-----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, LlZroNCAWDOp+V6PsGDutilsJBAR/Hv4WkUm+VSc9jGjrmRB+axBLNfFIwqoWwjZ MHUwVDUy2oui57mGx+bj1g== 0000732718-98-000031.txt : 19980817 0000732718-98-000031.hdr.sgml : 19980817 ACCESSION NUMBER: 0000732718-98-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDIA ONE GROUP INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840926774 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08611 FILM NUMBER: 98686941 BUSINESS ADDRESS: STREET 1: 188 INVERNESS DR WEST STREET 2: STE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3038583000 MAIL ADDRESS: STREET 1: 188 INVERNESS DRIVE WEST STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: US WEST INC DATE OF NAME CHANGE: 19920703 10-Q 1 SECOND QUARTER REPORT Page 1 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 June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 1-8611 MEDIAONE GROUP, INC.
A Delaware Corporation IRS Employer No. 84-0926774
188 Inverness Drive West, Englewood, Colorado 80112 Telephone Number 303-858-3000 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 __ The number of shares of MediaOne Group, Inc. common stock outstanding (net of shares held in treasury), at July 31, 1998, was 609,405,218 shares. MediaOne Group, Inc. Form 10-Q TABLE OF CONTENTS
Item Page PART I - FINANCIAL INFORMATION 1. MediaOne Group, Inc. Financial Information Consolidated Statements of Operations - Three and Six Months Ended June 30, 1998 and 1997 3 Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 6 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 8 Notes to Consolidated Financial Statements 9 2. MediaOne Group, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations 29 3. MediaOne Group, Inc. Quantitative and Qualitative Disclosures About Market Risk 51
PART II - OTHER INFORMATION
1. Legal Proceedings 52 4. Submission of Matters to a Vote of Security Holders 52 6. Exhibits and Reports on Form 8-K 53
Form 10-Q - Part I MEDIAONE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ------------------------------------------------------- ----------------------------- ------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ------------------------ Dollars in millions 1998 1997 1998 1997 - -------------------------------------------------------- ------------- -------------- ------------ ----------- Sales and other revenues: Cable and broadband $613 $589 $1,237 $1,145 Wireless communications 20 363 361 698 Other 8 29 15 58 ------------- -------------- ------------ ----------- Total sales and other revenues 641 981 1,613 1,901 Operating expenses: Cost of sales and other revenues 241 326 558 631 Selling, general and admin. expenses 195 313 502 590 Depreciation and amortization 258 290 606 584 ------------- -------------- ------------ ----------- Total operating expenses 694 929 1,666 1,805 ------------- -------------- ------------ ----------- Income (loss) from operations (53) 52 (53) 96 Interest expense (143) (166) (293) (340) Equity losses in unconsolidated ventures (69) (153) (205) (318) Gain on sale of domestic wireless investment 3,869 - 3,869 - Gains on sales of investments 22 44 39 95 Guaranteed minority interest expense (20) (22) (42) (44) Other income (expense) - net 110 (7) 73 (11) ------------- -------------- ------------ ----------- Income (loss) from continuing operations before income taxes 3,716 (252) 3,388 (522) (Provision) benefit for income taxes (1,542) 71 (1,436) 151 ------------- -------------- ------------ ----------- Income (loss) from continuing operations 2,174 (181) 1,952 (371) Income from discontinued operations - net of income taxes (Note 13): Results of operations 313 416 747 836 Gain on separation 24,461 - 24,461 - ------------- -------------- ------------ ----------- Income before extraordinary item 26,948 235 27,160 465 Extraordinary item: Early extinguishment of debt, net of tax (333) 3 (333) 3 ============= ============== ============ =========== NET INCOME $26,615 $238 $26,827 $468 ============= ============== ============ =========== - - Dividends on preferred stock (13) (12) (26) (25) Loss on redemption of Preferred Securities (53) - (53) - ------------- -------------- ------------ ----------- EARNINGS AVAILABLE FOR COMMON STOCK $26,549 $226 $26,748 $443 - -------------------------------------------------------- ============= ============== ============ ===========
See Notes to Consolidated Financial Statements. Form 10-Q - Part I MEDIAONE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited), continued
- -------------------------------------------------------- ------------------------------ --------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------------------ --------------------------- In thousands (except per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------- --------------- -------------- ------------- ------------- MEDIAONE GROUP STOCK (Note 8) BASIC EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $3.46 $(0.31) $3.08 $(0.65) Income from discontinued operations (1) 0.12 0.14 0.26 0.27 Gain on separation 40.16 - 40.19 - Extraordinary item - early extinguishment of debt (0.55) - (0.55) - --------------- -------------- ------------- ------------- Basic earnings (loss) per common share $43.19 $(0.17) $42.98 $(0.38) =============== ============== ============= ============= BASIC AVERAGE COMMON SHARES OUTSTANDING 609,098 606,446 608,699 606,486 =============== ============== ============= ============= COMMUNICATIONS STOCK (Note 8) BASIC EARNINGS PER COMMON SHARE: Income from discontinued operations (2) $0.50 $0.69 $1.21 $1.39 =============== ============== ============= ============= BASIC AVERAGE COMMON SHARES OUTSTANDING (3) 484,982 482,542 484,972 481,945 =============== ============== ============= ============= COMMUNICATIONS STOCK DIVIDENDS PER COMMON SHARE $ - $0.535 $0.535 $1.07 - -------------------------------------------------------- =============== ============== ============= =============
(1) Amounts represent the operations of U S WEST Dex, Inc., which were discontinued as of June 12, 1998. (2) Amounts represent the operations of Communications Group, which were discontinued as of June 12, 1998. (3) The computation of average common shares outstanding for Communications Stock during 1998 reflects shares outstanding through June 12, 1998. See Notes to Consolidated Financial Statements. Form 10-Q - Part I MEDIAONE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited), continued
- -------------------------------------------------------- ------------------------------ --------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------------------ --------------------------- In thousands (except per share amounts) 1998 (1) 1997 1998 1997 - -------------------------------------------------------- --------------- -------------- ------------- ------------- MEDIAONE GROUP STOCK (Note 8) DILUTED EARNINGS (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $3.24 $(0.31) $2.91 $(0.65) Income from discontinued operations (2) 0.11 0.14 0.24 0.27 Gain on separation 37.42 - 37.48 - Extraordinary item - early extinguishment of debt (0.51) - (0.51) - --------------- -------------- ------------- ------------- Diluted earnings (loss) per common share $40.27 $(0.17) $40.12 $(0.38) =============== ============== ============= ============= DILUTED AVERAGE COMMON SHARES OUTSTANDING 653,611 606,446 652,601 606,486 =============== ============== ============= ============= COMMUNICATIONS STOCK (Note 8) DILUTED EARNINGS PER COMMON SHARE: Income from discontinued operations (3) $0.49 $0.69 $1.20 $1.39 =============== ============== ============= ============= DILUTED AVERAGE COMMON SHARES OUTSTANDING (4) 489,057 482,542 489,069 481,945 - -------------------------------------------------------- =============== ============== ============= =============
(1) Column does not add due to rounding of individual components. (2) Amounts represent the operations of U S WEST Dex, Inc., which were discontinued as of June 12, 1998. (3) Amounts represent the operations of Communications Group, which were discontinued as of June 12, 1998. (4) The computation of average common shares outstanding for Communications Stock during 1998 reflects shares outstanding through June 12, 1998. See Notes to Consolidated Financial Statements. Form 10-Q - Part I MEDIAONE GROUP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited)
- ------------------------------------------------------------------------ ----------------- ------------------- June 30, December 31, Dollars in millions 1998 1997 - ------------------------------------------------------------------------ ----------------- ------------------- ASSETS Current assets: Cash and cash equivalents $384 $184 Accounts and notes receivable - net 376 604 Inventories and supplies 8 29 Deferred tax asset 80 102 Prepaid and other 32 48 Net investment in assets of discontinued operations - 4,367 ----------------- ------------------- Total current assets 880 5,334 Gross property, plant and equipment 4,161 5,571 Accumulated depreciation 782 1,299 ----------------- ------------------- Property, plant and equipment - net 3,379 4,272 Investment in Time Warner Entertainment 2,491 2,486 Investment in AirTouch Communications 5,015 - Net investment in international ventures 728 742 Net investment in assets held for sale 445 419 Intangible assets - net 11,886 12,597 Other assets 565 933 ----------------- ------------------- Total assets $25,389 $26,783 - ------------------------------------------------------------------------ ================= ===================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I MEDIAONE GROUP, INC. CONSOLIDATED BALANCE SHEETS (Unaudited), continued
- -------------------------------------------------------------------- -------------------- -------------------- June 30, December 31, Dollars in millions 1998 1997 - -------------------------------------------------------------------- -------------------- -------------------- LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $2,075 $735 Accounts payable 125 395 Employee compensation 62 109 Deferred revenues and customer deposits 79 108 Other 743 841 -------------------- -------------------- Total current liabilities 3,084 2,188 Long-term debt 3,040 8,228 Deferred income taxes 4,996 3,276 Deferred credits and other 604 587 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures 561 1,080 Preferred stock subject to mandatory redemption 100 100 Shareowners' equity: Preferred stock 924 923 Common shares 10,515 10,876 Retained earnings (deficit) 1,218 (359) LESOP guarantee - (46) Accumulated other comprehensive income (loss) 347 (70) -------------------- -------------------- Total shareowners' equity 13,004 11,324 -------------------- -------------------- Total liabilities and shareowners' equity $25,389 $26,783 - -------------------------------------------------------------------- ==================== ====================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I MEDIAONE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ----------------------------------------------------------------------------------- ------------- ------------ Six Months Ended June 30, 1998 1997 - ----------------------------------------------------------------------------------- ------------- ------------ OPERATING ACTIVITIES Dollars in millions Net income $26,827 $468 Adjustments to net income: Discontinued operations (747) (836) Gain on Separation (24,461) - Extraordinary (gain) loss on debt extinguishment 333 (3) Depreciation and amortization 606 584 Equity losses in unconsolidated ventures 205 318 Distribution from unconsolidated ventures 28 5 Gain on sale of domestic wireless investment (3,869) - Gains on sales of investments (39) (95) Deferred income taxes and amortization of investment tax credits 1,557 (76) Provision for uncollectibles 27 32 Separation costs paid (97) - Changes in operating assets and liabilities: Accounts and notes receivable 29 (24) Inventories, supplies and other current assets (46) (30) Accounts payable and accrued liabilities (286) 84 Other - net 91 (16) ------------- ------------ Cash provided by operating activities 158 411 ------------- ------------ INVESTING ACTIVITIES Expenditures for property, plant and equipment (725) (709) Payment to Continental Cablevision shareowners - (1,150) Investment in international ventures (13) (49) Investment in domestic ventures (79) (116) Purchase of miscellaneous investments (35) (25) Proceeds from sales of investments 187 575 Cash (to) from net investment in assets held for sale (101) 50 Other - net 6 - ------------- ------------ Cash used for investing activities (760) (1,424) ------------- ------------ FINANCING ACTIVITIES Net proceeds from (repayments of) short-term debt 2,405 (3,051) Proceeds from issuance of long-term debt - 4,110 Repayments of long-term debt (5,447) (108) Repayments of Preferred Securities (582) - Proceeds from issuance of common stock 104 49 Dividends paid on common stock (519) (475) Dividends paid on preferred stock (27) (23) Purchases of treasury stock (85) (53) ------------- ------------ Cash (used for) provided by financing activities (4,151) 449 ------------- ------------ Cash provided by discontinued operations 4,953 598 ------------- ------------ CASH AND CASH EQUIVALENTS Increase 200 34 Beginning balance 184 121 ============= ============ Ending balance $384 $155 - ----------------------------------------------------------------------------------- ============= ============
See Notes to Consolidated Financial Statements. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Six Months Ended June 30, 1998 (Dollars in millions) (Unaudited) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The Consolidated Financial Statements have been prepared by MediaOne Group, Inc. ("MediaOne Group" or the "Company") pursuant to the interim reporting rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally accompanying financial statements prepared in accordance with generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of MediaOne Group's management, the Consolidated Financial Statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial information set forth therein. It is suggested that these Consolidated Financial Statements be read in conjunction with the MediaOne Group Consolidated Financial Statements and notes thereto filed on Form 8-K dated June 18, 1998. The MediaOne Group Form 8-K filing restated the U S WEST, Inc. Consolidated Financial Statements filed on Form 10-K/A dated April 13, 1998, and gave effect to the classification of New U S WEST as a discontinued operation, as defined in Note 2 - the Separation - to the Consolidated Financial Statements. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. NOTE 2: THE SEPARATION Prior to June 12, 1998, MediaOne Group was known as "U S WEST, Inc." ("Old U S WEST"). On June 12, 1998, Old U S WEST separated its businesses into two independent public companies (the "Separation"). Until the Separation, Old U S WEST conducted its businesses through two groups: U S WEST Media Group (the "Media Group") and U S WEST Communications Group (the "Communications Group"). Upon Separation, Old U S WEST was renamed "MediaOne Group, Inc." and retained the multimedia businesses of Media Group, except for U S WEST Dex, Inc. ("Dex"), the domestic directory business. The telecommunications businesses of the Communications Group became an independent public company and retained the "U S WEST, Inc." name ("New U S WEST"). In addition, Dex was aligned with New U S WEST (the "Dex Alignment"). In connection with the Dex Alignment, (i) each holder of Media Group common stock received as a dividend .02731 shares of New U S WEST common stock for each share of Media Group common stock held (the "Dex Dividend"), and (ii) $3.9 billion of Old U S WEST debt was refinanced by New U S WEST. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) The Separation was consummated pursuant to the terms of a separation agreement between MediaOne Group and New U S WEST (the "Separation Agreement"). The Company accounted for the distribution of New U S WEST stock to the Communications Group stockholders, and to the Media Group stockholders for the Dex Alignment, as a discontinuance of the businesses comprising New U S WEST. As a result, certain financial information of Old U S WEST has been restated to give effect to the classification of New U S WEST as a discontinued operation. See Note 13 - Discontinued Operations - to the Consolidated Financial Statements. The Refinancing In connection with the Separation, MediaOne Group refinanced substantially all of the indebtedness issued or guaranteed by Old U S WEST through a combination of tender offers, prepayments, and consent solicitations (the "Refinancing"). See Note 4 - Debt - to the Consolidated Financial Statements. NOTE 3: ACQUISITIONS AND DISPOSITIONS Sale of Domestic Wireless Businesses On April 6, 1998, MediaOne Group sold its domestic wireless businesses to AirTouch Communications, Inc. ("AirTouch") in a tax-efficient transaction (the "AirTouch Transaction"). The AirTouch Transaction was consummated pursuant to an agreement and plan of merger (the "AirTouch Merger Agreement") dated as of January 29, 1998. The domestic wireless businesses included cellular communication services provided to 2.6 million customers in 12 western and midwestern states and a 25 percent interest in PrimeCo Personal Communications, L.P. ("PrimeCo"). Pursuant to the AirTouch Merger Agreement, AirTouch acquired these cellular and personal communications services ("PCS") interests. Consideration under the AirTouch Transaction consisted of (i) debt reduction of $1,350, (ii) the issuance to MediaOne Group of $1,650 in liquidation preference of dividend bearing AirTouch preferred stock (fair value of $1,493), and (iii) the preliminary issuance to MediaOne Group of 59,447,000 shares of AirTouch common stock. During July, 1998, the number of shares was adjusted to 59,314,000 as a result of post-closing adjustments. The transaction resulted in a gain of $2,257, net of deferred taxes of $1,612. MediaOne Group is accounting for its investment in AirTouch under the cost method of accounting, as available for sale securities. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) PrimeStar Transaction Prior to April 1, 1998, MediaOne Group held a 10.4 percent equity interest in PrimeStar Partners, L.P. ("Old PrimeStar"). In addition, MediaOne Group distributed PrimeStar direct broadcast satellite ("DBS") services to subscribers in its service areas and, as a result, reflected consolidated operating results with respect to such subscribers. On April 1, 1998, MediaOne Group contributed its interest in Old PrimeStar, as well as its PrimeStar subscribers and certain related assets, to PrimeStar, Inc. ("PrimeStar"), a newly formed entity, in exchange for an approximate 10 percent interest in PrimeStar and $77 in cash (the "PrimeStar Contribution"). As a result, effective April 1, 1998, MediaOne Group no longer reflects consolidated operating results for PrimeStar DBS services. MediaOne Group is accounting for the investment in PrimeStar under the cost method of accounting. High Speed Data Joint Venture On June 15, 1998, MediaOne Group formed a joint venture with Time Warner, Inc., ("Time Warner"), Time Warner Entertainment Company L.P. ("TWE") and Time Warner Entertainment-Advance/Newhouse Partnership ("TWE/AN") called "ServiceCo, LLC" (the "HSD Joint Venture"). The parties to the joint venture contributed certain of their respective high speed data ("HSD") assets into the HSD Joint Venture in exchange for common equity interests of approximately 31.4 percent for MediaOne Group, 10.7 percent for Time Warner, 25.0 percent for TWE and 32.9 percent for TWE/AN. In addition, Microsoft Corporation and Compaq Computer Corporation each contributed $212.5 million for a respective 10 percent preferred equity investment in the HSD Joint Venture. The preferred shares are convertible into a combined 20 percent common equity interest in the HSD Joint Venture. Assuming the conversion of the preferred shares and taking into account MediaOne Group's ownership in TWE, MediaOne Group would hold a proportionate diluted common equity interest in the HSD Joint Venture of approximately 34.6 percent. MediaOne Group intends to account for its investment in the HSD Joint Venture under the equity method of accounting. The HSD Joint Venture will be responsible for maintaining an Internet network, providing technical customer support and developing national content. The parties to the joint venture will continue to operate their HSD businesses and be responsible for customer service and billing. However, the service will be marketed under the "Road Runner" brand name. Accordingly, MediaOne Group will continue to reflect HSD service revenues in its consolidated results. Beginning in the third quarter of 1998, MediaOne Group will reflect a service fee, payable to the HSD Joint Venture, based upon a predetermined formula. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Time Warner Cable Systems The Company has reached a definitive agreement with Time Warner to acquire Time Warner's cable systems in the cities of Dearborn and Wayne, Michigan for approximately $60. The systems serve approximately 30,000 subscribers. The transaction is expected to close in the fourth quarter of 1998. NOTE 4: DEBT Short-term Debt As part of the Refinancing, $4.9 billion of notional medium and long-term debt was redeemed, effective June 12, 1998, for a total cash redemption amount of $5.5 billion. MediaOne Group extinguished the debt by issuing commercial paper at a weighted-average interest rate of 5.85 percent. In accordance with the Separation Agreement, New U S WEST funded to MediaOne Group $3.9 billion related to the Dex Alignment. The Company used the funds to repay the amount of commercial paper issued in connection with the Refinancing. Debt extinguishment costs totaled $333 (net of income tax benefits of $209) and are reflected in the Consolidated Statements of Operations as an extraordinary item. In addition to refinancing costs, such costs included the difference between the market and face value of the debt redeemed and a charge for unamortized debt issuance costs. MediaOne Group financed the debt extinguishment costs by issuing commercial paper, net of a $140 reimbursement by New U S WEST for shared costs. In connection with the AirTouch Transaction, AirTouch assumed $1,350 of short-term debt from MediaOne Group. MediaOne Group maintains a commercial paper program to finance short-term cash flow requirements, as well as to maintain a presence in the short-term debt market. The Company is permitted to borrow up to $4.0 billion of commercial paper, backed by lines of credit, of which approximately $2.2 billion was available at June 30, 1998. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) The components of short-term debt follow: -------------------------------------------------------------------- -------------------- -------------------- June 30, December 31, 1997 1998 -------------------------------------------------------------------- -------------------- -------------------- Notes payable: Commercial paper $1,814 $750 Other 22 17 Current portion of long-term debt 450 266 Allocated to the capital assets segment - net (211) (100) Allocated to the discontinued operations - (198) ==================== ==================== Total $2,075 $735 ==================================================================== ==================== ====================
Long-term Debt The components of long-term debt follow:
- ---------------------------------------------------------------------------- ------------------- -------------------- June 30, December 31, 1997 1998 - ---------------------------------------------------------------------------- ------------------- -------------------- Senior unsecured notes, debentures and medium-term notes $2,351 $7,275 Senior subordinated debt 300 300 Debt exchangeable for common stock - 254 Insurance company notes 18 36 Capital lease obligations 5 6 Other 93 81 Unamortized discount - net - (8) Unamortized premium - net 273 284 =================== ==================== Total $3,040 $8,228 ============================================================================ =================== ====================
Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Interest rates and maturities of long-term debt follow:
- ------------------------- ------------------------------------------------------------ ------------------------- Maturities Total ------------------------------------------------------------ ------------------------- Interest Rates 1999 2000 2001 2002 Thereafter 1998 1997 - ------------------------- ----------- --------- ---------- ----------- --------------- ------------ ------------ Above 5% to 6% $- $- $- $- $- $- $10 Above 6% to 7% 11 1 - 36 48 96 2,498 Above 7% to 8% - - - 2 47 49 2,730 Above 8% to 9% - - 200 - 1,475 1,675 1,717 Above 9% to 10% 4 3 - - 525 532 575 Above 10% 17 - - - 300 317 335 =========== ========= ========== =========== =============== ------------ ------------ $32 $4 $200 $38 $2,395 2,669 7,865 =========== ========= ========== =========== =============== Capital lease obligations and other 98 87 Unamortized discount - net - (8) Unamortized premium - net 273 284 ============ ============ Total $3,040 $8,228 - ------------------------- ----------- --------- ---------- ----------- --------------- ============ ============
In conjunction with the Refinancing, MediaOne Group assumed from Old U S WEST $351 of medium and long-term debt securities. The debt securities were reflected as outstanding on MediaOne Group's restated Consolidated Balance Sheet as of December 31, 1997. Interest Rate Risk Management On June 3, 1998, in conjunction with the Refinancing, MediaOne Group terminated all of its outstanding interest rate swap agreements, resulting in a charge to interest expense of approximately $16. The swap agreements were terminated as the debt underlying the instruments was refinanced on June 12, 1998. NOTE 5: FAIR VALUE OF FINANCIAL INSTRUMENTS Fair values of cash equivalents, other current amounts receivable and payable, and short-term debt approximate carrying values due to their short-term nature. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) The carrying values of mandatorily redeemable preferred stock and long-term receivables approximate the fair values based on quoted market prices or discounting future cash flows. The carrying value of foreign exchange contracts approximates the fair value based on estimated amounts MediaOne Group would receive or pay to terminate such agreements. It is not practicable to estimate the fair value of financial guarantees because there are no quoted market prices for similar transactions. The fair values of long-term debt, including debt associated with the capital assets segment and Preferred Securities, are based on quoted market prices where available or, if not available, are based on discounting future cash flows using current interest rates.
