amended in any manner which would adversely affect the rights, privileges or powers of the Series A Preferred Stock without, in addition to any other vote of stockholders required by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Preferred Stock, voting together as a single class. 3.1.12. Fractional Shares. Series A Preferred Stock may be issued in fractions of a share (in one one- 14 hundredths (1/100) of a share and integral multiples thereof) that shall entitle the holder thereof, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of shares of Series A Preferred Stock. ARTICLE VI BOARD OF DIRECTORS SECTION 1. Number of Directors. The number of Directors shall be fixed by the bylaws of the Corporation, but shall not be less than six nor more than seventeen. SECTION 2. Powers of the Board of Directors. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors selected as provided by law and the Certificate of Incorporation and the bylaws of the Corporation. In furtherance, and not in limitation, of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to: (A) adopt, amend, alter, change or repeal bylaws of the Corporation; provided, however, that no bylaw hereafter adopted shall invalidate any prior act of the Corporation that would have been valid if such new bylaws had not been adopted; (B) subject to the bylaws as from time to time in effect, determine the rules and procedures for the conduct of the business of the Board of Directors and the management and direction by the Board of Directors of the business and affairs of the Corporation, including the power to designate and empower committees of the Board of Directors, to elect, or authorize the appointment of, and empower officers and other agents of the Corporation, and to determine the time and place of, the notice requirements for, and the manner of conducting, Board meetings, as well as other notice requirements for, and the manner of taking, Board action; and (C) exercise all such powers and do all such acts as may be exercised or done by the Corporation, subject to the provisions of the Corporation Law and the 15 Certificate of Incorporation and bylaws of the Corporation. SECTION 3. Classified Board of Directors. The directors, other than those who may be elected solely by the holders of shares of any class or series of stock having a preference over the common stock of the Corporation as to dividends or to distributions upon liquidation or dissolution and winding-up of the Corporation pursuant to the terms of Article V of the Certificate of Incorporation of the Corporation, shall be classified, with respect to the time for which they severally hold office, into three classes, with each class to hold office until its successors are elected and qualified. Subject to the rights of the holders of any series of Preferred Stock, at each annual meeting of the stockholders, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. SECTION 4. Vacancies. Except as otherwise required by law and subject to the rights of the holders of any series of Preferred Stock, any vacancy in the Board of Directors for any reason and any newly created directorship resulting by reason of any increase in the number of directors may be filled only by the Board of Directors (and not by the stockholders), by resolution adopted by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum (or by a sole remaining director); provided, however, that if not so filled, any such vacancy shall be filled by the stockholders at the next annual meeting or at a special meeting called for that purpose. Any director so appointed shall hold office until the next meeting of stockholders at which directors of the class for which such director has been chosen are to be elected and until his or her successor is elected and qualified. SECTION 5. Removal of Directors. Except as may be provided in respect of any series of Preferred Stock pursuant to Article V with respect to any directors elected solely by the holders of such series of Preferred Stock, any director (including all members of the Board of Directors) may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the voting power of all of the shares of capital 16 stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class. For the purposes of this Section 5, "cause" shall mean the wilful and continuous failure of a director to substantially perform such director's duties to the Corporation (other than any such failure resulting from incapacity due to physical or mental illness) or the wilful engaging by a director in gross misconduct materially and demonstrably injurious to the Corporation. ARTICLE VII STOCKHOLDER ACTIONS AND MEETINGS OF STOCKHOLDERS Subject to the rights of the holders of any series of Preferred Stock, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by written consent in lieu of a meeting of such holders. Subject to the rights of the holders of any series of Preferred Stock, special meetings of stockholders of the Corporation may be called only by the Chairman of the Board of Directors of the Corporation or the Board of Directors pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office. Elections of directors need not be by written ballot, unless otherwise provided in the bylaws. For purposes of all meetings of stockholders, a quorum shall consist of a majority of the shares entitled to vote at such meeting of stockholders, unless otherwise required by law or, in respect of a meeting of the holders of any series of Preferred Stock, by the provisions of Section 3 of Article V. ARTICLE VIII LIMITATION ON LIABILITY OF DIRECTORS No person shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, including without limitation for serving on a committee of the Board of Directors; provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing 17 violation of law, (iii) arising under Section 174 of the Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment, repeal or modification of this Article VIII shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such amendment, repeal or modification. ARTICLE IX CERTAIN BUSINESS COMBINATIONS SECTION 1. Vote Required for Certain Business Combinations. Except as otherwise expressly provided in Section 2 of this Article, in addition to any affirmative vote required by law or by any other provision of the Certificate of Incorporation of the Corporation, the affirmative vote of the holders of not less than 80% of the outstanding shares of "Voting Stock" (as hereinafter defined) of the Corporation voting together as a single class shall be required for the approval or authorization of any "Business Combination" (as hereinafter defined) of the Corporation with any "Related Person" (as hereinafter defined). For the purpose of this Article: (A) The term "Business Combination" shall mean (1) any merger or consolidation of the Corporation or a Subsidiary (as hereinafter defined) of the Corporation with or into a Related Person or of a Related Person with or into the Corporation or a Subsidiary of the Corporation; (2) any sale, lease, exchange, transfer, or other disposition, including, without limitation, a mortgage or any other hypothecation or transfer as collateral, of all or any "Substantial Part" (as hereinafter defined) of the assets either of the Corporation (including, without limitation, any voting securities of a Subsidiary) or of a Subsidiary of the Corporation to a Related Person; (3) the issuance of any securities (other than by way of a distribution to stockholders made pro rata to all holders of the class of stock to receive the distribution) of the Corporation or a Subsidiary of the Corporation to a Related Person; (4) the acquisition by the Corporation or a Subsidiary of the Corporation of any securities of a Related Person; (5) any recapitalization that would have the effect, directly or indirectly, of increasing the voting power of a Related Person; (6) any merger of 18 the Corporation into a Subsidiary of the Corporation; or (7) any agreement, contract, or other arrangement providing for any of the transactions described in this definition of "Business Combination." (B) The term "Continuing Director" shall mean any member of the Board of Directors who is neither Affiliated (as defined below) nor Associated (as defined below) with the Related Person and who was a member of the Board of Directors prior to the time that the Related Person became a Related Person, and any successor of a Continuing Director who is recommended to succeed a Continuing Director by a majority of Continuing Directors then members of the Board of Directors. (C) The term "Related Person" shall mean and include any individual, corporation, partnership, or other person or entity which, together with its "Affiliates" and "Associates," "Beneficially Owns" (as hereinafter defined), in the aggregate ten percent (10%) or more of the outstanding Voting Stock of the Corporation, and any Affiliate or Associate of any such individual, corporation, partnership, or other person or entity. (D) The term "Substantial Part" shall mean more than 80% of the book value of the total consolidated assets of the Corporation as reported in the consolidated financial statements of the Corporation and its subsidiaries as of the end of its most recent fiscal year ending prior to the time as of which a "Substantial Part" is to be determined. (E) The term "Voting Stock" shall mean all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation and each reference to a percentage of shares of Voting Stock shall refer to such percentage of the votes entitled to be cast by such shares. (F) The terms "Affiliate" and "Associate" shall have the meanings set forth in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect on the Effective Date (as defined in subsection 2.6). 19 (G) The term "Beneficially Owns" shall have the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on the Effective Date (as defined in subsection 2.6), provided, however, that, any shares of Voting Stock of the Corporation that any Related Person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed Beneficially Owned by the Related Person whether immediately exercisable or exercisable within ten years of the date as of which Beneficial Ownership is to be determined. (H) The term "Subsidiary" with respect to the Corporation shall mean any corporation, partnership, limited liability company, business trust or similar entity in which a majority of any class of any equity security is owned directly or indirectly by the Corporation. SECTION 2. When Higher Vote is Not Required. The provisions of Section 1 of this Article shall not be applicable to any particular Business Combination and such Business Combination shall require only such affirmative vote as may be required by law or by any other provision of this Certificate of Incorporation of the Corporation, if all of the conditions specified in either of the following paragraphs (A) or (B) are met: (A) the Business Combination shall have been approved by a vote of not less than a majority of the Continuing Directors, or (B) all of the following conditions shall have been met: (1) The aggregate amount of cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of the consideration, other than cash, to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest of the following: (a) if applicable, the highest price per share (including any brokerage commissions, transfer taxes, and soliciting dealers' fees) paid by the Related Person for 20 any shares of Common Stock acquired by it (i) within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (ii) in the transaction in which it became a Related Person; or (b) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Related Person became a Related Person (such latter date is referred to in this Article as the "Determination Date"), whichever is higher; and (2) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of the consideration, other than cash, to be received per share by holders of shares of any class or series of outstanding Voting Stock, other than Common Stock, shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (B)(2) shall be required to be met with respect to every class or series of outstanding capital stock of the Corporation other than Common Stock, whether or not the Related Person has previously acquired any shares of such class or series of Voting Stock): (a) if applicable, the highest per share price (including any brokerage commission, transfer taxes, and soliciting dealers' fees) paid by the Related Person for any shares of such class or series of Voting Stock acquired by it (i) within the two year period immediately prior to the Announcement Date or (ii) in the transaction in which it became a Related Person, whichever is higher; or (b) if applicable, the Redemption Price (as hereinafter defined) of the shares of such class or series, or if such shares have no Redemption Price, the highest amount per share which such class or series would be entitled to receive upon liquidation of the 21 Corporation on the Announcement Date or the Determination Date, whichever is higher; or (c) the Fair Market Value per share of such class or series of Voting stock on the Announcement Date or on the Determination Date, whichever is higher; and (3) the consideration to be received in such Business Combination by holders of each class or series of outstanding Voting Stock (including Common stock) shall be in cash or in the same form as the Related Person has previously paid for shares of such class or series of Voting Stock; provided, however, that if the Related Person has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it; and (4) a proxy statement responsive to the requirements of the Securities Exchange Act of 1934, as amended, shall have been mailed to public stockholders of the Corporation for the purpose of soliciting stockholder approval of the Business Combination and shall have contained at the front thereof, in a prominent place, any recommendations as to the advisability (or inadvisability) of the Business Combination that the Continuing Directors, or any of them, may choose to state and, if deemed advisable by a majority of the Continuing Directors, an opinion of a reputable investment banking firm as to the fairness (or not) of the terms of the Business Combination, from the point of view of the remaining public stockholders of the Corporation (such investment banking firm to be selected by a majority of the Continuing Directors and to be paid a reasonable fee for their services by the Corporation upon receipt of the opinion). SECTION 3. Certain Definitions and Additional Provisions. For the purposes of this Article: (A) "Fair Market Value" shall mean: 22 (1) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934, as amended, on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the NASDAQ National Market or any quotations system then generally in use, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by the Continuing Directors in good faith, which determination shall be final; and (2) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Continuing Directors in good faith, which determination shall be final. (B) The Board of Directors, with the approval of a majority of the total number of Continuing Directors, shall have the power and duty to determine, on the basis of information known to it after reasonable inquiry, all facts necessary to determine compliance with this Article, including, without limitation, (i) whether a person is a Related Person, (ii) the number of shares of Voting Stock Beneficially Owned by any person, (iii) whether a person is an Affiliate or Associate of another person, (iv) whether the applicable conditions set forth in paragraph (B) of Section 2 have been met with respect to any Business Combination, and (v) whether the proposed transaction is a Business Combination. Any such