-----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, HIH/CiFnKH5Rt2W18qqux35aBqtno+ku3XYtt8tN4GnwyctJ489lmeAE07gOuMJD gS6jFaHEcGOcGAZfWIKp3Q== 0001054522-99-000057.txt : 19991124 0001054522-99-000057.hdr.sgml : 19991124 ACCESSION NUMBER: 0001054522-99-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S WEST INC /DE/ CENTRAL INDEX KEY: 0001054522 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99748718 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 U S WEST INC. 3RD 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, 1999 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. (Exact name of registrant as specified in its charter)
A Delaware Corporation 84-0953188 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation of organization)
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 29, 1999, 505,306,250 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 months and nine months ended September 30, 1999 and 1998................ 3 Consolidated Balance Sheets - September 30, 1999 and December 31, 1998....................................... 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and 1998................................. 5 Notes to Consolidated Financial Statements...................................... 6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................. 16 3. Quantitative and Qualitative Disclosures About Market Risk................................................................ 26 PART II - OTHER INFORMATION 1. Legal Proceedings....................................................................... 33 2. Changes in Securities and Use of Proceeds............................................... 33 4. Submission of Matters to a Vote of Security Holders..................................... 34 5. Recent Developments..................................................................... 35 6. Exhibits and Reports on Form 8-K........................................................ 35
U S WEST, Inc. CONSOLIDATED STATEMENTS OF INCOME (dollars in millions, except per share amounts) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- Operating revenues: Local services...................................... $1,979 $1,805 $5,779 $5,291 Access services..................................... 688 660 2,057 1,996 Directory services.................................. 336 313 995 929 Long-distance services.............................. 141 202 471 606 Other services...................................... 173 132 455 352 ------------ ------------ ------------- ------------ Total operating revenues......................... 3,317 3,112 9,757 9,174 ------------ ------------ ------------- ------------ Operating expenses: Employee-related expenses........................... 1,195 1,104 3,473 3,179 Other operating expenses............................ 657 651 1,996 2,072 Depreciation and amortization....................... 588 558 1,763 1,625 ------------ ------------ ------------- ------------ Total operating expenses......................... 2,440 2,313 7,232 6,876 ------------ ------------ ------------- ------------ Operating income.......................................... 877 799 2,525 2,298 ------------ ------------ ------------- ------------ Other expense: Interest expense.................................... 203 172 519 378 Terminated merger-related expenses.................. 282 - 282 - Other (income) expense-net.......................... (4) 19 10 77 ------------ ------------ ------------- ------------ Total other expense-net.......................... 481 191 811 455 ------------ ------------ ------------- ------------ Income before income taxes................................ 396 608 1,714 1,843 Provision for income taxes................................ 257 229 757 703 ------------ ------------ ------------- ------------ Net income................................................ $139 $379 $957 $1,140 ============ ============ ============= ============ Basic earnings per share.................................. $0.28 $0.76 $1.90 $2.32 ============= =========== ============== ============ Basic average shares outstanding (in 000's)............... 504,771 501,807 504,009 491,608 ============= =========== ============== ============ Diluted earnings per share................................ $0.27 $0.75 $1.88 $2.30 ============= =========== ============== ============ Diluted average shares outstanding (in 000's)............. 509,014 505,949 508,511 495,718 ============= =========== ============== ============ Dividends per share....................................... $0.535 $0.535 $1.820 $1.605 ============= =========== ============== ============
The accompanying notes are an integral part of the consolidated financial statements.
U S WEST, Inc. CONSOLIDATED BALANCE SHEETS (dollars in millions, except share amounts) September 30, December 31, 1999 1998 ---- ---- (unaudited) ASSETS Current assets: Cash and cash equivalents....................................................... $55 $49 Accounts receivable, less allowance for uncollectibles of $77 and $69, respectively..................................................... 1,785 1,743 Inventories and supplies........................................................ 257 197 Deferred directory costs........................................................ 273 274 Deferred tax assets............................................................. 163 151 Prepaid and other............................................................... 118 78 ----------------- ----------------- Total current assets............................................................... 2,651 2,492 Property, plant and equipment-net.................................................. 15,705 14,908 Other assets-net................................................................... 2,604 1,007 ----------------- ----------------- Total assets....................................................................... $20,960 $18,407 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt................................................................. $3,379 $1,277 Accounts payable................................................................ 1,436 1,347 Accrued expenses................................................................ 1,762 1,702 Advance billings and customer deposits.......................................... 385 370 ----------------- ----------------- Total current liabilities.......................................................... 6,962 4,696 Long-term debt..................................................................... 9,754 8,642 Postretirement and other postemployment benefit obligations........................ 2,635 2,643 Deferred income taxes.............................................................. 454 786 Unamortized investment tax credits................................................. 158 159 Deferred credits and other......................................................... 845 726 Commitments and Contingencies Stockholders' equity: Preferred stock - $1.00 par value, 190,000,000 shares authorized, none issued and outstanding.............................................................. - - Series A junior preferred stock-$1.00 par value, 10,000,000 shares authorized, none issued and outstanding.................................................. - - Common stock-$0.01 par value, 2,000,000,000 shares authorized, 505,305,886 and 503,207,058 issued, 505,001,883 and 502,903,055 outstanding................. 617 532 Retained earnings............................................................... 264 223 Accumulated other comprehensive loss............................................ (729) - ----------------- ----------------- Total stockholders' equity......................................................... 152 755 ----------------- ----------------- Total liabilities and stockholders' equity......................................... $20,960 $18,407 ================= =================
The accompanying notes are an integral part of the consolidated financial statements.
U S WEST, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in millions) (unaudited) Nine Months Ended September 30, 1999 1998 ---- ---- OPERATING ACTIVITIES Net income................................................................................ $957 $1,140 Adjustments to net income: Depreciation and amortization....................................................... 1,763 1,625 Deferred income taxes and amortization of investment tax credits.................... 131 102 Changes in operating assets and liabilities: Accounts receivable................................................................. (42) (18) Inventories, supplies and other current assets...................................... (93) (49) Accounts payable, accrued expenses and advance billings............................. 155 116 Other............................................................................... 81 34 -------------- -------------- Cash provided by operating activities............................................... 2,952 2,950 -------------- -------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment......................................... (2,681) (1,937) Payments on disposals of property, plant and equipment................................. (30) (14) Investment in Global Crossing Ltd. common stock........................................ (2,464) - Other.................................................................................. (11) (57) -------------- -------------- Cash used for investing activities..................................................... (5,186) (2,008) -------------- -------------- FINANCING ACTIVITIES Net proceeds from short-term debt...................................................... 2,102 1,519 Proceeds from issuance of long-term debt............................................... 1,302 3,066 Repayments of long-term debt........................................................... (307) (411) Repayments of Old U S WEST debt in connection with the Dex Alignment................... - (3,829) Net repayments of Old U S WEST debt.................................................... - (198) Proceeds from issuance of common stock................................................. 60 60 Dividends paid on common stock......................................................... (917) (787) Dividends paid to Old U S WEST......................................................... - (194) Payment to Old U S WEST for debt refinancing costs..................................... - (140) Return of capital from Old U S WEST.................................................... - 13 Purchases of treasury stock............................................................ - (46) -------------- -------------- Cash provided by (used in) financing activities........................................ 2,240 (947) -------------- -------------- CASH AND CASH EQUIVALENTS Increase (decrease).................................................................... 6 (5) Beginning balance...................................................................... 49 27 -------------- -------------- Ending balance......................................................................... $55 $22 ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the nine months ended September 30, 1999 (dollars in millions, except per share amounts) (unaudited) NOTE 1: U S WEST SEPARATION On June 12, 1998, our former parent company ("Old U S WEST"), separated into two independent companies (the "Separation"). Old U S WEST conducted its businesses through two groups: (i) the U S WEST Communications Group (the "Communications Group"), which included the communications businesses of Old U S WEST, and (ii) the U S WEST Media Group (the "Media Group"), which included the multimedia and directories businesses of Old U S WEST. As part of the Separation, Old U S WEST contributed to us the businesses of the Communications Group and the domestic directories business of the Media Group known as U S WEST Dex, Inc. ("Dex"). The alignment of Dex with U S WEST, Inc. (the "Company" or "U S WEST") is referred to in this document as the "Dex Alignment." Old U S WEST continues to operate as an independent public company comprised of the businesses of Media Group other than Dex and has been renamed MediaOne Group, Inc. In connection with the Dex Alignment, (i) Old U S WEST distributed to holders of Media Group common stock, approximately 16,341,000 shares of our common stock (net of the redemption of approximately 305,000 fractional shares) with an aggregate of $850 in value (the "Dex Dividend") and (ii) we refinanced $3,900 of Old U S WEST debt (the "Dex Indebtedness"), formerly allocated to Media Group. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The consolidated financial statements include the consolidated results of operations, financial position 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 financial effects of the Separation and the Dex Alignment, including interest expense associated with refinancing the Dex Indebtedness and the dilutive effect of the Dex Dividend, are not reflected in the accompanying consolidated statements of income prior to the Separation. For periods prior to the Separation, the consolidated financial statements include an allocation of certain costs, expenses, assets and liabilities from Old U S WEST. We believe the allocations were reasonable; however the amount of costs allocated to us were not necessarily indicative of the costs we would have incurred if we had operated as a stand-alone company. The consolidated financial statements may not reflect the future financial position, results of operations or cash flows or what they would have been had we operated as a separate, stand-alone company during such periods. The consolidated interim financial statements are unaudited. We prepared the financial statements in accordance with the instructions for Form 10-Q and therefore, did not include all information and footnotes required by generally accepted accounting principles. In our opinion, we made all the adjustments (consisting only of normal recurring adjustments) necessary to fairly present our consolidated results of operations, financial position and cash flows as of September 30, 1999 and for all periods presented. The financial statements are subject to year-end audit adjustment. A description of our accounting policies and other financial information are included in the audited consolidated financial statements filed with the Securities and Exchange Commission in our Form 10-K/A for the year ended December 31, 1998. The consolidated results of operations for the three and nine months ended September 30, 1999 are not necessarily indicative of the results expected for the full year. We reclassified prior period revenue amounts to conform to the current year presentation. For a description of the reclassifications, see our Form 8-K filed April 21, 1999. On January 1, 1999, we adopted the accounting provisions required by the American Institute of Certified Public Accountants' Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1, among other things, requires that certain costs of internal use software, whether purchased or developed internally, be capitalized and amortized over the estimated useful life of the software. Adoption of the SOP resulted in an increase in net income for the three months ended September 30, 1999 of $42, or $0.08 per diluted share and $141, or $0.28 per diluted share for the nine months ended September 30, 1999. We expect that the impact for fiscal year 1999 will be to increase net income by approximately $150 to $180 or $0.30 to $0.35 per diluted share. NOTE 3: EARNINGS PER SHARE The following table is a reconciliation of basic weighted average shares to diluted weighted average shares (shares in thousands):
Three Months Nine Months Ended September 30, Ended September 30, --------------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Basic weighted average shares outstanding....... 504,771 501,807 504,009 491,608 Dilutive effect of stock options................ 4,243 4,142 4,502 4,110 -------------- ------------- ------------- ----------- Diluted weighted average shares outstanding..... 509,014 505,949 508,511 495,718 ============== ============= ============= ===========
Certain of the financial effects of the Separation and the Dex Alignment, including interest expense associated with the refinancing of the Dex Indebtedness and dilutive effects of the Dex Dividend, are not reflected in the consolidated statements of income prior to the Separation. The following presents earnings per share for the nine months ended September 30, 1998 on a pro forma basis. The pro forma earnings per share amounts give effect to the Dex Indebtedness and issuance of approximately 16,341,000 shares (net of the redemption of 305,000 fractional shares) of common stock in connection with the Dex Alignment as if such transactions had been consummated as of January 1, 1998 (shares in thousands).
Basic Earnings Per Share Net income....................................... $1,140 Pro forma adjustment(1).......................... (72) ----------------- Pro forma net income............................. $1,068 ================= Basic weighted average shares(2)................. 491,608 Pro forma adjustment(3).......................... 9,937 ----------------- Pro forma basic weighted average shares.......... 501,545 ================= Pro forma basic earnings per share............... $2.13 ================= Diluted Earnings Per Share - - -------------------------- Net income....................................... $1,140 Pro forma adjustment(1).......................... (72) ----------------- Pro forma net income............................. $1,068 ================= Diluted weighted average shares(2)............... 495,718 Pro forma adjustment(3).......................... 9,937 ----------------- Pro forma diluted weighted average shares........ 505,655 ================= Pro forma diluted earnings per share............. $2.11 ================= (1) Reflects incremental (after-tax) interest expense associated with the Dex Indebtedness. (2) 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. (3) Reflects the issuance of approximately 16,341 shares of common stock (net of the redemption of approximately 305 fractional shares) issued in connection with the Dex Alignment as if the shares were issued at the beginning of the period.
NOTE 4: SEGMENT INFORMATION We operate in four segments: retail services, wholesale services, network services and directory services. The retail services segment provides local telephone services, including wireless, data and long-distance services. The wholesale services segment provides access services that connect customers to the facilities of interexchange carriers and interconnection to our telecommunications network to competitive local exchange carriers. Our network services segment provides access to our telecommunications network, including our information technologies, primarily to our retail services and wholesale services segments. The directory services segment publishes White and Yellow Pages telephone directories, provides electronic directory and other information services. We provide our services to more than 25 million residential and business customers in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Following is a breakout of our segments. Because significant operating expenses of the retail services and wholesale services segments are not allocated to the segments for decision-making purposes, management does not believe the segment margins are representative of the actual operating results of the segments. The margins for the retail services and wholesale services segments exclude network and corporate expenses. The margins for the network and directory services segment exclude corporate expenses. The "other" category includes our corporate expenses and intersegment eliminations.