- -------------------------------------------------------------------------------------------------------------- June 30, 1998 December 31, 1997 ---------------------------------------------------- ---------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------------------------------------------------- Debt (includes short-term portion) $5,483 $5,960 $9,335 $9,910 Interest rate swap agreements - assets - - - - Interest rate swap agreements - liabilities - - - 19 ==================================================== Debt - net $5,483 $5,960 $9,335 $9,929 ==================================================== Preferred Securities $561 $565 $1,080 $1,110 - --------------------------------------------------------------------------------------------------------------
Investments in debt and equity securities are classified as available for sale and are carried at market value. The debt securities have various maturity dates through the year 2002. The market value of these securities is based on quoted market prices where available or, if not available, is based on discounting future cash flows using current interest rates. The amortized cost and estimated market value of debt and equity securities follow:
----------------------------------------- ----------------------------------------------- June 30, 1998 --------------- --------------- --------------- Gross Unrealized Fair Value Securities Cost Gains ----------------------------------------- --------------- --------------- --------------- Equity securities $5,128 $718 $5,846 Debt securities 12 - 12 Securitized loan 47 - 47 =============== =============== =============== Total $5,187 $718 $5,905 ----------------------------------------- =============== =============== ===============
Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Net unrealized gains and losses on marketable securities are included in equity. For the six-month period ended June 30, 1998, net unrealized gains were $679, net of deferred taxes of $265. NOTE 6: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES On June 12, 1998, MediaOne Group tendered for cash or exchanged (the "Exchange Offer") all of the outstanding Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely Company-guaranteed debentures ("Preferred Securities"). Of the total outstanding, $301 face value of 7.96 percent Preferred Securities and $237 face value of 8.25 percent Preferred Securities were redeemed for cash. The cash redemption amount of $570 was financed by issuing commercial paper at a weighted average interest rate of 5.85 percent. In addition, $266 face value of 7.96 percent Preferred Securities and $213 face value of 8.25 percent Preferred Securities were exchanged for 9.30 percent Preferred Securities and 9.50 percent Preferred Securities, respectively, at fair value. After the Exchange Offer, there were outstanding $33 of 7.96 percent Preferred Securities and $30 of 8.25 percent Preferred Securities previously guaranteed by Old U S WEST. Such guarantees were assumed by MediaOne Group. As of June 30, 1998, there were 1,312,910 shares of 7.96 percent Preferred Securities and 1,185,618 shares of 8.25 percent Preferred Securities outstanding. MediaOne Finance Trust I ("Finance I"), a wholly owned subsidiary of MediaOne Group, issued $274 fair value of 9.30 percent Preferred Securities, with a maturity date of September 30, 2025, in exchange for 10,658,108 shares of 7.96 percent Preferred Securities previously guaranteed by Old U S WEST. MediaOne Finance Trust II ("Finance II"), a wholly owned subsidiary of MediaOne Group, issued $224 fair value of 9.50 percent Preferred Securities, with a maturity date of October 29, 2036, in exchange for 8,520,289 shares of 8.25 percent Preferred Securities previously guaranteed by Old U S WEST. The Preferred Securities of Finance I and Finance II were recorded at fair value of $25.75 and $26.30 per share, respectively, and have a liquidation value of $25.00 per share. Finance I and Finance II also issued $9 and $7, respectively, of common securities to MediaOne Group. Finance I used the total proceeds to purchase from MediaOne Group Funding, Inc. ("MediaOne Funding"), a newly formed financing subsidiary of the Company, $283 principal amount of MediaOne Group Funding 9.30 percent Subordinated Deferrable Interest Notes (the "Finance I Subordinated Debt Securities") due 2025, the Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) obligations under which are fully and unconditionally guaranteed by MediaOne Group (the "Finance I Debt Guarantees"). The sole assets of Finance I are and will be the Finance I Subordinated Debt Securities and the Finance I Debt Guarantees. Finance II used the total proceeds to purchase from MediaOne Funding $231 principal amount of MediaOne Group Funding 9.50 percent Subordinated Deferrable Interest Notes (the "Finance II Subordinated Debt Securities" and together with the Finance I Subordinated Debt Securities, the "Subordinated Debt Securities") due 2036, the obligations under which are fully and unconditionally guaranteed by MediaOne Group (the "Finance II Debt Guarantees" and together with the Finance I Debt Guarantees, the "Debt Guarantees"). The sole assets of Finance II are and will be the Finance II Subordinated Debt Securities and the Finance II Debt Guarantees. MediaOne Group has guaranteed the payment of interest and redemption amounts to holders of Preferred Securities when Finance I and Finance II have funds available for such payments (the "Payment Guarantee") as well as MediaOne Funding's undertaking to pay all of Finance I and Finance II's costs, expenses and other obligations (the "Expense Undertaking"). The Payment Guarantee and the Expense Undertaking, including MediaOne Group's guarantee with respect thereto, considered together with MediaOne Funding's obligations under the indenture and Subordinated Debt Securities and MediaOne Group's obligations under the indenture, declaration and Debt Guarantee, constitute a full and unconditional guarantee by MediaOne Group of Finance I's and Finance II's obligations under the Preferred Securities. The interest and other payment dates on the Subordinated Debt Securities correspond to the distribution and other payment dates on the Preferred Securities. Under certain circumstance, the Subordinated Debt Securities may be distributed to the holders of Preferred Securities and common securities in liquidation of Finance I and Finance II. The 9.30 percent Subordinated Debt Securities are redeemable in whole or in part by MediaOne Funding at any time on or after September 11, 2000, at a redemption price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest. If MediaOne Funding redeems the Subordinated Debt Securities, Finance I is required to redeem the Preferred Securities concurrently at $25.00 per share plus accrued and unpaid distributions. As of June 30, 1998, there were 10,658,108 shares of the 9.30 percent Preferred Securities outstanding. The 9.50 percent Subordinated Debt Securities are redeemable in whole or in part by MediaOne Funding at any time on or after October 29, 2001, at a redemption price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest. If MediaOne Funding redeems the Subordinated Debt Securities, Finance II is required to redeem the Preferred Securities concurrently at $25.00 per share plus accrued and unpaid distributions. As of June 30, 1998, there were 8,520,289 shares of the 9.50 percent Preferred Securities outstanding. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) MediaOne Group recorded a charge to equity of $53, after tax benefits of $28, related to the Exchange Offer. Such charge represented redemption costs, including the difference between the face and market value of the securities, and a charge for unamortized issuance costs. Also included was a charge of $19 related to market value premiums on the exchanged securities. NOTE 7: SHAREOWNERS' EQUITY Series D Preferred Stock. Effective with the Separation, the 19,999,478 shares outstanding of 4.5 percent, 20 year, Series D Preferred Stock (the "Series D Preferred Stock") remain outstanding and represent shares of MediaOne Group Series D Preferred Stock. Since holders of the Series D Preferred Stock did not participate in the Dex Dividend, the Board of Directors, pursuant to a certificate of designation of the Series D Preferred Stock, adjusted the conversion rate of the Series D Preferred Stock to $25.25 per share from $26.25 per share. Common Stock. Prior to the Separation, Old U S WEST had outstanding two separate classes of common stock which reflected the performance of its two groups. The performance of Media Group was reflected by the U S WEST Media Group Common Stock (the "Media Stock") and the performance of the Communications Group was reflected by the U S WEST Communications Group Common Stock (the "Communications Stock"). Upon Separation, and in accordance with the terms of the Separation Agreement, each outstanding share of Media Stock remains outstanding and represents one share of MediaOne Group Common Stock ("MediaOne Group Stock"). Each share of Media Stock held as treasury stock by Old U S WEST now represents one share of MediaOne Group Stock held as treasury stock by MediaOne Group. All issued and outstanding shares of Communications Stock were redeemed for shares of New U S WEST common stock, resulting in a reduction of $421 to MediaOne Group's Common Shares presented on the Consolidated Balance Sheet. Each share of Communications Stock held as treasury stock by Old U S WEST was canceled. During the six month period ended June 30, 1998, MediaOne Group purchased and placed into treasury 1,468,000 shares of MediaOne Group stock, for an average purchase price of $36.94 per share and a total cost basis of $54. Retained Earnings (Deficit). MediaOne Group no longer holds Communications Stock and, accordingly, the Consolidated Balance Sheet reflects decreased assets and stockholders' equity. The Separation resulted in an overall reduction in MediaOne Group's retained earnings of $884 at June 12, 1998, including Separation costs. The reduction in equity represents the $770 net book value of New U S WEST, net of the $3.9 billion debt assumption, and the $151 of Separation costs, less the tax benefit on those costs of $37. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) The calculation of the gain on Separation is as follows:
------------------------------------------------------------------------- ---------------- Fair value of Communications Group at June 12, 1998 $24,495 Dex Dividend 850 ---------------- Total fair value 25,345 Net book value of New U S WEST at June 12, 1998 (4,670) Debt assumption by New U S WEST 3,900 Separation costs (151) Tax benefit on Separation costs 37 ================ Gain on Separation $24,461 ------------------------------------------------------------------------- ================
Comprehensive Income. Total comprehensive income and the components of comprehensive income follow:
- ----------------------------------------------------- ---------------------------- --------------------------- Three Months Ended June 30, Six Months Ended June 30, ---------------------------- --------------------------- 1998 1997 1998 1997 - ----------------------------------------------------- -------------- -------------- -------------- ----------- Net income $26,615 $238 $26,827 $468 Other comprehensive income, before tax: Foreign currency translation adjustment (8) (9) 9 2 Unrealized gains on debt and equity securities 571 146 690 83 Reclassification for gains realized in net income (11) (29) (11) (32) Income tax provision related to items of other comprehensive income (219) (51) (271) (29) ============== ============== ============== =========== Total comprehensive income $26,948 $295 $27,244 $492 - ----------------------------------------------------- ============== ============== ============== ===========
The majority of the unrealized gains on debt and equity securities relate to the Company's investment in AirTouch common and preferred stock. Such investment was acquired on April 6, 1998, in connection with the AirTouch Transaction. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Leveraged Employee Stock Ownership Plan ("LESOP"). Old U S WEST maintained a defined contribution savings plan for substantially all employees, except for employees of the Atlanta cable systems and foreign national employees. Old U S WEST matched a percentage of eligible employee contributions with shares of MediaOne Group Stock and Communications Stock. In 1989, Old U S WEST established two LESOPs to provide stock for matching contributions to the savings plan through borrowings at reduced rates of interest. Shares in the LESOP were released as principal and interest were paid on the debt. The borrowings associated with the LESOP were unconditionally guaranteed by Old U S WEST, and reflected as debt in the Consolidated Balance Sheet as of December 31, 1997. A corresponding reduction in shareowners' equity was also reflected on the Consolidated Balance Sheet. In May, 1998, the borrowings associated with the LESOP were repaid, resulting in corresponding adjustments to debt and equity. In connection with the Separation, the unallocated shares in the LESOP as of June 12, 1998, were split between MediaOne Group and New U S WEST. As of June 30, 1998, MediaOne Group held approximately 105,000 shares of MediaOne Group Stock to be allocated to the defined contribution savings plan participants. NOTE 8: EARNINGS PER SHARE The following table reflects the computation of basic and diluted earnings (loss) per share for MediaOne Group Stock and Communications Stock. The 1998 dilutive securities represent the incremental weighted average shares from potential share issuances associated with stock options for MediaOne Group Stock and Communications Stock, and the assumed conversion of the convertible Series D Preferred Stock for MediaOne Group Stock. The 1997 diluted loss and loss per share amounts do not include potential share issuances associated with stock options and the convertible Series D Preferred Stock since the effect would have been antidilutive on the loss from continuing operations. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited)
- --------------------------------------------------------- ---------------------------- ------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ------------------------- 1998 1997 1998 1997 - --------------------------------------------------------- ------------- -------------- ------------ ------------ MEDIAONE GROUP STOCK Income (loss) from continuing operations $2,174 $(181) $1,952 $(371) Preferred stock dividends (13) (12) (27) (25) Loss on redemption of Preferred Securities (53) - (53) - ------------- -------------- ------------ ------------ Income (loss) from continuing operations available for common shareowners used for basic earnings per share $2,108 $(193) $1,872 $(396) Preferred stock dividends on assumed conversion 12 - 24 - ============= ============== ============ ============ Income (loss) from continuing operations used for diluted earnings (loss) per share $2,120 $(193) $1,896 $(396) ============= ============== ============ ============ Income from discontinued operations Results of operations (1) $71 $84 $158 $165 ============= ============== ============ ============ Gain on Separation $24,461 - $24,461 - ============= ============== ============ ============ Extraordinary item - early extinguishment of debt - net of tax $(333) $3 $(333) 3 - --------------------------------------------------------- ============= ============== ============ ============
Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited)
- --------------------------------------------------------- ---------------------------- ------------------------- Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ------------------------- 1998 1997 1998 1997 - --------------------------------------------------------- ------------- -------------- ------------ ------------ (Shares in thousands) MEDIAONE GROUP STOCK Weighted average number of shares used for basic earnings (loss) per share 609,098 606,446 608,699 606,486 Effect of dilutive securities: Stock options 6,112 - 5,651 - Series D Preferred Stock 38,401 - 38,251 - ============= ============== ============ ============ Weighted average number of shares used for diluted earnings (loss) per share 653,611 606,446 652,601 606,486 ============= ============== ============ ============ BASIC EARNINGS(LOSS) PER SHARE: Income (loss) from continuing operations $3.46 $(0.31) $3.08 $(0.65) ============= ============== ============ ============ Income from discontinued operations - results of operations (1) $0.12 $0.14 $0.26 $0.27 ============= ============== ============ ============ Income from discontinued operations - gain on Separation $40.16 $ - $40.19 $ - ============= ============== ============ ============ Extraordinary item - early extinguishment of debt - net of tax $(0.55) $ - $(0.55) $ - ============= ============== ============ ============ DILUTED EARNINGS (LOSS) PER SHARE: Earnings (loss) per share from continuing operations $3.24 $(0.31) $2.91 $(0.65) ============= ============== ============ ============ Earnings per share from discontinued operations - results of operations (1) $0.11 $0.14 $0.24 $0.27 ============= ============== ============ ============ Earnings per share from discontinued operations - gain on Separation $37.42 $ - $37.48 $ - ============= ============== ============ ============ Loss per share from extraordinary item - early extinguishment of debt - net of tax $(0.51) $ - $(0.51) $ - - --------------------------------------------------------- ============= ============== ============ ============
(1) Represents the operations of Dex, which were discontinued on June 12, 1998. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited)
- ----------------------------------------------------------- -------------------------- ------------------------- Three Months Ended Six Months Ended June 30, June 30, -------------------------- ------------------------- 1998 1997 1998 1997 - ----------------------------------------------------------- ----------- -------------- ------------ ------------ (Shares in thousands) COMMUNICATIONS STOCK Income from discontinued operations used for basic and diluted earnings per share (1) $242 $332 $589 $671 ============ ============== =========== ============ Weighted average number of shares used for basic earnings per share 484,982 482,542 484,972 481,945 Effect of dilutive securities: Stock options 4,075 - 4,097 - ============ ============== =========== ============ Weighted average number of shares used for diluted earnings per share 489,057 482,542 489,069 481,945 ============ ============== =========== ============ BASIC AND DILUTED EARNINGS PER SHARE: Basic earnings per share from discontinued operations $0.50 $0.69 $1.21 $1.39 ============ ============== =========== ============ Diluted earnings per share from discontinued operations $0.49 $0.69 $1.20 $1.39 - ----------------------------------------------------------- ============ ============== =========== ============
(1) Represents the operations of the Communications Group, which were discontinued on June 12, 1998. NOTE 9: EMPLOYEE BENEFITS Pension Plans. On June 12, 1998, MediaOne Group established a new defined benefit pension plan covering substantially all of its employees, except for foreign national employees. Benefits are based on a final pay formula. The Company uses the projected unit credit method for the determination of pension cost for financial reporting purposes and the aggregate cost method for funding purposes. The Company's policy is to fund amounts required under the Employee Retirement Income Security Act of 1974. In connection with the Separation, a portion of the existing assets of the Old U S WEST pension plan were transferred at fair value to MediaOne Group. The following discussion utilizes values as of June 12, 1998, the day of the Separation. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) The funded status of the plan follows:
---------------------------------------------------------------------------------------============== Accumulated benefit obligation, including vested benefits of $105 $120 ============== Plan assets at fair value, primarily stocks and bonds $200 Less: Projected benefit obligation 134 -------------- Plan assets in excess of projected benefit obligation 66 Unrecognized net (gain) (68) Balance of unrecognized net asset at January 1, 1987 (8) ============== Net pension liability $(10) =====================================================================================================
The actuarial assumptions used to calculate the projected benefit obligation follow:
- -------------------------------------------------------------------------------------------------- Discount rate 7.00% Weighted-average rate of compensation increase 5.50% - --------------------------------------------------------------------------------------------------
Anticipated future benefit changes have been reflected in the above calculations. Postretirement Benefits Other Than Pension. Old U S WEST had established an employee welfare benefit program that included retiree medical and life insurance benefits for certain employees. Assets totaling approximately $4 were transferred from two Old U S WEST retiree medical and life insurance benefits trusts to MediaOne Group at the time of the Separation. As of June 12, 1998, the day of the Separation, the accumulated postretirement benefit obligation was $20 and the accrued postretirement benefit obligation was $12. A discount rate and medical trend rate of 7.0% and 8.5%, respectively, were used to calculate the accumulated postretirement obligation. Anticipated future benefit changes were also reflected in the postretirement benefit calculations. NOTE 10: COMMITMENTS At December 31, 1997, a subsidiary of MediaOne Group guaranteed debt, non-recourse to MediaOne Group, associated with its international investment, in the principal amount of approximately $600. In June 1998, the international investment refinanced its line of credit and drew on the new line of credit, resulting in an increase of the debt guarantee to approximately $900, as of June 30, 1998. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) NOTE 11: SUBSEQUENT EVENTS. Investment in Binariang Bhd. On July 24, 1998, British Telecom (BT) announced it would acquire a 33.3 percent stake in Binariang Bhd, a major Malaysian telecommunications group. MediaOne Group currently owns a 19 percent stake in Binariang. Under the terms of the deal, MediaOne Group's interest would be diluted to 12.6 percent. The Company's investment carrying value is currently at zero due to an impairment write-down at the end of 1997. The Company continues to monitor its investment in Malaysia. Time Warner Telecom. On July 14, 1998, TWE, TWE-A/N and Time Warner contributed the assets and liabilities of the Time Warner competitive local exchange business (the "Time Warner Telecom Business") into a newly formed entity, Time Warner Telecom LLC ("TW Telecom"). The Time Warner Telecom Business had been jointly operated by the parties to provide telephony services to its business customers in their respective cable markets. TWE and TWE-A/N distributed their ownership interest in TW Telecom on a pro rata basis to Time Warner, MediaOne Group and Advance/Newhouse. As a result, MediaOne Group now holds an 18.88 percent interest in TW Telecom. Since the investment in TW Telecom resulted from a distribution by TWE, MediaOne Group's investment balance in TWE will be reduced by the book value of the TW Telecom investment attributable to MediaOne Group. The investment in TW Telecom will be accounted for under the cost method of accounting. Debt Issuance. On August 5, 1998, MediaOne Group issued approximately $1.5 billion of 6.25 percent notes, mandatorily exchangeable at maturity into (i) shares of AirTouch common stock held by MediaOne Group, (ii) the cash equivalent or (iii) a combination of cash and AirTouch common stock, at MediaOne Group's option. The notes mature in August, 2001. Proceeds from the offering were used to reduce outstanding commercial paper and for general corporate purposes. NOTE 12: NET INVESTMENT IN ASSETS HELD FOR SALE The capital assets segment is being accounted for in accordance with Staff Accounting Bulletin No. 93, issued by the SEC, which requires discontinued operations not disposed of within one year of the measurement date to be accounted for prospectively in continuing operations as "net investment in assets held for sale." The net realizable value of the assets is being evaluated on an ongoing basis with adjustments to the existing reserve, if any, being charged to continuing operations. No such adjustment has been required. Prior to January 1, 1995, the entire capital Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) assets segment was accounted for as discontinued operations in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". The components of net investment in assets held for sale follow:
- ------------------------------------------------------------------- ------------------ --------------------- June 30, December 31, 1998 1997 - ------------------------------------------------------------------- ------------------ --------------------- ASSETS Cash and cash equivalents $ 37 $ 54 Finance receivables - net 778 777 Investment in real estate - net of valuation allowance 82 156 Bonds, at market value 116 119 Investment in FSA 404 365 Other assets 227 197 ------------------ --------------------- Total assets $1,644 $1,668 ================== ===================== LIABILITIES Debt $ 368 $ 372 Deferred income taxes 684 669 Accounts payable, accrued liabilities and other 135 197 Minority interests 12 11 ------------------ --------------------- Total liabilities 1,199 1,249 ------------------ --------------------- Net investment in assets held for sale $ 445 $ 419 =================================================================== ================== =====================
Building sales and operating revenues of the capital assets segment were $59 and $122 for the three- and six-month periods ended June 30, 1998, respectively, and $21 and $78 for the three- and six-month periods ended June 30, 1997, respectively. Revenues of MediaOne Financial Services, Inc. ("Financial Services"), a member of the capital assets segment, were $5 and $10 for the three- and six-month periods ended June 30, 1998, respectively, and $6 and $11 for the three-and six-month periods ended June 30, 1997, respectively. Selected financial data for Financial Services follows. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited)
- ------------------------------------------------------------------- ------------------ -------------------- June 30, December 31, 1998 1997 - ------------------------------------------------------------------- ------------------ -------------------- Net finance receivables $ 819 $ 824 Total assets 1,166 1,208 Total debt 354 363 Total liabilities 1,076 1,121 Equity 90 87 - ------------------------------------------------------------------- ------------------ --------------------
In conjunction with the Separation, Financial Services redeemed $125 notional medium-term debt for a cash redemption amount of $129. Financial Services funded the redemption with proceeds loaned from MediaOne Funding. NOTE 13: DISCONTINUED OPERATIONS The Company has accounted for the distribution of New U S WEST stock to the holders of Communications Stock, and to the holders of Media Stock for the Dex Alignment, as a discontinuance of the businesses comprising New U S WEST. The measurement date for discontinued operations accounting purposes was June 4, 1998, the date upon which Old U S WEST's shareowners approved the Separation. The effective date of the Separation was June 12, 1998. Because the distribution of New U S WEST was non pro-rata, as compared with the businesses previously attributed to Old U S WEST's two classes of shareowners, it was accounted for at fair value. The distribution resulted in a gain of $24,461, net of Separation costs of $151 and tax benefits of $37. Separation costs included cash payments under severance agreements of $45 and financial advisory, legal, registration fee, printing and mailing costs. Separation costs also included a one-time payment to terminate the sale of the Minnesota cable systems. Form 10-Q - Part I MEDIAONE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Summarized financial information for the discontinued operations is as follows:
----------------------------------------------------------------- --------------------- December 31, Summarized Financial Position 1997 ----------------------------------------------------------------- --------------------- ASSETS Cash and cash equivalents $ 27 Accounts and notes receivables - net 1,717 Property, plant and equipment - net 14,308 Other assets 1,344 --------------------- Total assets $17,396 ===================== LIABILITIES Debt $ 5,715 Accounts payable, accrued liabilities and other 4,260 Postretirement and other postemployment benefit obligation 2,534 Deferred income taxes and credits 520 --------------------- Total liabilities 13,029 --------------------- Net investment in assets of discontinued operations $ 4,367 ================================================================= =====================
- ------------------------------------------------- -------------------------- ------------------------------ Three Months Ended Six Months Ended June 30, June 30, -------------------------- ------------------------------ Summarized Operating Results 1998 1997 1998 1997 - ------------------------------------------------- ------------- ------------ -------------- --------------- Revenues $2,445 $2,830 $5,454 $5,697 Operating income 597 756 1,412 1,533 Income before income taxes 494 667 1,187 1,337 Income tax expense (181) (251) (440) (501) ============= ============ ============== =============== Net income of discontinued operations $313 $416 $747 $836 ================================================= ============= ============ ============== ===============
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts) Some of the information presented in or in connection with this report constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include: (i) greater than anticipated competition from new entrants into the cable, and wireless communications markets, (ii) changes in demand for the Company's products and services, (iii) regulatory changes affecting the cable and telecommunications industries, (iv) changes in economic conditions in the various markets served by MediaOne Group operations, including international markets, that could adversely affect the level of demand for cable, wireless, or other services offered by the Company, (v) greater than anticipated competitive activity requiring new pricing for services, (vi) higher than anticipated start-up costs associated with new business opportunities, (vii) higher than anticipated employee levels, capital expenditures, and operating expenses (such as costs associated with Year 2000 remediation), (viii) consumer acceptance of broadband services, including telephony and data services, and wireless services, (ix) increases in fraudulent activity with respect to broadband and wireless services, or (x) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. The Separation Prior to June 12, 1998, MediaOne Group was known as Old U S WEST. On June 12, 1998, Old U S WEST consummated a transaction in which it separated its businesses into two independent public companies. Until the Separation, Old U S WEST conducted its businesses through two groups: the Media Group and the Communications Group. Upon Separation, Old U S WEST was renamed "MediaOne Group, Inc." and retained the multimedia businesses of Media Group, except for Dex, the domestic directory business. The telecommunications businesses of the Communications Group became an independent public company and retained the "U S WEST, Inc." name. In addition, Dex was aligned with New U S WEST. The Company accounted for the distribution of New U S WEST stock to the Communications Group stockholders, and to the Media Group stockholders for the Dex Alignment, as a discontinuance of the businesses comprising New U S WEST. Because the distribution was non pro-rata, as compared with the businesses previously attributed to Old U S WEST's two classes of stock, the distribution was accounted for at fair value and resulted in a gain of $24,461, or $40.16 basic earnings per MediaOne Group share, net of Separation costs of $151 and tax benefits of $37. Separation costs included cash payments under severance agreements of $45 and financial advisory, legal, registration fees, printing and mailing costs. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued In conjunction with the Separation, Old U S WEST redeemed $4.9 billion of its long term debt outstanding. The redemption resulted in an extraordinary loss of $333, net of tax benefits of $209, or $0.55 basic loss per MediaOne Group share. The loss was the result of refinancing costs, including the difference between the market and face value of the debt redeemed and a charge for unamortized debt issuance costs. MediaOne Group financed the redemption with short-term commercial paper at a weighted average interest rate of 5.85 percent. In accordance with the Separation Agreement, New U S WEST funded to MediaOne Group $3.9 billion related to the Dex Alignment. Such funds were used to repay the commercial paper issued in connection with the Refinancing. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Results of Operations - Continuing Operations - Three and Six Months Ended June 30, 1998 Compared with 1997 Income (Loss) from Continuing Operations
- ----------------------------- ---------------------- -------------------- -------------------------------------------- Basic Earnings (Loss) Per Share From Continuing Operations -------------------------------------------- Three Months Ended Three Months Ended June 30, Change June 30, Change ---------------------- -------------------- ----------------------- -------------------- 1998 1997 $ % 1998 1997 $ % - ----------------------------- ---------- ----------- --------- ---------- ---------- ------------ --------- ---------- Income (loss) from continuing operations $2,174 $(181) $2,355 - $3.46 $(0.31) $3.77 - Adjustments to reported gain (loss) from continuing operations: Gain on sale of domestic wireless investment (2,257) - (2,257) - (3.71) - (3.71) - Gains on sales of investments (14) (25) 11 (44.0) (0.02) (0.04) 0.02 (50.0) ========== =========== ========= ========== ========== ============ ========= ========== Normalized loss from continuing operations $(97) $(206) $109 (52.9) $(0.27) (0.35) $0.08 (22.9) ============================= ========== =========== ========= ========== ========== ============ ========= ========== - ----------------------------- --------------------- --------------------- ------------------------------------------- Basic Earnings (Loss) Per Share From Continuing Operations ------------------------------------------- Six Months Ended Six Months Ended June 30, Change June 30, Change --------------------- --------------------- --------------------- --------------------- 1998 1997 $ % 1998 1997 $ % - ----------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gain (loss) from continuing operations $1,952 $(371) $2,323 - $3.08 $(0.65) $3.73 - Adjustments to reported gain (loss) from continuing operations: Gain on sale of domestic wireless investment (2,257) - (2,257) - (3.71) - (3.71) - Gains on sales of investments (24) (56) 32 (57.1) (0.04) (0.09) 0.05 (55.6) ============================= ========== ========== ========== ========== ========== ========== ========== ========== Normalized loss from continuing operations $(329) $(427) $98 (23.0) $(0.67) $(0.74) $0.07 (9.5) ============================= ========== ========== ========== ========== ========== ========== ========== ==========
The normalized decreases in loss from continuing operations were primarily a result of decreased equity losses generated by unconsolidated international ventures and decreased interest expense due to lower debt levels at MediaOne Group, partially offset by the lack of operating results from the domestic wireless businesses which were sold on April 6, 1998. On a pro forma basis, removing the 1998 and 1997 operating results of the domestic wireless operations, and the 1998 gain on the sale of the domestic wireless investment and loss on the redemption of the Preferred Securities, the loss per share for the three- and six-month periods ended June 30, 1998, would have been $0.17 and $0.58, respectively, compared with $0.36 and $0.74, for the same periods in 1997, respectively. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Sales and Other Revenues
- ------------------------- ----------------------- --------------------- ---------------------- ---------------------- Three Months Ended Six Months Ended June 30, Change June 30, Change ----------------------- --------------------- ---------------------- ---------------------- 1998 1997 $ % 1998 1997 $ % - ------------------------- ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- Cable and broadband: Domestic $607 $585 $22 3.8 $1,226 $1,137 $89 7.8 International 6 4 2 50.0 11 8 3 37.5 ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- 613 589 24 4.1 1,237 1,145 92 8.0 Corporate 7 6 1 16.7 14 13 1 7.7 Other(1) 1 23 (22) (95.7) 1 45 (44) (97.8) ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- Current operations 621 618 3 0.5 1,252 1,203 49 4.1 Domestic wireless(2) 20 363 (343) (94.5) 361 698 (337) (48.3) ========== ============ ========== ========== =========== ========== =========== ========== Total $641 $981 $(340) (34.7) $1,613 $1,901 $(288) (15.1) ========================= ========== ============ ========== ========== =========== ========== =========== ==========
(1) Primarily includes international directories which were sold in the second and third quarters of 1997. (2) The domestic wireless businesses were sold effective 4/6/98. MediaOne Group sales and other revenues decreased $340, or 34.7 percent, to $641, and $288, or 15.1 percent, to $1,613 for the three- and six-month periods ended June 30, 1998, respectively, primarily as a result of the sale of the domestic wireless businesses in April, 1998, and the international directories businesses in the latter part of 1997. Normalized for acquisitions and dispositions, total revenues increased 9.5 percent and 10.2 percent for the three- and six-month periods ended June 30, 1998, respectively. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Cable and Broadband - Domestic.