determinations shall be final. SECTION 4. Amendment of this Article. This Article may be amended, altered, changed, or repealed only by the affirmative vote of the holders of at least 80% of the outstanding shares of Voting Stock voting together as a 23 single class unless the proposed amendment, alteration, change, or repeal has been recommended to the stockholders by the Board of Directors with the approval of at least two-thirds of the Continuing Directors, in which event the proposed amendment, alteration, change, or repeal shall require for approval the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of Voting Stock, voting as a single class. ARTICLE X BYLAWS The Board of Directors shall have the power to adopt, amend, alter, change or repeal bylaws of and for the Corporation by the affirmative vote of 662/3% of the members then in office. The affirmative vote of the holders of at least 80% of the voting power of all of the shares of capital stock of the Corporation then entitled to vote generally in the election of directors, voting together as a single class shall be required to adopt, amend, alter, change or repeal bylaws of the Corporation (notwithstanding the fact that approval by a lesser percentage may be permitted by the Corporation Law). ARTICLE XI AMENDMENT OF CERTIFICATE OF INCORPORATION The Corporation hereby reserves the right from time to time to amend, alter, change or repeal any provision contained in the Certificate of Incorporation of the Corporation in any manner permitted by the Corporation Law and all rights and powers conferred upon stockholders, directors and officers herein are granted subject to this reservation. In addition to any vote otherwise required by law, and except as may otherwise be provided in Article V or IX hereof, any such amendment, alteration, change or repeal shall require approval of both (i) the Board of Directors by the affirmative vote of a majority of the members then in office and (ii) the holders of a majority of the voting power of all of the shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, except that any proposal to amend, alter, change or repeal the provisions of Section 3 of Article VI, Section 5 of Article VI, Article VII, Article X and this Article XI shall require the affirmative vote of the holders of 80% of the voting power of all of the shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. 24 IN WITNESS WHEREOF, this Restated Certificate of Incorporation which restates, integrates and amends the provisions of the certificate of incorporation of the Corporation, and which has been duly adopted by written consent of the sole stockholder of the Corporation in accordance with the provisions of Sections 228, 242 and 245 of the Delaware General Corporation Law, has been executed by Thomas O. McGimpsey, its Assistant Secretary, this 12th day of June, 1998. U S WEST, INC. /s/ THOMAS O. MCGIMPSEY By: Name: Thomas O. McGimpsey Title: Assistant Secretary 25 EX-10 3 AMENDMENT NO. 1 TO CREDIT AGREEMENTS EXHIBIT 10(e)(1) AMENDMENT NO. 1 TO CREDIT AGREEMENTS AMENDMENT dated as of June 30, 1998 to the 364-Day Credit Agreement dated as of May 8, 1998 and the Five-Year Credit Agreement dated as of May 8, 1998 (individually a "Credit Agreement" and together, the "Credit Agreements") among U S WEST CAPITAL FUNDING, INC. (the "Borrower"), U S WEST, INC. (formerly named USW-C, Inc.), the BANKS listed on the signature pages thereto (the "Banks") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Agent"). W I T N E S S E T H : WHEREAS, the parties hereto desire to amend the Credit Agreements to modify a condition to borrowing; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in a Credit Agreement has the meaning assigned to such term in such Credit Agreement. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in a Credit Agreement shall, after this Amendment becomes effective, refer to such Credit Agreement as amended hereby. SECTION 2. Amendment of Section 5.06(a). Section 5.06(a) of each of the Credit Agreements is amended and restated in its entirety to read as follows: (a) Prior to the Separation, total Debt of all Consolidated Subsidiaries (excluding Debt of (i) the Borrower and (ii) a Consolidated Subsidiary to the Company or to a Wholly-Owned Consolidated Subsidiary) ("Subsidiary Debt") will at no time exceed 250% of Consolidated Net Worth. SECTION 3. Representations of Borrower. The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of each Credit Agreement will be true on and as of the Amendment Effective Date and (ii) no Default will have occurred and be continuing on such date. SECTION 4. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 5. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 6. Effectiveness. This Amendment shall become effective as of the date hereof on the date (the "Amendment Effective Date") when the Agent shall have received from each of the Borrower and the Required Banks (as defined in each Credit Agreement) a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Agent) that such party has signed a counterpart hereof; IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. U S WEST CAPITAL FUNDING, INC. By /s/ Thomas. O McGimpsey Title: Assistant Secretary U S WEST, INC. (FORMERLY NAMED USW-C, INC.) By /s/ Thomas O. McGimpsey Title: Assistant Secretary MORGAN GUARANTY TRUST COMPANY OF NEW YORK By /s/ John M. Mikolay Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By /s/ Doug Meckelnburg Title: Vice President THE CHASE MANHATTAN BANK By /s/ Ann B. Kerns Title: Vice President MELLON BANK, N.A. By /s/ David McGowan Title: Vice President ABN AMRO BANK N.V. By /s/ Thomas M. Toerpe Title: Vice President By /s/ Roxana Sopala Title: Vice President THE BANK OF NEW YORK By /s/ James W. Whitaker Title: Vice President BANK ONE, COLORADO, N.A. By /s/ David L. Ericson Title: Vice President CITIBANK, N.A. By /s/ P. M. Chonkar Title: Attorney-In-Fact KEYBANK NATIONAL ASSOCIATION By /s/ Mary Young Title: Commercial Banking Officer NATIONSBANK, N.A. By /s/ Anthony M. Cacheria Title: Senior Vice President COMMERZBANK AG LOS ANGELES BRANCH By /s/ Christian Jagenberg Title: Senior Vice President and Manager By /s/ John Korthuis Title: Vice President FLEET NATIONAL BANK By /s/ Sue Anderson Title: Vice President CANADIAN IMPERIAL BANK OF COMMERCE By /s/ Gerald Girardi Title: Executive Director CIBC Oppenheimer Corp., As Agent BANKERS TRUST COMPANY By /s/ Gina S. Thompson Title: Vice President THE FIRST NATIONAL BANK OF CHICAGO By /s/ Michael J. Harrington Title: Corporate Banking Officer KBC BANK N.V. By /s/ Robert Snauffer Title: First Vice President By /s/ Marcel Claes Title: Deputy General Manager THE ROYAL BANK OF SCOTLAND PLC By /s/ R.A. Green Title: Senior Relationship Manager WELLS FARGO BANK, N.A. By /s/ Catherine M. Wallace Title: Vice President By /s/ Donald A. Hartmann Title: Senior Vice President BANK OF HAWAII By /s/ Eric N. Pelletier Title: Vice President BARCLAYS BANK PLC By /s/ Les Bek Title: Director BAYERISCHE LANDESBANK GIROZENTRALE CAYMAN ISLANDS BRANCH By /s/ Alexander Kohnert Title: Vice President By /s/ James H. Boyle Title: Second Vice President BAYERISCHE HYPO-UND VEREINSBANK AG By /s/ P.M. Tresnan Title: Vice President By /s/ Steve Atwell Title: Vice President LEHMAN COMMERCIAL PAPER INC. By /s/ Michele Swanson Title: Authorized Signatory MERRILL LYNCH CAPITAL CORPORATION By /s/ Robert Stevens Title: Vice President NORWEST BANK COLORADO, NATIONAL ASSOCIATION By /s/ Carol A. Ward Title: Vice President THE TOKAI BANK, LIMITED By /s/ Masahiko Saito Title: Senior Vice President and Assistant General Manager U.S. BANK NATIONAL ASSOCIATION By /s/ Scott E. Page Title: Vice President BANQUE NATIONALE DE PARIS By /s/ Mitchell M. Ozawa Title: Vice President By /s/ Marc T. Schaefer Title: Assistant Vice President ROYAL BANK OF CANADA By /s/ John P. Page Title: Senior Manager ISTITUTO BANCARIO SAN PAOLO DI TORINO S.P.A. By Name: Title: By Name: Title: THE PROVIDENT BANK. By /s/ Tom B. Scherpenberg Title: Vice President EX-10 4 U S WEST 1998 BROAD BASED STOCK OPTION PLAN EXHIBIT 10(l) Dated June 12, 1998 U S WEST 1998 BROAD BASED STOCK OPTION PLAN I. Purpose. The U S WEST 1998 Broad Based Stock Option Plan (the "Plan"), is intended to promote the long term success of U S WEST, Inc. (the "Company"), by affording certain Eligible Employees of the Company with an opportunity to acquire a proprietary interest in the Company, in order to provide incentives to employees and to align the financial interests of these employees with the shareholders of the Company. This Plan is a successor plan of the U S WEST Communications Group 1997 Stock Option Plan (the "Predecessor Plan"). This Plan is effective only upon consummation of the Separation (as defined herein). II. Separate Plan. The Plan is separate and distinct from the U S WEST 1998 Stock Plan. III. Definitions. The following defined terms are used in this Plan: A. "Agreement" shall mean the agreement accepted by the Participant as described in Section VIII of this Prospectus between the Company and a Participant, under which the Participant receives an Option pursuant to the Plan. B. "Board" or "Board of Directors" shall mean the Board of Directors of the Company. C. "Change of Control" shall mean any of the following: 1. any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) who is or becomes a beneficial owner of (or otherwise has the authority to vote), directly or indirectly, securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities, unless through a transaction arranged by, or consummated with the prior approval of the Board of Directors; 2. any period of two (2) consecutive calendar years during which there shall cease to be a majority of the Board of Directors comprised as follows: individuals who at the beginning of such period constitute the Board of Directors and any new director(s) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; or 3. the Company becomes a party to a merger or consolidation in which either (i) the Company will not be the surviving corporation or (ii) the Company will be the surviving corporation and any outstanding shares of Common Stock of the Company will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or 4. any other event that a majority of the Board of Directors, in its sole discretion, shall determine constitutes a Change of Control. D. "Code" shall mean the Internal Revenue Code of 1986, as amended. E. "Committee" shall mean the Employee Benefits Committee or its delegates, as applicable, pursuant to provisions of Section IV of this Prospectus. F. "Common Stock" shall mean the common stock, $.01 par value, issued by the Company. G. "Company" shall mean U S WEST, Inc., a Delaware corporation (previously known as "USW-C, Inc."), and any successor thereof. H. "Disabled" or "Disability" shall mean long-term disability as determined under the provisions of any U S WEST disability plan maintained for the benefit of Eligible Employees of the Company or any Related Entity. I. "Eligible Employee" shall mean any employee of the Company or any Related Entity, excluding Officers, who the Committee selects to receive an Option and who is so employed on the date of the grant of an Option. J. "Employee Benefits Committee" shall mean a committee of the Company which shall administer the Plan as provided in Section IV hereof, and consisting of employees of the Company or any Related Entity who are appointed by the Human Resources Committee. K. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. L. "Fair Market Value" shall mean the closing price of a share of stock as reported on the New York Stock Exchange for the applicable date, or if there were no sales on such date, on the last day on which there were sales. M. "Human Resources Committee" shall mean the Human Resources Committee of the Board. N. "Nonqualified Option" shall mean an Option that does not qualify as an incentive stock option under Section 422 of the Code. O. "Officer" shall mean any executive of the Company or any Related Entity who is eligible to participate in the Company's executive compensation programs. P. "Option" shall mean an option granted by the Company to purchase Common Stock pursuant to the provisions of this Prospectus. Q. "Optionee" shall mean a Participant to whom one or more Options have been granted. R. "Option Price" shall mean the price per share payable to the Company for shares of Common Stock upon the exercise of an Option. S. "Parent Corporation" shall mean any corporation within the meaning of Section 424(e) of the Code. T. "Participant" shall mean an Eligible Employee. U. "Plan" shall mean the U S WEST 1998 Broad Based Stock Option Plan, as described in this Prospectus. V. "Related Entity" shall mean any Parent Corporation or Subsidiary of the Company. W. "Retirement" shall mean, with respect to any Eligible Employee, that such person has terminated employment with the Company or any Related Entity other than "for cause" (as defined in subsection IX.C.(v)) and (i) such person is eligible to receive an immediate service pension benefit under the U S WEST Pension Plan or (ii) such person would be eligible to receive an immediate service pension benefit under the U S WEST Pension Plan, as amended and restated effective January 1, 1993, had that plan not been amended and restated effective January 1, 1997 or (iii) such person specifically is treated as "retired" for purposes of the Plan under any individually negotiated, custom, written agreement or arrangement between the Company or any Related Entity and the Eligible Employee. "Retirement" shall not apply to any Eligible Non-Employee. X. "Securities Act" shall mean the Securities Act of 1933 as amended. Y. "Subsidiary" shall mean any corporation, joint venture or partnership in which the Company owns, directly or indirectly, (i) with respect to a corporation, stock possessing twenty percent (20%) or more of the total combined voting power of all classes of stock in the corporation or (ii) in the case of a joint venture or partnership, the Company possesses a twenty percent (20%) interest in the capital or profits of such joint venture or partnership. Z. "Vested" shall mean the status that results with respect to an Option that may be exercised immediately under the terms of the Agreement granting such Option pursuant to the provisions of the Plan or by action of the Committee. IV. Administration. A. The Plan shall be administered by the Committee. The Committee may adopt such rules, regulations and guidelines as it determines necessary for the administration of the Plan. B. The Committee may delegate to one or more of its members, or to one or more agents, such duties as it may deem advisable, and may itself or through its delegate employ an advisor to render advice with respect to any responsibility it may have under the Plan. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred in the engagement of such counsel, consultant or agent shall be paid by the Company or such Related Entity whose employees have benefited from the Plan, as determined by the Committee. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company or a Related Entity against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's gross negligence or willful misconduct. C. In furtherance of and not in limitation of the Committee's discretionary authority, the Committee shall have the authority to: 1. determine the Participants to whom Options shall be granted and the number of and terms and conditions upon which Options shall be granted (which need not be the same for all Options); 2. determine the time when Options shall be granted, the Option Price of each Option, the period(s) during which Options shall be exercisable (whether in whole or in part), the restrictions to be applicable to Options, and the other terms and provisions of Options; 3. modify grants of Options pursuant to Paragraph D of this Section IV or rescind grants of Options pursuant to Section IX(C)(v), respectively; 4. provide the establishment of a procedure whereby a number of shares of Common Stock or other securities may be withheld from the total number of shares of Common Stock to be issued upon exercise of an Option, to meet the obligation of withholding for income tax, social security and other taxes incurred by a Participant upon such exercise or required to be withheld by the Company in connection with such exercise; 5. adopt, modify and rescind rules, regulations and guidelines relating to the Plan; 6. adopt modifications to the Plan and procedures as may be necessary to comply with provisions of the laws and applicable regulatory rulings of countries in which the Company or a Related Entity operates to assure the legality of Options granted under the Plan to Participants who reside in such countries; 7. make all determinations, perform all other acts, exercise all other powers and establish any other procedures determined by the Committee to be necessary, appropriate or advisable in administering the Plan and to maintain compliance with any applicable law. D. The Committee may at any time, in its sole discretion, accelerate the exercisability of any Options and waive or amend any and all restrictions and conditions of any Options. V. Decisions Final. Any decision, interpretation or other action made or taken in good faith by the Committee arising out of or in connection with the Plan shall be final, binding and conclusive on the Company and all Participants and their respective heirs, executors, administrators, successors and assigns. VI. Arbitration. Any agreement may contain, among other things, provisions that require binding arbitration of any and all disputes between a Participant and the Company or any Related Entity, in a form or forms acceptable to the Committee, in its sole discretion. VII. Shares Available _ Limitations. A. Up to 6,000,000 shares of Common Stock may be granted under the Plan. VIII. Stock Option Agreements. Each grant of an Option under this Plan shall be evidenced by an Agreement dated as of the date of the grant of the Option. Agreements under the Predecessor Plan are hereby assumed by the Company and shall be deemed Agreements under this Plan. Such Agreement shall set forth the terms and conditions of the Option, as may be determined by the Committee. Each grant of an Option is conditioned upon the acceptance by the Participant of the terms of the Agreement. Unless otherwise extended by the Committee, a Participant shall have ninety (90) days from the date of the Agreement to accept its terms. IX. Option Terms. A. Term of Option. No Option shall be exercisable after the expiration of ten (10) years from the date of grant of the Option. B. Exercise of Stock Option. Each Option shall be exercisable in one or more installments as the Committee in its sole discretion may determine at the time of the Option grant and as provided in the Agreement. The right to purchase shares shall be cumulative so that when the right to purchase any shares has accrued such shares or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option. The Option Price shall be payable (i) in cash or by an equivalent means acceptable to the Committee, (ii) by delivery (constructive or otherwise) to the Company of shares of Common Stock owned by the Optionee or (iii) by any combination of the above as provided in the Agreement. Shares delivered to the Company in payment of the Option Price shall be valued at the Fair Market Value on the date of the exercise of the Option. C. Vesting. The Agreement shall specify the date or dates on which the Optionee may begin to exercise all or a portion of his Option. Subsequent to such date or dates, the Option shall be deemed Vested and fully exercisable. (i) Death. In the event of the death of any Optionee, all Options held by such Optionee on the date of his or her death shall become Vested Options and the estate of such Optionee, shall have the right, at any time and from time to time within one year after the date of death, or such other period, if any, as the Committee in its sole discretion may determine, to exercise the Options of the Optionee (but not after the expiration date of the Option). (i) Disability. If the employment of any Optionee is terminated because of Disability, all Options held by such Optionee on the date of his or her termination shall be retained by such Optionee, and such Options that are not yet Vested Options shall become Vested Options in accordance with the vesting schedule established at the time such Options were issued. The Optionee shall have the right to exercise Vested Options at any time and from time to time, but not after the expiration date of the Option. (iii) Retirement. Upon an Optionee's Retirement, all Options held by such Optionee on the date of his or her Retirement shall be retained by such Optionee, and such Options that are not yet Vested Options shall become Vested Options in accordance with the vesting schedule established at the time such Options were issued, unless the Committee, in its sole discretion, determines otherwise. The Optionee shall have the right to exercise Vested Options at any time and from time to time, but not after the expiration date of the Option. (iv) Other Termination. If the employment with the Company or a Related Entity of an Optionee is terminated for any reason other than for death, Disability or Retirement and other than "for cause" as defined in subparagraph (v) below, such Optionee shall have the right, in the case of a Vested Option, for a period of three (3) months after the date of such termination or such longer period as determined by the Committee, to exercise any such Vested Option, but in any event not after the expiration date of any such Option. (v) Termination For Cause. Notwithstanding any other provision of the Plan to the contrary, if the Optionee's employment is terminated by the Company or any Related Entity "for cause" (as defined below), such Optionee immediately shall forfeit all rights under his or her Options except as to the shares of Common Stock already purchased prior to such termination. Termination "for cause" shall mean (unless another definition is agreed to in writing by the Company and the Optionee) termination by the Company because of: (a) the Optionee's willful and continued failure substantially to perform his or her duties (other than any such failure resulting from the Optionee's incapacity due to physical or mental impairment) after a written demand for substantial performance is delivered to the Optionee by the Company, which demand specifically identifies the manner in which the Company believes the Optionee has not substantially performed his or her duties, (b) the willful conduct of the Optionee that is demonstrably and materially injurious to the Company or Related Entity, monetarily or otherwise, or (c) the conviction of the Optionee for a felony by a court of competent jurisdiction. X. Foreign Options and Rights. The Committee may grant Options to Eligible Employees who are subject to the tax laws of nations other than the United States, which Options may have terms and conditions as determined by the Committee as necessary and appropriate to comply with applicable foreign laws. The Committee may take any action which it deems advisable to obtain approval of such Option by the appropriate foreign governmental entity; provided, however, that no such Option may be granted pursuant to this Section X and no action may be taken that would result in a violation of the Exchange Act, the Code or any other applicable law. XI. Change of Control Acceleration. Upon the occurrence of a Change of Control each outstanding Option automatically and immediately shall become fully exercisable by the Participant. XII. Adjustment of Shares. In the event there is any change in the Common Stock by reason of any consolidation, combination, liquidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or other like change in capital structure of the Company, the number or kind of shares or interests subject to an Option and the per share price or value thereof shall be adjusted by the Committee appropriately at the time of such event, provided that each Participant's economic position with respect to the Option shall not, as a result of such adjustment, be worse than it had been immediately prior to such event. Any fractional shares or interests resulting from such adjustment shall be rounded up to the next whole share of Common Stock. XIII. Miscellaneous Provisions. A. Assignment or Transfer. No grant of any "derivative security" (as defined by Rule 16a-1(c) under the Exchange Act) made under the Plan or any rights or interests therein shall be assignable or transferable by a Participant except by last will and testament or the laws of descent and distribution and except to the extent it is otherwise permissible under the Exchange Act. No grant of any "derivative security" shall be assignable or transferable pursuant to a domestic relations order. During the lifetime of a Participant, Options granted hereunder shall be exercisable only by the Participant, the Participant's guardian or his or her legal representative. B. Investment Representation; Legends. No shares of Common Stock shall be issued pursuant to an Option until all applicable securities law and other legal and stock exchange requirements have been satisfied. The Committee may require the placing of stop-orders and restrictive legends on certificates for Common Stock as it deems appropriate. C. Withholding Taxes. The Company, as a condition of the distribution of Common Stock hereunder, may require the payment (through withholding from the Participant's salary, payment of cash by the Participant, reduction of the number of shares of Common Stock or other securities to be issued, or otherwise) of any federal, state, local or foreign taxes required by law to be withheld with respect to such distribution. D. Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any Option or against any Participant receiving an Option. E. Other Incentive Plans. The adoption of the Plan does not preclude the adoption by appropriate means of any other incentive plan for employees. F. Effect on Employment. Nothing contained in this Plan or any related agreement or referred to in the Plan shall affect, or be construed as affecting, the terms of employment of any Participant except to the extent specifically provided. Nothing contained in the Plan or any agreement related hereto or referred to herein shall impose, or be construed as imposing, an obligation on (i) the Company or any Related Entity to continue the employment of any Participant or (ii) any Participant to remain in the employ of the Company or any Related Entity. G. Noncompetition. Any Agreement may contain, among other things, provisions prohibiting Participants from competing with the Company or any Related Entity in a form or forms acceptable to the Committee, in its sole discretion. H. Governing Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Colorado. XIV. Amendment or Termination of Plan. The Committee shall have the right to amend, modify, suspend or terminate the Plan at any time. DESCRIPTION OF SEPARATION This Plan is effective only upon consummation of the separation of U S WEST, Inc. ("Old U S WEST") into two independent companies (the "Separation"). Old U S WEST currently conducts its business through two groups, the U S WEST Communications Group and the U S WEST Media Group. Upon consummation of the Separation, USW-C, Inc. (to be renamed "U S WEST, Inc." at Separation and referred to in this Prospectus as "U S WEST" or the Company) will become a separately-traded company and will conduct the business of the U S WEST Communications Group and the domestic directories business of the U S WEST Media Group. The Separation is expected to occur in June of 1998. EX-10 5 DEFERRED COMPENSATION PLAN EXHIBIT 10(m) U S WEST DEFERRED COMPENSATION PLAN Amended and Restated Effective as of June 12, 1998
TABLE OF CONTENTS Page PREAMBLE 1 ARTICLE I DEFINITIONS 1 ARTICLE II PARTICIPATION 3 Section 2.1 Eligibility to Participate 3 Section 2.2 Election of Deferred Compensation 3 Section 2.3 Participants' Accounts 4 ARTICLE III DEFERRED ACCOUNTS 4 Section 3.1 Crediting of Deferrals--Cash Account 4 Section 3.2 Crediting of Deferrals--Company Shares Account 4 Section 3.3 Transferring Shares Between Accounts 4 Section 3.4 Dividends on Company Shares Accounts 4 Section 3.5 Cash Account 4 Section 3.6 Change in Outstanding Shares 5 ARTICLE IV MATCHING COMPANY CONTRIBUTIONS 5 Section 4.1 Funds Eligible for Company Match 5 Section 4.2 Forfeiture of Company Match 5 Section 4.3 Company Match Investment 5 ARTICLE V DISTRIBUTION 5 Section 5.1 Timing of Distribution 5 Section 5.2 Form of Distribution 6 Section 5.3 Automatic Lump Sum Distribution 6 Section 5.4 Distribution to Beneficiaries 6 Section 5.5 Unforeseeable Emergency 7 ARTICLE VI CHANGE IN CONTROL 7 Section 6.1 Change in Control 7 Section 6.2 Change in Control Defined 8 ARTICLE VII MISCELLANEOUS 9 Section 7.1 Satisfaction of Interests 9 Section 7.2 Inalienability of Benefits 9 Section 7.3 Effect on Employment 9 Section 7.4 Taxation 9 Section 7.5 Amendment or Termination 10 Section 7.6 Binding Effect 10 Section 7.7 Status of Participants 10 Section 7.8 Governing Law 10 Section 7.9 Federal Securities Law 10 ARTICLE VIII CLAIMS PROCEDURE 11 Section 8.1 Disputes 11 Section 8.2 Submission of Claims 11 Section 8.3 Denial of Claim 11 Section 8.4 Adequate Notice 11 Section 8.5 Review of Claim 11 Section 8.6 Decision on Claim 11 SIGNATURE PAGE 12