Total Communications and Retail Wholesale Network Related Directory Reconciling Consolidated Services Services Services Services Services Other Items Total -------- -------- -------- -------- -------- ----- ----- ----- Three Months Ended September 30, 1999 - - ---- Operating revenues..... $2,270 $725 $63 $3,058 $338 $- ($79) (1) $3,317 Margin....... 1,560 549 (699) 1,410 190 (34) (1,170) (2) 396 Assets....... -(3) -(3) -(3) -(3) 546 -(3) 20,414(3) 20,960 Capital expenditures. 144(4) 25 877 1,046 10 (5) - 1,051 1998 - - ---- Operating revenues..... $2,157 $643 $51 $2,851 $316 $- ($55) (1) $3,112 Margin....... 1,554 464 (726) 1,292 160 (11) (833)(2) 608 Assets....... -(3) -(3) -(3) -(3) 518 -(3) 17,543(3) 18,061 Capital expenditures. 49(4) - 507 556 6 27 - 589 - - ----------------------- (1) Represents primarily intersegment charges. (2) Adjustments made to arrive at consolidated income before income taxes include the following:
Three Months Ended September 30, ------------------------------------------ 1999 1998 ------------------- ------------------- Costs and adjustments excluded from segment data but included in the consolidated total: Taxes other than income taxes................................... $101 $84 Depreciation and amortization................................... 588 558 Interest expense................................................ 203 172 Terminated merger-related expenses.............................. 282 - Other (income) expense-net...................................... (4) 19 ------------------- ------------------- $1,170 $833 =================== =================== (3) We do not provide a breakout of assets for all segments to our chief operating decision-maker. The reconciling items column represents the amount to reconcile to the consolidated total. (4) Capital expenditures reported for the retail services segment include only expenditures for wireless services and certain data services. Additional capital expenditures relating to those services are included in network services capital expenditures.
Total Communications and Retail Wholesale Network Related Directory Reconciling Consolidated Services Services Services Services Services Other Items Total -------- -------- -------- -------- -------- ----- ----- ----- Nine Months Ended September 30, 1999 ---- Operating revenues......... $6,660 $2,134 $178 $8,972 $1,002 $- ($217) (1) $9,757 Margin........... 4,607 1,604 (2,083) 4,128 530 (70) (2,874) (2) 1,714 Assets........... -(3) -(3) -(3) -(3) 546 -(3) 20,414(3) 20,960 Capital expenditures..... 348(4) 65 2,346 2,759 27 33 - 2,819 1998 ---- Operating revenues......... $6,337 $1,916 $150 $8,403 $936 $- ($165)(1) $9,174 Margin........... 4,662 1,423 (2,031) 4,054 472 (199) (2,484) (2) 1,843 Assets........... -(3) -(3) -(3) -(3) 518 -(3) 17,543(3) 18,061 Capital expenditures..... 286(4) - 1,539 1,825 27 68 - 1,920 (1) Represents primarily intersegment charges. (2) Adjustments made to arrive at consolidated income before income taxes include the following:
Nine Months Ended September 30, ------------------------------------------ 1999 1998 ------------------- ------------------- Costs and adjustments excluded from segment data but included in the consolidated total: Restructuring costs............................................. $- $129 Taxes other than income taxes................................... 300 275 Interest expense................................................ 519 378 Depreciation and amortization................................... 1,763 1,625 Terminated merger-related expenses.............................. 282 - Other expense-net............................................... 10 77 ------------------- ------------------- $2,874 $2,484 =================== =================== (3) We do not provide a breakout of assets for all segments to our chief operating decision-maker. The reconciling items column represents the amount to reconcile to the consolidated total. (4) Capital expenditures reported for the retail services segment include only expenditures for wireless services and certain data services. Additional capital expenditures relating to those services are included in network services capital expenditures.
In addition to the operating revenues disclosed above, intersegment operating revenues of the retail services, network services and directory services segments were: Three Months Nine Months Ended September 30, Ended September 30, ------------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Retail services................................. $13 $7 $34 $22 Network services................................ 15 16 46 48 Directory services.............................. 2 2 7 7
NOTE 5: OTHER COMPREHENSIVE LOSS Other comprehensive loss at September 30, 1999 consists of $729 of net unrealized losses on available for sale marketable securities, which are net of deferred taxes of $476. Total comprehensive income (loss) for the three and nine months ended September 30, 1999 is as follows:
September 30, 1999 Three months ended Nine months ended ------------------ ----------------- Net income..................................................... $139 $957 Other comprehensive loss- Net unrealized losses on available for sale marketable securities................................................. (815) (732) Less reclassification adjustment for gains included in net income..................................................... 3 3 ------------------------ ----------------------- Comprehensive income (loss).................................... ($673) $228 ======================== =======================
NOTE 6: COMMITMENTS AND CONTINGENCIES Commitments We entered into an agreement with Olympic Properties of the United States to sponsor the 2002 Salt Lake City Winter Olympics and the U.S. Olympic Teams through 2004. As of September 30, 1999, we have a remaining commitment of $49 to be paid in a combination of cash and services through 2004. Contingencies U S WEST Communications, Inc. ("USWC"), a wholly owned subsidiary, has the following pending regulatory action in Oregon. On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a stipulation terminating prematurely USWC's alternative form of regulation ("AFOR") plan and it then undertook a review of USWC's earnings. In May 1997, the OPUC ordered USWC 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. This one-time refund for interim rates became subject to refund when USWC's AFOR plan was terminated on May 1, 1996. USWC filed an appeal of the order and asked for an immediate stay of the refund with the Oregon Circuit Court which granted USWC's 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 USWC's favor on most of the appealed issues. The OPUC appealed to the Oregon Court of Appeals on March 19, 1998, and the appeal remains pending. USWC continues to charge interim rates, subject to refund, during the pendency of that appeal. On September 9, 1999, USWC and the OPUC staff reached a tentative settlement agreement whereby USWC would refund approximately $230 and provide ongoing rate reductions of $63. The agreement is subject to public hearing and final OPUC approval. We have reserved for the proposed refunds. Other Contingencies. In 1999, twelve complaints were filed against us and our directors in the following jurisdictions: California Superior Court, Los Angeles County (1); New York Supreme Court, New York County (1); Colorado District Court, City and County of Denver (2); Delaware Court of Chancery (8). These actions are purported class actions brought on behalf of all persons, other than the defendants, who own our common stock against us and our directors. Each of the complaints makes substantially similar allegations that the defendants breached their fiduciary duties to the class members by refusing to seek all bona fide offers for the Company and refusing to consider the Qwest Communications International Inc. ("Qwest") proposal, resulting in the stockholders being prevented from maximizing the value of their common stock. The complaints seek various injunctive and monetary relief, including orders: a) requiring defendants to act in accordance with their fiduciary duties by considering any bona fide proposal which would maximize stockholder value; b) requiring the directors to undertake an evaluation of our Company as a merger/acquisition candidate and take steps to enhance that value and create an active auction for our Company; c) preventing defendants from using a stockholder rights plan to impede any bona fide offer for our Company; d) enjoining the consummation of the proposed Global Crossing Ltd. ("Global Crossing")-U S WEST merger until all alternatives are explored; e) requiring defendants to account for all damages suffered by plaintiffs as a result of defendants' actions with respect to the tender offer for the shares of Global Crossing common stock by us and the proposed Global Crossing-U S WEST merger; and f) requiring defendants to pay damages to plaintiffs. We intend to vigorously defend these actions. On October 1, 1999, a Fifth Amended Class Action Complaint was filed in the District Court, Larimer County, Colorado, against us and USWC purportedly on behalf of 220,000 customers in the State of Colorado. The complaint alleges that from 1993 to the present, we and USWC, in violation of alleged statutory and common law obligations, willfully delayed the provision of local telephone service to the purported class members. The complaint seeks compensatory damages for purported class members, disgorgement of profits and punitive damages. The Company and USWC intend to vigorously defend this action. The New Mexico Public Regulation Commission is expected shortly to rule on a petition by its Staff to require USWC to reduce revenues on an interim basis by $29. Rates are interim pending the completion of a full rate case during 2000. We are subject to other legal proceedings and claims that arise in the ordinary course of business. Although there can be no assurance of the ultimate disposition of these matters, it is management's opinion, based upon the information available at this time, that the expected outcome, individually or in the aggregate, will not have a material adverse effect on our consolidated results of operations or financial position. NOTE 7: MERGER AGREEMENTS In May 1999, we entered into an agreement to merge with Global Crossing. In connection with the Global Crossing merger agreement, in June 1999, we completed a cash tender offer for approximately 39 million shares of Global Crossing common stock at a price of $62.75 per share for an aggregate purchase price of $2,464. The transaction was financed through the issuance of $1,000 of debt securities maturing June 2000, with interest based on LIBOR, and the issuance of commercial paper for approximately $1,500. We entered into a line of credit for $1,500 as a backup facility in issuing the commercial paper. The line of credit expires June 2000. Commitment fees on the unused portion of the line of credit are .125%. As of September 30, 1999, there was no outstanding balance on the line of credit. In July 1999, we entered into an agreement to merge with Qwest. Under the terms of the merger agreement, Qwest will issue shares of its common stock having a value of $69.00 for each share of our common stock, subject to a "collar" on Qwest's Average Price (as defined below) between $28.26 and $39.90 per share. The exchange ratio, and accordingly, the number of Qwest shares to be issued for each U S WEST share will be determined by dividing $69.00 by the average of the volume weighted averages of the trading prices of Qwest common stock for the 15 trading days randomly selected by lot, by Qwest and us together from the 30 consecutive trading days ending on the third trading day preceding the closing of the transaction (the "Average Price"). If Qwest's Average Price is less than $28.26, the exchange ratio will be 2.44161. If Qwest's Average Price is greater than $39.90, the exchange ratio will be 1.72932. The obligation, if necessary, under the "collar" may be satisfied in whole or in part with cash if Qwest's Average Price is below $38.70 per share. In determining the cash amount for the "collar", Qwest and our Company will consider Qwest's desire to reduce dilution to its stockholders, our desire to provide a cash element to our stockholders and both companies' desire to maintain the merged company's strong financial condition. We may terminate the merger agreement if the closing price of Qwest's shares is below $22.00 for 20 consecutive trading days before the closing, or if the Average Price of Qwest shares during the measurement period is less than $22.00. The Boards of Directors of both Qwest and our Company and their and our stockholders approved the proposed merger. The merger is subject to federal and state regulatory approvals without significant conditions and other customary closing conditions. Closing of the merger is expected by mid-2000. In connection with the Qwest/U S WEST merger, our Company and Global Crossing agreed to terminate the merger agreement between us. In consideration for terminating the merger agreement, we paid Global Crossing $140 in cash and 2,231,076 shares of Global Crossing common stock valued at $140. Qwest provided us a $140 loan to pay for the cash portion of the termination fee. The loan bears interest at LIBOR plus 0.15% and is due December 31, 2001. If our merger with Qwest is terminated because we change our recommendation for the merger, we will be obligated to repay $70 in cash to Qwest and we will receive from Qwest 1,115,538 shares of Global Crossing common stock or the market value in cash at the time of the termination. If termination is not caused by our changing our recommendation, Qwest will not receive reimbursement for its $140 loan and will have to deliver to us the same number of shares of Global Crossing common stock delivered to Global Crossing by us or pay us the market value in cash at the time of the termination. NOTE 8: SALE OF EXCHANGES In June 1999, we entered into a series of definitive agreements to sell local-exchange telephone properties serving approximately 530,000 access lines in nine states for approximately $1,650 in cash, subject to adjustment. Approval of the sale is subject to review by federal and state regulatory agencies. The transfer of ownership, which will occur on a state-by-state basis, is expected to be completed over the next two years. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions) Special Note Regarding Forward-Looking Statements Some of the information presented in this Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Although U S WEST, Inc. (the "Company," which may also be referred to as "we," "us" or "our") believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its businesses and operations, there can be no assurance that actual results will not differ materially from our expectations. Factors that could cause actual results to differ from expectations include: o greater than anticipated competition from new entrants into the local exchange, intraLATA (local access transport area) toll, wireless, data and directories markets, causing loss of customers and increased price competition; o changes in demand for our products and services, including optional custom calling features; o higher than anticipated employee levels, capital expenditures and operating expenses (such as costs associated with interconnection and Year 2000 remediation); o the loss of significant customers; o pending and future state and federal regulatory changes affecting the telecommunications industry, including changes that could have an impact on the competitive environment and service pricing in the local exchange market; o acceleration of the deployment of advanced new services to customers, such as broadband data, wireless and video services, which would require substantial expenditure of financial and other resources, o a change in economic conditions in the various markets served by our operations; o higher than anticipated start-up costs associated with new business opportunities; o delays in our ability to begin offering interLATA long-distance services; o consumer acceptance of broadband services, including telephony, data, video and wireless services; o delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations; and o the timing and completion of the recently announced merger with Qwest Communications International Inc. ("Qwest") and the subsequent integration of the businesses of the two companies. These cautionary statements should not be construed as an exhaustive list or as any admission by us regarding the adequacy of the disclosures. We cannot always predict or determine after the fact what factors would cause actual results to differ materially from those indicated by our forward-looking statements or other statements. In addition, consider statements that include the terms "believes," "belief," "expects," "plans," "objectives," "anticipates," "intends," or the like to be uncertain and forward-looking. All cautionary statements should be read as being applicable to all forward-looking statements wherever they appear. We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed herein might not occur. General On June 12, 1998, our former parent company, herein referred to as ("Old U S WEST"), separated into two independent companies (the "Separation"). Old U S WEST conducted its businesses through two groups: (i) the U S WEST Communications Group (the "Communications Group"), which included the communications businesses of Old U S WEST, and (ii) the U S WEST Media Group (the "Media Group"), which included the multimedia and directories businesses of Old U S WEST. As part of the Separation, Old U S WEST contributed to us the businesses of the Communications Group and the domestic directories business of the Media Group known as U S WEST Dex, Inc. ("Dex"). The alignment of Dex with our Company is referred to in this document as the "Dex Alignment." Old U S WEST has continued as an independent public company comprised of the businesses of Media Group other than Dex and has been renamed MediaOne Group, Inc. In connection with the Dex Alignment, (i) Old U S WEST distributed to holders of Media Group common stock, approximately 16,341,000 shares of our common stock (net of the redemption of approximately 305,000 fractional shares) with an aggregate of $850 in value (the "Dex Dividend") and (ii) we refinanced $3,900 of Old U S WEST debt (the "Dex Indebtedness"), formerly allocated to Media Group. The consolidated financial statements include the consolidated results of operations, financial position 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 financial effects of the Separation and the Dex Alignment, including interest expense associated with the refinancing of the Dex Indebtedness and the dilutive effect of the Dex Dividend, are not reflected in the consolidated statements of income prior to the Separation. Results of Operations Three and Nine Months Ended September 30, 1999 Compared with 1998 Several non-recurring items impacted net income for the three and nine months ended September 1999 and 1998. Results of operations normalized to exclude the effects of such items, are as follows:
Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) ---- ---- ---------- ---- ---- ---------- Net income ................ $139 $379 ($240) (63.3%) $957 $1,140 ($183) (16.1)% Non-recurring items........ 282(1) - 282 - 282(1) 89(2) 193 216.9 -------------------------------------------- --------------------------------------------- Normalized income.......... $421 $379 $42 11.1% $1,239 $1,229 $10 0.8% ============================================ ============================================= Diluted earnings per share. $0.27 $0.75 ($0.48) (64.0%) $1.88 $2.30 ($0.42) (18.3%) Non-recurring items........ 0.56(1) - 0.56 - 0.56(1) 0.17(2) 0.39 229.4 -------------------------------------------- --------------------------------------------- Normalized diluted earnings per share...... $0.83 $0.75 $0.08 10.7% $2.44 $2.48(3) ($0.04) (1.6%) ============================================ ============================================= (1) Reflects terminated merger-related expenses. (2) Reflects charges for Separation costs and an asset impairment. (3) Does not foot due to rounding.