- ------------------------- ----------------------- --------------------- ---------------------- ---------------------- Three Months Ended Six Months Ended June 30, Change June 30, Change ----------------------- --------------------- ---------------------- ---------------------- REVENUES 1998 1997 $ % 1998 1997 $ % - ------------------------- ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- Domestic Basic Cable $428 $382 $46 12.0 $847 $752 $95 12.6 Premium 80 81 (1) (1.2) 159 163 (4) (2.5) Pay-per-view 11 19 (8) (42.1) 24 30 (6) (20.0) Advertising 40 33 7 21.2 71 58 13 22.4 Equipt. & Install. 44 38 6 15.8 84 73 11 15.1 Other (7) 1 (8) - (14) 2 (16) - ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- Total core cable 596 554 42 7.6 1,171 1,078 93 8.6 New Products 11 5 6 - 21 10 11 - PrimeStar - 26 (26) - 34 49 (15) (30.6) ========== ============ ========== ========== =========== ========== =========== ========== Total revenues $607 $585 $22 3.8 $1,226 $1,137 $89 7.8 ========================= ========== ============ ========== ========== =========== ========== =========== ==========
Domestic cable and broadband revenues increased $22, or 3.8 percent, to $607 during the three-month period ended June 30, 1998, and $89, or 7.8 percent, to $1,226, during the six-month period ended June 30, 1998, due primarily to increased core cable revenues. Normalized for the one-time effects of cable system acquisitions and dispositions, and a change in classification of late fee revenues, domestic cable and broadband revenues increased 9.0 percent during the three- month period and 9.9 percent during the six-month period. Core cable revenues increased $42, or 7.6 percent, to $596 during the three-month period, and $93, or 8.6 percent, to $1,171, during the six-month period, primarily a result of higher basic cable services revenue and advertising revenue growth. Core cable revenue per average cable subscriber increased 5.4 percent to $40.28 in the three-month period of 1998, compared with $38.20 in the same period of 1997, and 6.4 percent to $39.73 in the six-month period of 1998, compared with $37.34 during the same period in 1997. Excluding the one-time effects of cable system acquisitions and dispositions and a change in classification of late fee revenues, core cable revenue for the three month period increased 8.0 percent, of which 6.5 percent related to increased revenue per subscriber and 1.5 percent related to increased subscribers. The increased revenue per subscriber related to increased channel offerings, repackaging of services and increased rates. The normalized six-month period increase was 8.9 percent, of which 7.4 percent related to increased revenue per subscriber and 1.5 percent related to increased subscribers. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Basic cable services revenue increased $46, or 12.0 percent, to $428 for the three-month period due primarily to a 10 percent increase in revenue per average cable subscriber and increased basic subscribers. The increase in revenue per subscriber is primarily a result of expanded channel offerings, repackaging of services and rate increases. During the six-month period, basic cable services revenue increased $95, or 12.6 percent, to $847. Basic cable subscribers were 4,933,000 at June 30, 1998, an increase of 1.5 percent, normalized for the effect of cable system acquisitions and dispositions. Advertising revenues contributed increased revenues of $7 and $13, for the three-and six-month periods, respectively, primarily a result of increased channel capacity and growth in local and national advertising sales. Equipment and installation revenues contributed increased revenues of $6 and $11 for the three- and six-month periods, respectively, primarily a result of subscribers upgrading converter boxes. Partially offsetting the increase in core cable revenues was a decrease in pay-per-view revenues of $8 and $6 for the three- and six-month periods, respectively. This decrease was due primarily to the airing of a boxing event in June, 1997, with no comparable event in 1998. New product revenues contributed increased revenues of $6 and $11 during the three- and six-month periods, respectively, primarily from growth in HSD services revenue. As of June 30, 1998, MediaOne Group had 40,600 HSD customers compared with 6,400 HSD customers for the same period in 1997. On June, 15, 1998, MediaOne Group formed the HSD Joint Venture with Time Warner, TWE and TWE/AN to deliver HSD services under the "Road Runner" brand name. The investment will be accounted for under the equity method of accounting. The HSD Joint Venture will be responsible for maintaining an Internet network, providing technical customer support and developing national content. The parties to the joint venture will continue to operate their HSD businesses and be responsible for customer service and billing. Accordingly, MediaOne Group will continue to reflect HSD service revenues in its consolidated results. Beginning in the third quarter of 1998, MediaOne Group will reflect a service fee, payable to the HSD Joint Venture, based upon a predetermined formula. Prior to April 1, 1998, MediaOne Group distributed PrimeStar DBS services to subscribers in its service areas, and as a result, reflected consolidated operating results with respect to such subscribers. Subsequent to April 1, 1998, in conjunction with the Prime Star Contribution, MediaOne Group no longer reflects consolidated operating results for PrimeStar DBS services. Cable and Broadband - International. International cable and broadband revenues represent the consolidated operations of Cable Plus a.s., a cable operator in the Czech Republic. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Domestic Wireless. On April 6, 1998, MediaOne Group sold its domestic wireless businesses to AirTouch. Operating Income (Loss)
- ------------------------- ----------------------- --------------------- ---------------------- ---------------------- Three Months Ended Six Months Ended June 30, Change June 30, Change ----------------------- --------------------- ---------------------- ---------------------- 1998 1997 $ % 1998 1997 $ % - ------------------------- ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- Cable and broadband: Domestic $(10) $ 2 $ (12) - $(58) $(15) $ (43) - International (1) (2) 1 (50.0) (4) (7) 3 (42.9) ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- (11) - (11) - (62) (22) (40) - International wireless (2) (6) 4 (66.7) (5) (9) 4 (44.4) Corporate (1) (44) (35) (9) 25.7 (73) (49) (24) 49.0 Other(2) (3) (7) 4 (57.1) (6) (18) 12 (66.7) ---------- ------------ ---------- ---------- ----------- ---------- ----------- ---------- Current operations (60) (48) (12) 25.0 (146) (98) (48) 49.0 Domestic wireless(3) 7 100 (93) (93.0) 93 194 (101) (52.1) ========== ============ ========== ========== =========== ========== =========== ========== Total $(53) $52 $(105) - $(53) $96 $(149) - ========================= ========== ============ ========== ========== =========== ========== =========== ==========
(1) Primarily includes headquarters expenses for shared services and divisional expenses associated with equity investments. (2) Primarily includes international directories which were sold in the second and third quarters of 1997. (3) The domestic wireless businesses were sold effective 4/6/98. During 1998, MediaOne Group's operating income decreased $105, to a loss of $53, and $149, to a loss of $53, for the three- and six-month periods ended June 30, 1998, respectively. The decrease in operating income was primarily a result of selling the domestic wireless businesses in April, 1998. MediaOne Group's earnings before income taxes, depreciation and amortization ("EBITDA") for the three-month period ended June 30, 1998 were $205, compared with $342 during the same period in 1997. Excluding the effect of the domestic wireless operations, EBITDA would have been $196in the second quarter of 1998, compared with $197 in the same period of 1997. For the six-month period ended June 30, 1998, EBITDA was $553, compared with $680 during the same period in 1997. Excluding the effect of the domestic wireless operations, EBITDA would have been $405 during the first six-months of 1998, compared with $399 during the same period in 1997. MediaOne Group considers EBITDA an important indicator of the operational strength and performance of its businesses. EBITDA, however, should not be considered an alternative to operating or net income as an indicator of the performance of MediaOne Group's businesses, or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Cable and Broadband - Domestic. Domestic cable and broadband operating income decreased $12, to a loss of $10, for the three-month period ended June 30, 1998, as compared with the same period in 1997. Operating loss for the six-month period ended June 30, 1998, increased $43, to a loss of $58, as compared with the same period in 1997. The changes during the periods were caused primarily by increased depreciation and amortization expense. As MediaOne Group continues to upgrade its cable networks, depreciation expense will continue to escalate. In addition, during the first quarter of 1998, there was a one-time increase to depreciation and amortization expense of $28, related to the termination of the sale of cable systems in Minnesota. Depreciation and amortization expense had been suspended on this property while it was held for sale in 1997. EBITDA for domestic cable and broadband operations during the second quarter of 1998 was $239 compared to $238 in the same period of 1997. EBITDA remained flat as revenue increases of $22, or 3.8 percent, were offset by increased programming costs of $9, or 6.8 percent, and increased operating, marketing and advertising, and general and administrative costs of $12, or 5.6 percent. New products contributed revenues of $11 and costs of $24 to total domestic cable and broadband EBITDA during the second quarter of 1998. Domestic cable and broadband EBITDA increased 1.7 percent, normalized for the one-time effects of cable system acquisitions and dispositions. For the six-month period ended June 30, 1998, EBITDA for domestic cable and broadband operations was $479, an increase of $16, or 3.5 percent, over the same period in 1997. Revenue increases of $89, or 7.8 percent, more than offset increased programming costs of $31, or 12.0 percent, and increased operating, marketing and advertising, and general and administrative costs of $42, or 10.1 percent. New products contributed revenues of $21 and costs of $43 to total domestic cable and broadband EBITDA during the period. Domestic cable and broadband EBITDA increased 3.7 percent, normalized for the one-time effects of cable system acquisitions and dispositions. Core cable EBITDA was $276 in the second quarter of 1998, an increase of $20, or 7.8 percent, compared with $256 for the same period of 1997. Normalizing for acquisitions and dispositions, core cable EBITDA increased 6.3 percent. During the six-month period ended June 30, 1998, core cable EBITDA was $537, an increase of $45, or 9.1 percent, compared with $492 in the same period of 1997. Normalizing for acquisitions and dispositions, core cable EBITDA increased 8.3 percent. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Programming costs were $141 for the second quarter of 1998, an increase of $9, or 6.8 percent, over the same period in 1997. Excluding programming costs related to PrimeStar services, programming costs increased 14.7 percent. The normalized increase was primarily a result of increased programming costs per subscriber as a result of rate increases, growth in subscribers and expanded channel offerings. During the six-month period ended June 30, 1998, programming costs were $290, an increase of $31, or 12.0 percent, over the same period in 1997. Excluding programming costs related to PrimeStar services, programming costs increased 14.3 percent during the six-month period ended June 30, 1998. Operating, marketing and advertising, and general and administrative costs were $227 for the second quarter of 1998, an increase of $12, or 5.6 percent, over the same period in 1997. Increases in operating, marketing and advertising, and general and administrative costs are primarily a function of increases in employee costs, as well as costs associated with the deployment of new products, such as high-speed data. During the six-month period ended June 30, 1998, operating, marketing and advertising, and general and administrative costs were $457, an increase of $42, or 10.1 percent, over the same period in 1997. International Wireless. International wireless operating losses represent the consolidated operations of Russian Telecommunications Development Corporation ("RTDC"), a Russian venture, which holds various wireless investments. Corporate. Other operating losses increased primarily as a result of increased corporate costs, including costs associated with international activities. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Interest Expense and Other
- ------------------------------ ----------------------- -------------------- -------------------- -------------------- Three Months Ended Six Months Ended June 30, Change June 30, Change ----------------------- -------------------- -------------------- -------------------- 1998 1997 $ % 1998 1997 $ % - ------------------------------ ---------- ------------ ---------- --------- ---------- --------- ---------- --------- Interest expense $(143) $(166) $23 (13.9) $(293) $(340) $47 (13.8) Equity losses in unconsolidated ventures (69) (153) 84 (54.9) (205) (318) 113 (35.5) Gains on sales of investments 22 44 (22) (50.0) 39 95 (56) (58.9) Gain on sale of domestic wireless investment 3,869 - 3,869 - 3,869 - 3,869 - Guaranteed minority interest expense (20) (22) 2 (9.1) (42) (44) 2 (4.5) Other income (expense)-net 110 (7) 117 - 73 (11) 84 - - ------------------------------ ---------- ------------ ---------- --------- ---------- --------- ---------- ---------
Interest Expense. Interest expense decreased $23, or 13.9 percent, during the three-month period ended June 30, 1998, due primarily to the June 12, 1998 assumption by New U S WEST of $3.9 billion of debt related to the Dex Alignment, and the Refinancing which resulted in lower interest rate commercial paper outstanding. The reduction in interest expense was partially offset by a charge of $16 related to the termination of various interest rate swap agreements. The swap agreements were terminated since the long term debt underlying the instruments was refinanced. Interest expense decreased $47, or 13.8 percent during the six-month period ended June 30, 1998, due to the debt assumption and refinancing described above, as well as overall lower debt levels in 1998 as compared with 1997. Equity Losses in Unconsolidated Ventures. Equity losses decreased $84 and $113 for the three- and six-month periods ended June 30, 1998, predominantly due to a decrease in losses generated from international ventures and the absence of the domestic investment in PrimeCo which was transferred to AirTouch on April 6, 1998 pursuant to the AirTouch Transaction. The decrease in international losses relates to foreign exchange rate improvements at Telewest Communications, plc ("Telewest"); rapid subscriber growth experienced by the wireless ventures located in Hungary, the Czech and Slovak Republics, Poland, and India, and the absence of losses related to ventures in Malaysia and Indonesia in the first half of 1998. In 1998, equity method accounting was suspended on the Company's investments in Malaysia and Indonesia in conjunction with a 1997 adjustment to write down the carrying value of the investment in Malaysia to its fair value of zero and to recognize probable funding commitments in connection with a shareholder support agreement related to the investment in Indonesia. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued The Company continues to monitor its investments in Malaysia and Indonesia. During the first half of 1998, the Indonesian currency declined 62 percent as compared with the U. S. dollar and the Malaysian currency decreased slightly. During the first quarter of 1998, the Company funded an additional $6 pursuant to the terms of the Indonesian venture shareholder support agreement. After such fundings, the Company's contractual funding commitment is $13 and the partners' commitments are $36, for which MediaOne Group is contingently liable. During the first half of 1998, the Company contributed $4 to its Malaysian venture related to debt repayment. In addition, during July 1998, MediaOne Group contributed $6 as a shareholder loan. On July 24, 1998, British Telecom (BT) announced it would acquire a 33.3 percent stake in Binariang Bhd, the Malaysian venture discussed above. MediaOne Group currently owns a 19 percent stake in the venture. Under the terms of the deal, MediaOne Group's interest would be diluted to 12.6 percent. MediaOne Group's interest in Old PrimeStar was exchanged for an approximate 10 percent interest in PrimeStar on April 1, 1998. Gains on Sales of Investments. During the second quarter of 1998, MediaOne Group sold various investments, resulting in a pretax gain of $22. In addition, during the first quarter of 1998, the Company sold a cable programming investment, resulting in a pretax gain of $17. During 1997, MediaOne Group sold its shares of Time Warner, (acquired in the acquisition of Continental Cablevision, Inc.), for a pretax gain of $44 during the second quarter, and its five percent interest in a wireless venture in France, for a pretax gain of $51 during the first quarter. Gains on Sales of Investments in Domestic Wireless. On April 6, 1998, MediaOne Group sold its domestic wireless businesses to AirTouch, resulting in a pretax gain of $3,869. Guaranteed Minority Interest Expense. On June 12, 1998, MediaOne Group redeemed for cash $301 face value of 7.96 percent Preferred Securities and $237 face value of 8.25 percent Preferred Securities, resulting in decreased guaranteed minority interest expense for the quarter. Other Income (Expense) - Net. Other income of $110 during the second quarter of 1998 increased $117 due primarily to a reclass of Separation and other costs of $53, accrued in the first quarter of 1998, to the gain realized upon distribution of New U S WEST. In addition, the recognition of dividend income on the AirTouch preferred stock received in the AirTouch Transaction and decreased foreign exchange transaction losses associated with loans to international ventures contributed to other income in 1998. Other income of $73 during the six-month period ended June 30, 1998 increased $84 due primarily to the AirTouch preferred dividend income and foreign exchange transaction losses described above. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Liquidity and Capital Resources Operating Activities Cash provided by operating activities during the six months ended June 30, 1998, decreased $253 to $158 as compared with the same period in 1997. The decrease was caused by the domestic wireless operations which were sold on April 6, 1998, as well as from the timing of interest payments and costs paid for the Separation. The decrease in cash provided by operating activities was slightly offset by the receipt in 1998 of $28 in dividends, primarily from Westel 450 and Westel 900, the Company's European wireless investments in Hungary. During 1997, the domestic wireless business contributed operating cash flow of approximately $360. As a result of the AirTouch Transaction, MediaOne Group no longer has access to this operating cash flow. Operating cash flows of MediaOne Group will consist primarily of the cash generated by its domestic cable business. MediaOne Group expects that its future cash needs, primarily associated with domestic cable capital expenditures and debt service, will exceed cash generated from operations during the next few years. Additional financing will come primarily from a combination of new debt and the monetization of the securities received from AirTouch in connection with the AirTouch Transaction. Effective June 12, 1998, New U S WEST was no longer part of the consolidated tax return of MediaOne Group. MediaOne Group expects to recover tax benefits for expected consolidated tax losses in 1998 and 1999 from the carryback of these losses to 1996 and 1997 consolidated tax returns. MediaOne Group does not expect to be able to recover tax benefits in the year 2000 if it incurs a tax loss for that year. Investing Activities Total capital expenditures at MediaOne Group, were $725 and $709 during the six months ended June 30, 1998 and 1997, respectively. The majority of the capital expenditures were devoted to upgrading the domestic cable network and preparing for the provision of new and enhanced services. The Company anticipates that capital expenditures will accelerate during the latter part of 1998. MediaOne Group holds various investments in international and domestic ventures. For the six- month period ended June 30, 1998 and 1997, the Company invested $13 and $49, respectively, in international ventures, net of a $45 repayment in 1998 from a wireless investment in the United Kingdom. The majority of investments made during 1998 and 1997 were capital contributions. During 1998, capital contributions were made to cable investments in Belgium, Japan and Singapore, as well as a wireless venture in India. Investments in 1997 included capital contributions to a wireless venture in India. Domestically, MediaOne Group invested $79 and $116 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued during the six months ended June 30, 1998 and 1997, respectively. Of such investments, $64 and $98 represented contributions to PrimeCo during 1998 and 1997, respectively. The investment in PrimeCo was sold April 6, 1998, in conjunction with the AirTouch Transaction. During 1998, MediaOne Group sold various investments resulting in net proceeds of $187, comprised of the following: (a) an equity investment in PrimeStar, for net proceeds of $77, (b) a cable programming investment, for net proceeds of $38, (c) various cable systems, for net proceeds of $33, and (d) miscellaneous assets, for net proceeds of $39. During 1997, MediaOne Group sold international and domestic investments totaling $575, as follows: (a) shares of Time Warner, for net proceeds of $220, (b) shares of Teleport Communications Group, for net proceeds of $178, (c) Thomson Directories, the directory operation in the United Kingdom, for net proceeds of $121, (d) partial proceeds of $29 from the sale of a five percent interest in a French wireless venture, and (e) miscellaneous investments, for net proceeds of $27. During the first quarter of 1997, MediaOne Group paid the cash portion of the acquisition of Continental Cablevision, Inc., of $1,150 to the shareowners of that company. Financing Activities Dividends. The Company paid dividends on the Communications Stock of $519 and $475 during the six-months ended June 30, 1998 and 1997, respectively. MediaOne Group will no longer pay dividends on the Communications Stock as all Communications Stock has been exchanged for New U S WEST stock, effective June 12, 1998. Cash from Discontinued Operations. Cash from discontinued operations was $4,953 and $598 during the six months ended June 30, 1998 and 1997, respectively. Such amounts consisted primarily of fundings to MediaOne Group for common dividends paid to Communications Stock shareowners, dividends paid by Dex to MediaOne Group, proceeds from the issuance of Communications Stock, and debt fundings and repayments between MediaOne Group and New U S WEST. Also included in the 1998 amounts were the $3.9 billion of debt assumed by New U S WEST in connection with the Dex Alignment, as well as $152 of net costs reimbursed to MediaOne Group as a result of the Separation and the Refinancing. The $3.9 billion payment by New U S WEST was used by MediaOne Group to repay the amount of commercial paper issued in the Refinancing. Debt Activity. Total debt at June 30, 1998 was $5,115, a decrease of $3,848 compared with December 31, 1997. The decrease in debt outstanding was due primarily to the assumption by New U S WEST of approximately $3.9 billion of indebtedness in connection with the Dex Alignment. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Excluding debt associated with the capital assets segment, MediaOne Group's percentage of debt to total capital at June 30, 1998 was 27.2 percent compared with 41.8 percent at December 31, 1997. Including debt associated with the capital assets segment, Preferred Securities and mandatorily redeemable preferred stock, MediaOne Group's percentage of debt to total capital at June 30, 1998 was 32.1 percent compared with 48.1 percent at December 31, 1997. Including debt associated with the capital assets segment of $368 and Preferred Securities of $561, total indebtedness at June 30, 1998 was $6,044. On June 12, 1998, MediaOne Group tendered $4.9 billion notional amount of long term debt. The cash tender amount of $5.5 billion was financed with commercial paper, at a weighted average interest rate of 5.85 percent. Also on June 12, 1998, MediaOne Group tendered for cash a portion of the outstanding Preferred Securities. Of the total outstanding Preferred Securities, $301 face value of 7.96 percent Preferred Securities and $237 face value of 8.25 percent Preferred Securities were redeemed for cash. The cash redemption amount of $570 was financed with floating-rate commercial paper, with a weighted average interest rate of 5.85 percent. On August 5, 1998, MediaOne Group issued approximately $1.5 billion of 6.25 percent notes mandatorily exchangeable at maturity into (i) shares of AirTouch common stock held by MediaOne Group, (ii) the cash equivalent or (iii) a combination of cash and AirTouch common stock, at MediaOne Group's option. The notes mature in August, 2001. Proceeds from the offering were used to reduce outstanding commercial paper and for general corporate purposes. During the second quarter of 1997, MediaOne Group redeemed a 10-5/8 percent senior subordinated note with a recorded value of $110, including a premium of $10. The debt extinguishment resulted in a net gain of $3, net of income tax expenses of $2. The Company financed the redemption with floating-rate commercial paper. Other At December 31, 1997, a subsidiary of MediaOne Group guaranteed debt, non-recourse to MediaOne Group, associated with its international investment, in the principal amount of approximately $600. In June 1998, the international investment refinanced its line of credit and drew on the new line of credit, resulting in an increase of the debt guarantee to approximately $900, as of June 30, 1998. Under registration statements filed with the SEC as of August 10, 1998, the Company is permitted to issue up to approximately $500 of new debt securities. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued On August 7, 1998, the Board of Directors of MediaOne Group authorized the repurchase of up to 25 million shares of the Company's common stock. The shares may be repurchased over the next three years, dependent on market and financial conditions. MediaOne Group from time to time engages in preliminary discussions regarding restructurings, dispositions and other similar transactions. Any such transaction may include, among other things, the transfer of certain assets, businesses or interests, or the incurrence or assumption of indebtedness, and could be material to the financial condition and results of operations of the Company. There is no assurance that any such discussions will result in the consummation of any such transaction. Risk Management In conjunction with the Separation, MediaOne Group refinanced substantially all of the indebtedness issued or guaranteed by Old U S WEST and terminated existing interest rate contracts. The cost of refinancing, including debt redemption, was financed by issuing commercial paper. In connection with the AirTouch Transaction, AirTouch assumed $1,350 of short-term debt from MediaOne Group. Interest Rate Risk Management. At June 30, 1998, MediaOne Group had approximately $1,814 of floating rate commercial paper debt exposed to changes in interest rates. A hypothetical 10 percent increase in the weighted average commercial paper rate would result in a $6 decrease in the annual reported earnings of the company. Competitive and Regulatory Environment In June, 1998, the Federal Communications Commission issued formal rules providing for the retail sale of set-top television boxes designed to integrate digital programming. On January 1, 2005, cable companies will no longer be permitted to sell or lease new integrated boxes to their subscribers. In addition, cable companies must provide subscribers with related security modules that plug into set-top boxes that are purchased from consumer electronics retailers by January 1, 2000. The Company is currently reviewing the impact of this ruling. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Year 2000 Costs MediaOne Group uses software and related technologies throughout its business that will be affected by the date change in the Year 2000. MediaOne Group established a corporate-wide Year 2000 program in 1997, which in relation to other business projects and objectives, has been assigned a high priority. The inability of systems to appropriately recognize the year 2000 could result in a disruption of Company operations. MediaOne Group is progressing through a comprehensive program to evaluate and address the impact of the Year 2000 on its operations to ensure that its systems recognize calendar Year 2000. MediaOne Group is utilizing both internal and external resources in implementing the program. The program consists of the following phases:
Phase (I) Assessment - Structured evaluation, including a detailed inventory outlining the impact that the Year 2000 may have on current operations. (II) Detailed Plan - Establishment of priorities, development of specific action steps and allocation of resources to address the issues as outlined in Phase I. (III) Conversion - Implementation of the necessary changes, (i.e., repair, replacement or retirement) as outlined in Phase II. (IV) Testing - Verification that the conversions implemented in Phase III will be successful in resolving the Year 2000 problem so that all inventory items will function properly, both as individual units and on an integrated basis. (V) Implementation - The final roll-out of fully tested components into an operational unit.
MediaOne Group has aggregated its business operations into four critical business functions in order to manage its Year 2000 program. The critical business functions are (i) customer service, which includes service delivery, service disruption, network management and workforce management; (ii) customer care and billing, which includes bill issuance and access to functioning call centers; (iii) cash flow, which includes payment processing, general ledger, accounts payable and accounts receivable; and (iv) employees, health and safety, which includes payroll processing, pension fund, and building operations and security. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued In addition to the program phases and critical business functions, MediaOne Group has identified three primary risk assessment levels for various inventory items relative to the Year 2000 program. These levels are high, medium and low, with high risk items being those that would have such an impact on the business, that if the risk is not appropriately managed and/or mitigated, the occurrence of the risk would have an adverse impact on the operations of the business. MediaOne Group has identified two business areas relative to disclosures. These are Domestic Cable and Broadband, and Investments in Unconsolidated Subsidiaries. DOMESTIC CABLE AND BROADBAND The following chart describes the status of the Company's Year 2000 program with respect to Domestic Cable and Broadband operations in the four critical business functions identified above.
- ---------------------- ------------------------- --------------------- ------------------ ----------------- Estimated Date Business Functions Current Areas of Focus Operational Impact Current Status of Completion - ---------------------- ------------------------- --------------------- ------------------ ----------------- Customer Service Head End Controller Inability to Phase II Q2 1999 Set Top Box provide video, Switches telephony & data Ad Insertion service Customer Care & Subscriber Billings Loss of revenues Phase II Q2 1999 Billing Ad Sales Billings Call Center Operations Cash Flow Financial Systems Interruption to Early Phase III Q2 1999 cash receipts & disbursements cycle Employees, Health & Payroll & Benefit Loss of support Phase III Q2 1999 Safety Systems systems and Facilities Functions employee disruption - ---------------------- ------------------------- --------------------- ------------------ -----------------
MediaOne Group is currently evaluating Year 2000 cost estimates based upon the definition in the SEC's interpretation on disclosure of Year 2000 issues released on August 4, 1998. MediaOne Group intends to provide Year 2000 cost estimates in the third quarter of 1998. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued MediaOne Group has significant relationships and dependencies with regard to systems and technology provided and supported by third party vendors and service providers. As part of its Year 2000 program MediaOne Group is closely evaluating these relationships and associated contracts to minimize the operational risk which may exist while gaining vendor commitment to product compliance on time and within expected cost estimates. MediaOne Group is heavily dependent upon the connectivity with content and service providers who are in turn responsible for their own systems and technology as well as systems and technology provided to them. Business Continuity teams are being developed for the Year 2000 program which will include contingency and disaster recovery management. Contingency plans are being developed as part of the vendor review which includes trigger dates and processes for implementation of the contingency plan where necessary. There can be no assurance that these contingency plans will eliminate all potential for service interruption. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES MediaOne Group has significant investments in both domestic and international cable and broadband operations as well as wireless operations. Within this area MediaOne Group has separated the Year 2000 program between domestic and international investments for improved analysis and program management. (I) Domestic Investments The domestic investments include an investment in TWE, the second-largest provider of cable television services in the United States. MediaOne Group also holds a significant cost basis investment in AirTouch as a result of selling its domestic wireless businesses to AirTouch on April 6, 1998. MediaOne Group influences Year 2000 efforts at TWE through the TWE Board of Representatives. TWE has represented to MediaOne Group that it is in the conversion phase of their Year 2000 program as of June 30, 1998. MediaOne Group is planning to audit TWE and its progress relative to their Year 2000 program during the last half of 1998 as deemed necessary. MediaOne Group will continue to monitor information provided to the investor community by AirTouch to insure sufficient progress is being made toward remediation of Year 2000 issues and that MediaOne Group's investment value is maintained. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued (II) International Investments Internationally, MediaOne Group holds an investment in Telewest, the second-largest provider of combined cable and broadband communications services in the United Kingdom. MediaOne Group also holds interests in cable and broadband properties in Singapore, the Netherlands, Belgium, the Czech Republic and Japan. Additionally MediaOne Group holds wireless interests which include a 50 percent joint venture interest in Mercury Personal Communications ("One 2 One"), a provider of PCS services in the United Kingdom. MediaOne Group also owns interests in wireless properties in Hungary, the Czech and Slovak Republics, Russia, India and Poland. Fifteen of the sixteen international ventures in which MediaOne Group has an investment have completed their initial inventory of systems and related technologies subject to Year 2000 exposure. The ventures have established remediation strategies for approximately 80 percent of the inventory items, while having completed remediation on approximately 50 percent of the high to medium risk related items. Based upon current information provided by the ventures to MediaOne Group, costs of addressing potential problems are not expected to have a material adverse impact on MediaOne Group's financial position. SUMMARY MediaOne Group cannot provide assurance that actual results will not differ from management's estimates due to the complexity of correcting the systems and related technologies surrounding the Year 2000 problem. Failure to complete the project in a timely or complete manner, within its estimate of projected costs, or failure by third parties, such as financial institutions and related networks, local telephone companies, long distance providers, power providers, etc. to correct their systems, which MediaOne Group's systems interconnect with, could have a material impact on future results of operations and financial position. Other factors which might cause a material difference from management's estimate would include, but not be limited to, the availability and cost of personnel with appropriate skills and abilities to locate and correct all relevant computer code and similar uncertainties. However, MediaOne Group believes that with its planned repair, replacement, or retirement of the relevant systems and related technologies, the Year 2000 issue can be mitigated. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Selected Proportionate Data The following table and discussion is not required by GAAP or intended to replace the Combined Financial Statements prepared in accordance with GAAP. It is presented supplementally because MediaOne Group believes that proportionate financial and operating data facilitate the understanding and assessment of its Combined Financial Statements. The table does not reflect financial data of the capital assets segment, which had net assets of $445 and $419 at June 30, 1998 and December 31, 1997, respectively. The financial information included below departs materially from GAAP because it aggregates the revenues and operating income of entities not controlled by MediaOne Group with those of the consolidated operations of MediaOne Group.
- ----------------------------------------------------------------- ------------- -------------- ------------- Percent Six Months Ended June 30, 1998 1997 Change - ----------------------------------------------------------------- ------------- -------------- ------------- Revenues Cable and broadband: Domestic (1) $2,696 $2,496 8.0 International 150 226 (33.6) Wireless communications: Domestic 354 652 (45.7) International 509 324 57.1 Corporate 10 7 42.9 Other (2) 32 77 (58.4) ------------- -------------- ------------- Total revenues $3,751 $3,782 (0.8) ================================================================= ============= ============== ============= EBITDA (3) Cable and broadband: Domestic (1) $873 $792 10.2 International 3 20 (85.0) Wireless communications: Domestic 114 212 (46.2) International 65 (3) - Corporate (30) (22) 36.4 Other (2) - (9) - ------------- -------------- ------------- Total EBITDA $1,025 $ 990 3.5 ================================================================= ============= ============== =============
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Selected Proportionate Data, continued
- ----------------------------------------------------------------- ------------- -------------- ------------ Percent Six Months Ended June 30, 1998 1997 Change - ----------------------------------------------------------------- ------------- -------------- ------------ Subscribers Cable and broadband: Domestic (1) 7,452 7,674 (2.9) International 903 1,199 (24.7) Wireless communications: Domestic - 2,119 - International 1,268 760 66.8 ------------- -------------- ------------ Total subscribers 9,623 11,752 (18.1) ================================================================= ============= ============== ============
(1) The proportionate results are based on the MediaOne Group's 25.51 percent pro rata priority and residual equity interests in reported Time Warner Entertainment Company L.P. ("TWE") results. The reported TWE results are prepared in accordance with GAAP and have not been adjusted to report TWE results on a proportionate basis. (2) Primarily includes international directories. (3) Proportionate EBITDA represents the MediaOne Group's equity interest in the entities multiplied by the entity's EBITDA. As such, proportionate EBITDA does not represent cash available to the MediaOne Group. Proportionate Results of Operations - Six Months Ended June 30, 1998 Compared with 1997 For the first six months of 1998, proportionate MediaOne Group revenues decreased 0.8 percent, to $3,751, EBITDA increased 3.5 percent, to $1,025. Normalized for the one-time effects of acquisitions, dispositions, and a change in classification of the domestic cable late fee revenues, proportionate revenue increased 14.9 percent and EBITDA increased 20.8 percent. Cable and Broadband. During the first six months of 1998, proportionate revenues for the domestic cable and broadband operations increased 8.0 percent, to $2,696. Normalized for the one-time effects of cable system acquisitions and dispositions, and a change in classification of the late fee revenues, proportionate revenue increased 9.0 percent. This is a result of increases in subscribers and revenue per subscriber mainly due to price increases. Proportionate EBITDA increased 10.2 percent, to $873. Normalized for the one-time effects of cable system acquisitions and dispositions, proportionate EBITDA increased 10.3. This increase is primarily a result of Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Selected Proportionate Data, continued higher revenues, partially offset by higher programming fees, increased personnel costs related to customer service initiatives and costs associated with deployment of high speed data services. Proportionate EBITDA related to TWE operations increased 19.3 percent. TWE's results benefited from improved cable and programming operations and gains realized by asset sales. During the first six months of 1998, international cable and broadband proportionate revenues decreased $76, or 33.6 percent, to $150, and proportionate EBITDA decreased $17, or 85 percent, to $3. Normalized for dispositions, proportionate revenue increased $30, or 25.0 percent, to $150 and EBITDA increased $8 to $3. Customer growth at Telewest Communications, Inc. ("Telewest") contributed to the increase in proportionate revenue. A reduction in MediaOne Group international staff costs as well as improved operations at Telewest contributed to the increase in proportionate EBITDA. In 1998, the Company suspended proportionate reporting for Malaysia and Indonesia in conjunction with the suspension of equity method accounting for these two ventures. Proportionate international cable subscribers totaled 903,000 at June 30, 1998, a 5 percent increase, on a comparable basis. Telewest's cable television subscribers increased 14 percent compared with last year. Wireless Communications. On April 6, 1998, MediaOne Group sold its domestic wireless businesses to AirTouch. During the first six months of 1998, proportionate revenues for the international wireless operations increased $185, or 57.1 percent, to $509, and proportionate EBITDA increased $68 to $65. The increase in proportionate revenue and EBITDA is the result of a 66.8 percent increase in the international wireless subscriber base to 1,268,000. The digital wireless operations in Hungary, Czech Republic, Slovakia, Malaysia, Poland and India contributed significantly to the increase. The personal communications services venture in the United Kingdom, One 2 One, added 328,000 proportionate customers, a 93 percent increase, from a year ago. Corporate. During the first half of 1998, proportionate revenue for corporate operations increased $3, or 42.9 percent, to $10. EBITDA decreased $8, or 36.4 percent to $(30). Other. MediaOne Group sold its wholly owned international directory operations in the United Kingdom and Poland on June 4, 1997, and October 1, 1997, respectively. These two operations comprise the majority of proportionate international directories results. Form 10-Q - Part I Item 3. Quantitative and Qualitative Disclosures About Market Risk. Reference is made to the information set forth on page 43. 54 Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. Legal Proceedings MediaOne Group, Inc. and its subsidiaries are subject to claims and proceedings arising in the ordinary course of business. While complete assurance cannot be given as to the outcome of any contingent liabilities, in the opinion of MediaOne Group, any financial impact to which MediaOne Group and its subsidiaries are subject is not expected to be material in amount to MediaOne Group's operating results or its financial position. Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders on June 6, 1998, shareholders voted as follows to approve the Separation of Old U S WEST into MediaOne Group, Inc. and New U S WEST:
For Against Abstained 638,993,680 13,740,673 5,847,573
The shareholders voted as follows for the purpose of electing five individuals as directors of the Company:
Directors Votes in Favor Votes Withheld CLASS I Grant A. Dove 721,898,887 18,124,990 Allen F. Jacobson 721,576,398 18,447,479 Charles M. Lillis 720,321,422 19,702,455 Charles P. Russ, III 722,124,382 17,899,495 Louis A. Simpson 722,279,645 17,744,232
Arthur Andersen LLP was confirmed as the Company's independent auditors with 729,715,548 votes in favor, 6,454,085 votes against and 3,853,011 votes abstaining. The shareholders voted as follows to approve an amendment to the U S WEST 1994 Stock Plan (renamed "MediaOne Group 1994 Stock Plan" effective with the split on June 12, 1998):
In Favor Against Abstained 589,664,012 58,543,696 10,373,943
Form 10-Q - Part II Item 4. Submission of Matters to a Vote of Security Holders (continued) The shareholders voted as follows to approve an amendment to the U S WEST Executive Short-Term Incentive Plan (renamed "MediaOne Group Executive Short-Term Incentive Plan" effective with the split on June 12, 1998):
In Favor Against Abstained 564,029,310 83,676,618 10,875,723
The shareholders also considered and rejected the following two shareholder proposals at the annual meeting:
Proposal In Favor Against Abstained Not Voted Elimination of Classified Board 279,095,426 358,753,835 20,722,694 81,451,922 Initiation of Cumulative Voting 229,361,902 401,500,167 27,710,490 81,451,318
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit Number (10a). Form of Amended and Restated Rights Agreement between MediaOne Group, Inc. and State Street Bank and Trust Company, as Rights Agent (Exhibit 4 to the Company's Current Report on Form 8-K dated June 24, 1998). (10b). Separation Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated as of June 5, 1998 (Exhibit 99.1 to the Company's Current Report on Form 8-K dated June 24, 1998). (10c). Employee Matters Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated as of June 5, 1998 (Exhibit 99.2 to the Company's Current Report on Form 8-K dated June 24, 1998). (10d). Tax Sharing Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated as of June 5, 1998 (Exhibit 99.3 to the Company's Current Report on Form 8-K dated June 24, 1998).
Form 10-Q - Part II Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits (cont'd.)
Exhibit Number 10e. Form of Chief Executive Officer Change of Control Agreement. 10f. Form of Business Unit Executive Change of Control Agreement. 10g. Form of Executive Change of Control Agreement. 12. Statement regarding computation of earnings to fixed charges ratio of MediaOne Group, Inc. 99. Unaudited Pro Forma Condensed Combined Statements of Operations of MediaOne Group, Inc.
(b) Reports on Form 8-K filed during the Second Quarter of 1998
(i) Form 8-K/A report dated April 13, 1998, containing amendments to the U S WEST, Inc. Unaudited Pro Forma Condensed Combined Financial Statements with respect to U S WEST, Inc.'s amended annual report filed on Form 10-K/A. (ii) Form 8-K report dated April 6, 1998, with respect to the disposition by the Media Group of U S WEST, Inc. of its domestic wireless businesses to AirTouch Communications, Inc. (iii) Form 8-K report dated April 24, 1998, regarding press releases by U S WEST Communications Group and U S WEST Media Group with respect to the Company's first quarter earnings. (iv) Form 8-K report dated May 15, 1998, concerning the release of Unaudited Pro Forma Condensed Combined Financial Statements with respect to the Separation of U S WEST, Inc.'s Media Group and Communications Group into two separate companies. (v) Form 8-K report dated June 18, 1998, concerning the issuance of restated consolidated financial statements with respect to the Separation of U S WEST, Inc.'s Media Group and Communications Group into two separate companies. (vi) Form 8-K report dated June 24, 1998, with respect to the disposition of the Dex business to the New U S WEST and the acquisition of New U S WEST under the Dex Dividend.