U S WEST DEFERRED COMPENSATION PLAN PREAMBLE U S WEST, Inc. maintains the U S WEST Deferred Compensation Plan (the "Plan") to permit Eligible Employees, and New Executives to defer a portion of their compensation and to provide a "matching credit" with respect to all or a portion of such deferred compensation. As of the Separation Time, U S WEST, Inc. and the Plan shall have no liability for benefits accrued under the Plan by individuals who participated in the Plan prior to the Separation Time but who are employees of MediaOne Group, Inc. at the Separation Time; MediaOne Group, Inc. and the MediaOne Group Deferred Compensation Plan shall assume all such liabilities. The Plan is intended to be a nonqualified deferred compensation "top-hat" plan for "a select group of management or highly compensated employees," as that phrase is used in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This amended and restated Plan is effective as of the Separation Time. ARTICLE I DEFINITIONS 1.1 "Administrator" means the Vice President-Law and Human Resources of the Company or his or her delegate (or, in the event the Plan benefits of the Vice President-Law and Corporate Human Resources are directly or indirectly impacted by any claim for benefits, the Executive Vice President-Public Policy, Human Resources and Law or his or her delegate). 1.2 "Board of Directors" means the Board of Directors of the Company. 1.3 "Code" means the Internal Revenue Code of 1986, as amended. 1.4 "Committee" means the Human Resources Committee of the Board of Directors of U S WEST, Inc. or its delegate. 1.5 "Company" means (a) after the Separation Time, U S WEST, Inc., a Delaware corporation formerly named USW-C, Inc. and, (b) prior to the Separation Time, U S WEST, Inc. "Company" shall also include any successor company and any adopting subsidiaries approved by U S WEST, Inc. or its successor. 1.6 "Deferred Compensation" means Eligible Compensation deferred under the Plan, reduced by any taxes deducted in accordance with Section 7.5. 1.7 "Eligible Compensation" means (a) any award payable under an annual incentive program, including a team award and an STIP and (b) at the election of the Participant, either (i) Excluded Compensation, or (ii) Pay (as defined in the Savings Plan) earned by a Participant during a Plan Year after the Participant has contributed to the Savings Plan the maximum pre-tax contribution permitted under section 402(g) of the Code. 1.8 "Eligible Employee" means any management or highly compensated employee of the Company solicited by the Administrator in his or her sole discretion. 1.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.10 "Excluded Compensation" means that part of a Participant's Pay (as defined in the Savings Plan) earned from the Company that exceeds the dollar limit in effect during the Plan Year under section 401(a)(17) of the Code. 1.11 "New Executive" means an Eligible Employee who has not met the minimum service requirements of the Savings Plan and any individual who, during the Plan Year, is promoted to a key executive or managerial position. 1.12 "Participant" means an Eligible Employee who has elected to participate in the Plan. 1.13 "Pension Plan" means the U S WEST Pension Plan, as amended from time to time. 1.14 "Plan" means this U S WEST Deferred Compensation Plan, as amended from time to time. 1.15 "Plan Year" means the calendar year. 1.16 "Savings Plan" means the U S WEST Savings Plan/ESOP, as amended from time to time. 1.17 "Separation Time" means the time at which U S WEST, Inc., a Delaware corporation, ("Old U S WEST") is separated into two separate public companies, USW-C, Inc., renamed U S WEST, Inc. as of the Separation Time (the "Company") and MediaOne Group, Inc. 1.18 "STIP" means any senior management short term incentive award, including any award under the Short Term Incentive Plan and the Executive Short Term Incentive Plan maintained by the Company. ARTICLE II PARTICIPATION 2.1 Eligibility to Participate. Participation in the Plan shall be limited to Eligible Employees who are chosen to participate in the Plan by the Administrator in his or her sole discretion. 2.2 Election of Deferred Compensation. Participants shall make irrevocable Deferred Compensation elections in such form as is specified by the Company. A Deferred Compensation election shall apply only to Eligible Compensation earned during the Plan Year specified in the election, and shall specify the whole percentage to be deferred, up to 75%, of Eligible Compensation other than an STIP and the whole percentage, up to 100%, net of required withholding taxes, of any STIP. Deferred Compensation elections shall be made prior to the last day of the Plan Year preceding the Plan Year in which the services for which the compensation is payable are performed or, if earlier, prior to the close of the enrollment period specified by the Administrator. Compensation shall actually be deferred at the time such compensation would otherwise be paid to the Participant (e.g., a deferral election regarding an annual award to be earned in 2000 must be made in 1999 and the actual deferral of such award shall be at the time the award becomes payable in 2001). Notwithstanding the foregoing, New Executives shall make Deferred Compensation elections within 30 days of the date their employment with the Company commences. Annual elections are voluntary and irrevocable as to the amount of Deferred Compensation. A Participant's initial annual election must specify the time and form of payment (pursuant to Sections 5.1 and 5.2) of such Deferred Compensation and must specify the accounts to which deferrals shall be credited. Once a Participant has specified the time and form of payment and the account to which deferrals shall be credited, such elections shall remain in effect and apply to subsequent years' Deferred Compensation until the Participant chooses different time, form and/or accounts in his or her annual election. Payments attributable to the Company match shall be distributed at the same time and in the same form as the corresponding Deferred Compensation. Subject to the limitations below, a Participant may make an additional election ("Additional Election") to change prior elections regarding the timing and form of distributions from all prior annual accounts. Such Additional Election shall be made no more often than once every five years and only with regard to prior years for which payment has not yet begun. Any such Additional Election shall be effective on the date that is six months after the date the Participant made such election, provided the Participant has been continuously employed by the Company for such six-month period. In the event a Participant requests an Additional Election within five years of the date of a previous Additional Election that has taken effect, or with respect to an account that is scheduled to be distributed or to commence distribution within 6 months of such election, such Additional Election shall be null and void. 2.3 Participants' Accounts. For every Plan Year, a separate bookkeeping account shall be maintained for each Participant. Each Participant's accounts may include the following: (a) an account treated as invested in phantom U S WEST, Inc. common stock (the "Company Shares Account"), (b) an account treated as invested in cash, ("Cash Account"), and (c) an account accumulating the Company match (the "Company Match Account"), which shall be treated as invested entirely in phantom U S WEST, Inc. common stock in a Company Shares Account. ARTICLE III DEFERRED ACCOUNTS 3.1 Crediting of Deferrals -- Cash Account. A Participant may elect that up to 50% of his or her annual Deferred Compensation be credited to the Cash Account. The Cash Account shall be merely a bookkeeping entry and shall not represent funds set aside and invested. 3.2 Crediting of Deferrals - Company Shares Account. Pursuant to a Participant's election, Deferred Compensation (unless credited to the Cash Account) shall be credited to the Participant's Company Shares Account, which shall be credited with phantom shares of U S WEST, Inc. common stock. The amounts so credited shall be converted to shares of phantom stock in accordance with standard record keeping procedures. 3.3 Transferring Shares Between Accounts. No more frequently than two times per year, or as otherwise determined by the Administrator, a Participant may elect to transfer all or a portion of his or her Cash Account to his or her Company Shares Account. A Participant may not transfer any portion of his or her Company Shares Account to his or her Cash Account unless the Participant is no longer employed by the Company. 3.4 Dividends on Company Shares Accounts. Participants shall be credited dividend payments on the phantom stock held in their Company Shares Accounts if, and to the extent, a dividend is paid by the Company on its common stock. The amount credited shall be credited in shares of phantom stock and shall be calculated by multiplying the number of phantom shares held in the Participant's Company Shares Accounts by the dividend payable per share of Company common stock. 3.5 Cash Account. Deferred Compensation that is credited to a Participant's Cash Account shall be credited with additional amounts representing earnings from the date the Deferred Compensation is credited to the Participant's Cash Account. The crediting rate for such earnings shall be determined at the beginning of each quarter and shall be based on 10-year U.S. Treasury note rates plus 1% for deferrals credited after December 31, 1990 (DC-T Plus One). Deferrals made to Cash Accounts prior to 1991 shall be credited with interest based on 10-year U.S. Treasury note rates plus 2% (DC-T Plus Two). 3.6 Change in Outstanding Shares. In the event of any change in outstanding U S WEST, Inc. shares by reason of any stock dividend or split, recapitalization, merger, consolidation or exchange of shares or other similar corporate change, the Board of Directors or its delegate shall make such adjustments, if any, that it deems appropriate in the number of phantom shares then credited to the Participant's accounts. Any and all such adjustments shall be conclusive and binding upon all parties concerned. ARTICLE IV MATCHING COMPANY CONTRIBUTIONS 4.1 Funds Eligible for Company Match. A Participant shall receive matching contribution credits on his or her Deferred Compensation in accordance with the matching formula, if any, applicable to such Participant under the provisions of the Savings Plan, as if such Deferred Compensation had been contributed to the Savings Plan. If a Participant contributes to both the Savings Plan and the Plan, deferrals under the Plan shall receive matching contributions credits only to the extent that the Participant has elected a contribution percentage under the Savings Plan that is less than the maximum percentage eligible for Company match under the Savings Plan. Annual incentive awards shall be eligible for a match without regard to whether the Participant is employed by the Company on the date such award is paid. 4.2 Forfeiture of Company Match. Subject to Article 6, a Participant's Company matching contribution credits and the earnings thereon shall be subject to forfeiture unless and until the Participant is vested in the Company match in the Savings Plan. 4.3 Company Match Investment. The Company's matching contribution credits shall be credited to the Participant's Company Match Account and shall be treated as invested in accordance with Sections 2.3 and 3.2 above. ARTICLE V DISTRIBUTION 5.1 Timing of Distribution. Benefit payments under the Plan shall commence at the time specified in the Participant's deferral election made pursuant to Section 2.2, which time may be while the Participant is employed by the Company; however, benefit payments shall commence no later than March of the Plan Year next following the earliest to occur of the following events: (a) the date that is five years after the Participant's termination of employment, (b) the Participant's 65th birthday, if the Participant is not employed by the Company on such date, or (c) the Participant's death. If the Participant fails to specify a distribution date, the Participant's benefit payments shall commence no later than March of the Plan Year next following the Plan Year in which the Participant's termination of employment occurs. Notwithstanding the preceding paragraph, in the event that the Internal Revenue Service or a court determines that amounts deferred under the Plan are currently taxable to any Participant due to the administration, operation or any provision of the Plan, the Committee shall have the discretion to cause such taxable amounts to be distributed to such Participant during the year in which such amounts are taxable or during any year thereafter. 5.2 Form of Distribution. (a) At the time a Participant makes an election to participate in the Plan, the Participant shall also make an election with respect to the form or timing of distribution of the amounts credited to such Participant's account. Such election shall be made at the same time as part of the election made in Section 2.2 above. Amounts shall be distributed in cash, provided, however that a Participant may elect to receive amounts credited to the Participant's Company Shares Accounts as shares of U S WEST, Inc. common stock. (b) A Participant may elect to receive the amount credited to such Participant's accounts: (i) in one lump sum payment, (ii) in some other whole number of approximately equal or percentage-based annual installments, not to exceed ten installments, or (iii) in a combination of a lump sum and installments; except that if the total amount credited to all of a Participant's accounts is less than $10,000 at the time benefits commence, such amount shall be distributed as a lump sum pursuant to Section 5.3. Notwithstanding the foregoing, Participants who commence a leave of absence or other assignment approved by the Company or who continue to accrue service credit with the Company following their termination of employment shall not be subject to an automatic lump sum distribution from the Plan. 5.3 Automatic Lump Sum Distribution. The entire amount credited to a Participant's account shall be paid in a single payment to the Participant in March of the Plan Year next following the Plan Year in which the Participant's termination of employment occurs if: (a) a Participant failed to specify a form of payment, (b) a Participant's balance is less than $10,000 and the Participant has not received prior payments under the Plan, or (c) a Participant becomes a proprietor, officer, partner, employee, agent, or otherwise enters into a similar relationship with a competitor or a governmental agency having jurisdiction over the activities of the Company. 5.4 Distribution to Beneficiaries. In connection with the election described in Section 5.2, a Participant may elect that if such Participant dies before full distribution of all amounts credited to his or her account, the balance of the account shall be distributed to the beneficiary or beneficiaries designated in writing by the Participant. If no such designation has been made, the balance of the account shall be distributed to the estate of the Participant. The Participant shall designate whether the distribution to the beneficiary is to be made in one payment or some other number of approximately equal installments (not exceeding 10). If the form of distribution is not specified, the distribution shall be made as a lump sum payment. The first installment (or the lump sum payment if the Participant has so elected) shall be paid no later than March of the Plan Year next following the Plan Year in which the Participant dies. 5.5 Unforeseeable Emergency. The Participant may, in writing, request early withdrawal in the event of an "unforeseeable emergency." The request should be directed to the Administrator, who may, in his or her discretion, approve an early withdrawal in an amount not to exceed the amount reasonably necessary to meet the emergency, reduced by any funds that the Administrator determines may be used by a Participant to relieve the hardship, including, but not limited to, reimbursement or compensation by insurance or otherwise, liquidation of assets (to the extent such liquidation itself would not cause severe financial hardship), or amounts realized through a cessation of deferrals under the Plan. In the case of individuals subject to Section 16 of the Exchange Act (as hereinafter defined), an early withdrawal shall be subject to the discretion of the Committee. An "unforeseeable emergency" is an unanticipated emergency that is caused by an event beyond the control of the Participant or beneficiary and that would result in severe financial hardship to the individual if early withdrawal were not permitted. "Unforeseeable emergency" includes: (a) a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent of the Participant (as defined in Code section 152(a)); (b) a loss of property due to casualty; or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the Participant's control. "Unforeseeable emergencies" shall not include college tuition or the costs of purchasing a home. ARTICLE VI CHANGE IN CONTROL 6.1 Change in Control. Upon a Change in Control (defined in Section 6.2) of the Company, the following provisions shall apply: (a) As of the Change in Control, each Participant shall be fully vested in his or her Company Match Account, regardless of vesting status under the Savings Plan. Each Participant whose service with the Company terminates after the Change in Control and before such Participant is fully vested in the Company match in the Savings Plan shall be entitled to an additional payment under this Plan equal to the amount forfeited under the Savings Plan. Such additional amount shall be payable in accordance with Article 5. (b) Each Participant in this Plan may elect no later than thirty days after the Change in Control to receive as soon as practicable following the Change in Control, a single lump sum payment equal to 94% of the value of his benefits under this Plan as of the date of the Change in Control. A Participant making such election shall permanently forfeit the remaining 6% of the value of his benefits under this Plan as of the date of the Change in Control and the Company shall have no further liability to the Participant with respect to benefits accrued under this Plan for periods prior to the Change in Control. (c) Without the written consent of each affected Participant, this Plan may not be amended during the period commencing on the date of the Change in Control and ending three years thereafter in any way that would cause a Participant to receive lower benefits under this Plan than he would have received if such amendment had not been made, including, but not limited to, amendments affecting eligibility and coverage. (d) The Company has established an irrevocable "rabbi trust" that may provide a source of funds to satisfy the Company's liability under this Plan. Upon a Change in Control, the Company shall transfer to the trustee of such trust an amount equal to the present value of all benefits under this Plan as of the date of the Change in Control. The trustee shall be a bank or other entity that may be granted corporate trustee powers under applicable law. The Company shall have no obligation to pay any benefits under this Plan to the extent such benefits are paid from such trust. 