Net income, normalized for non-recurring items, increased by $42, or 11.1% to $421 for the quarter ended September 30, 1999 and increased $10, or 0.8% to $1,239 for the nine months ended September 30, 1999. We experienced a 6.6% and 6.4% increase in revenues for the three and nine months ended September 30, 1999, respectively, over the comparable 1998 periods. These increases were partially offset by increases in expenses to support our growth initiatives, enhance customer service and greater network costs. The following sections provide a more detailed discussion of the changes in revenues and expenses. Operating Revenues
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Local services revenues......... $1,979 $1,805 $174 9.6% $5,779 $5,291 $488 9.2%
Local services revenues. Local services revenues include basic monthly service fees, fees for calling services such as voice messaging and caller identification, wireless revenues, subscriber access line charges, MegaBit(TM) data services, local number portability ("LNP") charges, public phone revenues, and installation and connection charges. State public service commissions regulate most local service rates. Local services revenues increased primarily due to greater sales of wireless and calling services. Wireless services accounted for $44 and $116 of the revenue increases for the three and nine months ended September 30, 1999, respectively. Revenues from calling services increased $30 for the quarter ended September 30, 1999 and $96 for the nine months ended September 30, 1999, over comparable 1998 periods. Additionally, access line growth contributed to the rise in revenues. Second line additions by residential and small business customers contributed to access line growth due to continuing demand for Internet access and data transport capabilities. As of the end of the third quarter of 1999, we had added 504,000 access lines, an increase of 3.1% over the end of the third quarter of 1998. Of this increase, residential second line installations accounted for 240,000 lines, an increase of 16.0% compared with the end of the third quarter of 1998. Also contributing to the revenue growth were greater revenues from inside wire maintenance plans, LNP charges, interconnection revenues and increases in the subscriber base of our Megabit(TM) data services. Partially offsetting these increases were net regulatory rate adjustments and refunds of $2 for the three months ended September 30, 1999 and $21 for the nine months ended September 30, 1999, over the comparable 1998 periods. While local services revenues increased in 1999, the growth rate has declined from 1998. The decline in the growth rate was primarily attributable to increased competition as well as our customer retention strategy of offering bundles of services to customers at lower prices in return for entering into longer-term contracts. Additionally, some business customers have opted to migrate from multiple single lines to high capacity lines, which decreases local services revenues but increases access services revenues. We believe we may continue to experience declining growth rates as the level of customer demand slows and competition increases. In June 1999, we entered into a series of definitive agreements to sell 530,000 access lines in nine states for $1,650 in cash, subject to adjustment. The access lines accounted for 3.8% of fiscal 1998 local services revenues. While the sale is expected to provide us with a one-time gain, it will negatively impact future local services revenue growth.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Access services revenues........ $688 $660 $28 4.2% $2,057 $1,996 $61 3.1%
Access services revenues. Access services revenues are derived primarily from charging interexchange carriers, such as AT&T and MCI WorldCom, for use of our local network to connect customers to their long-distance networks. Also included in access services revenues are special access and private line revenues from end-users buying dedicated local exchange capacity to support their private networks. The growth in access services revenues was attributable to increased demand for private line and special access services which increased $48 for the quarter ended September 30, 1999 and $134 for the nine months ended September 30, 1999 over the comparable 1998 periods. Additionally, demand from interexchange carriers contributed to the revenue increase. Access minutes of use increased 5.3% and 5.2%, respectively, for the three and nine months ended September 30, 1999. The growth in access minutes of use was partially offset by mandated rate reductions of $52 for the three months ended September 30, 1999 and $113 for the nine months ended September 30, 1999.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Directory services revenues...................... $336 $313 $23 7.3% $995 $929 $66 7.1%
Directory services. Directory services revenues are primarily derived from selling advertising in our published directories. The increases in directory services revenues were primarily attributable to increased sales of premium advertisements and price changes.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Decrease 1999 1998 Decrease ---- ---- -------- ---- ---- -------- Long-distance services revenues.......... $141 $202 ($61) (30.2%) $471 $606 ($135) (22.3%)
Long-distance services revenues. Long-distance services revenues are derived from customer calls to locations outside of their local calling area but within the same LATA. The decrease in long-distance services revenues for the three and nine months ended September 30, 1999 was primarily attributable to greater competition, strategic price reductions, and the expansion in the number and size of extended area services, resulting in revenue declines of $55 and $118, respectively. Mandated rate reductions of $8 and $25 for the three and nine months ended September 30, 1999, respectively, also contributed to the revenue decreases. As of September 30, 1999, customers in the 14 states in which we operate were able to choose an alternative provider for intraLATA calls without dialing a special access code when placing a call. We believe we will continue to experience further declines in long-distance services revenues as regulatory actions provide for increased levels of competition. We are responding to competition through competitive pricing of intraLATA long-distance services and increased promotional efforts to retain customers. See "Special Note Regarding Forward-Looking Statements" on page 16.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Other services revenues......... $173 $132 $41 31.1% $455 $352 $103 29.3%
Other services revenues. Other services revenues include billing and collection services for interexchange carriers, customer equipment sales and sales of other unregulated products, such as U S WEST.net(R), our Internet service. Other services revenues increased primarily as a result of increased subscribers for U S WEST.net(R) and customer equipment sales. Operating Expenses
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Employee-related expenses..... $1,195 $1,104 $91 8.2% $3,473 $3,179 $294 9.2%
Employee-related expenses. Employee-related expenses include salaries and wages, benefits, payroll taxes and contract labor. Employee related expenses for 1998 include $21 of costs related to the third quarter 1998 work stoppage. Excluding these costs, employee-related expenses increased 10.3% and 10.0%, respectively, for the three and nine months ended September 30, 1999. Employee-related expenses increased because of increased commitments towards improving customer service, including meeting requests for installation, repair services and customer services, resulting in higher labor costs. Additionally, growth in several sectors of the business, primarily wireless and data communications, resulted in increased employee levels. Across-the-board wage increases also contributed to the increase in employee-related expenses. Additionally, included in employee-related expenses for the nine months ended September 30, 1999, are the salary and benefit costs for employees who were transferred from Old U S WEST as part of the Separation. Prior to the Separation, these costs were allocated to us and included in other operating expenses. Partially offsetting these increases was the capitalization in 1999 of employee-related expenses associated with developing internal use software due to the adoption of the AICPA's Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with the SOP, $22 and $60 were capitalized for the quarter and nine months ended September 30, 1999, respectively. An increase in pension credits of $47 also partially offset the increase in employee-related expenses for the nine months ended September 30, 1999.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Decrease ---- ---- -------- ---- ---- -------- Other operating expenses........ $657 $651 $6 0.9% $1,996 $2,072 ($76) (3.7%)
Other operating expenses. Other operating expenses include access charges paid to carriers for the routing of local and long-distance traffic through their facilities, taxes other than income taxes, paper, printing, delivery and distribution costs associated with publishing activities and other selling, general and administrative costs. Included in the nine months ended September 30, 1998 were $129 of Separation costs and asset impairment charges. Excluding these charges, other operating expenses increased $53, or 2.7% for the nine months ended September 30, 1999. The increases in other operating expenses for the quarter and nine months ended September 30, 1999, were primarily attributable to the following: o increased costs of product sales associated with our growth initiatives, including wireless handset costs and costs applicable to our data communications services, and our directory segment, o higher access charge expenses resulting from regulatory rulings that require us to pay access charges to carriers for calls that originate on our network and terminate on other carriers' networks, o higher property taxes, o Year 2000 remediation costs, and o higher rent expense related to increased computer hardware leasing and increases in leasing costs associated with telephone poles. In addition, the increase in other operating expenses for the nine months ended September 30, 1999, was also due to higher marketing and advertising costs for wireless, data communications services and calling services such as caller identification. Offsetting the increases in other operating expenses were the effects of capitalizing $62 and $208 for the quarter and nine months ended September 30, 1999, respectively, of costs associated with developing internal use software in accordance with SOP 98-1. A $20 refund related to a gross receipts tax settlement also offset increases to expenses for the three and nine months ended September 30, 1999. Additionally, for the nine months ended September 30, 1999, the transfer of employees from Old U S WEST as part of the Separation resulted in the reclassification of related salary and benefit costs to employee-related expenses.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Depreciation and amortization expense....... $588 $558 $30 5.4% $1,763 $1,625 $138 8.5%
Depreciation and amortization expense. Depreciation and amortization expense increased primarily due to higher overall property, plant and equipment balances resulting from continued investment in our network. Additionally, the useful lives of certain assets were reduced, reflecting changes in technology, causing greater depreciation expense. Partially offsetting the increases was the cessation of depreciation associated with the 530,000 access lines that are under definitive sales agreements entered into in the second quarter of 1999.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Other expense-net........... $481 $191 $290 151.8% $811 $455 $356 78.2%
Other expense-net. Interest expense was $203 for the third quarter of 1999 compared to $172 for the third quarter of 1998. Interest expense was $519 for the nine months ended September 30, 1999, compared to $378 for the comparable prior period. The increase in interest expense for the quarter and nine months ended September 30, 1999 was primarily attributable to the debt incurred for the Global Crossing stock purchase. The $3,900 debt assumed in the Separation as part of the Dex Alignment contributed to the increase in interest expense for the nine months ended September 30, 1999. Also included in other expense-net was other income of $4 for the quarter ended September 30, 1999, compared to other expense of $19 for the quarter ended September 30, 1998 and other expense of $10 for the nine months ended September 30, 1999, compared to other expense of $77 for the prior comparable period. The decreases in other expense were due to a reduction in regulatory interest expense, gains on sales of real estate and marketable securities and interest earned on a gross receipts tax settlement. Additionally, the decrease in other expense-net for the nine months ended September 30, 1999 was also due to the reduction in interest expense attributable to an anticipated settlement of federal income tax liabilities for tax years still under audit. We incurred a one-time charge of $282 to dissolve the proposed merger with Global Crossing. The charge includes a cash payment of $140 to Global Crossing, the issuance of $140 of Global Crossing stock purchased in the Global Crossing tender offer and $2 of miscellaneous merger-related costs.
Three Months Nine Months Ended September 30, Ended September 30, Increase 1999 1998 Increase 1999 1998 (Decrease) ---- ---- -------- ---- ---- ---------- Segment margin results: Retail segment.................. $1,560 $1,554 $6 0.4% $4,607 $4,662 ($55) (1.2)% Wholesale segment............... 549 464 85 18.3 1,604 1,423 181 12.7 Network segment................. (699) (726) 27 3.7 (2,083) (2,031) (52) (2.6) Directory segment............... 190 160 30 18.8 530 472 58 12.3
Segment results. For segment reporting purposes, segment margins exclude certain costs and expenses, including depreciation and amortization, corporate expenses and taxes other than income. See Note 4 to the consolidated financial statements. Margin from the retail services segment decreased for the nine months ended September 30, 1999 from the comparable prior period due to operating expenses increasing at a greater rate than revenue growth. Revenue from the retail services segment increased 5.1% for the nine months ended September 30, 1999 over the comparable 1998 period, primarily due to growth in local services revenue. The revenue increase was more than offset by higher operating expenses driven by growth initiatives and costs associated with enhancing customer service. For the quarter ended September 30, 1999, the retail margin was consistent when compared to the prior comparable period. Margins from the wholesale services segment increased as a result of greater demand for access services and interconnect services, partially offset by price reductions as mandated by both federal and state regulatory authorities and higher operating costs associated with access charge expenses. Margins from the network services increased for three months ended September 30, 1999, due to higher levels of software capitalization. Margins from the network services segment decreased for the nine months ended September 30, 1999 as a result of expenditures to support growth in both the retail and wholesale services segments. Margins from the directory services segment increased due to growth in directory services revenue partially offset by increased sales support costs.