SIGNATURES 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. /S/ Richard A. Post ------------------------------------------------- August 13, 1998 MediaOne Group, Inc. Richard A. Post Executive Vice President and Chief Executive Officer EX-10 2 EXHIBIT 10E 2 July ____, 1998 [Name] [Title] [Company] [Address] Dear [Name]: MediaOne Group, Inc., on behalf of itself, its subsidiaries and its stockholders, and any successor or surviving entity, wishes to encourage your continued service and dedication in the performance of your duties, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Subsection I(i)) of the Company (as defined in Subsection I(k)). The Board of Directors of the Company (the "Board") believes that the prospect of a pending or threatened Change of Control inevitably creates distractions and personal risks and uncertainties for its executives, and that it is in the best interests of MediaOne Group, Inc. and its stockholders to minimize such distractions to certain executives. The Board further believes that it is in the best interests of the Company to encourage its executives' full attention and dedication to their duties, both currently and in the event of any threatened or pending Change of Control. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued retention of certain members of the Company's management, including yourself, and the attention and dedication of management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change of Control. In order to induce you ("Executive") to remain in the employ of the Company and in consideration of your continued service to the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event that your employment with the Company is terminated subsequent to a Change of Control in the circumstances described herein. For purposes of this Agreement, references to employment with the Company shall include employment with a Subsidiary of the Company (as defined in Subsection I(y)). I. Definitions The meaning of each capitalized term that is used in this Agreement is set forth below. (a) AAA. The American Arbitration Association. (b) Additional Pay. The meaning of this term is set forth in Subsection IV(b). (c) Agreement. The meaning of this term is set forth in the third paragraph of this Agreement. (d) Agreement Payments. The meaning of this term is set forth in Subsection IV(e)(i). (e) Beneficiaries. The meaning of this term is set forth in Subsection VI(b). (f) Board. The meaning of this term is set forth in the first paragraph of this Agreement. (g) Business Combination. The meaning of this term is set forth in Subsection I(i)(iii). (h) Cause. For purposes of this Agreement, "Cause" shall mean Executive's willful breach or failure to perform his employment duties. For purposes of this Subsection I(h), no act, or failure to act, on the part of Executive shall be deemed "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that such action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive's employment shall not be deemed to have been terminated for Cause unless and until the Company delivers to Executive a certificate of a resolution duly adopted by the affirmative vote of not less than seventy-five percent (75%) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive has engaged in such willful conduct and specifying the details of such willful conduct. (i) Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if there is a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) as currently in effect, of the Exchange Act) is or becomes a "beneficial owner" (as determined for purposes of Regulation 13D-G as currently in effect, under the Exchange Act, directly or indirectly, of securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities. For purposes of this Agreement, the term "person" shall not include: (A) the Company or any of its Subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, or (C) an underwriter temporarily holding securities pursuant to an offering of said securities; (ii) during any period of two (2) consecutive calendar years, individuals who at the beginning of such period constitute the Board and any new director(s) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board, but excluding for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A, as currently in effect, of the Exchange Act) or other actual or threatened solicitation of proxies on consents by or on behalf of a person other than the Board; (iii) the stockholders of the Company approve a merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless following such Business Combination: (i) all or substantially all of the individuals and entities who were the "beneficial owners" (as determined for purposes of Regulation 13D-G, as currently in effect, of the Exchange Act) of the outstanding voting securities of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, securities representing more than seventy percent (70%) of the total voting power of the then outstanding voting securities of the corporation resulting from such Business Combination or the parent of such corporation (the "Resulting Corporation"); (ii) no "person" (as such term is used in Section 13(d) and 14(d)(2), as currently in effect, of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or the Resulting Corporation, is the "beneficial owner" (as determined for purposes of Regulation 13D-G, as currently in effect, of the Exchange Act), directly or indirectly, of voting securities representing twenty percent (20%) or more of the total voting power of then outstanding voting securities of the Resulting Corporation; and (iii) at least a majority of the members of the board of directors of the Resulting Corporation were members of the Board at the time of the execution of the initial agreement, or at the time of the action of the Board, providing for such Business Combination; (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or (v) any other event that a simple majority of the Board, in its sole discretion, shall determine constitutes a Change of Control. (j) Code. The meaning of this term is set forth in Subsection IV(e)(i). (k) Company. The meaning of this term is set forth in Subsection VI(a). (l) Controlled Group. For purposes of this Agreement, "Controlled Group" shall mean the Company and all of the Company's Subsidiaries. (m) Disability. For purposes of this Agreement, "Disability" shall mean an illness, injury or similar incapacity which 52 weeks after its commencement, continues to render Executive unable to perform the material and substantial duties of Executive's position or any substantially similar occupation or substantially similar employment for which Executive is qualified or may reasonably become qualified by training, education or experience. Any question as to the existence of a Disability upon which Executive and the Company cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, by any adult member of Executive's immediate family or Executive's legal representative), and approved by the Company, such approval not to be unreasonably withheld. The determination of such physician made in writing to both the Company and Executive shall be final and conclusive for all purposes of this Agreement. (n) Employer. For purposes of this Agreement, "Employer" shall mean the Company or the Subsidiary, as the case may be, with which Executive has an employment relationship. (o) Exchange Act. This term shall have the meaning set forth in Subsection I(i). (p) Executive. This term shall have the meaning set forth in the third paragraph of this Agreement. (q) Excise Tax. This term shall have the meaning set forth in Subsection IV(e)(i). (r) Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without Executive's prior express written consent, of any of the following circumstances: (i) The assignment to Executive of any duties inconsistent with Executive's status or responsibilities as in effect immediately prior to a Change of Control, including imposition of travel obligations which differ materially from required business travel immediately prior to the Change of Control; (ii) Any diminution in the status or responsibilities of Executive's position from that which existed immediately prior to the Change of Control, whether by reason of the Company ceasing to be a public company under the Exchange Act, becoming a subsidiary of a successor public company, or otherwise; (iii) (A) A reduction in Executive's annual base salary as in effect immediately before the Change of Control; or (B) the failure to pay a bonus award to which Executive is entitled under any short-term incentive plan(s) or program(s) or any long-term incentive plan(s) or program(s) in which Executive participates, or any companion, amended, successor or other incentive compensation plan(s) or program(s), at the time such awards are usually paid; (iv) A change in the principal place of Executive's employment, as in effect immediately prior to the Change of Control to a location more than thirty-five (35) miles distant from the location of such principal place at such time; (v) The failure by the Company to continue in effect any incentive compensation plan or stock option plan in which Executive participates immediately prior to the Change of Control, unless participation in an equivalent alternative compensation or stock or stock option arrangement (embodied in an ongoing substitute or alternative plan) has been provided to Executive, or the failure by the Company to continue Executive's participation in any such compensation or stock or stock option plan on a substantially equivalent or more beneficial basis, both in terms of the nature and amount of benefits provided and the level of Executive's participation relative to other participants, as existed immediately prior to the time of the Change of Control; (vi) (A) Except as required by law, the failure by the Company to continue to provide to Executive benefits substantially equivalent or more beneficial, in the aggregate, to those enjoyed by Executive under the qualified and non-qualified employee benefit and welfare plans of the Company, including, without limitation, any pension, deferred compensation, life insurance, medical, dental, health and accident, disability, retirement or savings plan(s) or program(s) in which Executive was eligible to participate immediately prior to the Change of Control; (B) the taking of any action by the Company that would, directly or indirectly, materially reduce or deprive Executive of any other perquisite or benefit enjoyed by Executive immediately prior to the Change of Control (including, without limitation, Company-paid and/or reimbursed club memberships, financial counseling fees and the like); or (C) the failure by the Company to treat Executive under the Company's vacation policy, past practice or special agreement in the same manner and to the same extent as was in effect immediately prior to the Change of Control; (vii) The failure of the Company to obtain a satisfactory written agreement from any successor prior to consummation of the Change of Control to assume and agree to perform this Agreement, as contemplated in Subsection VI(a); or (viii) Any purported termination by the Company of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection III(b) or, if applicable, Subsection I(h). For purposes of this Agreement, no such purported termination shall be effective except as constituting Good Reason. Executive's continued employment with the Company or any Subsidiary shall not constitute a consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (s) Gross-Up Payment. The meaning of this term is set forth in Subsection IV(e)(i). (t) Notice of Termination. The meaning of this term is set forth in Subsection III(b). (u) Other Payments. The meaning of this term is set forth in Subsection IV(e)(i). (v) Payments. The meaning of this term is set forth in Subsection IV(e)(i). (w) Resulting Corporation. The meaning of this term is set forth in Subsection I (i)(iii). (x) Retirement. For purposes of this Agreement, "Retirement" shall mean Executive's voluntary termination of employment with the Company, other than for Good Reason, and in accordance with the Company's retirement policy generally applicable to its employees or in accordance with any prior or contemporaneous retirement agreement or arrangement between Executive and the Company. (y) Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean any corporation of which fifty percent (50%) or more of the voting stock is owned, directly or indirectly, by the Company. (z) Tax Consultant. The meaning of this term is set forth in Subsection IV(e)(ii). (aa) Terminate(d) or Termination. The meaning of this term is set forth in Subsection III(a). (bb) Termination Date. For purposes of this Agreement, "Termination Date" shall mean: (i) If Executive's employment is terminated for Disability, thirty (30) calendar days after Notice of Termination is given (provided that Executive shall not have returned to the full-time performance of his duties during such thirty-day period); and (ii) If Executive's employment is terminated for Cause or Good Reason or for any reason other than death or Disability, the date specified in the Notice of Termination (which in the case of a termination for Cause shall not be less than thirty (30) calendar days and in the case of a termination for Good Reason shall not be less than thirty (30) calendar days nor more than sixty (60) calendar days, respectively, from the date such Notice of Termination is given). II. Term of Agreement (a) General. Upon execution by Executive, this Agreement shall commence as of June 16, 1998. This Agreement shall continue in effect through December 31, 2001; provided, however, that commencing on January 1, 2002, and every third January 1 thereafter, the term of this Agreement shall automatically be extended for three (3) additional years unless, not later than ninety (90) calendar days prior to the January 1 on which this Agreement otherwise automatically would be extended, the Company shall have given notice to Executive that it does not wish to extend this Agreement; provided further, however, that if a Change of Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which the Change of Control occurred. The term of this Agreement automatically shall be extended for three (3) additional years from the date of any public announcement of an event that would constitute a Change of Control as defined in this Agreement; provided, however, that if any such announced event is not consummated within that three (3) year period, the original renewal term thereafter shall apply. (b) Disposition of Employer. In the event Executive is employed by a Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold or otherwise disposed of prior to the date on which a Change of Control occurs, unless Executive continues in employment with the Controlled Group after such sale or other disposition. If Executive's Employer is sold or disposed of on or after the date on which a Change of Control occurs, this Agreement shall continue through its original term or any extended term then in effect. (c) Deemed Change of Control. If Executive's employment with Employer is terminated prior to the date on which a Change of Control occurs, and such termination was at the request of a third party who has taken steps to effect a Change of Control, or otherwise was in connection with the Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred prior to such termination. (d) Expiration of Agreement. No termination or expiration of this Agreement shall affect any rights, obligations or liabilities of either party that shall have accrued on or prior to the date of such termination or expiration. III. Termination Following Change of Control (a) Entitlement to Benefits. If a Change of Control shall have occurred, Executive shall be entitled to the benefits provided in Section IV hereof upon the subsequent termination of his employment with the Company for any reason (including, without limitation, by Executive without Good Reason) within three (3) years after the date of the Change of Control, unless the Change of Control is a Business Combination and (A) the board of directors of the Resulting Corporation (as defined in Subsection I(i)(iii)) is comprised of a majority of the Board as constituted immediately prior to execution of the initial agreement or action of the Board leading to the Business Combination, and (B) Executive remains in the position of Chief Executive Officer of the Company after the Business Combination at the request of the board of directors of the Resulting Corporation on terms that would not constitute Good Reason for Executive to terminate his employment. If a Change of Control shall have occurred that is a Business Combination meeting the criteria specified in clauses (A) and (B) of the preceding sentence, Executive shall be entitled to the benefits provided in Section IV hereof upon the subsequent Termination (as defined below) of his employment with the Company within three (3) years after the date of the Change of Control unless such termination is (i) a result of Executive's death or Retirement, (ii) for Cause, (iii) a result of Executive's Disability, or (iv) by Executive other than for Good Reason. For purposes of this Agreement, "Termination," when capitalized, shall mean a termination of Executive's employment that is not as a result of Executive's death, Retirement or Disability and (x) if by the Company, is not for Cause, or (y) if by Executive, is for Good Reason. (b) Notice of Termination. Any purported termination of Executive's employment by either the Company or Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section VIII. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice that indicates the specific provision(s) of this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision(s) so indicated. If Executive's employment shall be terminated by the Company for Cause or by Executive for other than Good Reason, the Company shall pay Executive his full base salary through the Termination Date at the salary level in effect at the time Notice of Termination is given and shall pay any amounts to be paid to Executive pursuant to any other compensation or stock or stock option plan(s), program(s) or employment agreement(s) then in effect, and the Company shall have no further obligations to Executive under this Agreement. If within thirty (30) calendar days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the grounds for termination, then, notwithstanding the meaning of "Termination Date" set forth in Subsection I(bb), the Termination Date shall be the date on which the dispute is finally resolved, whether by mutual written agreement of the parties or by a decision rendered pursuant to Section XI; provided that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay Executive his full compensation including, without limitation, base salary, bonus, incentive pay and equity grants, in effect when the notice of the dispute was given, and continue Executive's participation in all benefits plans or other perquisites in which Executive was participating, or which he was enjoying, when the Notice of Termination giving rise to the dispute was given, until the dispute is finally resolved. Amounts paid under this Subsection III(b) are in addition to and not in lieu of all other amounts due to Executive under this Agreement and shall not be offset against or reduce any other amounts due to Executive under this Agreement. IV. Compensation Upon a Termination Following a Change of Control, and pursuant to the provision set forth in Subsection III(a) Executive shall be entitled to the following benefits: (a) Standard Benefits. The Company shall pay to Executive, in cash, no later than the second business day following the Termination Date: (i) his full base salary through the Termination Date at the salary level in effect on either (x) the day on which Notice of Termination is given, or (y) the day immediately preceding the date of the Change of Control, whichever is higher; (ii) the annual bonus payable to Executive under any short-term incentive plan(s) or program(s) of the Company in which Executive participates following a termination of employment after a change of control, as defined in such plan(s) or program(s). If a change of control has not occurred within the meaning of such plan(s) or program(s), a change of control shall be deemed to have occurred with respect to Executive for the purpose of determining the bonus payable to Executive based on a Change of Control occurring within the meaning of this Agreement; and (iii) the annual grant value of any long-term incentive award payable to Executive under any long-term incentive plan(s) or program(s) of the Company in which Executive participates following a termination of employment after a change of control, as defined in such plan(s) or program(s). If a change of control has not occurred within the meaning of such plan(s) or program(s), a change of control shall be deemed to have occurred with respect to Executive based on a Change of Control occurring within the meaning of this Agreement. In addition, the Company shall cause: (x) all unvested stock options held by Executive on the Termination Date immediately to vest and be fully exercisable as of the Termination Date; (y) any restrictions on all restricted stock held by Executive on the Termination Date immediately to lapse and all shares of such stock to fully vest as of the Termination Date; and (z) any accrued benefit or deferred arrangement of the Company that Executive otherwise would become entitled to if he continued employment with the Company immediately to vest as of the Termination Date. (b) Additional Benefits. The Company shall pay to Executive as additional pay ("Additional Pay"), the product of (i) the lesser of (x) three (3) or (y) the difference between sixty-five (65) and Executive's age as of the date of the Notice of Termination (calculated to the nearest twelfth of a year), multiplied by (ii) the sum of (x) Executive's annual base salary in effect immediately prior to the Termination Date, (y) Executive's annual bonus amount under any short-term incentive plan(s) or program(s) in which Executive participates, such bonus amount to be calculated on the basis of the extent to which the performance factors targeted by the Human Resources Committee of the Board have been achieved (for this purpose, the Company's performance through the Termination Date shall be annualized based upon the actual number of days elapsed from the beginning of the fiscal year in which the Termination Date occurs through the Termination Date over a year of 360 days), which shall be deemed to be 100% unless the performance actually achieved is greater than 100%, in which case the actual performance level shall be utilized, and (z) the dollar value of the most recent annual grant to Executive prior to the Termination Date under any long-term incentive plan(s), program(s) or grant(s) in which Executive participates, whether such value is in the form of stock, stock options, Dividend Equivalent Units or any other form of long term incentive compensation, such grant value to be calculated as if the performance measures set forth in any such plan(s), program(s) or grant(s) (e.g., Dividend Equivalent Units) for the applicable performance period shall be deemed to be one hundred percent (100%). The Company shall pay the Additional Pay to Executive in a lump sum, in cash, not later than the fifteenth calendar day following the Termination Date. The Company also shall provide Executive with office space and shared administrative support for the three (3) year period immediately following the Termination Date, in the county of Executive's residence, at a location to be designated by the Company, which office space and support shall be similar to that currently provided by the Company to retired senior officers. The Company shall maintain for Executive for the three (3) year period immediately following the Termination Date, all perquisites and benefits enjoyed by Executive immediately prior to the Termination Date. (c) Retirement Plan Benefits. If not already vested, Executive shall be deemed fully vested as of the Termination Date in any Company retirement plan(s) or other written agreement(s) between Executive and the Company relating to pay or other benefits upon retirement in which Executive was a participant, party or beneficiary immediately prior to the Change of Control, and any additional plan(s) or agreement(s) in which such Executive became a participant, party or beneficiary thereafter. In addition to the foregoing, for purposes of determining the amounts to be paid to Executive under such plan(s) or agreement(s), the years of service with the Company and the age of Executive under all such plans and agreements shall be deemed increased by the lesser of thirty-six (36) months or such shorter period of time as would render Executive sixty-five (65) years of age. For purposes of this Subsection IV(c), the term "plan(s)" includes, without limitation, the Company's qualified pension plan, non-qualified and mid-career pension plans, and any companion, successor or amended plan(s), and the term "agreement(s)" encompasses, without limitation, the terms of any offer letter(s) leading to Executive's employment with the Company where Executive was a signatory thereto, any written amendment(s) to the foregoing and any subsequent agreements on such matters. In the event the terms of the plans referenced in this Subsection IV(c) do not for any reason coincide with the provisions of this Subsection IV(c) (e.g., if plan amendments would cause disqualification of qualified plans), Executive shall be entitled to receive from the Company under the terms of this Agreement an amount equal to all amounts he would have received, at the time he would have received such amounts, had all such plans continued in existence as in effect on the date of this Agreement after being amended to coincide with the terms of this Subsection IV(c). (d) Health and Other Benefits. Following the Termination Date, the Company shall continue to provide substantially the same level of health, vision and dental benefits to Executive and Executive's eligible dependents that the Company would provide to Executive and Executive's eligible dependents if Executive were first eligible for retiree health, vision and dental benefits immediately prior to the Change of Control. The eligibility of Executive's dependents shall be determined by the terms of any retiree health, vision and dental benefit plan(s) or program(s) in effect immediately prior to the Change of Control. Following the Termination Date, (i) ownership of any Basic Executive Life Insurance held by the Company for the benefit of Executive, immediately shall be transferred to a third party trustee and held in an irrevocable rabbi trust for the benefit of Executive, and (ii) any collateral assignment by Executive to the Company under any Supplemental Executive Life Insurance (SELI) owned by Executive shall be subordinated to Executive's right to maximum cash value under the SELI measured against a death benefit equal to fifty percent (50%) of the SELI coverage in effect immediately prior to the Change of Control, without the SELI becoming a modified endowment contract. (e) Gross-Up Payments. (i) In the event any payment(s) or the value of any benefit(s) received or to be received by Executive in connection with Executive's termination or contingent upon a Change of Control (whether received or to be received pursuant to the terms of this Agreement (the "Agreement Payments") or of any other plan, arrangement or agreement of the Company, its successors, any person whose actions result in a Change of Control or any person affiliated with any of them (or which, as a result of the completion of the transaction(s) causing a Change of Control, will become affiliated with any of them) ("Other Payments" and, together with the Agreement Payments, the "Payments")), in the opinion of the Tax Consultant (as defined below in Subsection IV(e)(ii)),would be subject to an excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any other federal, state or local excise tax (any such excise or other tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), as determined as provided below, the Company shall pay to Executive an additional amount such that the net amount retained by Executive, after deduction of the Excise Tax on Agreement Payments and Other Payments and any federal, state and local income and employment tax and Excise Tax upon the Payment(s) provided for by this Subsection IV(e)(i), and any interest, penalties or additions to tax payable by Executive with respect thereto shall be equal to the total present value of the Agreement Payments and Other Payments at the time such Payments are to be made (the "Gross-Up Payment(s)"). The intent of the parties is that the Company shall be responsible in full for, and shall pay, any and all Excise Tax on any Payments and Gross-Up Payment(s) and any income and all employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment(s) as well as any loss of deduction caused by or related to the Gross-Up Payment(s). (ii) All determinations required to be made under this Subsection IV(e), including, without limitation, whether and when a Gross-Up Payment is required, and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, unless otherwise set forth in this Agreement, shall be made by tax consultant(s) selected by the Company and reasonably acceptable to Executive ("Tax Consultant"). For purposes of determining the amount of any Gross-Up Payment, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The Company shall cause the Tax Consultant to provide detailed supporting calculations to the Company and Executive within fifteen (15) business days after notice is given by Executive to the Company that any or all of the Payments have occurred, or such earlier time as is requested by the Company. Within two (2) business days after such notice is given to the Company, the Company shall instruct the Tax Consultant to timely provide the data required by this Subsection IV(e) to Executive. All fees and expenses of the Tax Consultant shall be paid in full by the Company. Any Excise Tax as determined pursuant to this Subsection IV(e) shall be paid by the Company to the Internal Revenue Service or any other appropriate taxing authority on Executive's behalf within five (5) business days after receipt of the Tax Consultant's determination. If the Tax Consultant determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Tax is payable by Executive, the Tax Consultant shall furnish Executive with a written opinion that failure to disclose or report the Excise Tax on Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or any other penalty. Any determination by the Tax Consultant shall be binding upon the Company and Executive in the absence of material mathematical or legal error. As a result of the uncertainty in the application of Section 4999 of the Code at the time the initial determination by the Tax Consultant hereunder, it is possible that Gross-Up Payments will not have been made by the Company that should have been made or that Gross-Up Payments have been made that should not have been made, in each case, consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Subsection IV(e)(iii) below and Executive is thereafter required to make a payment of any Excise Tax or any interest, penalties or addition to tax, the Tax Consultant shall determine the amount of underpayment of Excise Taxes that has occurred and any such underpayment and interest, penalties or addition to tax shall be promptly paid by the Company to the Internal Revenue Service or other appropriate taxing authority on Executive's behalf or, if such underpayment has been previously paid by Executive to the appropriate taxing authority, to Executive. In the event the Tax Consultant determines that an overpayment of Gross-Up Payment(s) has occurred, any such overpayment shall be treated for all purposes as a loan to Executive with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, due and payable within ninety (90) days after written demand to Executive by the Company; provided, however, that Executive shall have no duty or obligation whatsoever to repay such loan if Executive's receipt of the overpayment, or any portion thereof, is includible in Executive's income and Executive's repayment of the same is not deductible by Executive for federal and state income tax purposes. (iii) Executive shall notify the Company in writing of any claim of which he is aware by the Internal Revenue Service or state or local taxing authority, that, if successful, would result in any Excise Tax or an underpayment of any Gross-Up Payment(s). Such notice shall be given as soon as practicable but no later than fifteen (15) business days after Executive is informed in writing of the claim by the taxing authority and Executive shall provide written notice of the Company of the nature of the claim, the administrative or judicial appeal period, and the date on which any payment of the claim must be paid. Executive shall not pay any portion of the claim prior to the expiration of the thirty (30) day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any amount under the claim is due). If the Company notifies Executive in writing prior to the expiration of such thirty (30) day period that it desires to contest the claim, Executive shall: (A) give the Company any information reasonably requested by the Company relating to the claim; (B) take such action in connection with contesting the claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation concerning the claim by an attorney selected by the Company who is reasonably acceptable to Executive; and (C) cooperate with the Company in good faith in order to effectively contest the claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, without limitation, additional interest and penalties and attorneys' fees) incurred in such contests and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed as a result of such representation. Without limitation upon the foregoing provisions of this Subsection IV(e) (iii), except as provided below, the Company shall control all proceedings concerning such contest and, in its sole opinion, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority pertaining to the claim. At the written request of the Company and upon payment to Executive of an amount at least equal to the claim plus any additional amount necessary to obtain the jurisdiction of the appropriate tribunal and/or court, Executive shall pay the same to the appropriate taxing authority and sue for a refund. Executive agrees to prosecute in cooperation with the Company any contest of a claim to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company requests Executive to pay the claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless on an after-tax basis, from any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed on such advance or for any imputed income on such advance. Any extension of the statute of limitations relating to assessment of any Excise Tax for the taxable year of Executive which is the subject of the claim is to be limited solely to the claim. Furthermore, the Company's control of the contest shall be limited to issues for which a Gross-Up Payment would be payable hereunder. Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, Executive receives any refund of a claim or any additional amount that was necessary to obtain jurisdiction, Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, a determination is made that Executive shall not be entitled to any refund of the claim, and the Company does not notify Executive in writing of its intent to contest such denial of refund of a claim prior to the expiration of thirty (30) calendar days after such determination, then the portion of such advance attributable to a claim shall be forgiven by the Company and shall not be required to be repaid by Executive. The amount of such advance attributable to a claim shall offset, to the extent thereof, the amount of the underpayment required to be paid by the Company to Executive. (v) If, after the advance by the Company of an additional amount necessary to obtain jurisdiction, there is a final determination made by the taxing authority that Executive is not entitled to any refund of such amount, or any portion thereof, then such advance shall be repaid to the Company by Executive within thirty (30) calendar days after Executive receives notice of such final determination. A final determination shall occur when the period to contest or otherwise appeal any decision by an administrative tribunal or court of initial jurisdiction has been waived or the time for contesting or appealing the same has expired. (f) Legal Fees and Expenses. The Company shall pay to Executive all legal fees and expenses as and when incurred by Executive in connection with this Agreement, including all such fees and expenses, if any, incurred in contesting or disputing any termination or in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome, unless, in the case of a legal action brought by or in the name of Executive, a decision is rendered pursuant to Section XI, or in any other proper legal proceeding, that such action was not brought by Executive in good faith. (g) No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Section IV by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section IV be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement or other benefits received from whatever source after the Termination Date or otherwise, except as specifically provided in this Section IV. The Company's obligation to make payments to Executive provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company or Employer may have against Executive or other parties. V. Death and Disability Benefits In the event of the death or Disability of Executive after a Change of Control, Executive, or in the case of death, Executive's Beneficiaries (as defined below in Subsection VI.(b)), shall receive the benefits to which Executive or his Beneficiaries are entitled under this Agreement and any and all retirement plans, pension plans, disability policies and other applicable plans, programs, policies, agreements or arrangements of the Company. VI. Successors; Binding Agreement (a) Obligations of Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated employment for Good Reason following a Change of Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, the term "Company" shall mean MediaOne Group, Inc., including any surviving entity or successor to all or substantially all of its business and/or assets and the parent of any such surviving entity or successor. (b) Enforceable by Beneficiaries. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees (the "Beneficiaries"). In the event of the death of Executive while any amount would still be payable hereunder if such death had not occurred, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's Beneficiaries. (c) Employment. Except in the event of a Change of Control and, thereafter, only as specifically set forth in this Agreement, nothing in this Agreement shall be construed to (i) limit in any way the right of the Company or a Subsidiary to terminate Executive's employment at any time for any reason or for no reason; or (ii) be evidence of any agreement or understanding, expressed or implied, that the Company or a Subsidiary will employ Executive in any particular position, on any particular terms or at any particular rate of remuneration. VII. Confidential Information. Executive shall hold in fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company, the Subsidiaries and their respective businesses, which shall have been obtained during Executive's employment with the Employer and which shall not be public knowledge (other than by acts by Executive or his representatives in violation of this Agreement). After termination of Executive's employment with the Company or any Employer within the Controlled Group, Executive shall not, without prior written consent of the Company or the Employer, communicate or divulge any such information, knowledge or data to anyone other than the Company, the Employer or those designated by them. In no event shall an asserted violation of this Section VII constitute a basis for deferring or withholding any amounts otherwise payable to Executive under this Agreement. VIII. Notice All notices and communications including, without limitation, any Notice of Termination hereunder, shall be in writing and shall be given by hand delivery to the other party, by registered or certified mail, return receipt requested, postage prepaid, or by overnight delivery service, addressed as follows: If to Executive: [Name] [Title] [Company] [Address] If to the Company: MediaOne Group, Inc. 188 Inverness Drive West, Suite 500 Englewood, Colorado 80112 Attn: Vice President - Law, General Corporate and Litigation Group or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be deemed given and effective when actually received by the addressee. IX. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and the Chairman of the Human Resources Committee of the Board or an authorized officer designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Code or the Exchange Act shall be deemed also to refer to any successor provisions of such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Sections IV and V shall survive the expiration of the term of this Agreement. X. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. XI. Arbitration Executive may agree in writing with the Company (in which case this Article XI shall have effect but not otherwise) that any dispute that may arise directly or indirectly in connection with this Agreement, Executive's employment or the termination of Executive's employment, whether arising in contract, statute, tort, fraud, misrepresentation, discrimination or other legal theory, shall be resolved by arbitration in Denver, Colorado under the applicable rules and procedures of the AAA. The only legal claims between Executive and the Company or any Subsidiary that would not be included in this agreement to arbitration are claims by Executive for workers' compensation or unemployment compensation benefits, claims for benefits under a Company or Subsidiary benefit plan if the plan does not provide for arbitration of such disputes, and claims by Executive that seek judicial relief in the form of specific performance of the right to be paid until the Termination Date during the pendency of any applicable dispute or controversy. If this Article XI is in effect, any claim with respect to this Agreement, Executive's employment or the termination of Executive's employment must be established by a preponderance of the evidence submitted to an impartial arbitrator. A single arbitrator engaged in the practice of law shall conduct any arbitration under the applicable rules and procedures of the AAA. The arbitrator shall have the authority to order a pre-hearing exchange of information by the parties including, without limitation, production of requested documents, and examination by deposition of parties and their authorized agents. If this Article XI is in effect, the decision of the arbitrator: (i) shall be final and binding, (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator, and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. Section 1 et seq., not state law, shall govern the arbitrability of all claims. If this letter sets forth our agreement on the subject matter hereof, kindly sign both originals of this letter and return to the Vice President - Law, General Corporate and Litigation Section, one of the fully executed originals of this letter which will then constitute our Agreement on this subject. Sincerely, MediaOne Group, Inc. By:___________________________________ [Name] Chairman, Human Resources Committee of the Board of Directors ______________________________________ [Name] 14 EX-10 3 EXHIBIT 10F July ____, 1998 [Name] [Title] [Company] [Address] Dear [Name]: MediaOne Group, Inc., on behalf of itself, its subsidiaries and its stockholders, and any successor or surviving entity, wishes to encourage your continued service and dedication in the performance of your duties, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Subsection I(i)) of the Company (as defined in Subsection I(k). The Board of Directors of the Company (the "Board") believes that the prospect of a pending or threatened Change of Control inevitably creates distractions and personal risks and uncertainties for its executives, and that it is in the best interests of MediaOne Group, Inc. and its stockholders to minimize such distractions to certain executives. The Board further believes that it is in the best interests of the Company to encourage its executives' full attention and dedication to their duties, both currently and in the event of any threatened or pending Change of Control. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued retention of certain members of the Company's management, including yourself, and the attention and dedication of management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change of Control. In order to induce you ("Executive") to remain in the employ of the Company and in consideration of your continued service to the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event that your employment with the Company is terminated subsequent to a Change of Control in the circumstances described herein. For purposes of this Agreement, references to employment with the Company shall include employment with a Subsidiary of the Company (as defined in Subsection I(y)). I. Definitions The meaning of each defined term that is used in this Agreement is set forth below. (a) AAA. The American Arbitration Association. (b) Additional Pay. The meaning of this term is set forth in Subsection IV(b). (c) Agreement. The meaning of this term is set forth in the third paragraph of this Agreement. (d) Agreement Payments. The meaning of this term is set forth in Subsection IV(e)(i). (e) Beneficiaries. The meaning of this term is set forth in Subsection VI(b). (f) Board. The meaning of this term is set forth in the first paragraph of this Agreement. (g) Business Combination. The meaning of this term is set forth in Subsection I(i)(iii). (h) Cause. For purposes of this Agreement, "Cause" shall mean Executive's willful breach or failure to perform his employment duties. For purposes of this Subsection I(h), no act, or failure to act, on the part of Executive shall be deemed "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that such action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive's employment shall not be deemed to have been terminated for Cause unless and until the Company delivers to Executive a certificate of a resolution duly adopted by the affirmative vote of not less than seventy-five percent (75%) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive has engaged in such willful conduct and specifying the details of such willful conduct. (i) Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if there is a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) as currently in effect, of the Exchange Act) is or becomes a "beneficial owner" (as determined for purposes of Regulation 13D-G as currently in effect, under the Exchange Act, directly or indirectly, of securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities. For purposes of this Agreement, the term "person" shall not include: (A) the Company or any of its Subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, or (C) an underwriter temporarily holding securities pursuant to an offering of said securities; (ii) during any period of two (2) consecutive calendar years, individuals who at the beginning of such period constitute the Board and any new director(s) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (iii) the stockholders of the Company approve a merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless following such Business Combination: (i) all or substantially all of the individuals and entities who were the "beneficial owners" (as determined for purposes of Regulation 13D-G, as currently in effect, of the Exchange Act) of the outstanding voting securities of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, securities representing more than fifty percent (50%) of the total voting power of the then outstanding voting securities of the corporation resulting from such Business Combination or the parent of such corporation (the "Resulting Corporation"); (ii) no "person" (as such term is used in Section 13(d) and 14(d)(2), as currently in effect, of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or the Resulting Corporation, is the "beneficial owner" (as determined for purposes of Regulation 13D-G, as currently in effect, of the Exchange Act), directly or indirectly, of voting securities representing twenty percent (20%) or more of the total voting power of then outstanding voting securities of the Resulting Corporation; and (iii) at least a majority of the members of the board of directors of the Resulting Corporation were members of the Board at the time of the execution of the initial agreement, or at the time of the action of the Board, providing for such Business Combination; (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or (v) any other event that a simple majority of the Board, in its sole discretion, shall determine constitutes a Change of Control. (j) Code. The meaning of this term is set forth in Subsection IV(e)(i). (k) Company. The meaning of this term is set forth in Subsection VI(a). (l) Controlled Group. For purposes of this Agreement, "Controlled Group" shall mean the Company and all of the Company's Subsidiaries. (m) Disability. For purposes of this Agreement, "Disability" shall mean an illness, injury or similar incapacity which 52 weeks after its commencement, continues to render Executive unable to perform the material and substantial duties of Executive's position or any substantially similar occupation or substantially similar employment for which Executive is qualified or may reasonably become qualified by training, education or experience. Any question as to the existence of a Disability upon which Executive and the Company cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, by any adult member of Executive's immediate family or Executive's legal representative), and approved by the Company, such approval not to be unreasonably withheld. The determination of such physician made in writing to both the Company and Executive shall be final and conclusive for all purposes of this Agreement. (n) Employer. For purposes of this Agreement, "Employer" shall mean the Company or the Subsidiary, as the case may be, with which Executive has an employment relationship. (o) Exchange Act. This term shall have the meaning set forth in Subsection I(i). (p) Executive. This term shall have the meaning set forth in the third paragraph of this Agreement. (q) Excise Tax. This term shall have the meaning set forth in Subsection IV(e)(i). (r) Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without Executive's prior express written consent, of any of the following circumstances: (i) The assignment to Executive of any duties inconsistent with Executive's status or responsibilities as in effect immediately prior to a Change of Control, including imposition of travel obligations which differ materially from required business travel immediately prior to the Change of Control; (ii) Any diminution in the status or responsibilities of Executive's position from that which existed immediately prior to the Change of Control, whether by reason of the Company ceasing to be a public company under the Exchange Act, becoming a subsidiary of a successor public company, or otherwise; (iii) (A) A reduction in Executive's annual base salary as in effect immediately before the Change of Control; or (B) the failure to pay a bonus award to which Executive is entitled under any short-term incentive plan(s) or program(s) or any long-term incentive plan(s) or program(s) in which Executive participates, or any companion, amended, successor or other incentive compensation plan(s) or program(s), at the time such awards are usually paid; (iv) A change in the principal place of Executive's employment, as in effect immediately prior to the Change of Control to a location more than thirty-five (35) miles distant from the location of such principal place at such time; (v) The failure by the Company to continue in effect any incentive compensation plan or stock option plan in which Executive participates immediately prior to the Change of Control, unless participation in an equivalent alternative compensation or stock or stock option arrangement (embodied in an ongoing substitute or alternative plan) has been provided to Executive, or the failure by the Company to continue Executive's participation in any such compensation or stock or stock option plan on a substantially equivalent or more beneficial basis, both in terms of the nature and amount of benefits provided and the level of Executive's participation relative to other participants, as existed immediately prior to the time of the Change of Control; (vi) (A) Except as required by law, the failure by the Company to continue to provide to Executive benefits substantially equivalent or more beneficial, in the aggregate, to those enjoyed by Executive under the qualified and non-qualified employee benefit and welfare plans of the Company, including, without limitation, any pension, deferred compensation, life insurance, medical, dental, health and accident, disability, retirement or savings plan(s) or program(s) in which Executive was eligible to participate immediately prior to the Change of Control; (B) the taking of any action by the Company that would, directly or indirectly, materially reduce or deprive Executive of any other perquisite or benefit enjoyed by Executive immediately prior to the Change of Control (including, without limitation, Company-paid and/or reimbursed club memberships, financial counseling fees and the like); or (C) the failure by the Company to treat Executive under the Company's vacation policy, past practice or special agreement in the same manner and to the same extent as was in effect immediately prior to the Change of Control; (vii) The failure of the Company to obtain a satisfactory written agreement from any successor prior to consummation of the Change of Control to assume and agree to perform this Agreement, as contemplated in Subsection VI(a); or (viii) Any purported termination by the Company of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection III(b) or, if applicable, Subsection I(h). For purposes of this Agreement, no such purported termination shall be effective except as constituting Good Reason. Executive's continued employment with the Company or any Subsidiary shall not constitute a consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (s) Gross-Up Payment. The meaning of this term is set forth in Subsection IV(e)(i). (t) Notice of Termination. The meaning of this term is set forth in Subsection III(b). (u) Other Payments. The meaning of this term is set forth in Subsection IV(e)(i). (v) Payments. The meaning of this term is set forth in Subsection IV(e)(i). (w) Resulting Corporation. The meaning of this term is set forth in Subsection I (i)(iii). (x) Retirement. For purposes of this Agreement, "Retirement" shall mean Executive's voluntary termination of employment with the Company, other than for Good Reason, and in accordance with the Company's retirement policy generally applicable to its employees or in accordance with any prior or contemporaneous retirement agreement or arrangement between Executive and the Company. (y) Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean any corporation of which fifty percent (50%) or more of the voting stock is owned, directly or indirectly, by the Company. (z) Tax Consultant. The meaning of this term is set forth in Subsection IV(e)(ii). (aa) Terminate(d) or Termination. The meaning of this term is set forth in Subsection III(a). (bb) Termination Date. For purposes of this Agreement, "Termination Date" shall mean: (i) If Executive's employment is terminated for Disability, thirty (30) calendar days after Notice of Termination is given (provided that Executive shall not have returned to the full-time performance of his duties during such thirty-day period); and (ii) If Executive's employment is terminated for Cause or Good Reason or for any reason other than death or Disability, the date specified in the Notice of Termination (which in the case of a termination for Cause shall not be less than thirty (30) calendar days and in the case of a termination for Good Reason shall not be less than thirty (30) calendar days nor more than sixty (60) calendar days, respectively, from the date such Notice of Termination is given). II. Term of Agreement (a) General. Upon execution by Executive, this Agreement shall commence as of June 16, 1998. This Agreement shall continue in effect through December 31, 2001; provided, however, that commencing on January 1, 2002, and every third January 1 thereafter, the term of this Agreement shall automatically be extended for three (3) additional years unless, not later than ninety (90) calendar days prior to the January 1 on which this Agreement otherwise automatically would be extended, the Company shall have given notice to Executive that it does not wish to extend this Agreement; provided further, however, that if a Change of Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which the Change of Control occurred. The term of this Agreement automatically shall be extended for three (3) additional years from the date of any public announcement of an event that would constitute a Change of Control as defined in this Agreement; provided, however, that if any such announced event is not consummated within that three (3) year period, the original renewal term thereafter shall apply. (b) Disposition of Employer. In the event Executive is employed by a Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold or otherwise disposed of prior to the date on which a Change of Control occurs, unless Executive continues in employment with the Controlled Group after such sale or other disposition. If Executive's Employer is sold or disposed of on or after the date on which a Change of Control occurs, this Agreement shall continue through its original term or any extended term then in effect. (c) Deemed Change of Control. If Executive's employment with Employer is terminated prior to the date on which a Change of Control occurs, and such termination was at the request of a third party who has taken steps to effect a Change of Control, or otherwise was in connection with the Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred prior to such termination. (d) Expiration of Agreement. No termination or expiration of this Agreement shall affect any rights, obligations or liabilities of either party that shall have accrued on or prior to the date of such termination or expiration. III. Termination Following Change of Control (a) Entitlement to Benefits. If a Change of Control shall have occurred, Executive shall be entitled to the benefits provided in Section IV hereof upon the subsequent termination of his employment with the Company within three (3) years after the date of the Change of Control unless such termination is (i) a result of Executive's death or Retirement, (ii) for Cause, (iii) a result of Executive's Disability, or (iv) by Executive other than for Good Reason. For purposes of this Agreement, "Termination" shall mean a termination of Executive's employment that is not as a result of Executive's death, Retirement or Disability and (x) if by the Company, is not for Cause, or (y) if by Executive, is for Good Reason. (b) Notice of Termination. Any purported termination of Executive's employment by either the Company or Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section VIII. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice that indicates the specific provision(s) of this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision(s) so indicated. If Executive's employment shall be terminated by the Company for Cause or by Executive for other than Good Reason, the Company shall pay Executive his full base salary through the Termination Date at the salary level in effect at the time Notice of Termination is given and shall pay any amounts to be paid to Executive pursuant to any other compensation or stock or stock option plan(s), program(s) or employment agreement(s) then in effect, and the Company shall have no further obligations to Executive under this Agreement. If within thirty (30) calendar days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the grounds for termination, then, notwithstanding the meaning of "Termination Date" set forth in Subsection I(bb), the Termination Date shall be the date on which the dispute is finally resolved, whether by mutual written agreement of the parties or by a decision rendered pursuant to Section XI; provided that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay Executive his full compensation including, without limitation, base salary, bonus, incentive pay and equity grants, in effect when the notice of the dispute was given, and continue Executive's participation in all benefits plans or other perquisites in which Executive was participating, or which he was enjoying, when the Notice of Termination giving rise to the dispute was given, until the dispute is finally resolved. Amounts paid under this Subsection III(b) are in addition to and not in lieu of all other amounts due to Executive under this Agreement and shall not be offset against or reduce any other amounts due to Executive under this Agreement. IV. Compensation Upon a Termination Following a Change of Control, upon Executive's Termination, Executive shall be entitled to the following benefits, provided that such Termination occurs during the three (3) year period immediately following the date of the Change of Control: (a) Standard Benefits. The Company shall pay Executive his full base salary through the Termination Date at the rate in effect at the time the Notice of Termination is given, no later than the second business day following the Termination Date, plus all other amounts to which Executive is entitled under any compensation plan(s) or program(s) of the Company applicable to Executive at the time such payments are due. Without limitation, amounts payable pursuant to this Subsection IV(a) shall include, pursuant to the express terms of the short-term incentive plan in which Executive participates or otherwise, Executive's annual bonus under such short-term incentive plan, pro-rated to the Termination Date. (b) Additional Benefits. The Company shall pay to Executive as additional pay ("Additional Pay"), the product of (i) the lesser of (x) three (3) or (y) the difference between sixty-five (65) and Executive's age as of the date of the Notice of Termination (calculated to the nearest twelfth of a year), multiplied by (ii) the sum of (x) Executive's annual base salary in effect immediately prior to the Termination Date, (y) Executive's annual bonus amount under any short-term incentive plan(s) or program(s) in which Executive participates, such bonus amount to be calculated on the basis of the extent to which the performance factors targeted by the Human Resources Committee of the Board have been achieved (for this purpose, the Company's performance through the Termination Date shall be annualized based upon the actual number of days elapsed from the beginning of the fiscal year in which the Termination occurs through the Termination Date over a year of 360 days), which shall be deemed to be 100% unless the performance actually achieved is greater than 100%, in which case the actual performance level shall be utilized, and (z) the dollar value of the most recent annual grant to Executive prior to the Termination Date under any long-term incentive plan(s), program(s) or grant(s) in which Executive participates, whether such value is in the form of stock, stock options, Dividend Equivalent Units or any other form of long term incentive compensation, such grant value to be calculated as if the performance measures set forth in any such plan(s), program(s) or grant(s) (e.g., Dividend Equivalent Units) for the applicable performance period shall be deemed to be one hundred percent (100%). The Company shall pay the Additional Pay to Executive in a lump sum, in cash, not later than the fifteenth calendar day following the Termination Date. The Company shall maintain for Executive, all such perquisites and fringe benefits enjoyed by Executive immediately prior to the Termination Date as are approved in writing by the Company's Chief Executive Officer for such period as is specified in such writing. (c) Retirement Plan Benefits. If not already vested, Executive shall be deemed fully vested as of the Termination Date in any Company retirement plan(s) or other written agreement(s) between Executive and the Company relating to pay or other benefits upon retirement in which Executive was a participant, party or beneficiary immediately prior to the Change of Control, and any additional plan(s) or agreement(s) in which such Executive became a participant, party or beneficiary thereafter. In addition to the foregoing, for purposes of determining the amounts to be paid to Executive under such plan(s) or agreement(s), the years of service with the Company and the age of Executive under all such plans and agreements shall be deemed increased by the lesser of thirty-six (36) months or such shorter period of time as would render Executive sixty-five (65) years of age. For purposes of this Subsection IV(c), the term "plan(s)" includes, without limitation, the Company's qualified pension plan, non-qualified and mid-career pension plans, and any companion, successor or amended plan(s), and the term "agreement(s)" encompasses, without limitation, the terms of any offer letter(s) leading to Executive's employment with the Company where Executive was a signatory thereto, any written amendment(s) to the foregoing and any subsequent agreements on such matters. In the event the terms of the plans referenced in this Subsection IV(c) do not for any reason coincide with the provisions of this Subsection