6.2 Change in Control Defined. For purposes of the Plan, a "Change in Control" shall be deemed to have occurred in the following circumstances: (a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes a beneficial owner of (or otherwise has the authority to vote), directly or indirectly, securities representing 20% or more of the total voting power of all of the Company's then outstanding voting securities, unless through a transaction arranged by, or consummated with the prior approval of the Board of Directors; (b) any period of two consecutive calendar years during which there shall cease to be a majority of the Board of Directors comprised as follows: individuals who at the beginning of such period constitute the Board of Directors and any new director(s) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; or (c) the Company becomes a party to a merger, consolidation or share exchange in which either (i) the Company shall not be the surviving corporation or (ii) the Company shall be the surviving corporation and any outstanding shares of common stock of the Company shall be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or (d) any other event that a majority of the Board of Directors, in its sole discretion, shall determine constitutes a Change of Control for all Plan Participants. ARTICLE VII MISCELLANEOUS PROVISIONS 7.1 Satisfaction of Interests. The Company may transfer assets to a trustee to be held in trust. Any trust created by the Company and any assets held by such trust to assist it in meeting its obligations under the Plan shall conform to the terms of the model trust (the "Trust"), as described in Revenue Procedure 92-64, 1992-33 I.R.B. 11, as modified, or any successor thereto. It is the intention of the Company and the Participants that the Plan be unfunded for tax purposes and for purposes of Title I of ERISA. Benefits under the Plan shall be paid from the Trust to the extent that there are sufficient assets in the Trust. However, the Company, at its discretion, may pay the benefits payable under the Plan out of its operating assets. If the assets of the Trust are not sufficient to pay the benefits under the Plan, the Company shall pay the benefits. 7.2 Inalienability of Benefits. A Participant's rights to benefit payments under the Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Participant or creditors of the Participant's beneficiary. 7.3 Effect on Employment. Nothing contained in the Plan or any agreement related hereto or referred to herein shall affect, or be construed as affecting, the terms of employment of any Participant except to the extent specifically provided herein or therein. Nothing contained in the Plan or any agreement related hereto or referred to herein shall impose, or be construed as imposing, any obligation on (a) the Company to continue the employment of any Participant and (b) any Participant to remain in the employ of the Company. 7.4 Taxation. The Company shall have the right to deduct from any deferral to be made or any distribution to be paid under the Plan any federal, state or local income and employment taxes that it is required by law to withhold. In the event that the Internal Revenue Service or a court determines that amounts deferred under the Plan are currently taxable to any Participant due to the administration, operation or any provision of the Plan, such liability shall be the sole responsibility of the Participant, and the Company shall not be liable for any such taxes. 7.5 Amendment or Termination. The Committee may at any time amend or terminate the Plan, but such amendments or termination shall not adversely affect the rights of any Participant to any accrued vested benefit under the Plan prior to the effective date of such amendment or termination without his or her consent. The Administrator or his or her delegate shall be authorized to make minor or administrative amendments to the Plan. Participants' account balances shall be frozen upon termination of the Plan, and any assets held in trust pursuant to Section 7.1 in excess of the amount required to pay benefits under the Plan shall be paid to the Company. 7.6 Binding Effect. The Plan and all benefits payable hereunder shall be binding upon and inure to the benefit of the Company, its successors and assigns and the Participant and his or her heirs, executors, administrators and legal representatives. 7.7 Status of Participants. Participants and beneficiaries shall have the status of unsecured creditors of the Company. The Plan constitutes a mere promise by the Company to make benefit payments in the future. No Participant or beneficiary shall have any preferred claim on, or any beneficial ownership interest in, any assets of any trust established in connection with the Plan pursuant to Section 7.1 prior to the time such assets are paid to the Participant or beneficiary. All rights created under the Plan and any trust shall be mere unsecured contractual, but enforceable rights of the Participants and beneficiaries against the Company. The rights under the Plan and assets in the trust, if any, shall not be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge by any Participant or beneficiary, and any attempt to do so shall be null and void. 7.8 Governing Law. The Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Colorado. 7.9 Federal Securities Law. With respect to individuals subject to Section 16 of the Exchange Act, the Company intends that the provisions of this Plan and all transactions effected in accordance with the Plan shall comply with Rule 16b-3 under the Exchange Act. Accordingly, notwithstanding any other provision set forth in this Plan, the Administrator shall administer and interpret the Plan to maintain compliance with such rule. ARTICLE VIII CLAIMS PROCEDURE 8.1 Disputes. All disputes concerning benefits under this Plan shall be subject to this Article VIII. 8.2 Submission of Claims. Claims must be submitted in writing and presented to the Administrator, who shall have full and absolute discretion to interpret the provisions of the Plan. 8.3 Denial of Claim. If a claim is denied, notice of denial shall be furnished by the Administrator to the claimant within 90 days after the receipt of the claim by the Administrator, unless special circumstances require an extension of the time for processing the claim, in which event notification of extension shall be provided to the Participant or the beneficiary. The extension shall not exceed 90 days. 8.4 Adequate Notice. The Administrator shall provide adequate notice, in writing, to any claimant whose claim has been denied, setting forth the specific reasons for such denial, specific reference to pertinent Plan provisions, a description of any additional material or information necessary for the claimant to perfect his or her claim and an explanation of why such material or information is necessary, all written in a manner calculated to be understood by the claimant. Such notice shall include appropriate information as to the steps to be taken if the claimant wishes to submit his or her claim for review. The claimant or the claimant's authorized representative may request such a review upon written application. The claimant may review pertinent documents and may submit issues or comments in writing. The claimant or the claimant's duly authorized representative must request such review within the reasonable period of time prescribed by the Administrator. In no event shall such a period of time be less than 60 days. 8.5 Review of Claim. The Administrator shall serve as the final review committee, under the Plan, ERISA, and the Code, for the review of all claims by Participants whose initial claims for benefits have been denied, in whole or in part, by the Company. The Administrator shall have the authority to interpret the provisions of the Plan in his or her full and absolute discretion. 8.6 Decision on Claim. A decision on review shall be rendered within 60 days after the receipt of the request for review by the Administrator. If special circumstances require a further extension of time for processing, a decision shall be rendered not later than 120 days following the Administrator's receipt of the request for the review. If such an extension of time of review is required, written notice of the extension shall be furnished to the claimant. The decision of the Administrator shall be furnished to the claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the claimant, as well as specific references to the pertinent Plan provisions on which the decision is based. The decision of the Administrator shall be final and binding. Executed this 12th day of June, 1998 U S WEST, INC. (formerly U S WEST-C, Inc.) /S/ ANTONIA D. OZEROFF By________________________________________ Its Vice President-Law and Corporate Human Resources and Assistant Secretary EX-10 6 1998 U S WEST STOCK PLAN EXHIBIT 10(n) 1998 U S WEST STOCK PLAN as amended June 22, 1998 I. Purpose. This 1998 U S WEST Stock Plan (the "Plan"), is intended to promote the long term success of U S WEST, Inc. (the "Company") by affording certain eligible employees, executive officers, non-employee directors of the Company and its Subsidiaries (as defined below) and certain outside consultants or advisors to the Company and its affiliates with an opportunity to acquire a proprietary interest in the Company, in order to incentivize such persons and to align the financial interests of such persons with the stockholders of the Company. This Plan became effective upon consummation of the Separation (defined below). II. Definitions. The following defined terms are used in the Plan: A. "Agreement" shall mean the agreement or grant letter accepted by the Participant as described in Section VIII of the Plan between the Company and a Participant under which the Participant receives an Award pursuant to this Plan. B. "Award" shall mean individually, collectively or in tandem, an incentive award granted under the Plan, whether in the form of Options, SARs, Stock Awards or Phantom Units. C. "Board" or "Board of Directors" shall mean the Board of Directors of the Company. D. "Change of Control" shall mean any of the following: 1. any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) who is or becomes a beneficial owner of (or otherwise has the authority to vote), directly or indirectly, securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities, unless through a transaction arranged by, or consummated with the prior approval of the Board of Directors; or 2. any period of two (2) consecutive calendar years during which there shall cease to be a majority of the Board of Directors comprised as follows: individuals who at the beginning of such period constitute the Board of Directors and any new director(s) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; or 3. the Company becomes a party to a merger or consolidation in which either (i) the Company will not be the surviving corporation or (ii) the Company will be the surviving corporation and any outstanding shares of Common Stock of the Company will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or 4. any other event that a majority of the Board of Directors, in its sole discretion, shall determine constitutes a Change of Control. E. "Code" shall mean the Internal Revenue Code of 1986, as amended. F. "Committee" shall mean the Human Resources Committee or the Employee Benefits Committee or their delegates, as applicable, pursuant to provisions of Section III of the Plan. G. "Common Stock" shall mean the common stock, $.01 par value, of the Company. H. "Company" shall mean U S WEST, Inc., a Delaware corporation (previously known as "USW-C, Inc."), and any successor thereof. I. "Director Compensation" shall mean all cash or stock remuneration payable to an Outside Director for service to the Company as a director, other than reimbursement for expenses or Common Stock received upon exercise of an Option, and shall include retainer fees for service on, and fees for attendance at meetings of, the Board and any committees thereof. J. "Disabled" or "Disability" shall mean long-term disability as determined under the provisions of any U S WEST disability plan maintained for the benefit of eligible employees of the Company or any Related Entity, provided, however, that in the case of an Incentive Option, "disability" shall have the meaning specified in Section 22(e)(3) of the Code. K. "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) and its successor promulgated under the Exchange Act. L. "Dividend Equivalent Rights" shall mean the right to receive the amount of any dividends that are paid on an equivalent number of shares of Common Stock underlying an Option or Phantom Unit, which shall be payable either in cash or in the form of additional Phantom Units or Stock. M. "Effective Date" shall mean the later of the date of the Separation or the date on which the Plan was approved by the stockholders of the Company. N. "Eligible Employee" shall mean any employee of the Company or any Related Entity who is so employed on the date of the grant of an Award. O. "Eligible Non-Employee" shall mean any consultant or advisor to the Company or any Related Entity, including any member of the State Executive Board(s) of the Company or any Related Entity that the Committee selects to receive an Award. P. "Employee Benefits Committee" shall mean a committee of the Company consisting of employees of the Company or any Related Entity appointed by the Human Resources Committee and which shall administer the Plan as provided in Section III hereof. Q. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. R. "Executive Officers" shall mean any Officer of the Company or any Related Entity who, at the time of an Award, is subject to the reporting requirements of Section 16(a) of the Exchange Act. S. "Fair Market Value" shall mean the closing price of a share of Common Stock as reported on the New York Stock Exchange for the applicable date, or if there were no sales on such date, on the last day on which there were sales. T. "Human Resources Committee" shall mean the human resources committee of the Board or any other committee of the Board appointed by the Board to administer the Plan in lieu of the Human Resources Committee, which committee shall consist of no fewer than three (3) persons, each of whom shall be a Disinterested Person. U. "Incentive Option" shall mean an incentive stock option under the provisions of Section 422 of the Code. V.