Three Months Nine Months Ended September 30, Ended September 30, 1999 1998 Increase 1999 1998 Increase ---- ---- -------- ---- ---- -------- Provision for income taxes......................... $257 $229 $28 12.2% $757 $703 $54 7.7%
Provision for income taxes. The provision for the three and nine months ended September 30, 1999 excludes the tax benefit for terminated merger-related expenses. Excluding the effects of terminated merger-related expenses, the effective tax rate for the three months ended September 30, 1999 of 37.9% remained consistent with the rate for the three months ended September 30, 1998 of 37.7%. The effective tax rate for the nine months ended September 30, 1999 of 37.9% remained consistent with the rate for the nine months ended September 30, 1998 of 38.1%. Liquidity and Capital Resources Operating Activities. Cash provided by operations remained consistent at $2,952 for the nine months ended September 30, 1999 compared to $2,950 for the prior comparable period. Investing Activities. Total capital expenditures, on a cash basis, were $2,681 in 1999 and $1,937 in 1998. Capital expenditures have primarily been, and continue to be, focused on expanding access line growth, modernization of the telecommunications network and meeting the requirements of the Telecommunications Act of 1996 ("the Act"), including interconnection services such as LNP, operational support systems, collocation and trunking. We continue to expand our investment to compete in the wireless, data and video markets. For 1999, we anticipate total capital expenditures will approximate $4,000, which includes software capitalization, the acceleration of the next generation of the network, launch of personal communication services in additional markets, expansion of the Internet data business and greater emphasis on our e-commerce efforts. Additionally, we will continue our expenditures on interconnection and LNP to enable competition in compliance with federal regulations. See "Special Note Regarding Forward-Looking Statements"on page 16. In connection with our proposed merger agreement with Global Crossing, we invested $2,464 to purchase approximately 39 million shares of Global Crossing common stock in a tender offer during the second quarter of 1999. As a result of our subsequent merger agreement with Qwest in July 1999, we entered into a termination agreement with Global Crossing under which we were required to pay Global Crossing $140 and 2,231,076 shares of Global Crossing common stock for which we paid $140. We obtained a $140 loan from Qwest to satisfy the cash portion of the termination fee. As of September 30, 1999, the remaining Global Crossing shares we held had a market value of $981. This market decline, which we believe to be temporary, has been reflected in accumulated other comprehensive loss in the stockholders' equity section of the consolidated balance sheets. See Note 5 to the consolidated financial statements. Financing Activities. Cash provided by financing activities was $2,240 in 1999 and cash used in 1998 was $947. In 1999, net proceeds from short-term and long-term debt were $3,404, of which $2,464 was used to finance the Global Crossing tender offer. We paid dividends on our common shares totaling $917 in 1999 and $787 in 1998. We maintain commercial paper programs to finance short-term cash flow requirements, as well as to maintain a presence in the short-term debt market. As of September 30, 1999, we had lines of credit with a total unused borrowing capacity of $4,050. Future cash needs could increase with the pursuit of new business opportunities and continued implementation of the requirements of the Act. Regulatory proceedings of the Federal Communications Commission ("FCC") and state commissions including price cap plans, access charge reforms and interconnection requirements may negatively impact cash flows. From time to time, we may consider the acquisition or disposition of assets or businesses or the acceleration of product deployments that may be material to our financial condition, and therefore, our cash needs. We expect that such cash needs will be funded through operations and, when necessary, the issuance of debt securities. Risk Management Over time, we are exposed to market risks arising from changes in interest rates. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We may employ derivative financial instruments to manage our interest rate risk exposure. We have also employed financial derivatives to hedge interest rate and foreign currency exposures associated with particular debt issues to synthetically obtain below market interest rates. We do not use derivative financial instruments for trading purposes. As of September 30, 1999 and December 31, 1998, approximately $3,075 and $957, respectively, of floating-rate debt was exposed to changes in interest rates. This exposure is primarily linked to commercial paper rates and changes in 3-month LIBOR. A hypothetical increase of 1% in commercial paper rates and 3-month LIBOR would increase annual pre-tax interest expenses by $31. As of September 30, 1999 and December 31, 1998, we also had $222 and $228, respectively, of long-term fixed rate debt obligations maturing in the following 12 months. Any new debt obtained to refinance this debt would be exposed to changes in interest rates. A hypothetical 10% change in the interest rates on this debt would not have had a material effect on our earnings. As of September 30, 1999, all outstanding interest rate swaps and the associated debt instrument have matured. As of December 31, 1998, we had interest rate swaps with notional amounts of $155. The swaps synthetically transformed certain of the Company's floating rate issues into fixed rate obligations. As of September 30, 1999 and December 31, 1998, we had also entered into cross-currency swaps with notional amounts of $133 and $204, respectively. The cross-currency swaps synthetically transform $100 and $182 of Swiss Franc borrowings at September 30, 1999 and December 31, 1998, respectively, into U.S. dollar obligations. Any gains (losses) on the cross-currency swaps would be offset by losses (gains) on the Swiss Franc debt obligations. Other assets at September 30, 1999 included marketable equity securities recorded at a fair value of $1,140 including net unrealized losses of $1,205. The securities have exposure to price risk. The estimated potential loss in fair value resulting from a hypothetical 10% decrease in prices quoted by stock exchanges would decrease our pre-tax earnings by $114. Recent Regulatory Developments Interconnection. The FCC issued an order (the "Order") in 1996 relating to the Act that established interconnection costing and pricing rules which, from our perspective, significantly impeded negotiations with new entrants to the local exchange market, state regulatory commission interconnection rulemakings and interconnection arbitration proceedings. On January 25, 1999, the U.S. Supreme Court ("Supreme Court") issued a ruling on our appeal of the Order. The Supreme Court affirmed in part and reversed in part the FCC Order. Although the decision stated that the Act was ambiguous and self-contradictory, the Supreme Court ruled that: o the FCC has authority to set pricing methodology; o unbundled network elements ("UNEs") must be provided in cases where necessary or the lack of availability would impair competition; o Incumbent local exchange companies ("ILECs") must sell on a bundled basis, at the competitive local exchange carriers' ("CLECs") request, network elements the ILEC uses itself on a bundled basis; and o CLECs may pick and choose pricing or other terms and conditions from multiple contracts within certain bounds. The impact of the Supreme Court ruling is unclear since state regulatory commissions generally follow the FCC's pricing and unbundling requirements in setting UNE prices. Further review of the legality of the FCC's pricing rules has been argued at the Eighth Circuit Court of Appeals. On November 5, 1999, the FCC released its order addressing the Supreme Court directives regarding unbundling and Interconnection. The full impact of this order is presently unclear. However, it largely reaffirms, and in some instances expands, the FCC's earlier unbundling decisions and may create significant risks of arbitrage for private line, special access and local business revenues. Appeals of this order are likely. See "Special Note Regarding Forward Looking Statements" on page 16. InterLATA Long-Distance Entry. Several regional Bell operating companies have filed for entry into the interLATA long-distance business. Although many of these applications have been approved by state regulatory commissions, the FCC has rejected all applications to date. We view entry into this business as important to our strategy of providing an integrated bundle of services to our customers. In 1999, we withdrew our previously filed applications to enter the interLATA long-distance business in Wyoming and Montana. We filed an application to enter the interLATA long-distance business in Arizona in 1999. In April 1999, the Nebraska Public Service Commission indicated it needed additional information before making a recommendation to the FCC. We expect to file our first interLATA entry application with the FCC for its review in 2000. See "Special Note Regarding Forward-Looking Statements " on page 16. Access Reform. In its access reform order, the FCC mandated a substantial restructuring of interstate access pricing. A significant portion of the services that were charged using minutes-of-use pricing are now being charged using a combination of minutes-of-use rates, flat-rate presubscribed interexchange carrier charges ("PICCs") and subscriber line charges ("SLCs"). Although an increase in the SLC to multi-line business users occurred on July 1, 1997, the bulk of the mandated pricing changes occurred on January 1, 1998. Additional mandated pricing changes occurred on January 1, 1999 and July 1, 1999 and further changes will be implemented in 2000 and 2001. The net effect of these changes will be to decrease minutes-of-use charges and increase flat-rate charges (i.e., PICCs and SLCs). The access reform order also continued in place the current rules under which ILECs may not assess interstate access charges on information service providers and purchasers of UNEs. In February 1999, the FCC issued an order declaring that Internet traffic is interstate and opened a proceeding to determine the appropriate regulatory structure. The FCC required no change in the current agreements for reciprocal compensation with CLECs until it rules on this matter. Pending before the FCC are several areas of access reform including the reduction of interstate rates to reflect the receipt of universal service support, changing the rate structure for switched access to a flat rated structure, an industry proposal for changing the general access structure including the removal of the productivity factor and a court remanded review of the productivity factor. Action on these items is expected by mid-2000 but some items may be decided in 1999. Advanced Telecommunications Services. On March 31, 1999, the FCC issued an order establishing expanded collocation requirements for both conventional voice and advanced services. The FCC also issued a FNPRM on "line sharing." Line sharing allows a CLEC to provide advanced services over the same loop that the ILEC uses to provide analog voice service. We expect the FCC to issue an order on line sharing in the fourth quarter of 1999. Long-Term Number Portability Tariffs. In July 1999, the FCC issued an order on our LNP tariff that was originally effective in February 1999. The FCC's order reduced our tariff from $0.54 per access line to $0.43 per access line. The FCC also required that the difference between $0.54 and $0.43, previously collected by the Company, be refunded to customers. We expect to pay the refund in the fourth quarter of 1999. Court Remand of 6.5% Productivity Factor. On May 21, 1999, the District of Columbia U.S. Court of Appeals issued a ruling reversing and remanding back to the FCC its order requiring ILECs to retroactively increase the productivity offset to price caps to 6.5% in their annual price cap filings. The Court found that the FCC's order did not justify the increase. The FCC must revise and reissue its order by April 2000. Universal Service Fees. On October 8, 1999, the FCC issued orders in response to the Fifth Circuit Court of Appeals mandate on Universal Service. These orders were effective on November 1, 1999. The FCC will allow the fees the ILECs pay to support Universal Service to be recovered in access indefinitely. ILECs that wish to do so may remove the fees from access and establish a separate end user charge. The FCC also changed the rules to remove the intrastate end user revenues from the base for calculating the fees. A tariff filing, effective November 1, 1999, will reduce the access rates which recover these fees. Access Pricing Flexibility. The FCC issued an order on pricing flexibility on August 27, 1999. The FCC removes many vestiges of regulation including price caps for intraLATA interstate toll because long distance parity has been achieved for all 14 states. Various levels of pricing flexibility up to and including the removal of Price Cap regulation are possible when competitive triggers are reached by geographic areas for special access and switched access transport. Some pricing flexibility is granted for switched access and subscriber line charges when certain levels of competition are demonstrated by geographical area. Contingencies We have pending regulatory actions in local regulatory jurisdictions. See Note 6 to the consolidated financial statements. Other Items From time to time, we engage in discussions regarding restructurings, dispositions, acquisitions and other similar transactions. Any such transaction could 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 our financial condition and results of operations. There is no assurance that any such discussions will result in the consummation of any such transaction. Year 2000 Costs Background. We have conducted a comprehensive review of our computer-based systems and related software and are taking measures to ensure that such systems will properly recognize the year 2000 and continue to process beyond December 31, 1999. The systems we evaluated include systems within (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 our core communications business, relies on remote switches, central office equipment, interoffice equipment and loop transport equipment that is predominantly provided to us by telecommunications network vendors. IT is comprised of our internal business systems that employ hardware and software on an enterprise-wide basis, including operational, financial and administrative functions. The Business Units, which include internal organizations such as finance, procurement, directory services, operator services, wireless, data networks, real estate, etc., employ systems that support desktop and departmental applications, as well as embedded computer chip technologies, which relate specifically to each of our Business Unit's functions and generally are not part of the Network or IT. We have approached year 2000 remediation activities through five general phases: (i) inventory/assessment, (ii) planning, (iii) conversion, (iv) testing/certification and (v) implementation. Additionally, we are continuously monitoring and improving our year 2000 related activities and progress, communicating with our customers and vendors, participating in cooperative testing with others and taking steps to assure that we have contingency plans in place prior to the end of 1999. These activities will continue through the remainder of 1999. Network update. With regard to the Network, we are working with our telecommunications network vendors to obtain and convert to compliant releases of hardware and software. We also are testing, at our own initiative, in cooperation with certain of our customers, vendors and other major wireline telecommunications companies, network equipment over multiple configurations involving a broad spectrum of services. Toward this end, we participate in 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 Telcordia (formerly known as Bellcore), a former affiliate engaged in telecommunications industry research, development and maintenance activities, to engage in inter-region interoperability testing. No significant issues have been found to date. We also participate in (i) 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, and (ii) the Alliance for Telecommunications Industry Solutions ("ATIS"), which is testing inter-network interoperability, and which, in conjunction with the Cellular Telecommunications Industry Association ("CTIA"), is testing network interoperability with wireless networks. Our inventory/assessment, planning, conversion and network testing/certification phases for the Network are complete. Cooperative testing with certain customers, vendors and other telecommunications companies is expected to continue for the rest of the year. As of September 30, 1999, our Network remediation implementation was complete. Substantial progress has been made with Network contingency planning activities. We anticipate that the remainder of the Network contingency planning activities will be complete by the fourth quarter, 1999. IT update. Within IT, we have identified approximately 570 applications that support our critical business processes, such as billing and collections, network monitoring, repair and ordering. The inventory/assessment, planning phases and conversion for such IT applications are complete. As of September 30, 1999, approximately 99% of IT testing activities and 