(1) "Indexed" shall mean the periodic adjustment of an Option Price based upon adjustment criteria determined by the Committee, but in no event shall the Option Price be adjusted to an amount less than the original Option Price. V.(2). "Initial Grant Date" shall mean the later of (i) June 22, 1998, or (ii) the date on which a new Outside Director is elected to the Board. W. "Nonqualified Option" shall mean an Option which does not qualify under Section 422 of the Code. X. "Officer" shall mean any executive of the Company or any Related Entity who participates in the Company's executive compensation programs. Y. "Option" shall mean an option granted by the Company to purchase Common Stock pursuant to the provisions of this Plan, including Incentive Options, Nonqualified Options and Reload Options. Z. "Optionee" shall mean a Participant to whom one or more Options have been granted. AA. "Option Price" shall mean the price per share payable to the Company for shares of Common Stock upon the exercise of an Option. AB. "Outside Director" shall mean an individual not employed by the Company or any Related Entity and who serves on the Board. AC. "Parent Corporation" shall mean any corporation within the meaning of Section 424(e) of the Code. AD. "Participant" shall mean an Eligible Employee, Eligible Non- Employee, Executive Officer or Outside Director who is granted an Award. AE. "Phantom Unit" shall mean a notional account representing a value equivalent to one share of Common Stock on the Award date. AF. "Plan" shall mean the 1998 U S WEST Stock Plan. AG. "Related Entity" shall mean any Parent Corporation or Subsidiary of the Company. AH. "Reload Option" shall mean the right to receive a further Option for a number of shares equal to the number of shares of Common Stock surrendered by the Optionee upon exercise of the original Option as provided in Section IX.E of the Plan. AI. "Restricted Period" shall mean the period of time from the date of grant of Restricted Stock until the lapse of restrictions attached thereto under the terms of the Agreement granting such Restricted Stock, pursuant to the provisions of the Plan or by action of the Committee. AJ. "Restricted Stock" shall mean an Award made by the Committee entitling the Participant to acquire, at no cost or for a purchase price determined by the Committee at the time of grant, shares of Common Stock which are subject to restrictions in accordance with the provisions of Section XII hereof. AK. "Retirement" shall mean with respect to any Eligible Employee, that such person has terminated employment with the Company or any Related Entity other than "for cause" (as defined in subsection IX.H.(v)) and (i) such person is eligible to receive an immediate service pension benefit under the U S WEST Pension Plan, or (ii) such person would be eligible to receive an immediate service pension under the U S WEST Pension Plan, as amended and restated effective January 1, 1993, had that plan not been amended and restated effective January 1, 1997, or (iii) such person specifically is treated as "retired" for purposes of the Plan under any individually negotiated, custom, written agreement or arrangement between the Company or any Related Entity and the Eligible Employee. "Retirement" shall not apply to any Eligible Non-Employee. AL. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. AM. "Separation" shall mean the separation of U S WEST Communications Group and U S WEST Media Group into two separate companies pursuant to the terms of the Separation Agreement between the Company and MediaOne Group, Inc. (previously known as "U S WEST, Inc."). AN. "Stock Appreciation Right" or "SAR" shall mean a grant entitling the Participant to receive an amount in cash or shares of Common Stock or a combination thereof having a value equal to (or if the Committee shall so determine at the time of a grant, less than) the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Fair Market Value of a share of Common Stock on the date of grant (or over the Option Price, if the Stock Appreciation Right was granted in tandem with an Option) multiplied by the number of shares with respect to which the Stock Appreciation Right shall have been exercised, with the Committee having sole discretion to determine the form or forms of payment at the time of grant of the SAR. AO. "Stock Awards" shall mean any Award which is in the form of Restricted Stock and any outright grants of Common Stock approved by the Committee pursuant to the Plan. AP. "Subsidiary" shall mean with respect to any Award other than an Incentive Option, any corporation, joint venture or partnership in which the Company owns, directly or indirectly, (i) with respect to a corporation, stock possessing twenty percent (20%) or more of the total combined voting power of all classes of stock in the corporation or (ii) in the case of a joint venture or partnership, the Company possesses a twenty percent (20%) interest in the capital or profits of such joint venture or partnership. In the case of any Incentive Option, Subsidiary shall mean any corporation within the meaning of Section 424(f) of the Code. AQ. "Vested" shall mean the status that results with respect to an Option or other Award which may be immediately exercised under the terms of the Agreement granting such Option or other Award, pursuant to the provisions of the Plan or by action of the Committee. III. Administration. A. The Plan shall be administered by the Human Resources Committee with respect to Officers, Executive Officers and Outside Directors and by the Employee Benefits Committee with respect to all other Eligible Employees and Eligible Non-Employees. The Human Resources Committee may adopt such rules, regulations and guidelines as it determines necessary for the administration of the Plan. Subject to any such rules, regulations and guidelines adopted by the Human Resources Committee, the Employee Benefits Committee shall have the power to adopt rules, regulations and guidelines to permit such Committee to administer the Plan with respect to Eligible Employees (other than Officers and Executive Officers) and with respect to Eligible Non-Employees. B. The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company or such Related Entity whose employees have benefited from the Plan, as determined by the Committee. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company or a Related Entity against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's gross negligence or willful misconduct. C. In furtherance of and not in limitation of the Committee's discretionary authority, subject to the provisions of the Plan, the Committee shall have the authority to: 1. determine the Participants to whom Awards shall be granted and the number of and terms and conditions upon which Awards shall be granted (which need not be the same for all Awards or types of Awards); 2. establish, in its sole discretion, annual or long-term financial goals of the Company, Related Entity, or division, department, or group of the Company or Related Entity, or individual goals which the Committee shall consider in granting Awards, if any; 3. determine the satisfaction of performance goals established by the Committee based upon periods of time or any combinations thereof; 4. determine the time when Awards shall be granted, the Option Price of each Option, the period(s) during which Options shall be exercisable (whether in whole or in part), the restrictions to be applicable to Awards, and the other terms and provisions of Awards; 5. modify grants of Awards pursuant to Paragraph D. of this Section III or rescind grants of Awards pursuant to Section IX.H(v), respectively; 6. provide the establishment of a procedure whereby a number of shares of Common Stock or other securities may be withheld from the total number of shares of Common Stock or other securities to be issued upon exercise of an Option, the lapse of restrictions on Restricted Stock and the vesting of Phantom Units (other than an Incentive Option) to meet the obligation of withholding for income, social security and other taxes incurred by a Participant upon such exercise or required to be withheld by the Company in connection with such exercise; 7. adopt, modify and rescind rules and regulations and guidelines relating to the Plan; 8. adopt modifications to the Plan and procedures, as may be necessary to comply with provisions of the laws and applicable regulatory rulings of countries in which the Company or a Related Entity operates in order to assure the legality of Awards granted under the Plan to Participants who reside in such countries; 9. obtain the approval of the stockholders of the Company with respect to Awards consisting of Phantom Units or Restricted Stock; provided, however, no action shall be proposed to stockholders without the approval of the Board of Directors; and 10. make all determinations, perform all other acts, exercise all other powers and establish any other procedures determined by the Committee to be necessary, appropriate or advisable in administering the Plan and to maintain compliance with any applicable law. D. The Committee may at any time, in its sole discretion, accelerate the exercisability of any Awards and waive or amend any and all restrictions and conditions of any Awards. E. Subject to and not inconsistent with the express provisions of the Plan, the Code and Rule 16b-3 of the Exchange Act, the Committee shall have the authority to require, as a condition to the granting of any Option, SAR or other Award (to the extent applicable) to any Executive Officer of the Company or any Related Entity that the Executive Officer receiving such Option, SAR or other Award agree not to sell or otherwise dispose of such Option, SAR or other Award or Common Stock acquired pursuant to such Option, SAR or other Award (to the extent applicable) or any other "derivative security" (as defined by Rule 16a-1(c) under the Exchange Act) for a period of six (6) months following the later of (i) the date of the grant of such Option, SAR or other Award (to the extent applicable) or (ii) the date when the other Option Price of such Option, SAR or other Award is fixed, if such Option Price is not fixed at the date of grant of such Option, SAR or other Award. IV. Decisions Final. Any decision, interpretation or other action made or taken in good faith by the Committee arising out of or in connection with the Plan shall be final, binding and conclusive on the Company and all Participants and their respective heirs, executors, administrators, successors and assigns. V. Arbitration. Any agreement may contain, among other things, provisions that require arbitration of any and all disputes between a Participant and the Company or any Related Entity, in a form or forms acceptable to the Committee, in its sole discretion. VI. Duration of the Plan. The Plan shall remain in effect for a period of five (5) years from the Effective Date, unless terminated by the Board pursuant to Section XX. VII. Shares Available; Limitations. A. Up to 4,800,000 shares of Common Stock may be granted in calendar year 1998 and the maximum aggregate number of shares of Common Stock that may be granted in any other calendar year for all purposes under the Plan shall be one percent (1.0%) of the shares outstanding (excluding shares held in the Company's treasury) on the first day of such calendar year, provided, however, that in the event that fewer than the full aggregate number of shares available for issuance in any calendar year are issued in such year, the shares not issued shall be added to the shares available for issuance in any subsequent year or years. If, for any reason, any shares of Common Stock as to which Options, SARs, Restricted Stock, or Phantom Units have been granted cease to be subject to exercise or purchase hereunder (other than the exercise of SARs for cash), the underlying shares of Common Stock shall thereafter be available for grants to Participants under the Plan during any calendar year. Awards granted under the Plan may be fulfilled in accordance with the terms of the Plan with (i) authorized and unissued shares of the Common Stock or (ii) issued shares of Common Stock reacquired by the Company, in each situation, as the Board of Directors or the Committee may determine from time to time at its sole discretion. B. The maximum number of shares of Common Stock that shall be subject to the grant of an Award in any calendar year for Awards other than Options or SARs shall not exceed one-third (1/3) of the total number of shares of Common Stock subject to Awards granted under the Plan for such calendar year. C. The maximum number of shares of Common Stock with respect to which Awards may be granted to any individual Participant in any calendar year may not exceed eight hundred thousand (800,000). D. The cumulative number of shares of Common Stock that may be issued under this Plan in connection the exercise of Incentive Options shall not exceed ten million (10,000,000). VIII. Grant of Awards. A. The Committee shall determine the type or types of Award(s) to be made to each Participant. Awards may be granted singly, in combination or in tandem subject to restrictions set forth in Section IX.C for Incentive Options. The types of Awards that may be granted under the Plan are Options, with or without Reload Options, SARs, Stock Awards and Phantom Units, and with respect to Phantom Units and Restricted Stock, with or without Dividend Equivalent Rights. B. Each grant of an Award under this Plan shall be evidenced by an Agreement dated as of the date of the grant of the Award, other than Stock Awards consisting of an outright grant of shares of Common Stock. This Agreement shall set forth the terms and conditions of the Award, as may be determined by the Committee, and if the Agreement relates to the grant of an Option, shall indicate whether the Option that it evidences, is intended to be an Incentive Option or a Nonqualified Option. Each grant of an Award is conditioned upon the acceptance by the Participant of the terms of the Agreement. Unless otherwise extended by the Committee, a Participant shall have ninety (90) days from the date of the Agreement to accept its terms. IX. Options. The Committee, in its sole discretion, may grant Incentive Options or Nonqualified Options to Eligible Employees, Officers and Executive Officers and Nonqualified Options to Eligible Non-Employees. Any Options granted to a Participant under the Predecessor Plan which remain outstanding as of the Effective Date shall be governed by the terms and conditions of the Plan, except to the extent the provisions of the Plan are inconsistent with the terms of the Options granted under the Predecessor Plans, in which event the applicable provisions of the Predecessor Plans shall govern; provided, however, that in no event shall there be a modification of the terms of any Incentive Option granted under the Predecessor Plan. The terms and conditions of the Options granted under this Section IX shall be determined from time to time by the Committee, as set forth in the Agreement granting the Option, and subject to the following conditions: A. Nonqualified Options. The Option Price for each share of Common Stock issuable pursuant to a Nonqualified Option may be an amount at or above the Fair Market Value on the date such Option is granted, may be Indexed from the original Option Price and may be granted with or without Dividend Equivalent Rights; provided, however, that with respect to Nonqualified Options granted to any Executive Officer, no Dividend Equivalent Rights may be granted. B. Incentive Options. The Option Price for each share of Common Stock issuable pursuant to an Incentive Option shall not be less than one hundred percent (100%) of the Fair Market Value on the date such Option is granted and may be Indexed from the original Option Price. C. Incentive Options; Special Rules. Options granted in the form of Incentive Options shall be subject to the following provisions: 1. Grant. No Incentive Option shall be granted pursuant to this Plan more than ten (10) years after the Effective Date. 2. Annual Limit. The aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Common Stock with respect to which one or more Incentive Options are exercisable for the first time by any Optionee during any calendar year under the Plan or under any other stock plan of the Company or any Related Entity shall not exceed $100,000 or such other maximum amount permitted under Section 422 of the Code. Any Option purporting to constitute an Incentive Option in excess of such limitation shall constitute a Nonqualified Option. 