99% of IT implementation had been completed. We anticipate that each of these phases for IT will be complete by November 1999. Substantial progress has been made with IT contingency planning activities. We anticipate that the remainder of the IT contingency planning activities will be complete by the fourth quarter, 1999. Business Units update. Within our Business Units, it is estimated that as of September 30, 1999, approximately 100% of the inventory/assessment activity, 100% of the planning activity, 99.8% of the conversion activity and 99% of the testing and remediation implementation activities were complete. We anticipate that each of these phases will be complete in the Business Units for major conversions and upgrades by the fourth quarter of 1999. We have recently initiated Business Unit contingency planning activities and we anticipate those will be complete by the fourth quarter, 1999. Costs relating to year 2000. We have spent approximately $232 from the beginning of 1997 through the end of the third quarter of 1999 on year 2000 projects and activities. Virtually all year 2000 related expenditures are being funded through operations. Contingency plan. We cannot provide assurance that the results of our year 2000 compliance efforts or the costs of such efforts will not differ materially from estimates or expectations. Accordingly, we are developing year 2000 specific business continuity and contingency plans to address high risk areas as they are identified. Our year 2000 contingency planning activities will include training of crisis managers on year 2000 issues and potential business impacts to their particular process areas, reviewing and modifying existing business continuity plans to address year 2000 issues and establishing rapid response teams and communications procedures for each of the major critical operations and facilities to handle potential post-implementation year 2000 failures. These year 2000 specific contingency planning activities are to be in place by the fourth quarter of 1999. In addition, we have in place our standard overall business continuity, contingency and disaster recovery plans (such as diesel generator back-up power supply sources for our Network, Network rerouting capabilities, computer data and records safe-keeping and back-up and recovery procedures) which will be verified, and as appropriate, augmented for specific year 2000 contingencies. Dependencies. Within Network, we are highly dependent upon our telecommunications network vendors to provide year 2000 compliant hardware and software in a timely manner, and on third parties that are assisting us in the focused testing and implementation phases regarding the Network. Because of these dependencies, we have developed and implemented a vendor compliance process whereby we have obtained written assurances of timely year 2000 compliance from most of our critical vendors (not only for Network, but also for IT and the Business Units). In addition, we monitor and actively participate in coordinated Network testing activities, as discussed above, with respect to the Forum, ATIS and Telcordia. Within IT, we depend 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, we have developed detailed timetables, resource plans and standardized year 2000 testing requirements for identified critical applications (irrespective of whether these applications are used primarily by IT, the Network or the Business Units). Within the Business Units, we are dependent on vendor supplied goods and services and operability of the Network and critical IT and Business Unit specific applications. Because of these dependencies, we are implementing the same type of vendor compliance processes and application planning and testing processes at the Business Units, as discussed above with respect to the Network and IT. Overall, we have sought compliance assurances from approximately 7,765 vendors concerning approximately 25,769 products and have received assurances for 99.6% of those products as of September 30, 1999. During 1999, we will continue to pursue assurances of timely year 2000 compliance for the remaining critical vendors. As with any large-scale computer-related project such as year 2000 remediation, the testing phase may require resources in excess of other project phases and the other project phases may be affected by and dependent upon the results of the testing phase. Summary. In management's view, the most reasonably likely worse case scenario for year 2000 failure prospects we face is that a limited number of important IT and/or Business Unit specific applications may unexpectedly fail. In addition, there may be unexpected problems with the Network relating to the year 2000. Our failure or the failure by certain of our 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 significant and costly disruption of our operations, possibly impacting the Network and impairing our ability to bill or collect revenues. However, while no assurance can be given, management believes that our efforts at remediation and testing, year 2000 specific contingency planning, and overall business continuity, contingency and disaster recovery planning will likely be successful, and that the aforementioned "worse case scenario" is unlikely to develop or significantly disrupt our financial operations. The above discussion regarding year 2000 contains many statements that are "forward-looking" within the meaning of the Reform Act. Although we believe that our estimates are based on reasonable assumptions, we cannot assure you that actual results will not differ materially from these expectations, beliefs or estimates. See "Special Note Regarding Forward-Looking Statements" on page 16. New Accounting Standards On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. FAS No. 133 requires, among other things, that all derivative instruments be recognized at fair value as assets or liabilities on the balance sheet and that changes in fair value generally be recognized currently in earnings unless specific criteria are met. The standard is effective for our 2001 fiscal year though earlier adoption is permitted. Financial statement impacts of adopting the new standard depend upon the amount and nature of the future use of derivative instruments and their relative changes in valuation over time. Had we adopted FAS No. 133 in 1999, its impact on the consolidated financial statements would not have been material. PART II - OTHER INFORMATION Item 1. Legal Proceedings Our Company and its subsidiaries are subject to claims and proceedings arising in the ordinary course of business. For a discussion of these actions, see "Note 6: Commitments and Contingencies" - to the consolidated financial statements. Item 2. Changes in Securities and Use of Proceeds Recent Sales of Unregistered Securities The following describes securities issued by us within the past fiscal quarter and prior to the filing of the Form 10-Q which were privately placed and not registered under the Securities Act of 1933, as amended (the "Securities Act"). We believe that the following issuances of securities were exempt from the registration requirements of the Securities Act, pursuant to the exemptions set forth in Section 4(2), Rule 144A, and Regulation S thereof. (a) On August 25, 1999, and in reliance on Rule 144A and Regulation S of the Securities Act, U S WEST Capital Funding, Inc. ("Capital Funding"), a wholly-owned subsidiary of our Company, issued 6-7/8% Notes (the "Notes") in the aggregate principal amount of $1,150,000,000. Payment of principal and interest on the Notes is unconditionally guaranteed by us. The Notes will mature and the principal amount, together with interest accrued and unpaid thereon, will be payable on August 15, 2001. The Notes will bear interest from August 25, 1999 at an interest rate of 6-7/8% per annum. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Banc of America Securities LLC, Lehman Brothers Inc., and Salomon Smith Barney Inc. (collectively, the "Initial Purchasers") purchased the Notes for resale to "qualified institutional buyers" as defined under Rule 144A, and non-U.S. persons under Regulation S, at 99.874% of their principal amount ($1,148,551,000 aggregate proceeds to Capital Funding before deducting commissions and expenses payable by Capital Funding). The Initial Purchasers received a commission in the amount of $4,025,000. Capital Funding used the net proceeds from the sale of the Notes to repay a portion of its commercial paper indebtedness and for general corporate purposes. The Notes are subject to registration rights that require us to offer registered exchange notes within 225 days of closing. (b) On November 1, 1999, and in reliance on Rule 144A and Regulation S of the Securities Act, U S WEST Communications, Inc. ("Communications"), our wholly-owned telephone subsidiary, issued 7.20% Notes (the "Communications Notes") in the aggregate principal amount of $750,000,000. The Communications Notes will mature and the principal amount, together with interest accrued and unpaid thereon, will be payable on November 1, 2004. The Communications Notes will bear interest from November 1, 1999 at an interest rate of 7.20% per annum. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Salomon Smith Barney Inc., ABN AMRO Incorporated, Banc of America Securities LLC, and Chase Securities Inc. (collectively, the "Communications Notes Initial Purchasers") purchased the Communications Notes for resale to "qualified institutional buyers" as defined under Rule 144A, and non-U.S. persons under Regulation S, at 99.81% of their principal amount ($748,575,000 aggregate proceeds to Communications before deducting commissions and expenses payable by Communications). The Communications Notes Initial Purchasers received a commission in the amount of $4,500,000. Communications plans to use the net proceeds from the sale of the Communications Notes to repay a portion of Communications' commercial paper indebtedness and for general corporate purposes. The Communications Notes are subject to registration rights that require Communications to offer registered exchange notes within 225 days of closing. Item 4. Submission of Matters to a Vote of Security Holders We held a special meeting of our shareholders (the "Special Meeting") on November 2, 1999. At the meeting, the following items relating to our merger with Qwest (as defined herein) were submitted to a vote of our shareholders. On the proxy record date, September 7, 1999, we had 504,856,275 shares outstanding and 398,303,878 shares represented at the Special Meeting. (a) Approval or adoption of the Agreement and Plan of Merger dated as of July 18, 1999, as amended, between U S WEST, Inc., a Delaware corporation and Qwest Communications International Inc., a Delaware corporation, and the merger.
Votes Delivered Votes For Votes Against Votes Abstained Not Voted --------- ------------- --------------- --------- 373,963,499 20,855,743 3,484,636 0 (b) Approval of any proposal to adjourn or postpone the meeting. Votes Delivered Votes For Votes Against Votes Abstained Not Voted --------- ------------- --------------- --------- 281,864,992 105,871,254 10,567,632 0 (c) Such other business as may properly come before the meeting. Votes Delivered Votes For Votes Against Votes Abstained Not Voted --------- ------------- --------------- --------- 263,736,115 115,432,374 19,135,389 0
Based on the above voting results, the merger with Qwest was approved by our shareholders. Item 5. Recent Developments Global Crossing Merger On May 17, 1999, our Board of Directors announced that we had entered into a definitive agreement to merge (the "Global Merger Agreement") our Company with Global Crossing. As part of the merger, we commenced and closed a cash tender offer for approximately 39 million shares of common stock of Global Crossing or approximately 9.5% of Global Crossing's outstanding shares at a price of $62.75 per share (the "Tender Offer"). The Tender Offer commenced on May 21, 1999, expired on June 18, 1999 and settled on June 28, 1999. We financed the purchase of Global Crossing shares pursuant to the Tender Offer with proceeds from the sale of notes and commercial paper. See Item 2 of Part II of our Form 10-Q for the quarter ended June 30, 1999. Qwest Merger On July 18, 1999, our Board of Directors announced that it had entered into a definitive agreement to merge our Company with and into Qwest. See Note 7 to the consolidated financial statements. The merger is subject to, among other things, the approval by the Federal Communications Commission, and other regulatory reviews. On November 2, 1999, we held our special meeting of shareholders to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger, dated as of July 18, 1999, as amended, between us and Qwest, and the merger, as described above. Please see Item 4 above concerning the results of that special meeting. For current information regarding the Qwest merger, you are encouraged to review the publicly filed reports of the respective companies. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits filed for the Company through the filing of this Form 10-Q. (2-A) Separation Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and U S WEST, Inc. (formerly USW-C, Inc.), dated June 5, 1998 (Exhibit 99.1 to Form 8-K/A dated June 26, 1998, File No. 1-14087). (2-A.1) Amendment to the Separation Agreement between MediaOne Group, Inc. (formerly U S WEST, Inc.) and U S WEST, Inc. (formerly USW-C, Inc.), dated June 12, 1998 (Exhibit 10(p) to Form 10-K/A for the year ended December 31, 1998, File No. 1-14087). (2-A.2) Offer to Purchase; Letter of Transmittal relating to the Common Stock; Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees to Clients; Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees to Clients; Notices of Guaranteed Delivery relating to the Common Stock; Press Release issued by the Offeror and the Company on May 17, 1999; and Guidelines for Certificate of Taxpayer Identification Number on Substitute Form W-9 each dated May 21, 1999 (Exhibits (a)(1) through (a)(5) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (2-A.3) Agreement and Plan of Merger, dated as of May 16, 1999, between Global Grossing Ltd. and U S WEST, Inc. (Exhibit 2 to Form 8-K, dated May 21, 1999, File No, 1-14087). (2-A.4) Tender Offer and Purchase Agreement, dated as of May 16, 1999, between Global Crossing Ltd. and U S WEST, Inc. (Exhibit (c)(2) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (2-A.5) Voting Agreement, dated as of May 16, 1999, between Global Crossing Ltd. and U S WEST, Inc. (Exhibit (c)(3) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (2-A.6) Standstill Agreement, dated as of May 16, 1999, between Global Crossing Ltd. and U S WEST, Inc. (Exhibit (c)(4) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (2-A.7) Tender and Voting Agreement, dated as of May 16, 1999, between U S WEST, Inc. and each of the parties listed on the signature page thereto (Exhibit (c)(5) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (2-A.8) Agreement, dated as of May 16, 1999, between U S WEST, Inc., Global Crossing Ltd. and each person whose name appears on the signature page thereto (Exhibit (c)(6) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (2-A.9) Letter Agreement, dated as of May 16, 1999, between U S WEST, Inc. and Global Crossing Ltd. (Exhibit 99 to Form 8-K, dated May 21, 1999, File No. 1-14087). (2-A.10) Transfer Agreement, dated as of May 16, 1999, between Global Crossing Ltd. and each person whose name appears on the signature page thereto (Exhibit (c)(8) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (2-A.11) Agreement and Plan of Merger between U S WEST, Inc. and Qwest Communications International Inc., dated as of July 18, 1999, (Exhibit 2 to Form 8-K dated July 20, 1999, File No. 1-14087). (2-A.12) Voting Agreement among each of the stockholders listed on the signature page thereto and U S WEST, Inc., dated as of July 18, 1999 (Exhibit 10.1 to Form 8-K, dated July 20, 1999, File No. 1-14087). (2-A.13) Termination Agreement between U S WEST, Inc. and Global Crossing Ltd., dated as of July 18, 1999 (Exhibit 10.2 to Form 8-K, dated July 20, 1999, File No. 1-14087). (2-A.14) Amendment No. 1 to Tender Offer and Purchase Agreement, dated as of July 18, 1999 (Exhibit 2-A.14 to Form 10-Q, for the quarter ended June 30, 1999, File No. 1-14087). 