3. 10% Stockholder. If any Optionee to whom an Incentive Option is to be granted pursuant to the provisions of the Plan is, on the date of grant, an individual described in Section 422(b)(6) of the Code, then the following special provisions shall be applicable to the Option granted to such individual: (a) the Option Price of shares subject to such Incentive Option shall not be less than 110% of the Fair Market Value of Common Stock on the date of grant; and (b) the Option shall not have a term in excess of (5) years from the date of grant. D. Other Options. The Committee may establish rules with respect to, and may grant to Eligible Employees, Options to comply with any amendment to the Code made after the Effective Date providing for special tax benefits for stock options. E. Reload Options. Without in any way limiting the authority of the Committee to make Awards hereunder, the Committee shall have the authority to grant Reload Options. Any such Reload Option shall be subject to such other terms and conditions as the Committee may determine. Notwithstanding the above, (i) the Committee shall have the right, in its sole discretion, to withdraw a Reload Option to the extent that the grant thereof will result in any adverse accounting consequences to the Company and (ii) no additional Reload Options shall be granted upon the exercise of a Reload Option. F. Term of Option. No Option shall be exercisable after the expiration of ten (10) years from the date of grant of the Option. G. Exercise of Stock Option. Each Option shall be exercisable in one or more installments as the Committee in its sole discretion may determine at the time of the Award and as provided in the Agreement. The right to purchase shares shall be cumulative so that when the right to purchase any shares has accrued such shares or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option, subject to rules on sequential exercise for Incentive Options pursuant to Paragraph C.2. of this Section IX. The Option Price shall be payable (i) in cash or by an equivalent means acceptable to the Committee, (ii) by delivery (constructive or otherwise) to the Company of shares of Common Stock owned by the Optionee or (iii) by any combination of the above as provided in the Agreement. Shares delivered to the Company in payment of the Option Price shall be valued at the Fair Market Value on the date of the exercise of the Option. H. Vesting. The Agreement shall specify the date or dates on which the Optionee may begin to exercise all or a portion of his Option. Subsequent to such date or dates, the Option shall be deemed vested and fully exercisable. (i) Death. In the event of the death of any Optionee, all Options held by such Optionee on the date of his death shall become Vested Options and the estate of such Optionee, shall have the right, at any time and from time to time within one year after the date of death, or such other period, if any, as the Committee in its sole discretion may determine, to exercise the Options of the Optionee (but not after the earlier of the expiration date of the Option or, in the case of an Incentive Option, one (1) year from the date of death). (ii) Disability. If the employment of any Optionee is terminated because of Disability, all Options held by such Optionee on the date of his or her termination shall be retained by such Optionee, and such Options that are not yet Vested Options shall become Vested Options in accordance with the vesting schedule established at the time such Options were issued. The Optionee shall have the right to exercise Vested Options at any time and from time to time, but not after the expiration date of the Option or, in the case of Incentive Options where tax-advantaged treatment is desired, one year from the date of termination of employment. (iii) Retirement. Upon an Optionee's Retirement, all Options held by such Optionee on the date of his or her Retirement shall be retained by such Optionee, and such Options that are not yet Vested Options shall become Vested Options in accordance with the vesting schedule established at the time such Options were issued, unless the Committee, in its sole discretion, determines otherwise. Unless the Committee, in its sole discretion, determines otherwise, the Optionee shall have the right to exercise Vested Options at any time and from time to time, but not after the expiration date of the Option. In the case of Incentive Options where tax-advantaged treatment is desired, the Optionee shall have the right to exercise Vested Options three months from the date of Retirement. (iv) Other Termination. If the employment with the Company or a Related Entity of an Optionee is terminated for any reason other than for death or Disability and other than "for cause" as defined in subparagraph (v) below, such Optionee shall have the right, in the case of a Vested Option, for a period of three (3) months after the date of such termination or such longer period as determined by the Committee, to exercise any such Vested Option, but in any event not after the expiration date of any such Option. (v) Termination For Cause. Notwithstanding any other provision of the Plan to the contrary, if the Optionee's employment is terminated by the Company or any Related Entity "for cause" (as defined below), such Optionee shall immediately forfeit all rights under his Options except as to the shares of Common Stock already purchased prior to such termination. Termination "for cause" shall mean (unless another definition is agreed to in writing by the Company and the Optionee) termination by the Company because of: (a) the Optionee's willful and continued failure to substantially perform his duties (other than any such failure resulting from the Optionee's incapacity due to physical or mental impairment) after a written demand for substantial performance is delivered to the Optionee by the Company, which demand specifically identifies the manner in which the Company believes the Optionee has not substantially performed his duties, (b) the willful conduct of the Optionee which is demonstrably and materially injurious to the Company or Related Entity, monetarily or otherwise, or (c) the conviction of the Optionee for a felony by a court of competent jurisdiction. X. Foreign Options and Rights. The Committee may make Awards of Options to Eligible Employees, Officers, Executive Officers and Eligible Non-Employees who are subject to the tax laws of nations other than the United States, which Awards may have terms and conditions as determined by the Committee as necessary to comply with applicable foreign laws. The Committee may take any action which it deems advisable to obtain approval of such Option by the appropriate foreign governmental entity; provided, however, that no such Award may be granted pursuant to this Section X and no action may be taken which would result in a violation of the Exchange Act, the Code or any other applicable law. XI. Stock Appreciation Rights. The Committee shall have the authority to grant SARs to Eligible Employees, Officers, Executive Officers and Eligible Non-Employees either alone or in connection with an Option. SARs granted in connection with an Option shall be granted either at the time of grant of the Option or by amendment to the Option. SARs granted in connection with an Option shall be subject to the same terms and conditions as the related Option and shall be exercisable only at such times and to such extent as the related Option is exercisable. A SAR granted in connection with an Option may be exercised only when the Fair Market Value of the Common Stock of the Company exceeds the Option Price of the related Option. A SAR granted in connection with an Option shall entitle the Participant to surrender to the Company unexercised the related Option, or any portion thereof and to receive from the Company cash and/or shares of Common Stock equal to that number of shares of Common Stock having an aggregate value equal to the excess of (i) the Fair Market Value of one share of Common Stock on the day of the surrender of such Option over (ii) the Option Price per share of Common Stock multiplied by (iii) the number of shares of Common Stock that may be exercised under the Option, or surrendered; provided, however, that no fractional shares shall be issued. A SAR granted singly shall entitle the Participant to receive the excess of (i) the Fair Market Value of a share of Common Stock on the date of exercise over (ii) the Fair Market Value of a share of Common Stock on the date of the grant of the SAR multiplied by (iii) the number of SARs exercised. Payment of any fractional shares of Common Stock shall be made in cash. A SAR shall become a Vested Award upon (i) a Participant becoming Disabled, or (ii) the death of a Participant. XII. Restricted Stock. The Committee may, in its sole discretion, grant Restricted Stock to Eligible Employees, Eligible Non-Employees, Officers or Executive Officers subject to the provisions below. A. Restrictions. A stock certificate representing the number of shares of Restricted Stock granted shall be held in custody by the Company for the Participant's account. The Participant shall have all rights and privileges of a stockholder as to such Restricted Stock, including the right to receive dividends and the right to vote such shares, except that, subject to the provisions of Paragraph B. below, the following restrictions shall apply: (i) the Participant shall not be entitled to delivery of the certificate until the expiration of the Restricted Period; (ii) none of the shares of Restricted Stock may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period; (iii) the Participant shall, if requested by the Company, execute and deliver to the Company, a stock power endorsed in blank. The Restricted Period shall lapse upon a Participant becoming Disabled or the death of a Participant. If a Participant ceases to be an employee of the Company or a Related Entity prior to the expiration of the Restricted Period applicable to such shares, except as a result of the death or Disability of the Participant, shares of Restricted Stock still subject to restrictions shall be forfeited unless otherwise determined by the Committee, and all rights of the Participant to such shares shall terminate without further obligation on the part of the Company. Upon the forfeiture (in whole or in part) of shares of Restricted Stock, such forfeited shares shall become shares of Common Stock held in the Company's treasury without further action by the Participant. B. Terms and Conditions. The Committee shall establish the terms and conditions for Restricted Stock pursuant to Section III of the Plan, including whether any shares of Restricted Stock shall have voting rights or a right to any dividends that are declared. Terms and conditions established by the Committee need not be the same for all grants of Restricted Stock. The Committee may provide for the restrictions to lapse with respect to a portion or portions of the Restricted Stock at different times or upon the occurrence of different events, and the Committee may waive, in whole or in part, any or all restrictions applicable to a grant of Restricted Stock. Restricted Stock Awards may be issued for no cash consideration or for such minimum consideration as may be required by applicable law or such other consideration as may be determined by the Committee. C. Delivery of Restricted Shares. At the end of the Restricted Period as herein provided, a stock certificate for the number of shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered (less any shares delivered pursuant to Section XIX.C in satisfaction of any withholding tax obligation), free of all such restrictions, except applicable securities law restrictions, to the Participant or the Participant's estate, as the case may be. The Company shall not be required to deliver any fractional share of Common Stock but shall pay, in lieu thereof, the Fair Market Value (measured as of the date the restrictions lapse) of such fractional share to the Participant or the Participant's estate, as the case may be. Notwithstanding the foregoing, the Committee may authorize the delivery of the Restricted Stock to a Participant during the Restricted Period, in which event any stock certificates in respect of shares of Restricted Stock thus delivered to a Participant during the Restricted Period applicable to such shares shall bear an appropriate legend referring to the terms and conditions, including the restrictions, applicable thereto. XIII. Phantom Units. A. General. The Committee may, in its sole discretion, grant the right to earn Phantom Units to Eligible Employees, Officers, Executive Officers and Eligible Non-Employees. The Committee shall determine the criteria for the earning of Phantom Units, pursuant to Section III of the Plan. Upon satisfaction of such criteria, a Phantom Unit shall be deemed a Vested Award. A Phantom Unit granted by the Committee shall provide for payment in shares of Common Stock. A Phantom Unit shall become a Vested Award upon (i) a Participant becoming Disabled, or (ii) the death of a Participant. Shares of Common Stock issued pursuant to this Section XIII may be issued for no cash consideration or for such minimum consideration as may be required by applicable law or such other consideration as may be determined by the Committee. The Committee shall determine whether a Participant granted a Phantom Unit shall be entitled to a Dividend Equivalent Right. B. Unfunded Claim. The establishment of Phantom Units under the Plan are unfunded obligations of the Company. The interest of a Participant in any such units shall be considered a general unsecured claim against the Company to the extent that the conditions for the earning of the Phantom Units have been satisfied. Nothing contained herein shall be construed as creating a trust or fiduciary relationship between the Participant, the Company or the Committee. C. Issuance of Common Stock. Upon a Phantom Unit becoming a Vested Award, unless a Participant has elected to defer under Paragraph D. below, shares of Common Stock representing the Phantom Units shall be distributed to the Participant, unless the Committee, with the consent of the Participant, provides for the payment of the Phantom Units in cash or partly in cash and partly in shares of Common Stock equal to the value of the shares of Common Stock which would otherwise be distributed to the Participant. D. Deferral of Phantom Units. Prior to the year with respect to which a Phantom Unit may become a Vested Award, the Participant may elect not to receive Common Stock upon the vesting of such Phantom Unit and for the Company to continue to maintain the Phantom Unit on its books of account. In such event, the value of a Phantom Unit shall be payable in shares of Common Stock pursuant to the agreement of deferral. E. Financial Hardship. Notwithstanding