2-1.15 Amendment No. 1, dated as of September 8, 1999, to the Agreement and Plan of Merger, dated as of July 18, 1999, between U S WEST, Inc. and Qwest Communications International Inc. (3-A) Restated Certificate of Incorporation of U S WEST, Inc. (Exhibit 3A) to Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). (3-B) 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, dated as of June 1, 1998 (Exhibit 4-A to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). (4-A.1) Amendment No. 1 to Rights Agreement between U S WEST, Inc. and State Street Bank and Trust Company, dated as of May 16, 1999 (Exhibit 4 to Form 8-K, dated May 21, 1999, File No. 1-14087). (4-A.2) Amendment No. 2 to Rights Agreement between U S WEST, Inc. and State Street Bank and Trust Company, dated as of July 18, 1999 (Exhibit 4-A.2 to Form 10-Q for the quarter ended June 30, 1999, File No. 1-14087). (4-B) Indenture among U S WEST Capital Funding, Inc., USW-C (renamed "U S WEST, Inc.") and First National Bank of Chicago, as Trustee, dated June 29, 1998 (Exhibit 4(a) to Form 8-K, filed November 18, 1998, File No. 1-14087). (10-A) 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-B) 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-C) 364-Day 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-D) Five-Year 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-D.1) Amendment No. 1 to Credit Agreements dated as of June 30, 1998 to the 364-Day Credit Agreement and the Five-Year 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 (Exhibit 10(e)(1) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). (10-D.2) Amended and Restated Credit Agreement, dated as of May 7, 1999, among U S WEST Capital Funding, Inc., U S WEST, Inc. and the banks listed on the signature pages thereof (Exhibit (b)(4) to Schedule 14D-1 and Schedule 13D, dated May 21, 1999, as amended). (10-D.3) Amendment to Credit Agreements, dated as of June 11, 1999, which further amends (i) the 364-Day Credit Agreement dated as of May 8, 1999, as amended and (ii) the Five-Year Credit Agreement dated as of May 8, 1998, as amended, 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 (Exhibit 10-D.3 to Form 10-Q for the quarter ended June 30, 1999, File No. 1-14087). (10-D.4) 364-Day $1.5 billion Credit Agreement dated as of June 11, 1999, among U S WEST Capital Funding, Inc., and U S WEST, Inc., the banks listed therein and Morgan Guaranty Trust Company of New York, as administrative agent (Exhibit (b)(6) to Amendment No. 3 to Schedule 14D-1 and Schedule 13D, dated June 11, 1999, filed on behalf of Global Crossing Ltd. and U S WEST, Inc.). (10-D.5) Assignment and Assumption Agreement among each institution listed on Schedule 1 thereto, U S WEST, Inc. and Morgan Guaranty Trust Company of New York, dated as of July 6, 1999 (Exhibit 10-D.5 to Form 10-Q for the quarter ended June 30, 1999, File No. 1-14087). (10-E) 364-Day Million Credit Agreement, among the banks listed therein, U S WEST Communications, Inc., and Morgan Guaranty Trust Company of New York, as administrative agent, dated as of May 19, 1999 (Exhibit 10-E to Form 10-Q for the quarter ended June 30, 1999, File No. 1-14087). (10-F) Amendment No. 1 to Credit Agreement to the 364-Day $800 Million Credit Agreement, dated as of May 19, 1998, among U S WEST Communications, Inc., U S WEST, Inc., the banks listed on the signature pages thereto and Morgan Guaranty Trust Company of New York, as administrative agent, dated as of June 11, 1999 (Exhibit 10-F to Form 10-Q for the quarter ended June 30, 1999, File No. 1-14087). (10-G) 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.1) Retention Agreement for the Chairman, Chief Executive Officer and President of U S WEST, Inc., dated as of September 7, 1999 (Exhibit 10-G.1 to Form 8-K dated September 20, 1999, File No. 1-14087). (10-H) Form of Change of Control Agreement for Tier II Executive (Exhibit 10(g) to Form 10-Q for the quarter ended June 30, 1998, File No. 1-14087). (10-H.1) Form of Retention Agreement for Executive Officers of U S WEST, Inc. (Exhibit 10-H.1 to Form 8-K dated September 20, 1999, File No. 1-14087). (10-I) Form of Executive Severance Agreement (Exhibit 10(h) to Form 10-Q for the quarter ended June 30, 1998, File No. 1-14087). (10-J) 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-K) 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-L) 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-M) U S WEST 1998 Broad Based Stock Option Plan dated June 12, 1998 (Exhibit 10(l) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). (10-N) U S WEST Deferred Compensation Plan, amended and restated effective as of June 12, 1998 (Exhibit 10(m) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). (10-O) U S WEST 1998 Stock Plan, as amended June 22, 1998 (Exhibit 10(n) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). 10-O.1 1998 U S WEST Stock Plan, as amended August 6, 1999. 10-O.2 1999 U S WEST Stock Plan, as amended August 6, 1999. (10-P) Stockholder Investment Plan dated June 12, 1998 (Form S-3 Registration Statement No. 333-52781, filed May 15, 1998). (10-Q) Form of Non-Qualified Stock Option Agreement (Exhibit 10-Q to Form 10-Q for the quarter ended March 31, 1999, File No. 1-14087). (10-R) Form of Agreement for Purchase and Sale of Telephone Exchanges, dated as of June 16, 1999, between Citizens Utilities Company and U S WEST Communications, Inc. (Exhibit 99 to Form 8-K, dated June 17, 1999, File No. 1-14087). (13) U S WEST 1998 Summary Annual Report to Stockholders (Exhibit 13 to Form 8-K dated February 24, 1999, File No. 1-14087). 27 Financial Data Schedule (99) Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 1998, (Exhibit 99 to Form 10-K/A filed by amendment on Form SE, File No. 1-14087), Paper Copy (P). - - ------------------- ( ) Previously filed. (b) Reports on Form 8-K filed during the Third Quarter of 1999 and through the filing of this Form 10-Q: (i) Form 8-K dated July 7, 1999 providing notification of a press release announcing that the Company's Board of Directors had authorized the Company's management and advisors to discuss with Qwest Communications International Inc. issues relating to its June 23, 1999 revised merger proposal. (ii) Form 8-K dated July 20, 1999 providing notification of a press release announcing that the Company had entered into an Agreement and Plan of Merger, dated as of July 18, 1999, with Qwest Communications International Inc., and filing (i) the Voting Agreement among each of the stockholders listed on the signature page thereto and U S WEST, Inc.; (ii) the Termination Agreement; and (iii) the joint analyst presentation of Qwest and U S WEST, dated as of July 19, 1999. (iii) Form 8-K dated July 23, 1999 providing notification of the release of second quarter earnings of U S WEST, Inc. (iv) Form 8-K/A dated July 26, 1999 amending the July 23, 1999 Form 8-K, providing notification of the release of second quarter earnings of U S WEST, Inc. (v) Form 8-K dated September 20, 1999 filing the Retention Agreement for the Chairman, Chief Executive Officer and President of U S WEST, Inc. and the Form of Retention Agreement for the Executive Officers of U S WEST, Inc. (vi) Form 8-K dated October 22, 1999 providing notification of the release of third quarter earnings of U S WEST, Inc. 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 10, 1999 EX-2 2 EXHIBIT 2-A.15 AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER AMENDMENT dated as of September 8, 1999 to the Agreement and Plan of Merger dated as of July 18, 1999 (the "Merger Agreement") between QWEST COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation ("Qwest"), and U S WEST, Inc., a Delaware corporation ("U S WEST"). W I T N E S S E T H WHEREAS, the parties hereto desire to amend the Merger Agreement in certain respects; 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 the Merger Agreement has the meaning assigned to such term in the Merger 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 the Merger Agreement shall, after this Amendment becomes effective, refer to the Merger Agreement as amended hereby. SECTION 2. Certificate of Incorporation of the Surviving Corporation. Section 2.08 of the Merger Agreement is hereby amended by deleting the word "and" at the end of clause (i) thereof, replacing the period at the end of clause (ii) thereof with a semicolon followed by the word "and" and adding the following new clause (iii) at the end thereof: the number of authorized shares of Qwest Common Stock will be 5,000,000,000. SECTION 3. Qwest's Equity Incentive Plan. Article 6 of the Merger Agreement is hereby amended by adding the following new Section 6.21: Qwest and U S WEST hereby agree that Qwest may increase the number of shares of Qwest Common Stock eligible for award under the Qwest Equity Incentive Plan from and after the Effective Time to an amount equal to the lessor of (1) 200 million and (2) 10% of the total number of shares of Qwest Common Stock outstanding as of the close of business on the date on which the Effective Time occurs, in each case reduced by the number of shares of Qwest Common Stock issuable upon the exercise of U S WEST Rights and Qwest options (other than Qwest options awarded under the Qwest Equity Incentive Plan) outstanding as of the close of business on the date on which the Effective Time occurs. SECTION 4. Governing Law. This Amendment shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed entirely within that State, without regard to the conflicts of laws provisions thereof. SECTION 5. Counterparts. This Amendment may be executed in one or more counterparts, and by the different parties in separate counterparts, each of which when executed shall be deemed to be an original, but all of which shall constitute one and the same agreement. SECTION 6. Effectiveness. This Amendment shall become effective upon execution by each of the parties hereto of a counterpart hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. QWEST COMMUNICATIONS INTERNATIONAL INC. By: /S/ DRAKE S. TEMPEST ------------------------------------- Name: Drake S. Tempest Title: Executive Vice President & General Counsel U S WEST, INC. By: /S/ MARK ROELLIG ------------------------------------- Name: Mark Roellig Title: Executive Vice President, Public Policy, Human Resources and Law, General Counsel and Secretary EX-10 3 EXHIBIT 10-O.1 THIS DOCUMENT CONSTITUTES A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 Dated August 6, 1999 Prospectus 1998 U S WEST STOCK PLAN I. Purpose. This 1998 U S WEST Stock Plan, as amended (the "Plan"), is intended to promote the long term success of U S WEST, Inc. by affording certain eligible employees, executive officers, non-employee directors of the Company (as defined below) 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 which is a condition subsequent to the grant of an Award to a Participant 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. Except as excluded below, "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 shall determine constitutes a Change of Control; provided, however, that, except as the Board of Directors otherwise determines, a Change of Control for purposes of the Plan does not include the Merger contemplated in the Agreement and Plan of Merger (the "Qwest Merger"), dated as of July 18, 1999, or as later amended, between the Company and Qwest Communications International Inc. ("Qwest"). E. "Code" shall mean the Internal Revenue Code of 1986, as amended. F. Reserved. 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, the Stock Award granted pursuant to Section XIV, the Stock Award granted pursuant to Section XV.D, 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. Reserved. 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 who has provided bona fide services to the Company or any Related Entity and is selected by the HRC or EBC to receive an Award; provided that services rendered by such consultant or advisor were not in connection with the offer or sale of securities in a capital raising transaction and do not directly or indirectly promote or maintain a market for the Company's securities. P. "Employee Benefits Committee" or "EBC" shall mean a committee of the Company consisting of employee(s) of the Company or any Related Entity appointed by the Board at the recommendation of the Human Resources Committee and which shall administer the Plan with respect to Eligible Employees and Eligible Non-Employees other than Officers, Executive Officers and Outside Directors 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 prior to the applicable date on which there were sales. T. "Human Resources Committee" or "HRC" 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 HRC, which committee shall consist of no fewer than three (3) persons, each of whom shall be a Non-Employee Director. 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 HRC or EBC, 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, with respect to an Outside Director, the later of (i) June 22, 1998, or (ii) the date on which a new Outside Director is elected to the Board. V.(3) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) or any successor rule issued under the Exchange Act. 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 to whom an Award is granted. AE. "Phantom Units" shall mean units held in a notional account in which each unit represents a value equivalent to one share of Common Stock on the Award date. AF. "Plan" shall mean the 1998 U S WEST Stock Plan, as amended. 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 EBC or HRC, as appropriate. AJ. "Restricted Stock" shall mean an Award made by the HRC or EBC entitling the Participant to acquire, at no cost or for a purchase price determined by the HRC or EBC 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, 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, pursuant to the Plan. AP. "Subsidiary" shall mean with respect to any Award other than an Incentive Option, any corporation, joint venture, limited liability company ("LLC") 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, (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, or (iii) in the case of an LLC, a twenty percent (20%) or greater interest in units in the LLC. 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 of that portion of an Option or other Award that 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 HRC for Officers, Executive Officers and Outside Directors or EBC for all other Eligible Employees and Eligible Non-Employees. III. Administration. A. The HRC, with respect to Officers, Executive Officers and Outside Directors and the EBC through the power delegated it by the Board, with respect to other Eligible Employees and Eligible Non-Employees, shall have sole and exclusive discretion to interpret and administer the Plan. The HRC may adopt such rules, regulations, procedures and guidelines as it determines necessary for the administration of the Plan. Subject to any such rules, regulations, procedures and guidelines adopted by the HRC, the EBC shall have the power to adopt rules, regulations, procedures and guidelines to administer the Plan with respect to Eligible Employees (other than Officers and Executive Officers) and with respect to Eligible Non-Employees. B. The HRC and the EBC may delegate to one or more of their members, or to one or more agents, such administrative duties as they may deem advisable, and the HRC and the EBC, or any person to whom they have delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the HRC and the EBC or such person may have under the Plan. The HRC and the EBC, as the case may be, may employ such legal or other counsel, consultants and agents as they 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 HRC or the EBC 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 HRC or the EBC, as the case may be. The Company shall indemnify members of the HRC and the EBC and any of their respective agents who are employees 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 discretionary authority granted to the HRC and the EBC, subject to the provisions of the Plan, the HRC and the EBC 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 annual or long-term financial goals of the Company, any Related Entity, or division, department, or group of the Company or any Related Entity, or individual goals which the HRC and the EBC, as the case may be, shall consider in granting Awards, if any; 3. determine the satisfaction of performance goals 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; 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 their respective rules, regulations, procedures 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 rules, regulations, procedures, and guidelines determined by the HRC and the EBC, respectively, to be necessary, appropriate or advisable in administering the Plan and to maintain compliance with any applicable law. D. The HRC or the EBC, as the case may be, may at any time accelerate the exercisability or define any other aspect of the grant of or conditions of grants 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 HRC 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 HRC, with respect to Officers, Executive Officers and Outside Directors, and the EBC, with respect to all other Eligible Employees and Eligible Non-Employees, 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 HRC, with respect to Officers, Executive Officers and Outside Directors, and the EBC, with respect to all other Eligible Employees and Eligible Non-Employees. 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 XXI, but shall continue to govern any Awards outstanding as of the end of that period. 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 HRC may determine from time to time. 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 2,500,000. D. The cumulative number of shares of Common Stock that may be issued under this Plan in connection with the exercise of Incentive Options shall not exceed ten million (10,000,000). VIII. Grant of Awards. A. The HRC shall determine the type or types of Award(s) to be made to Officers, Executive Officers and Non-Employee Directors, and the EBC shall determine the type or types of Award(s) to be made to all other Eligible Employees and Eligible Non-Employees. 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 conditioned upon the acceptance of 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 HRC, with respect to Officers, Executive Officers and Non-Employee Directors, and the EBC, with respect to all other Eligible Employees and Eligible Non-Employees. If the Agreement relates to the grant of an Option, it 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 subsequent acceptance by the Participant of the terms of the Agreement. Unless otherwise extended by the HRC, with respect to Officers, Executive Officers and Non-Employee Directors, or the EBC, with respect to all other Eligible Employees and Eligible Non-Employees, a Participant shall have ninety (90) days from the date of the Agreement to accept its terms. IX. Options. The HRC may grant Incentive Options or Nonqualified Options to Officers and Executive Officers, and the EBC may grant Incentive Options or Nonqualified Options to all other Eligible Employees 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 that the provisions of the Plan are inconsistent with the terms of, and have a materially adverse effect on the economic value of the Options granted under the predecessor plans, in which event the applicable provisions of the predecessor plans shall govern, unless otherwise agreed to by the Optionee; 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 HRC, with respect to Officers, Executive Officers and Non-Employee Directors, and the EBC, with respect to all other Eligible Employees and Eligible Non-Employees, 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 portion of an 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 HRC may grant, with respect to Officers and Executive Officers, and Directors, and the EBC may grant, with respect to all other Eligible Employees and Eligible Non-Employees, and establish rules with respect to 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 HRC or the EBC to make Awards hereunder, both the HRC and the EBC shall have the authority to grant Reload Options. Any such Reload Option shall be subject to such other terms and conditions as the HRC or the EBC, as the case may be, may determine. Notwithstanding the above, (i) the HRC and the EBC shall have the right 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 HRC or the EBC, as the case may be, 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. The Option Price shall be payable (i) in cash or by an equivalent means acceptable to the HRC or the EBC, as the case may be (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 HBC and the EBC, as the case may be, shall establish the vesting schedules for Awards. 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 applicable portion of 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 HRC or the EBC, as the case may be, 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 over time 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 over time in accordance with the vesting schedule established at the time such Options were issued, unless the HRC or the EBC, as the case may be, determines otherwise. Unless the HRC or the EBC, as the case may be, , 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, as necessary to comply with applicable foreign laws. The HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, may 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case shall be, 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 HRC or the EBC, as the case may be, need not be the same for all grants of Restricted Stock. The HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, 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 HRC or the EBC. 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, may grant the right to earn Phantom Units to Eligible Employees, Officers, Executive Officers and Eligible Non-Employees. The HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be. The HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be. 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, 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 HRC or the EBC, as the case may be, 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. Compensation for Outside Directors. A. Payment in Common Stock. In lieu of cash, each Outside Director may elect to receive payment of all or any portion of Director Compensation comprised of retainer fees for service on, and fees for attendance at meetings of, 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 Director Compensation 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 vested shares of Restricted Stock granted pursuant to Section XIV and/or the 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 vested shares of Restricted Stock and/or Common Stock and receive Phantom Units pursuant to this Section XV.B, the election shall be made in accordance with the deferral election procedures specified in the U S WEST, Inc. Deferred Compensation Plan for Nonemployee Directors. Outside Directors who elect to defer the receipt of Director Compensation (excluding the Stock Awards granted pursuant to Sections XIV and XV.D) shall receive additional Phantom Units equal to 5% of the portion of Director Compensation deferred pursuant to this Section. 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 HRC shall administer and interpret the Plan with respect to Directors and Executive Officers to the extent practicable, to maintain compliance with such rule. XVII. Change of Control; Acceleration. Upon the occurrence of a Change of Control or, within one year after the closing of the Qwest Merger, involuntary termination of a Participant, other than a termination "for cause" as defined in Paragraph IX.H.(v), , then: 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 HRC 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 HRC or the EBC, as the case may be, 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 HRC 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 HRC 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 HRC 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 HRC or the EBC, as the case may be. 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 reduce the economic value of, alter or impair any Awards previously granted under the Plan, without the consent of the holder thereof. DESCRIPTION OF SEPARATION This Plan became effective upon consummation of the separation of old U S WEST, Inc. ("Old U S WEST") into two, independent, publicly traded companies (the "Separation"). Prior to the Separation, Old U S WEST conducted 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. (which was renamed "U S WEST, Inc." at Separation and referred to in this Prospectus as "U S WEST" or the "Company") became a separately-traded company which engages in the business formerly conducted by the U S WEST Communications Group and the domestic directories business of the U S WEST Media Group. The Separation occurred in June of 1998. ADDITIONAL INFORMATION U S WEST is subject to certain informational requirements under the Exchange Act and has incorporated herein by reference the following documents filed by U S WEST into this Prospectus: (i) U S WEST's Annual Report on Form 10-K for the year ended December 31, 1998, as amended by Form 10-K/A filed March 24, 1999; (ii) U S WEST's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999; (iii) U S WEST's Current Reports on Form 8-K filed January 13, 1999, January 15, 1999, January 22, 1999, February 23, 1999, February 25, 1999, February 26, 1999, April 7, 1999, April 22, 1999, May 12, 1999, May 18, 1999, May 21, 1999, May 26, 1999, June 18, 1999, June 22, 1999, July 7, 1999, July 21, 1999 and July 26, 1999, as amended by Form 8-K/A filed July 27, 1999; (iv) U S WEST's Proxy Statement on Schedule 14A filed March 24, 1999; and (v) the description of Common Stock and preferred stock purchase rights of U S WEST contained in U S WEST's Registration Statement on Form 8-A filed on May 1, 1998 (as amended by Form 8-A/A filed May 12, 1998). All documents filed by U S WEST pursuant to Section 13(a), 13(c), 14 or 15(d) of the Act after the date of this Prospectus shall be deemed to be incorporated in this Prospectus from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any subsequently filed documents which also is or is deemed to be incorporated by reference in this Prospectus modifies or supersedes such statements. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. U S WEST shall provide, without charge, to any Participant to whom a Prospectus is delivered, upon written or oral request, a copy of the Annual Report on Form 10-K for its latest fiscal year (or for fiscal year ended December 31, 1998), an updated version of this prospectus and any or all of the documents that are incorporated by reference herein. Requests should be directed to the Corporate Secretary, U S WEST, 1801 California Street, Denver, Colorado 80202, Telephone (303) 672-2700. CERTAIN FEDERAL INCOME TAX EFFECTS It is the opinion of the Company that the following are certain income tax consequences of participation in the Plan. This section is only a summary, does not purport to be complete and, among other things, does not cover state and local tax treatment. Furthermore, differences in financial situation may cause Federal, state and local tax consequences to vary. Therefore, consultation with an accountant, legal counsel or other financial advisor regarding tax consequences is urged. 1. Incentive Options. An employee who receives an Incentive Option pursuant to the Plan does not recognize any taxable income upon the grant of such option. Similarly, the exercise of an Incentive Option generally does not give rise to federal income tax to the employee, provided that (i) the federal "alternative minimum tax," which depends on the employee's particular tax situation, does not apply and (ii) the employee is employed by U S WEST from the date of grant of the option until three months prior to the exercise thereof, except where such employment terminates by reason of disability (where the three month period is extended to one year) or death (where this requirement does not apply). If an employee exercises an Incentive Option after these requisite periods, the Incentive Option will be treated as a Nonqualified Option and will be subject to the rules described below under "Non-Qualified Options, Stock Appreciation Rights and Phantom Units." If, after exercising an Incentive Option, an employee disposes of the shares so acquired more than two years from the date of grant and more than one year from the date of transfer of the shares pursuant to the exercise of such Incentive Option (the "applicable holding period"), the employee generally will recognize a capital gain or loss equal to the difference, if any, between the amount received for the shares and the exercise price. If, however, an employee does not hold the shares so acquired for the applicable holding period, thereby making a "disqualifying disposition," the employee would recognize ordinary income equal to the excess of the fair market value of the shares at the time the Incentive Option was exercised over the exercise price; the balance of any income received at the time of such disqualifying disposition would be capital gain (provided the employee held such shares as a capital asset at such time). If the disqualifying disposition is a sale or exchange that would permit a loss to be recognized under the Code (were a loss in fact to be realized), and the sales proceeds are less than the fair market value of the shares on the date of exercise, the employee's ordinary income therefrom would be limited to the gain (if any) realized on the sale. An employee who exercises an Incentive Option by delivering shares previously acquired pursuant to the exercise of another Incentive Option before the expiration of their applicable holding period is treated as making a "disqualifying disposition" of such shares. Upon the exercise of an Incentive Option with previously acquired shares after the applicable holding period, it appears, despite some uncertainty, that the employee would not recognize gain or loss with respect to such previously acquired shares. 2. Nonqualified Options, Stock Appreciation Rights and Phantom Units. An individual who receives a grant of a Nonqualified Option, a SAR, or a phantom unit will not recognize any taxable income upon such grant. However, the individual generally will recognize ordinary income upon exercise of a Nonqualified Option in an amount equal to the excess of the fair market value of the shares at the time of exercise over the exercise price. Similarly, upon the receipt of cash or shares pursuant to the exercise of a SAR, the individual generally will recognize ordinary income in an amount equal to the sum of the cash and the fair market value of the shares received; likewise, upon the vesting of a phantom unit, the individual generally will recognize ordinary income in an amount equal to the fair market value of the shares, plus cash, if any, received. As a result of Section 16(b) of the Exchange Act, under certain circumstances, the timing of income recognition may be deferred (i.e., the "Deferral Period") for any individual who is an officer or director of U S WEST or a beneficial owner of more than ten percent (10%) of any class of equity securities of U S WEST. Absent a Section 83(b) election (as described below), recognition of income by the individual will be deferred until the expiration of the Deferral Period, if any. An individual who exercises a Nonqualified Option by delivering U S WEST Common Stock to U S WEST, other than U S WEST Common Stock previously acquired pursuant to the exercise of an Incentive Option which is treated as a "disqualifying disposition" as described above, will not recognize gain or loss with respect to the exchange of such U S WEST Common Stock, even if the fair market value of the shares so delivered is different from the individual's tax basis. The individual, however, will be taxed as described above with respect to the exercise of the Nonqualified Option as if he or she had paid the exercise price in cash. 3. Restricted Stock. Absent a written election pursuant to Section 83(b) of the Code filed with the IRS within 30 days after the date of transfer of such shares (a "Section 83(b) election"), an individual who receives restricted stock under the Plan generally will recognize ordinary income at the earlier of the time at which (i) the shares become transferable or (ii) the restrictions that impose a substantial risk of forfeiture of such shares lapse, in an amount equal to the excess of the fair market value (on such date) of such shares over the consideration paid for such restricted stock, if any. If a Section 83(b) election is made, the individual will recognize ordinary income, as of the transfer date, in an amount equal to the excess of the fair market value of the shares as of that date over the price paid for such award, if any. 4. Consequences to Company. U S WEST will not be allowed a federal income tax deduction upon the grant or exercise of an Incentive Option or the disposition, after the applicable holding period, of the shares acquired upon exercise of an Incentive Option. In the event of a disqualifying disposition of shares acquired upon exercise of an Incentive Option, U S WEST generally will be entitled to a deduction in an amount equal to the ordinary income included by the employee, provided that such amount constitutes an ordinary and necessary business expense to U S WEST and is reasonable and the limitations of Sections 280G and 162(m) of the Code (discussed below) do not apply. A federal income tax deduction generally will be allowed to U S WEST in an amount equal to the ordinary income included by the employee with respect to his or her Nonqualified Option, SAR, phantom unit, or restricted stock, provided that such amount constitutes an ordinary and necessary business expense to U S WEST and is reasonable and the limitations of Sections 280G and 162(m) of the Code do not apply. 5. Change of Control. In general, if the total amount of payments to an individual that are contingent upon a "change of control" of U S WEST (as defined in Section 280G of the Code), including payments under the Plan that vest upon a "change of control," equals or exceeds three times the individual's "base amount" (generally, such individual's average annual compensation for the five calendar years preceding the change of control), then, subject to certain exceptions, the payments may be treated as "parachute payments" under the Code, in which case a portion of such payments would be non-deductible to U S WEST and the individual would be subject to a 20% excise tax on such portion of the payments. 6. Certain Limitations on Deductibility of Executive Compensation. With certain exceptions, Section 162(m) of the Code denies a deduction to publicly held corporations for compensation paid to certain executive officers in excess of $1 million per executive per taxable year. One such exception applies to certain performance-based compensation provided that such compensation has been approved by stockholders in a separate vote and certain other requirements are met. U S WEST believes that certain awards granted under the Plan should qualify for the performance-based compensation exception to Section 162(m). RESALE RESTRICTIONS Resale restrictions imposed by federal and/or state securities laws may restrict certain Participants from transferring securities received under the Plan. For example, Participants who hold "restricted securities" or are deemed "affiliates," as those terms are defined in Rule 144 under the Securities Act, may not sell securities issued by U S WEST to the public except pursuant to (a) an effective resistration statement filed by U S WEST with the SEC under the Securities Act; or (b) an exemption from the registration requirements of the Securities Act. Rule 144 provides an exemption for resale, subject to certain conditions, such as a holding period, availability of public information, limitation on amount of securities sold, manner of sale, and notice of sale. This prospectus is not available for any resale. EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 The Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan is administered by the HRC with respect to Officers, Executive Officers and Outside Directors and by the EBC with respect to all other Eligible Employees an Eligible Non-Employees. The HRC consists of non-employee Board members appointed by the Board. The EBC consists of the Vice President-Law and Corporate Human Resources of U S WEST and other officers of U S WEST designated by the Vice President-Law and Corporate Human Resources. EXPERTS The financial statements and schedules incorporated by reference in this Prospectus have been audited by Arthur Andersen LLP, independent public accounts, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. EX-10 4 EXHIBIT 10-O.2 THIS DOCUMENT CONSTITUTES A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 Dated August 6, 1999 Prospectus 1999 U S WEST STOCK PLAN I. Purpose. This 1999 U S WEST Stock Plan, as amended (the "Plan"), is intended to promote the long term success of U S WEST, Inc. or its successor (the "Company") by affording certain eligible employees 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 approval by the Board of Directors (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 which is a condition subsequent to the grant of an Award to a Participant 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. Except as excluded below, "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 shall determine constitutes a Change of Control; provided, however, that, except as the Board of Directors otherwise determines, a Change of Control for purposes of the Plan does not include the merger contemplated in the Agreement and Plan of Merger (the "Qwest Merger"), dated as of July 18, 1999, or as later amended, between the Company and Qwest Communications International Inc., a Delaware corporation ("Qwest"). E. "Code" shall mean the Internal Revenue Code of 1986, as amended. F. "Committee" shall mean the Employee Benefits Committee of the Company consisting of employee(s) of the Company or any Related Entity appointed by the Board at the recommendation of the Human Resources Committee or its delegate(s), as applicable, to exercise the delegated authority of the Human Resources Committee, as set forth under 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" shall mean any member of the Board of Directors of the Company. 