any other provision hereof, at the written request of a Participant who has elected to defer pursuant to Paragraph D. above, the Committee, in its sole direction, upon a finding that continued deferral will result in financial hardship to the Participant, may authorize the payment of all or a part of a Participant's Vested Phantom Units in a single installment or the acceleration of payment of any multiple installments thereof; provided, however, that distributions will not be made under this paragraph if such distribution would result in liability of an Executive Officer under Section 16 of the Exchange Act. F. Distribution upon Death. The Committee shall pay the Fair Market Value of the Phantom Units of a deceased Participant to the estate of the Participant, as soon as practicable following the death of the Participant. The value of the Phantom Units for the purpose of such distribution shall be based upon the Fair Market Value of shares of Common Stock underlying the Phantom Units on the date of the Participant's death. XIV. Stock Awards to Outside Directors. Each Outside Director shall be granted a Stock Award on his or her Initial Grant Date consisting of 3,000 shares of Restricted Stock, which shall vest in 20% increments, with the first 600 shares vesting six months after the Initial Grant Date, the next 600 shares vesting one year after the Initial Grant Date, and the remaining shares vesting at a rate of 600 shares per year thereafter for the next three years. XV. Outside Director's Compensation. A. Payment in Common Stock. Each Outside Director may elect to receive payment of all or any portion of Director Compensation comprised of retainer fees for service on the Board and any committees thereof in Common Stock. The amount of Common Stock then issuable shall be based on the Fair Market Value of the Common Stock on the dates such retainer fees are otherwise due and payable to the Outside Director. When any fees are paid in Common Stock under this Section XV.A, any fractional shares of Common Stock shall be paid in cash. Certificates evidencing such Common Stock shall be delivered promptly following such date. If an Outside Director elects to receive payment of retainer fees in Common Stock as described in this Section XV.A, the election shall be (i) in writing, (ii) delivered to the Secretary of the Company at least six months in advance of the payment date, and (iii) irrevocable. B. Deferral of Payment. Each Outside Director may elect to defer the receipt of Common Stock payable pursuant to Section XV.A, in which event such Outside Director shall receive an equivalent number of Phantom Units with Dividend Equivalent Rights. Any such Phantom Units shall become Vested Awards at such time as the Outside Director no longer serves as a member of the Board. If an Outside Director elects to defer receipt of Common Stock and receive Phantom Units pursuant to this Section XV.B, the election shall be (i) in writing, (ii) delivered to the Secretary of the Company in the year preceding the year in which the Director Compensation would otherwise be paid and at least six months in advance of the date when Common Stock would otherwise be issued, and (iii) irrevocable. C. Director Stock Options. On his or her Initial Grant Date, each Outside Director shall be granted an Option to purchase thirty thousand (30,000) shares Common Stock, such Options to become Vested Options in 1/3 increments over three years, beginning one year after the Initial Grant Date. On the third anniversary of the Initial Grant Date, and each year thereafter, Outside Directors shall receive an annual grant of an Option to purchase ten thousand (10,000) shares of Common Stock, which Options shall become Vested Options one year after the date of each respective grant. Upon retirement of an Outside Director from the Board, all unvested Options shall become immediately vested and shall remain exercisable notwithstanding the retirement of the Director from the Board, until the expiration date of the Option, which shall occur ten years from the date of grant. D. Pension Replacement. After the Effective Date, no new pension benefits will be granted to Outside Directors; however, the Company will grandfather vested pension benefits accrued by Directors as of the Effective Date relating to service on the Board of U S WEST, Inc. prior to the Separation. In lieu thereof, Outside Directors shall receive a Stock Award consisting of the number of shares of Restricted Stock determined by dividing (a) the dollar amount equal to ten (10) times the amount of the annual retainer paid to Board members, by (b) the closing price on recipient's Initial Grant Date for Common Stock listed on the New York Stock Exchange as reported in the Wall Street Journal, which Stock Award shall be subject to the following vesting schedule: (i) 50% of the Stock Award shall vest five years after the recipient's Initial Grant Date, and (ii) the remainder shall vest at a rate of 10% per year thereafter for the next five years. XVI. Federal Securities Law. With respect to grants of Awards to Directors and Executive Officers, the Company intends that the provisions of this Plan and all transactions effected in accordance with Plan shall comply with Rule 16b-3 under the Exchange Act. Accordingly, the Committee shall administer and interpret the Plan to the extent practicable, to maintain compliance with such rule. XVII. Change of Control; Acceleration. Upon the occurrence of a Change of Control: A. in the case of all outstanding Options and SARs, each such Option and SAR shall automatically become immediately fully exercisable by the Participant; B. restrictions applicable to Restricted Stock shall automatically be deemed lapsed and conditions applicable to Phantom Units shall automatically be deemed waived, and the Participants who receive such grants shall become immediately entitled to receipt of the Common Stock subject to such grants; and C. the Human Resources Committee, in its discretion, shall have the right to accelerate payment of any deferrals of Vested Phantom Units. XVIII. Adjustment of Shares. A. In the event there is any change in the Common Stock by reason of any consolidation, combination, liquidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or other like change in capital structure of the Company, the number or kind of shares or interests subject to an Award and the per share price or value thereof shall be appropriately adjusted by the Committee at the time of such event, provided that each Participant's economic position with respect to the Award shall not, as a result of such adjustment, be worse than it had been immediately prior to such event. Any fractional shares or interests resulting from such adjustment shall be rounded up to the next whole share of Common Stock. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Option shall comply with the rules of Section 424(a) of the Code, and (ii) in no event shall any adjustment be made which would render any Incentive Option granted hereunder other than an "incentive stock option" for purposes of Section 422 of the Code. B. In the event of an acquisition by the Company of another corporation where the Company assumes outstanding stock options or similar obligations of such corporation, the number of Awards available under the Plan shall be appropriately increased to reflect the number of such options or other obligations assumed. XIX. Substitute Options. Options, shares of Restricted Stock and Phantom Units issued in substitution of outstanding options for U S WEST Communications Group Stock, restricted shares of U S WEST Communications Group Stock and phantom units with respect to U S WEST Communications Group Stock pursuant to the terms of the Employee Matters Agreement entered into by the Company and MediaOne Group, Inc. (previously known as "U S WEST, Inc.") shall be administered pursuant to the provisions of the Plan to the extent not inconsistent with the terms of the grant of such options, restricted stock and phantom units and such Employee Matters Agreement. XX. Miscellaneous Provisions. A. Assignment or Transfer. Except as otherwise permitted by this Section, no grant of any "derivative security" (as defined in the rules issued under Section 16 of the Exchange Act) made under the Plan or any rights or interests therein shall be assignable or transferable except by last will and testament or the laws of descent and distribution. No grant of any such derivative security shall be assignable or transferable pursuant to a domestic relations order. An Optionee who is an Officer or an Outside Director may assign or transfer an Option (other than an Incentive Option) as a gift to one or more members of his or her immediate family or to trusts maintained for the benefit of such immediate family members if such assignment or transfer is not pursuant to a domestic relations order and (i) such assignment or transfer is expressly approved in advance by the Committee or its delegate(s) or (ii) such Option was granted to the Optionee on or after August 15, 1996, and the Agreement pertaining to such Option expressly permits the assignment or transfer of the Option. B. Investment Representation; Legends. The Committee may require each Participant acquiring shares of Common Stock pursuant to an Award to represent to and agree with the Company in writing that such Participant is acquiring the shares without a view to distribution thereof. No shares of Common Stock shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange requirements have been satisfied. The Committee may require the placing of stop-orders and restrictive legends on certificates for Common Stock as it deems appropriate. C. Withholding Taxes. In the case of distributions of Common Stock or other securities hereunder, the Company, as a condition of such distribution, may require the payment (through withholding from the Participant's salary, payment of cash by the Participant, reduction of the number of shares of Common Stock or other securities to be issued (except in the case of an Incentive Option), or otherwise) of any federal, state, local or foreign taxes required by law to be withheld with respect to such distribution. D. Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any Award nor to any Participant receiving an Award. E. Other Incentive Plans. The adoption of the Plan does not preclude the adoption by appropriate means of any other incentive plan for employees. F. Effect on Employment. Nothing contained in the Plan or any agreement related hereto or referred to herein shall affect, or be construed as affecting, the terms of employment of any Participant except to the extent specifically provided herein or therein. Nothing contained in the Plan or any agreement related hereto or referred to herein shall impose, or be construed as imposing, an obligation on (i) the Company or any Related Entity to continue the employment of any Participant and (ii) any Participant to remain in the employ of the Company or any Related Entity. G. Noncompetition. Any Agreement may contain, among other things, provisions prohibiting Participants from competing with the Company or any Related Entity in a form or forms acceptable to the Committee, in its sole discretion. H. Governing Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Colorado. XXI. Amendment or Termination of Plan. The Board shall have the right to amend, modify, suspend or terminate the Plan at any time, provided that, with respect to Incentive Options, no amendment shall be made that (i) decreases the minimum Option Price in the case of any Incentive Option, or (ii) modifies the provisions of the Plan with respect to Incentive Options, unless such amendment is made by or with the approval of the stockholders or unless the Board receives an opinion of counsel to the Company that stockholder approval is not necessary with respect to any modifications relating to Incentive Options; and provided further that no amendment shall be made that (i) increases the number of shares of Common Stock that may be issued under the Plan, (ii) permits the Option Price for any Option to be less than Fair Market Value on the date such Option is granted, or (iii) extends the period during which awards may be granted under the Plan beyond five (5) years from the Effective Date, unless such amendment is made by or with the approval of stockholders. No amendment, modification, suspension or termination of the Plan shall alter or impair any Awards previously granted under the Plan, without the consent of the holder thereof. EX-12 7 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (1) (Dollars in Millions)
Quarter Ended 9/30/98 9/30/97 - ------------------------------------------ --------- -------- Income before income taxes and extraordinary item $ 608 $ 674 Interest expense (net of amounts capitalized) 172 100 Interest factor on rentals (1/3) 20 23 --------- -------- Earnings $ 800 $ 797 Interest expense $ 178 $ 104 Interest factor on rentals (1/3) 20 23 --------- -------- Fixed charges $ 198 $ 127 Ratio of earnings to fixed charges 4.04 6.28 - ------------------------------------------ --------- -------- Nine Months Ended 9/30/98 9/30/97 - ------------------------------------------ --------- -------- Income before income taxes and extraordinary item $ 1,843 $ 2,011 Interest expense (net of amounts capitalized) 378 304 Interest factor on rentals (1/3) 64 65 --------- -------- Earnings $ 2,285 $ 2,380 Interest expense $ 395 $ 319 Interest factor on rentals (1/3) 64 65 --------- -------- Fixed charges $ 459 $ 384 Ratio of earnings to fixed charges 4.98 6.20 - ------------------------------------------ --------- -------- (1) The historical ratios are based on the consolidated historical results of U S WEST and include interest expense associated with the refinancing of $3.9 billion of Dex Indebtedness from the separation date of June 12, 1998.
EX-12 8 PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 (Continued) U S WEST, INC. PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES (1) (Dollars in Millions)
Quarter Ended 9/30/98 9/30/97 - ------------------------------------------ --------- --------- Pro forma income before income taxes and extraordinary item $ 608 $ 609 Interest expense (net of amounts capitalized) 172 165 Interest factor on rentals (1/3) 20 23 --------- --------- Earnings $ 800 $ 797 Interest expense $ 178 $ 169 Interest factor on rentals (1/3) 20 23 --------- --------- Fixed charges $ 198 $ 192 Ratio of earnings to fixed charges 4.04 4.15 - ------------------------------------------ --------- --------- Nine Months Ended 9/30/98 9/30/97 - ------------------------------------------ --------- --------- Pro forma income before income taxes and extraordinary item $ 1,726 $ 1,815 Interest expense (net of amounts capitalized) 495 500 Interest factor on rentals (1/3) 64 65 --------- --------- Earnings $ 2,285 $ 2,380 Interest expense $ 512 $ 515 Interest factor on rentals (1/3) 64 65 --------- --------- Fixed charges $ 576 $ 580 Ratio of earnings to fixed charges 3.97 4.10 - ------------------------------------------ --------- --------- (1) Based on the unaudited pro forma condensed combined statements of income which give effect to the refinancing by U S WEST of the Dex Indebtedness as if such transaction had been consummated as of the beginning of each of the periods presented.
EX-27 9 FDS --
5 0001054522 U S WEST, INC. 1,000,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 JAN-01-1998 JAN-01-1998 SEP-30-1998 SEP-30-1998 22 22 0 0 1,735 1,735 0 0 248 248 2,553 2,553 34,840 34,840 20,342 20,342 18,061 18,061 5,258 5,258 7,920 7,920 0 0 0 0 0 0 625 625 18,061 18,061 3,112 9,174 3,112 9,174 0 0 0 0 2,313 6,876 0 0 172 378 608 1,843 229 703 379 1,140 0 0 0 0 0 0 379 1,140 0.76 2.32 0.75 2.30
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