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. K. "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. L. "Effective Date" shall mean the date on which the Plan was approved by the Board of Directors. M. "Eligible Employee" shall mean any employee of the Company or any Related Entity who is not a Director or an Executive Officer (defined below) and who is so employed on the date of the grant of an Award. N. "Eligible Non-Employee" shall mean any consultant or advisor who is not a Director and who has provided bona fide services to the Company or any Related Entity and is selected by the Committee to receive an Award; provided that services rendered by such consultant or advisor were not in connection with the offer or sale of securities in a capital raising transaction and do not directly or indirectly promote or maintain a market for the Company's securities as those terms are used in the Form S-8 issued under the Securities Act. O. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. P. "Executive Officer" 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. Q. "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 prior to the applicable date on which there were sales. R. "Incentive Option" shall mean an incentive stock option under the provisions of Section 422 of the Code. S. "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. T. "Nonqualified Option" shall mean an Option which does not qualify under Section 422 of the Code. U. "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. V. "Optionee" shall mean a Participant to whom one or more Options have been granted. W. "Option Price" shall mean the price per share payable to the Company for shares of Common Stock upon the exercise of an Option. X. "Parent Corporation" shall mean any corporation within the meaning of Section 424(e) of the Code. Y. "Participant" shall mean an Eligible Employee or Eligible Non-Employee to whom an Award is granted. Z. "Phantom Unit" shall mean a notional account representing a value equivalent to one share of Common Stock on the Award date. AA. "Plan" shall mean the 1999 U S WEST Stock Plan, as amended. AB. "Related Entity" shall mean any Parent Corporation or Subsidiary of the Company. AC. "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. AD. "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. AE. "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. AF. "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, written agreement or arrangement between the Company or any Related Entity and the Eligible Employee. "Retirement" shall not apply to any Eligible Non-Employee. AG. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. AH. "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 to determine the form or forms of payment at the time of grant of the SAR. AI. "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. AJ. "Subsidiary" shall mean with respect to any Award other than an Incentive Option, any corporation, joint venture, limited liability company ("LLC"), 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, (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, or (iii) in the case of an LLC, a twenty percent (20%) or more interest in units in the LLC. In the case of any Incentive Option, Subsidiary shall mean any corporation within the meaning of Section 424(f) of the Code. AK. "Vested" shall mean the status of that portion of an Option or other Award that 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 Committee shall have sole and exclusive discretion to interpret and administer the Plan. The Committee shall have the power to adopt rules, regulations and guidelines relating to the administration of the Plan. 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 annual or long-term financial goals of the Company, any 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; 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, regulations, procedures, 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; and 9. make all determinations, perform all other acts, exercise all other powers and establish any other rules, regulations, procedures, and guidelines 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 accelerate the exercisability or define any other aspect of the grant of or the conditions of the grant of any Awards and waive or amend any and all restrictions and conditions of any Awards. 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. 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 XVII but shall continue to govern any Awards outstanding as of the end of that period. VII. Shares Available; Limitations. Up to 12,000,000 shares of Common Stock may be granted under this Plan. 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. Absent an amendment of this provision by the Committee, no Incentive Options shall be granted under this Plan and no shares of Common Stock may be issued under this Plan in connection with the exercise of Incentive Options. 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. 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 conditioned upon the acceptance of 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 will be subject to amendment, modification or alteration by the Committee pursuant to Section III.D of this Plan and without the Participant's execution of such amendment, modification or alteration. If the Agreement relates to the grant of an Option, it 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 subsequent 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 may grant Incentive Options or Nonqualified Options to Eligible Employees and Nonqualified Options to Eligible Non-Employees. 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. All agreements granting options under Section IX.A shall state that the Options issued pursuant to the Agreement are not intended to qualify for tax benefits under Section 422 of the Code. 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 portion of an 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. 4. Shareholder Approval. If required by law to issue Incentive Options, shareholder approval of the Plan shall be obtained within twelve (12) months before or after adoption of the Plan. D. Other Options - Special Tax Benefits. 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 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 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. 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 Committee shall establish the vesting schedules for awards. 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 applicable portion of 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 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 over time 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 over time in accordance with the vesting schedule established at the time such Options were issued, unless the Committee determines otherwise. Unless the Committee 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 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 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 that 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 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 grant Restricted Stock to Eligible Employees and Eligible Non-Employees 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. 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 XVI.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 grant the right to earn Phantom Units to Eligible Employees 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. Change of Control; Acceleration. Upon the occurrence of a Change of Control or, within one year after the closing of the Qwest Merger, the involuntary termination of a Participant, other than a termination "for cause" as defined in Section IX.H.(v) of this Plan, then: 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 Employee Benefits Committee, in its discretion, shall have the right to accelerate payment of any deferrals of Vested Phantom Units. XV. 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. XVI. 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. 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. 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. XVII. Amendment or Termination of Plan. The Committee shall have the right to amend, modify, suspend or terminate the Plan or any Awards at any time. ADDITIONAL INFORMATION U S WEST is subject to certain informational requirements under the Exchange Act and has incorporated herein by reference the following documents filed by U S WEST into this Prospectus: (i) U S WEST's Annual Report on Form 10-K for the year ended December 31, 1998, as amended by Form 10-K/A filed March 24, 1999; (ii) U S WEST's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999; (iii) U S WEST's Current Reports on Form 8-K filed January 13, 1999, January 15, 1999, January 22, 1999, February 23, 1999, February 25, 1999, February 26, 1999, April 7, 1999, April 22, 1999, May 12, 1999, May 18, 1999, May 21, 1999, May 26, 1999, June 18, 1999, June 22, 1999, July 7, 1999, July 21, 1999 and July 26, 1999, as amended by Form 8-K/A filed July 27, 1999; (iv) U S WEST's Proxy Statement on Schedule 14A filed March 24, 1999; and (v) the description of Common Stock and preferred stock purchase rights of U S WEST contained in U S WEST's Registration Statement on Form 8-A filed on May 1, 1998 (as amended by Form 8-A/A filed May 12, 1998). All documents filed by U S WEST pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus shall be deemed to be incorporated in this Prospectus from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any subsequently filed documents which also is or is deemed to be incorporated by reference in this Prospectus modifies or supersedes such statements. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. U S WEST shall provide, without charge, to any Participant to whom a Prospectus is delivered, upon written or oral request, a copy of an updated version of this prospectus and any or all of the documents that are incorporated by reference herein. Requests for such documents or for additional information about the Plan or its administrators should be directed to the Corporate Secretary, U S WEST, 1801 California Street, Denver, Colorado 80202, Telephone (303) 672-2700. CERTAIN FEDERAL INCOME TAX EFFECTS It is the opinion of the Company that the following are certain income tax consequences of participation in the Plan. This section is only a summary, does not purport to be complete and, among other things, does not cover state and local tax treatment. Furthermore, differences in financial situation may cause Federal, state and local tax consequences to vary. Therefore, consultation with an accountant, legal counsel or other financial advisor regarding tax consequences is urged. 1. Nonqualified Options, Stock Appreciation Rights and Phantom Units. An individual who receives a grant of a Nonqualified Option, a SAR, or a phantom unit will not recognize any taxable income upon such grant. However, the individual generally will recognize ordinary income upon exercise of a Nonqualified Option in an amount equal to the excess of the fair market value of the shares at the time of exercise over the exercise price. Similarly, upon the receipt of cash or shares pursuant to the exercise of a SAR, the individual generally will recognize ordinary income in an amount equal to the sum of the cash and the fair market value of the shares received; likewise, upon the vesting of a phantom unit, the individual generally will recognize ordinary income in an amount equal to the fair market value of the shares, plus cash, if any, received. An individual who exercises a Nonqualified Option by delivering U S WEST Common Stock to U S WEST will not recognize gain or loss with respect to the exchange of such U S WEST Common Stock, even if the fair market value of the shares so delivered is different from the individual's tax basis. The individual, however, will be taxed as described above with respect to the exercise of the Nonqualified Option as if he or she had paid the exercise price in cash. 2. Restricted Stock. Absent a written election pursuant to Section 83(b) of the Code filed with the IRS within 30 days after the date of transfer of such shares (a "Section 83(b) election"), an individual who receives restricted stock under the Plan generally will recognize ordinary income at the earlier of the time at which (i) the shares become transferable or (ii) the restrictions that impose a substantial risk of forfeiture of such shares lapse, in an amount equal to the excess of the fair market value (on such date) of such shares over the consideration paid for such restricted stock, if any. If a Section 83(b) election is made, the individual will recognize ordinary income, as of the transfer date, in an amount equal to the excess of the fair market value of the shares as of that date over the price paid for such award, if any. 3. Consequences to Company. A federal income tax deduction generally will be allowed to U S WEST in an amount equal to the ordinary income included by the employee with respect to his or her Nonqualified Option, SAR, phantom unit, or restricted stock, provided that such amount constitutes an ordinary and necessary business expense to U S WEST and is reasonable and the limitations of Sections 280G and 162(m) of the Code do not apply. 4. Change of Control. In general, if the total amount of payments to an individual that are contingent upon a "change of control" of U S WEST (as defined in Section 280G of the Code), including payments under the Plan that vest upon a "change of control," equals or exceeds three times the individual's "base amount" (generally, such individual's average annual compensation for the five calendar years preceding the change of control), then, subject to certain exceptions, the payments may be treated as "parachute payments" under the Code, in which case a portion of such payments would be non-deductible to U S WEST and the individual would be subject to a 20% excise tax on such portion of the payments. RESALE RESTRICTIONS Resale restrictions imposed by federal and/or state securities laws may restrict certain Participants from transferring securities received under the Plan. For example, Participants who hold "restricted securities" or are deemed "affiliates," as those terms are defined in Rule 144 under the Securities Act, may not sell securities issued by U S WEST to the public except pursuant to (a) an effective registration statement filed by U S WEST with the SEC under the Securities Act; or (b) an exemption from the registration requirements of the Securities Act. Rule 144 provides an exemption for resale, subject to certain conditions, such as a holding period, availability of public information, limitation on amount of securities sold, manner of sale, and notice of sale. This prospectus is not available for any resale. EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 The Plan is not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan is administered by the Employee Benefits Committee. The Employee Benefits Committee consists of the Senior Vice President-Law and Corporate Human Resources of U S WEST and other officers of U S WEST designated by the Senior Vice President-Law and Corporate Human Resources. EXPERTS The financial statements and schedules incorporated by reference in this Prospectus have been audited by Arthur Andersen LLP, independent public accounts, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. EX-27 5 FDS --
5 0001054522 U S WEST, Inc. 1,000,000 3-MOS 9-MOS DEC-31-1999 DEC-31-1999 JUL-01-1999 JAN-01-1999 SEP-30-1999 SEP-30-1999 55 55 0 0 1,785 1,785 0 0 257 257 2,651 2,651 37,271 37,271 21,566 21,566 20,960 20,960 6,962 6,962 0 0 0 0 0 0 0 0 152 152 20,960 20,960 3,317 9,757 3,317 9,757 0 0 0 0 2,440 7,232 0 0 203 519 396 1,714 257 757 257 757 0 0 0 0 0 0 139 957 .28 1.90 .27 1.88
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