IV(c) (e.g., if plan amendments would cause disqualification of qualified plans), Executive shall be entitled to receive from the Company under the terms of this Agreement an amount equal to all amounts he would have received, at the time he would have received such amounts, had all such plans continued in existence as in effect on the date of this Agreement after being amended to coincide with the terms of this Subsection IV(c). (d) Health and Other Benefits. Following the Termination Date, the Company shall continue to provide substantially the same level of health, vision and dental benefits to Executive and Executive's eligible dependents that the Company would provide to Executive and Executive's eligible dependents if Executive were first eligible for retiree health, vision and dental benefits immediately prior to the Change of Control. The eligibility of Executive's dependents shall be determined by the terms of any retiree health, vision and dental benefit plan(s) or program(s) in effect immediately prior to the Change of Control. (e) Gross-Up Payments. (i) In the event any payment(s) or the value of any benefit(s) received or to be received by Executive in connection with Executive's Termination or contingent upon a Change of Control (whether received or to be received pursuant to the terms of this Agreement (the "Agreement Payments") or of any other plan, arrangement or agreement of the Company, its successors, any person whose actions result in a Change of Control or any person affiliated with any of them (or which, as a result of the completion of the transaction(s) causing a Change of Control, will become affiliated with any of them) ("Other Payments" and, together with the Agreement Payments, the "Payments")), in the opinion of the Tax Consultant (as defined below in Subsection IV(e)(ii)),would be subject to an excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any other federal, state or local excise tax (any such excise or other tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), as determined as provided below, the Company shall pay to Executive an additional amount such that the net amount retained by Executive, after deduction of the Excise Tax on Agreement Payments and Other Payments and any federal, state and local income and employment tax and Excise Tax upon the Payment(s) provided for by this Subsection IV(e)(i), and any interest, penalties or additions to tax payable by Executive with respect thereto shall be equal to the total present value of the Agreement Payments and Other Payments at the time such Payments are to be made (the "Gross-Up Payment(s)"). The intent of the parties is that the Company shall be responsible in full for, and shall pay, any and all Excise Tax on any Payments and Gross-Up Payment(s) and any income and all employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment(s) as well as any loss of deduction caused by or related to the Gross-Up Payment(s). (ii) All determinations required to be made under this Subsection IV(e), including, without limitation, whether and when a Gross-Up Payment is required, and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, unless otherwise set forth in this Agreement, shall be made by tax consultant(s) selected by the Company and reasonably acceptable to Executive ("Tax Consultant"). For purposes of determining the amount of any Gross-Up Payment, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The Company shall cause the Tax Consultant to provide detailed supporting calculations to the Company and Executive within fifteen (15) business days after notice is given by Executive to the Company that any or all of the Payments have occurred, or such earlier time as is requested by the Company. Within two (2) business days after such notice is given to the Company, the Company shall instruct the Tax Consultant to timely provide the data required by this Subsection IV(e) to Executive. All fees and expenses of the Tax Consultant shall be paid in full by the Company. Any Excise Tax as determined pursuant to this Subsection IV(e) shall be paid by the Company to the Internal Revenue Service or any other appropriate taxing authority on Executive's behalf within five (5) business days after receipt of the Tax Consultant's determination. If the Tax Consultant determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Tax is payable by Executive, the Tax Consultant shall furnish Executive with a written opinion that failure to disclose or report the Excise Tax on Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or any other penalty. Any determination by the Tax Consultant shall be binding upon the Company and Executive in the absence of material mathematical or legal error. As a result of the uncertainty in the application of Section 4999 of the Code at the time the initial determination by the Tax Consultant hereunder, it is possible that Gross-Up Payments will not have been made by the Company that should have been made or that Gross-Up Payments have been made that should not have been made, in each case, consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Subsection IV(e)(iii) below and Executive is thereafter required to make a payment of any Excise Tax or any interest, penalties or addition to tax, the Tax Consultant shall determine the amount of underpayment of Excise Taxes that has occurred and any such underpayment and interest, penalties or addition to tax shall be promptly paid by the Company to the Internal Revenue Service or other appropriate taxing authority on Executive's behalf or, if such underpayment has been previously paid by Executive to the appropriate taxing authority, to Executive. In the event the Tax Consultant determines that an overpayment of Gross-Up Payment(s) has occurred, any such overpayment shall be treated for all purposes as a loan to Executive with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, due and payable within ninety (90) days after written demand to Executive by the Company; provided, however, that Executive shall have no duty or obligation whatsoever to repay such loan if Executive's receipt of the overpayment, or any portion thereof, is includible in Executive's income and Executive's repayment of the same is not deductible by Executive for federal and state income tax purposes. (iii) Executive shall notify the Company in writing of any claim of which he is aware by the Internal Revenue Service or state or local taxing authority, that, if successful, would result in any Excise Tax or an underpayment of any Gross-Up Payment(s). Such notice shall be given as soon as practicable but no later than fifteen (15) business days after Executive is informed in writing of the claim by the taxing authority and Executive shall provide written notice of the Company of the nature of the claim, the administrative or judicial appeal period, and the date on which any payment of the claim must be paid. Executive shall not pay any portion of the claim prior to the expiration of the thirty (30) day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any amount under the claim is due). If the Company notifies Executive in writing prior to the expiration of such thirty (30) day period that it desires to contest the claim, Executive shall: (A) give the Company any information reasonably requested by the Company relating to the claim; (B) take such action in connection with contesting the claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation concerning the claim by an attorney selected by the Company who is reasonably acceptable to Executive; and (C) cooperate with the Company in good faith in order to effectively contest the claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, without limitation, additional interest and penalties and attorneys' fees) incurred in such contests and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed as a result of such representation. Without limitation upon the foregoing provisions of this Subsection IV(e) (iii), except as provided below, the Company shall control all proceedings concerning such contest and, in its sole opinion, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority pertaining to the claim. At the written request of the Company and upon payment to Executive of an amount at least equal to the claim plus any additional amount necessary to obtain the jurisdiction of the appropriate tribunal and/or court, Executive shall pay the same to the appropriate taxing authority and sue for a refund. Executive agrees to prosecute in cooperation with the Company any contest of a claim to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company requests Executive to pay the claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless on an after-tax basis, from any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed on such advance or for any imputed income on such advance. Any extension of the statute of limitations relating to assessment of any Excise Tax for the taxable year of Executive which is the subject of the claim is to be limited solely to the claim. Furthermore, the Company's control of the contest shall be limited to issues for which a Gross-Up Payment would be payable hereunder. Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, Executive receives any refund of a claim or any additional amount that was necessary to obtain jurisdiction, Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, a determination is made that Executive shall not be entitled to any refund of the claim, and the Company does not notify Executive in writing of its intent to contest such denial of refund of a claim prior to the expiration of thirty (30) calendar days after such determination, then the portion of such advance attributable to a claim shall be forgiven by the Company and shall not be required to be repaid by Executive. The amount of such advance attributable to a claim shall offset, to the extent thereof, the amount of the underpayment required to be paid by the Company to Executive. (v) If, after the advance by the Company of an additional amount necessary to obtain jurisdiction, there is a final determination made by the taxing authority that Executive is not entitled to any refund of such amount, or any portion thereof, then such advance shall be repaid to the Company by Executive within thirty (30) calendar days after Executive receives notice of such final determination. A final determination shall occur when the period to contest or otherwise appeal any decision by an administrative tribunal or court of initial jurisdiction has been waived or the time for contesting or appealing the same has expired. (f) Legal Fees and Expenses. The Company shall pay to Executive all legal fees and expenses as and when incurred by Executive in connection with this Agreement, including all such fees and expenses, if any, incurred in contesting or disputing any Termination or in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome, unless, in the case of a legal action brought by or in the name of Executive, a decision is rendered pursuant to Section XI, or in any other proper legal proceeding, that such action was not brought by Executive in good faith. (g) No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Section IV by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section IV be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement or other benefits received from whatever source after the Termination Date or otherwise, except as specifically provided in this Section IV. The Company's obligation to make payments to Executive provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company or Employer may have against Executive or other parties. V. Death and Disability Benefits In the event of the death or Disability of Executive after a Change of Control, Executive, or in the case of death, Executive's Beneficiaries (as defined below in Subsection VI.(b)), shall receive the benefits to which Executive or his Beneficiaries are entitled under this Agreement and any and all retirement plans, pension plans, disability policies and other applicable plans, programs, policies, agreements or arrangements of the Company. VI. Successors; Binding Agreement (a) Obligations of Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated employment for Good Reason following a Change of Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, the term "Company" shall mean MediaOne Group, Inc., including any surviving entity or successor to all or substantially all of its business and/or assets and the parent of any such surviving entity or successor. (b) Enforceable by Beneficiaries. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees (the "Beneficiaries"). In the event of the death of Executive while any amount would still be payable hereunder if such death had not occurred, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's Beneficiaries. (c) Employment. Except in the event of a Change of Control and, thereafter, only as specifically set forth in this Agreement, nothing in this Agreement shall be construed to (i) limit in any way the right of the Company or a Subsidiary to terminate Executive's employment at any time for any reason or for no reason; or (ii) be evidence of any agreement or understanding, expressed or implied, that the Company or a Subsidiary will employ Executive in any particular position, on any particular terms or at any particular rate of remuneration. VII. Confidential Information. Executive shall hold in fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company, the Subsidiaries and their respective businesses, which shall have been obtained during Executive's employment with the Employer and which shall not be public knowledge (other than by acts by Executive or his representatives in violation of this Agreement). After termination of Executive's employment with the Company or any Employer within the Controlled Group, Executive shall not, without prior written consent of the Company or the Employer, communicate or divulge any such information, knowledge or data to anyone other than the Company, the Employer or those designated by them. In no event shall an asserted violation of this Section VII constitute a basis for deferring or withholding any amounts otherwise payable to Executive under this Agreement. VIII. Notice All notices and communications including, without limitation, any Notice of Termination hereunder, shall be in writing and shall be given by hand delivery to the other party, by registered or certified mail, return receipt requested, postage prepaid, or by overnight delivery service, addressed as follows: If to Executive: [Name] [Title] [Company] [Address] If to the Company: MediaOne Group, Inc. 188 Inverness Drive West, Suite 500 Englewood, Colorado 80112 Attn: Vice President - Law, General Corporate and Litigation Group or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be deemed given and effective when actually received by the addressee. IX. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and the Company's Chief Executive Officer or other authorized officer designated by the Board or an appropriate committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Code or the Exchange Act shall be deemed also to refer to any successor provisions of such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Sections IV and V shall survive the expiration of the term of this Agreement. X. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. XI. Arbitration Executive may agree in writing with the Company (in which case this Article XI shall have effect but not otherwise) that any dispute that may arise directly or indirectly in connection with this Agreement, Executive's employment or the termination of Executive's employment, whether arising in contract, statute, tort, fraud, misrepresentation, discrimination or other legal theory, shall be resolved by arbitration in Denver, Colorado under the applicable rules and procedures of the AAA. The only legal claims between Executive and the Company or any Subsidiary that would not be included in this agreement to arbitration are claims by Executive for workers' compensation or unemployment compensation benefits, claims for benefits under a Company or Subsidiary benefit plan if the plan does not provide for arbitration of such disputes, and claims by Executive that seek judicial relief in the form of specific performance of the right to be paid until the Termination Date during the pendency of any applicable dispute or controversy. If this Article XI is in effect, any claim with respect to this Agreement, Executive's employment or the termination of Executive's employment must be established by a preponderance of the evidence submitted to an impartial arbitrator. A single arbitrator engaged in the practice of law shall conduct any arbitration under the applicable rules and procedures of the AAA. The arbitrator shall have the authority to order a pre-hearing exchange of information by the parties including, without limitation, production of requested documents, and examination by deposition of parties and their authorized agents. If this Article XI is in effect, the decision of the arbitrator: (i) shall be final and binding, (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator, and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. Section 1 et seq., not state law, shall govern the arbitrability of all claims. If this letter sets forth our agreement on the subject matter hereof, kindly sign both originals of this letter and return to the Vice President - Law, General Corporate and Litigation Section, one of the fully executed originals of this letter which will then constitute our Agreement on this subject. Sincerely, MediaOne Group, Inc. By:___________________________________ [Name] [Title] ______________________________________ [Name] 10 EX-10 4 EXHIBIT 10G July ____, 1998 [Name] [Title] [Company] [Address] Dear [Name]: MediaOne Group, Inc., on behalf of itself, its subsidiaries and its stockholders, and any successor or surviving entity, wishes to encourage your continued service and dedication in the performance of your duties, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Subsection I(i)) of the Company (as defined in Subsection I(k). The Board of Directors of the Company (the "Board") believes that the prospect of a pending or threatened Change of Control inevitably creates distractions and personal risks and uncertainties for its executives, and that it is in the best interests of MediaOne Group, Inc. and its stockholders to minimize such distractions to certain executives. The Board further believes that it is in the best interests of the Company to encourage its executives' full attention and dedication to their duties, both currently and in the event of any threatened or pending Change of Control. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued retention of certain members of the Company's management, including yourself, and the attention and dedication of management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change of Control. In order to induce you ("Executive") to remain in the employ of the Company and in consideration of your continued service to the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event that your employment with the Company is terminated subsequent to a Change of Control in the circumstances described herein. For purposes of this Agreement, references to employment with the Company shall include employment with a Subsidiary of the Company (as defined in Subsection I(y)). I. Definitions The meaning of each defined term that is used in this Agreement is set forth below. (a) AAA. The American Arbitration Association. (b) Additional Pay. The meaning of this term is set forth in Subsection IV(b). (c) Agreement. The meaning of this term is set forth in the third paragraph of this Agreement. (d) Agreement Payments. The meaning of this term is set forth in Subsection IV(e)(i). (e) Beneficiaries. The meaning of this term is set forth in Subsection VI(b). (f) Board. The meaning of this term is set forth in the first paragraph of this Agreement. (g) Business Combination. The meaning of this term is set forth in Subsection I(i)(iii). (h) Cause. For purposes of this Agreement, "Cause" shall mean Executive's willful breach or failure to perform his employment duties. For purposes of this Subsection I(h), no act, or failure to act, on the part of Executive shall be deemed "willful" unless done, or omitted to be done, by Executive not in good faith and without reasonable belief that such action or omission was in the best interest of the Company. Notwithstanding the foregoing, Executive's employment shall not be deemed to have been terminated for Cause unless and until the Company delivers to Executive a certificate of a resolution duly adopted by the affirmative vote of not less than seventy-five percent (75%) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to Executive and an opportunity for Executive, together with Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive has engaged in such willful conduct and specifying the details of such willful conduct. (i) Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if there is a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) as currently in effect, of the Exchange Act) is or becomes a "beneficial owner" (as determined for purposes of Regulation 13D-G as currently in effect, under the Exchange Act, directly or indirectly, of securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities. For purposes of this Agreement, the term "person" shall not include: (A) the Company or any of its Subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, or (C) an underwriter temporarily holding securities pursuant to an offering of said securities; (ii) during any period of two (2) consecutive calendar years, individuals who at the beginning of such period constitute the Board and any new director(s) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; (iii) the stockholders of the Company approve a merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless following such Business Combination: (i) all or substantially all of the individuals and entities who were the "beneficial owners" (as determined for purposes of Regulation 13D-G, as currently in effect, of the Exchange Act) of the outstanding voting securities of the Company immediately prior to such Business Combination beneficially own, directly or indirectly, securities representing more than fifty percent (50%) of the total voting power of the then outstanding voting securities of the corporation resulting from such Business Combination or the parent of such corporation (the "Resulting Corporation"); (ii) no "person" (as such term is used in Section 13(d) and 14(d)(2), as currently in effect, of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or the Resulting Corporation, is the "beneficial owner" (as determined for purposes of Regulation 13D-G, as currently in effect, of the Exchange Act), directly or indirectly, of voting securities representing twenty percent (20%) or more of the total voting power of then outstanding voting securities of the Resulting Corporation; and (iii) at least a majority of the members of the board of directors of the Resulting Corporation were members of the Board at the time of the execution of the initial agreement, or at the time of the action of the Board, providing for such Business Combination; (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company; or (v) any other event that a simple majority of the Board, in its sole discretion, shall determine constitutes a Change of Control. (j) Code. The meaning of this term is set forth in Subsection IV(e)(i). (k) Company. The meaning of this term is set forth in Subsection VI(a). (l) Controlled Group. For purposes of this Agreement, "Controlled Group" shall mean the Company and all of the Company's Subsidiaries. (m) Disability. For purposes of this Agreement, "Disability" shall mean an illness, injury or similar incapacity which 52 weeks after its commencement, continues to render Executive unable to perform the material and substantial duties of Executive's position or any substantially similar occupation or substantially similar employment for which Executive is qualified or may reasonably become qualified by training, education or experience. Any question as to the existence of a Disability upon which Executive and the Company cannot agree shall be determined by a qualified independent physician selected by Executive (or, if Executive is unable to make such selection, by any adult member of Executive's immediate family or Executive's legal representative), and approved by the Company, such approval not to be unreasonably withheld. The determination of such physician made in writing to both the Company and Executive shall be final and conclusive for all purposes of this Agreement. (n) Employer. For purposes of this Agreement, "Employer" shall mean the Company or the Subsidiary, as the case may be, with which Executive has an employment relationship. (o) Exchange Act. This term shall have the meaning set forth in Subsection I(i). (p) Executive. This term shall have the meaning set forth in the third paragraph of this Agreement. (q) Excise Tax. This term shall have the meaning set forth in Subsection IV(e)(i). (r) Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without Executive's prior express written consent, of any of the following circumstances: (i) The assignment to Executive of any duties inconsistent with Executive's status or responsibilities as in effect immediately prior to a Change of Control, including imposition of travel obligations which differ materially from required business travel immediately prior to the Change of Control; (ii) Any diminution in the status or responsibilities of Executive's position from that which existed immediately prior to the Change of Control, whether by reason of the Company ceasing to be a public company under the Exchange Act, becoming a subsidiary of a successor public company, or otherwise; (iii) (A) A reduction in Executive's annual base salary as in effect immediately before the Change of Control; or (B) the failure to pay a bonus award to which Executive is entitled under any short-term incentive plan(s) or program(s) or any long-term incentive plan(s) or program(s) in which Executive participates, or any companion, amended, successor or other incentive compensation plan(s) or program(s), at the time such awards are usually paid; (iv) A change in the principal place of Executive's employment, as in effect immediately prior to the Change of Control to a location more than thirty-five (35) miles distant from the location of such principal place at such time; (v) The failure by the Company to continue in effect any incentive compensation plan or stock option plan in which Executive participates immediately prior to the Change of Control, unless participation in an equivalent alternative compensation or stock or stock option arrangement (embodied in an ongoing substitute or alternative plan) has been provided to Executive, or the failure by the Company to continue Executive's participation in any such compensation or stock or stock option plan on a substantially equivalent or more beneficial basis, both in terms of the nature and amount of benefits provided and the level of Executive's participation relative to other participants, as existed immediately prior to the time of the Change of Control; (vi) (A) Except as required by law, the failure by the Company to continue to provide to Executive benefits substantially equivalent or more beneficial, in the aggregate, to those enjoyed by Executive under the qualified and non-qualified employee benefit and welfare plans of the Company, including, without limitation, any pension, deferred compensation, life insurance, medical, dental, health and accident, disability, retirement or savings plan(s) or program(s) in which Executive was eligible to participate immediately prior to the Change of Control; (B) the taking of any action by the Company that would, directly or indirectly, materially reduce or deprive Executive of any other perquisite or benefit enjoyed by Executive immediately prior to the Change of Control (including, without limitation, Company-paid and/or reimbursed club memberships, financial counseling fees and the like); or (C) the failure by the Company to treat Executive under the Company's vacation policy, past practice or special agreement in the same manner and to the same extent as was in effect immediately prior to the Change of Control; (vii) The failure of the Company to obtain a satisfactory written agreement from any successor prior to consummation of the Change of Control to assume and agree to perform this Agreement, as contemplated in Subsection VI(a); or (viii) Any purported termination by the Company of Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection III(b) or, if applicable, Subsection I(h). For purposes of this Agreement, no such purported termination shall be effective except as constituting Good Reason. Executive's continued employment with the Company or any Subsidiary shall not constitute a consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (s) Gross-Up Payment. The meaning of this term is set forth in Subsection IV(e)(i). (t) Notice of Termination. The meaning of this term is set forth in Subsection III(b). (u) Other Payments. The meaning of this term is set forth in Subsection IV(e)(i). (v) Payments. The meaning of this term is set forth in Subsection IV(e)(i). (w) Resulting Corporation. The meaning of this term is set forth in Subsection I (i)(iii). (x) Retirement. For purposes of this Agreement, "Retirement" shall mean Executive's voluntary termination of employment with the Company, other than for Good Reason, and in accordance with the Company's retirement policy generally applicable to its employees or in accordance with any prior or contemporaneous retirement agreement or arrangement between Executive and the Company. (y) Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean any corporation of which fifty percent (50%) or more of the voting stock is owned, directly or indirectly, by the Company. (z) Tax Consultant. The meaning of this term is set forth in Subsection IV(e)(ii). (aa) Terminate(d) or Termination. The meaning of this term is set forth in Subsection III(a). (bb) Termination Date. For purposes of this Agreement, "Termination Date" shall mean: (i) If Executive's employment is terminated for Disability, thirty (30) calendar days after Notice of Termination is given (provided that Executive shall not have returned to the full-time performance of his duties during such thirty-day period); and (ii) If Executive's employment is terminated for Cause or Good Reason or for any reason other than death or Disability, the date specified in the Notice of Termination (which in the case of a termination for Cause shall not be less than thirty (30) calendar days and in the case of a termination for Good Reason shall not be less than thirty (30) calendar days nor more than sixty (60) calendar days, respectively, from the date such Notice of Termination is given). II. Term of Agreement (a) General. Upon execution by Executive, this Agreement shall commence as of June 16, 1998. This Agreement shall continue in effect through December 31, 2001; provided, however, that commencing on January 1, 2002, and every third January 1 thereafter, the term of this Agreement shall automatically be extended for three (3) additional years unless, not later than ninety (90) calendar days prior to the January 1 on which this Agreement otherwise automatically would be extended, the Company shall have given notice to Executive that it does not wish to extend this Agreement; provided further, however, that if a Change of Control shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six (36) months beyond the month in which the Change of Control occurred. The term of this Agreement automatically shall be extended for three (3) additional years from the date of any public announcement of an event that would constitute a Change of Control as defined in this Agreement; provided, however, that if any such announced event is not consummated within that three (3) year period, the original renewal term thereafter shall apply. (b) Disposition of Employer. In the event Executive is employed by a Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold or otherwise disposed of prior to the date on which a Change of Control occurs, unless Executive continues in employment with the Controlled Group after such sale or other disposition. If Executive's Employer is sold or disposed of on or after the date on which a Change of Control occurs, this Agreement shall continue through its original term or any extended term then in effect. (c) Deemed Change of Control. If Executive's employment with Employer is terminated prior to the date on which a Change of Control occurs, and such termination was at the request of a third party who has taken steps to effect a Change of Control, or otherwise was in connection with the Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred prior to such termination. (d) Expiration of Agreement. No termination or expiration of this Agreement shall affect any rights, obligations or liabilities of either party that shall have accrued on or prior to the date of such termination or expiration. III. Termination Following Change of Control (a) Entitlement to Benefits. If a Change of Control shall have occurred, Executive shall be entitled to the benefits provided in Section IV hereof upon the subsequent termination of his employment with the Company within three (3) years after the date of the Change of Control unless such termination is (i) a result of Executive's death or Retirement, (ii) for Cause, (iii) a result of Executive's Disability, or (iv) by Executive other than for Good Reason. For purposes of this Agreement, "Termination" shall mean a termination of Executive's employment that is not as a result of Executive's death, Retirement or Disability and (x) if by the Company, is not for Cause, or (y) if by Executive, is for Good Reason. (b) Notice of Termination. Any purported termination of Executive's employment by either the Company or Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section VIII. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice that indicates the specific provision(s) of this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision(s) so indicated. If Executive's employment shall be terminated by the Company for Cause or by Executive for other than Good Reason, the Company shall pay Executive his full base salary through the Termination Date at the salary level in effect at the time Notice of Termination is given and shall pay any amounts to be paid to Executive pursuant to any other compensation or stock or stock option plan(s), program(s) or employment agreement(s) then in effect, and the Company shall have no further obligations to Executive under this Agreement. If within thirty (30) calendar days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the grounds for termination, then, notwithstanding the meaning of "Termination Date" set forth in Subsection I(bb), the Termination Date shall be the date on which the dispute is finally resolved, whether by mutual written agreement of the parties or by a decision rendered pursuant to Section XI; provided that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay Executive his full compensation including, without limitation, base salary, bonus, incentive pay and equity grants, in effect when the notice of the dispute was given, and continue Executive's participation in all benefits plans or other perquisites in which Executive was participating, or which he was enjoying, when the Notice of Termination giving rise to the dispute was given, until the dispute is finally resolved. Amounts paid under this Subsection III(b) are in addition to and not in lieu of all other amounts due to Executive under this Agreement and shall not be offset against or reduce any other amounts due to Executive under this Agreement. IV. Compensation Upon a Termination Following a Change of Control, upon Executive's Termination, Executive shall be entitled to the following benefits, provided that such Termination occurs during the three (3) year period immediately following the date of the Change of Control: (a) Standard Benefits. The Company shall pay Executive his full base salary through the Termination Date at the rate in effect at the time the Notice of Termination is given, no later than the second business day following the Termination Date, plus all other amounts to which Executive is entitled under any compensation plan(s) or program(s) of the Company applicable to Executive at the time such payments are due. Without limitation, amounts payable pursuant to this Subsection IV(a) shall include, pursuant to the express terms of the short-term incentive plan in which Executive participates or otherwise, Executive's annual bonus under such short-term incentive plan, pro-rated to the Termination Date. (b) Additional Benefits. The Company shall pay to Executive as additional pay ("Additional Pay"), the product of (i) the lesser of (x) three (3) or (y) the difference between sixty-five (65) and Executive's age as of the date of the Notice of Termination (calculated to the nearest twelfth of a year), multiplied by (ii) the sum of (x) Executive's annual base salary in effect immediately prior to the Termination Date, (y) Executive's annual bonus amount under any short-term incentive plan(s) or program(s) in which Executive participates, such bonus amount to be calculated on the basis of the extent to which the performance factors targeted by the Human Resources Committee of the Board have been achieved (for this purpose, the Company's performance through the Termination Date shall be annualized based upon the actual number of days elapsed from the beginning of the fiscal year in which the Termination occurs through the Termination Date over a year of 360 days), which shall be deemed to be 100% unless the performance actually achieved is greater than 100%, in which case the actual performance level shall be utilized, and (z) the dollar value of the most recent annual grant to Executive prior to the Termination Date under any long-term incentive plan(s), program(s) or grant(s) in which Executive participates, whether such value is in the form of stock, stock options, Dividend Equivalent Units or any other form of long term incentive compensation, such grant value to be calculated as if the performance measures set forth in any such plan(s), program(s) or grant(s) (e.g., Dividend Equivalent Units) for the applicable performance period shall be deemed to be one hundred percent (100%). The Company shall pay the Additional Pay to Executive in a lump sum, in cash, not later than the fifteenth calendar day following the Termination Date. The Company shall maintain for Executive, all such perquisites and fringe benefits enjoyed by Executive immediately prior to the Termination Date as are approved in writing by the Company's Chief Executive Officer for such period as is specified in such writing. (c) Retirement Plan Benefits. If not already vested, Executive shall be deemed fully vested as of the Termination Date in any Company retirement plan(s) or other written agreement(s) between Executive and the Company relating to pay or other benefits upon retirement in which Executive was a participant, party or beneficiary immediately prior to the Change of Control, and any additional plan(s) or agreement(s) in which such Executive became a participant, party or beneficiary thereafter. In addition to the foregoing, for purposes of determining the amounts to be paid to Executive under such plan(s) or agreement(s), the years of service with the Company and the age of Executive under all such plans and agreements shall be deemed increased by the lesser of thirty-six (36) months or such shorter period of time as would render Executive sixty-five (65) years of age. For purposes of this Subsection IV(c), the term "plan(s)" includes, without limitation, the Company's qualified pension plan, non-qualified and mid-career pension plans, and any companion, successor or amended plan(s), and the term "agreement(s)" encompasses, without limitation, the terms of any offer letter(s) leading to Executive's employment with the Company where Executive was a signatory thereto, any written amendment(s) to the foregoing and any subsequent agreements on such matters. In the event the terms of the plans referenced in this Subsection IV(c) do not for any reason coincide with the provisions of this Subsection IV(c) (e.g., if plan amendments would cause disqualification of qualified plans), Executive shall be entitled to receive from the Company under the terms of this Agreement an amount equal to all amounts he would have received, at the time he would have received such amounts, had all such plans continued in existence as in effect on the date of this Agreement after being amended to coincide with the terms of this Subsection IV(c). (d) Health and Other Benefits. For the three (3) year period immediately following the Termination Date, the Company shall continue to provide substantially the same level of health, vision and dental benefits to Executive and Executive's eligible dependents that the Company would provide to Executive and Executive's eligible dependents if Executive were first eligible for retiree health, vision and dental benefits immediately prior to the Change of Control. The eligibility of Executive's dependents shall be determined by the terms of any retiree health, vision and dental benefit plan(s) or program(s) in effect immediately prior to the Change of Control. (e) Gross-Up Payments. (i) In the event any payment(s) or the value of any benefit(s) received or to be received by Executive in connection with Executive's Termination or contingent upon a Change of Control (whether received or to be received pursuant to the terms of this Agreement (the "Agreement Payments") or of any other plan, arrangement or agreement of the Company, its successors, any person whose actions result in a Change of Control or any person affiliated with any of them (or which, as a result of the completion of the transaction(s) causing a Change of Control, will become affiliated with any of them) ("Other Payments" and, together with the Agreement Payments, the "Payments")), in the opinion of the Tax Consultant (as defined below in Subsection IV(e)(ii)),would be subject to an excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any other federal, state or local excise tax (any such excise or other tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), as determined as provided below, the Company shall pay to Executive an additional amount such that the net amount retained by Executive, after deduction of the Excise Tax on Agreement Payments and Other Payments and any federal, state and local income and employment tax and Excise Tax upon the Payment(s) provided for by this Subsection IV(e)(i), and any interest, penalties or additions to tax payable by Executive with respect thereto shall be equal to the total present value of the Agreement Payments and Other Payments at the time such Payments are to be made (the "Gross-Up Payment(s)"). The intent of the parties is that the Company shall be responsible in full for, and shall pay, any and all Excise Tax on any Payments and Gross-Up Payment(s) and any income and all employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment(s) as well as any loss of deduction caused by or related to the Gross-Up Payment(s). (ii) All determinations required to be made under this Subsection IV(e), including, without limitation, whether and when a Gross-Up Payment is required, and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, unless otherwise set forth in this Agreement, shall be made by tax consultant(s) selected by the Company and reasonably acceptable to Executive ("Tax Consultant"). For purposes of determining the amount of any Gross-Up Payment, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made, and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the Termination Date, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. The Company shall cause the Tax Consultant to provide detailed supporting calculations to the Company and Executive within fifteen (15) business days after notice is given by Executive to the Company that any or all of the Payments have occurred, or such earlier time as is requested by the Company. Within two (2) business days after such notice is given to the Company, the Company shall instruct the Tax Consultant to timely provide the data required by this Subsection IV(e) to Executive. All fees and expenses of the Tax Consultant shall be paid in full by the Company. Any Excise Tax as determined pursuant to this Subsection IV(e) shall be paid by the Company to the Internal Revenue Service or any other appropriate taxing authority on Executive's behalf within five (5) business days after receipt of the Tax Consultant's determination. If the Tax Consultant determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Tax is payable by Executive, the Tax Consultant shall furnish Executive with a written opinion that failure to disclose or report the Excise Tax on Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or any other penalty. Any determination by the Tax Consultant shall be binding upon the Company and Executive in the absence of material mathematical or legal error. As a result of the uncertainty in the application of Section 4999 of the Code at the time the initial determination by the Tax Consultant hereunder, it is possible that Gross-Up Payments will not have been made by the Company that should have been made or that Gross-Up Payments have been made that should not have been made, in each case, consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Subsection IV(e)(iii) below and Executive is thereafter required to make a payment of any Excise Tax or any interest, penalties or addition to tax, the Tax Consultant shall determine the amount of underpayment of Excise Taxes that has occurred and any such underpayment and interest, penalties or addition to tax shall be promptly paid by the Company to the Internal Revenue Service or other appropriate taxing authority on Executive's behalf or, if such underpayment has been previously paid by Executive to the appropriate taxing authority, to Executive. In the event the Tax Consultant determines that an overpayment of Gross-Up Payment(s) has occurred, any such overpayment shall be treated for all purposes as a loan to Executive with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, due and payable within ninety (90) days after written demand to Executive by the Company; provided, however, that Executive shall have no duty or obligation whatsoever to repay such loan if Executive's receipt of the overpayment, or any portion thereof, is includible in Executive's income and Executive's repayment of the same is not deductible by Executive for federal and state income tax purposes. (iii) Executive shall notify the Company in writing of any claim of which he is aware by the Internal Revenue Service or state or local taxing authority, that, if successful, would result in any Excise Tax or an underpayment of any Gross-Up Payment(s). Such notice shall be given as soon as practicable but no later than fifteen (15) business days after Executive is informed in writing of the claim by the taxing authority and Executive shall provide written notice of the Company of the nature of the claim, the administrative or judicial appeal period, and the date on which any payment of the claim must be paid. Executive shall not pay any portion of the claim prior to the expiration of the thirty (30) day period following the date on which Executive gives such notice to the Company (or such shorter period ending on the date that any amount under the claim is due). If the Company notifies Executive in writing prior to the expiration of such thirty (30) day period that it desires to contest the claim, Executive shall: (A) give the Company any information reasonably requested by the Company relating to the claim; (B) take such action in connection with contesting the claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation concerning the claim by an attorney selected by the Company who is reasonably acceptable to Executive; and (C) cooperate with the Company in good faith in order to effectively contest the claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, without limitation, additional interest and penalties and attorneys' fees) incurred in such contests and shall indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed as a result of such representation. Without limitation upon the foregoing provisions of this Subsection IV(e) (iii), except as provided below, the Company shall control all proceedings concerning such contest and, in its sole opinion, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority pertaining to the claim. At the written request of the Company and upon payment to Executive of an amount at least equal to the claim plus any additional amount necessary to obtain the jurisdiction of the appropriate tribunal and/or court, Executive shall pay the same to the appropriate taxing authority and sue for a refund. Executive agrees to prosecute in cooperation with the Company any contest of a claim to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company requests Executive to pay the claim and sue for a refund, the Company shall advance the amount of such payment to Executive, on an interest-free basis, and shall indemnify and hold Executive harmless on an after-tax basis, from any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed on such advance or for any imputed income on such advance. Any extension of the statute of limitations relating to assessment of any Excise Tax for the taxable year of Executive which is the subject of the claim is to be limited solely to the claim. Furthermore, the Company's control of the contest shall be limited to issues for which a Gross-Up Payment would be payable hereunder. Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, Executive receives any refund of a claim or any additional amount that was necessary to obtain jurisdiction, Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, a determination is made that Executive shall not be entitled to any refund of the claim, and the Company does not notify Executive in writing of its intent to contest such denial of refund of a claim prior to the expiration of thirty (30) calendar days after such determination, then the portion of such advance attributable to a claim shall be forgiven by the Company and shall not be required to be repaid by Executive. The amount of such advance attributable to a claim shall offset, to the extent thereof, the amount of the underpayment required to be paid by the Company to Executive. (v) If, after the advance by the Company of an additional amount necessary to obtain jurisdiction, there is a final determination made by the taxing authority that Executive is not entitled to any refund of such amount, or any portion thereof, then such advance shall be repaid to the Company by Executive within thirty (30) calendar days after Executive receives notice of such final determination. A final determination shall occur when the period to contest or otherwise appeal any decision by an administrative tribunal or court of initial jurisdiction has been waived or the time for contesting or appealing the same has expired. (f) Legal Fees and Expenses. The Company shall pay to Executive all legal fees and expenses as and when incurred by Executive in connection with this Agreement, including all such fees and expenses, if any, incurred in contesting or disputing any Termination or in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome, unless, in the case of a legal action brought by or in the name of Executive, a decision is rendered pursuant to Section XI, or in any other proper legal proceeding, that such action was not brought by Executive in good faith. (g) No Mitigation. Executive shall not be required to mitigate the amount of any payment provided for in this Section IV by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section IV be reduced by any compensation earned by Executive as the result of employment by another employer or by retirement or other benefits received from whatever source after the Termination Date or otherwise, except as specifically provided in this Section IV. The Company's obligation to make payments to Executive provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Company or Employer may have against Executive or other parties. V. Death and Disability Benefits In the event of the death or Disability of Executive after a Change of Control, Executive, or in the case of death, Executive's Beneficiaries (as defined below in Subsection VI.(b)), shall receive the benefits to which Executive or his Beneficiaries are entitled under this Agreement and any and all retirement plans, pension plans, disability policies and other applicable plans, programs, policies, agreements or arrangements of the Company. VI. Successors; Binding Agreement (a) Obligations of Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated employment for Good Reason following a Change of Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, the term "Company" shall mean MediaOne Group, Inc., including any surviving entity or successor to all or substantially all of its business and/or assets and the parent of any such surviving entity or successor. (b) Enforceable by Beneficiaries. This Agreement shall inure to the benefit of and be enforceable by Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees (the "Beneficiaries"). In the event of the death of Executive while any amount would still be payable hereunder if such death had not occurred, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to Executive's Beneficiaries. (c) Employment. Except in the event of a Change of Control and, thereafter, only as specifically set forth in this Agreement, nothing in this Agreement shall be construed to (i) limit in any way the right of the Company or a Subsidiary to terminate Executive's employment at any time for any reason or for no reason; or (ii) be evidence of any agreement or understanding, expressed or implied, that the Company or a Subsidiary will employ Executive in any particular position, on any particular terms or at any particular rate of remuneration. VII. Confidential Information. Executive shall hold in fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company, the Subsidiaries and their respective businesses, which shall have been obtained during Executive's employment with the Employer and which shall not be public knowledge (other than by acts by Executive or his representatives in violation of this Agreement). After termination of Executive's employment with the Company or any Employer within the Controlled Group, Executive shall not, without prior written consent of the Company or the Employer, communicate or divulge any such information, knowledge or data to anyone other than the Company, the Employer or those designated by them. In no event shall an asserted violation of this Section VII constitute a basis for deferring or withholding any amounts otherwise payable to Executive under this Agreement. VIII. Notice All notices and communications including, without limitation, any Notice of Termination hereunder, shall be in writing and shall be given by hand delivery to the other party, by registered or certified mail, return receipt requested, postage prepaid, or by overnight delivery service, addressed as follows: If to Executive: [Name] [Title] [Company] [Address] If to the Company: MediaOne Group, Inc. 188 Inverness Drive West, Suite 500 Englewood, Colorado 80112 Attn: Vice President - Law, General Corporate and Litigation Group or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be deemed given and effective when actually received by the addressee. IX. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and the Company's Chief Executive Officer or other authorized officer designated by the Board or an appropriate committee of the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Code or the Exchange Act shall be deemed also to refer to any successor provisions of such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Sections IV and V shall survive the expiration of the term of this Agreement. X. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. XI. Arbitration Executive may agree in writing with the Company (in which case this Article XI shall have effect but not otherwise) that any dispute that may arise directly or indirectly in connection with this Agreement, Executive's employment or the termination of Executive's employment, whether arising in contract, statute, tort, fraud, misrepresentation, discrimination or other legal theory, shall be resolved by arbitration in Denver, Colorado under the applicable rules and procedures of the AAA. The only legal claims between Executive and the Company or any Subsidiary that would not be included in this agreement to arbitration are claims by Executive for workers' compensation or unemployment compensation benefits, claims for benefits under a Company or Subsidiary benefit plan if the plan does not provide for arbitration of such disputes, and claims by Executive that seek judicial relief in the form of specific performance of the right to be paid until the Termination Date during the pendency of any applicable dispute or controversy. If this Article XI is in effect, any claim with respect to this Agreement, Executive's employment or the termination of Executive's employment must be established by a preponderance of the evidence submitted to an impartial arbitrator. A single arbitrator engaged in the practice of law shall conduct any arbitration under the applicable rules and procedures of the AAA. The arbitrator shall have the authority to order a pre-hearing exchange of information by the parties including, without limitation, production of requested documents, and examination by deposition of parties and their authorized agents. If this Article XI is in effect, the decision of the arbitrator: (i) shall be final and binding, (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator, and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. Section 1 et seq., not state law, shall govern the arbitrability of all claims. If this letter sets forth our agreement on the subject matter hereof, kindly sign both originals of this letter and return to the Vice President - Law, General Corporate and Litigation Section, one of the fully executed originals of this letter which will then constitute our Agreement on this subject. Sincerely, MediaOne Group, Inc. By:___________________________________ [Name] [Title] ______________________________________ [Name] EX-12 5 EXHIBIT 12 Exhibit 12 MediaOne Group, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions)
Quarter Ended 06/30/98 06/30/97 - ------------------------------------------ -------- -------- Income from continuing operations before income taxes $ 3,716 $ (252) Interest expense (net of amounts capitalized) 143 166 Interest factor on rentals (1/3) (1) 3 Equity losses in unconsolidated ventures (less than 50% owned) 63 112 Guaranteed minority interest expense 20 22 -------- ------- Earnings $ 3,941 $ 51 Interest expense $ 158 $ 170 Interest factor on rentals (1/3) (1) 3 Guaranteed minority interest expense 20 22 Preferred stock dividends (pre-tax equivalent) 22 18 -------- ------- Fixed charges $ 199 $ 213 Ratio of earnings to combined fixed charges and preferred stock dividends 19.80 - - ------------------------------------------ -------- -------
Earnings for the quarter ended June 30, 1997 were insufficient to cover fixed charges by $162. Exhibit 12 MediaOne Group, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions)
Year-to-Date 06/30/98 06/30/97 - ------------------------------------------ -------- -------- Income from continuing operations before income taxes $ 3,388 $ (522) Interest expense (net of amounts capitalized) 293 340 Interest factor on rentals (1/3) 3 7 Equity losses in unconsolidated ventures (less than 50% owned) 138 217 Guaranteed minority interest expense 42 44 -------- -------- Earnings $ 3,864 $ 86 Interest expense $ 318 $ 348 Interest factor on rentals (1/3) 3 7 Guaranteed minority interest expense 42 44 Preferred stock dividends (pre-tax equivalent) 46 36 -------- -------- Fixed charges $ 409 $ 435 Ratio of earnings to combined fixed charges and preferred stock dividends 9.45 - - ------------------------------------------ -------- --------
Earnings for the period ended June 30, 1997 were insufficient to cover fixed charges by $349. Exhibit 12 MediaOne Group, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended 06/30/98 06/30/97 - ------------------------------------------ -------- -------- Income from continuing operations before income taxes $ 3,716 $ (252) Interest expense (net of amounts capitalized) 143 166 Interest factor on rentals (1/3) (1) 3 Equity losses in unconsolidated ventures (less than 50% owned) 63 112 Guaranteed minority interest expense 20 22 -------- -------- Earnings $ 3,941 $ 51 Interest expense $ 158 $ 170 Interest factor on rentals (1/3) (1) 3 Guaranteed minority interest expense 20 22 -------- -------- Fixed charges $ 177 $ 195 Ratio of earnings to fixed charges 22.27 - - ------------------------------------------ -------- --------
Earnings for the quarter ended June 30, 1997 were insufficient to cover fixed charges by $144. Exhibit 12 MediaOne Group, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Year Ended 06/30/98 06/30/97 - ------------------------------------------ -------- -------- Income from continuing operations before income taxes $ 3,388 $ (522) Interest expense (net of amounts capitalized) 293 340 Interest factor on rentals (1/3) 3 7 Equity losses in unconsolidated ventures (less than 50% owned) 138 217 Guaranteed minority interest expense 42 44 -------- -------- Earnings $ 3,864 $ 86 Interest expense $ 318 $ 348 Interest factor on rentals (1/3) 3 7 Guaranteed minority interest expense 42 44 -------- -------- Fixed charges $ 363 $ 399 Ratio of earnings to fixed charges 10.64 - - ------------------------------------------ -------- --------
Earnings for the period ended June 30, 1997 were insufficient to cover fixed charges by $313. EX-99 6 EXHIBIT 99 Exhibit 99 The following unaudited pro forma condensed combined statements of operations of MediaOne Group for the six months ended June 30, 1998 and the year ended December 31, 1997 give effect to (i) the Refinancing, including the refinancing by New U S WEST of the Dex Indebtedness (the "MediaOne Separation Adjustments") and (ii) the AirTouch Transaction (the "AirTouch Transaction Adjustments") as if such transactions had been consummated as of January 1, 1998 and 1997 respectively. The pro forma adjustments included herein are based on available information and certain assumptions that management believes are reasonable and are described in the accompanying notes. The unaudited pro forma financial statements do not necessarily represent what MediaOne Group's results of operation would have been had the transactions occurred at such dates or to project MediaOne Group's results of operations at or for any future date or period. In the opinion of management, all adjustments necessary to present fairly the unaudited pro forma financial information have been made. The unaudited pro forma financial statements should be read in conjunction with the historical financial statements of MediaOne Group. Exhibit 99 MEDIAONE GROUP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1998 Dollars in millions, except per share amounts
MediaOne Group Pro Forma MediaOne Excluding MediaOne Group AirTouch AirTouch MediaOne Group Separation Transaction Transaction Group Historical Adjustments Adjustments Adjustments Pro Forma --------------- -------------- ------------ ------------ ----------- (E) Sales and other revenues $ 1,613 $ 1,613 $ (359) $ 1,254 (E) Cost of sales and other revenues 558 558 (72) 486 (E) Selling, general and administrative 502 502 (139) 363 (E) Depreciation and amortization 606 606 (55) 551 ------------- ------------- -------------- ------------- ------------- Total operating expense $ 1,666 $ 1,666 $ (266) $ 1,400 ------------- ------------- --------------- ------------- ------------- Operating loss from (E) continuing operations (53) (53) (93) (146) Other income (expense) (A) (E) Interest expense (293) 118 (175) 26 (149) Equity losses in unconsolidated (E) ventures (205) (205) 35 (170) (B) (E) Other income (expense) - net 3,939 17 3,956 (3,841) 115 ------------- ------------- -------------- ------------- ------------ Income (loss) from continuing operations before income taxes 3,388 135 3,523 (3,873) (350) (C) (E) (Provision) benefit for income taxes (1,436) (41) (1,477) 1,614 137 ------------- ------------- -------------- ------------- ------------ Income (loss) from continuing operations $ 1,952 $ 94 $ 2,046 $ (2,259) $ (213) ------------- ------------- --------------- ------------- ------------- Dividends on preferred stock (26) (26) (26) Loss on Redemption of Preferred (D) Securities (53) 53 ============= ============= =============== ============= ============= Earnings (loss) available for common stock $ 1,873 $ 147 $ 2,020 $ (2,259) $ (239) ============= ============= =============== ============= ============= Basic earnings (loss) per share $ 3.08 $ (.39) ============= ============= Basic average shares outstanding (in thousands) 608,699 608,699 ============= ============= Diluted earnings (loss) per share $ 2.91 $ (.39) ============= ============= Diluted average shares outstanding (in thousands) 652,601 608,699 ============= =============
Exhibit 99 MEDIAONE GROUP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS For the Year Ended December 31, 1997 Dollars in millions, except per share amounts
MediaOne Group Pro Forma MediaOne Excluding MediaOne Group AirTouch AirTouch MediaOne Group Separation Transaction Transaction Group Historical Adjustments Adjustments Adjustments Pro Forma ----------- ----------- ----------- ----------- --------- (E) Sales and other revenues $ 3,847 $ 3,847 $ (1,428) $ 2,419 (E) Cost of sales and other revenues 1,255 1,255 (345) 910 (E) Selling, general and administrative 1,305 1,305 (550) 755 (E) Depreciation and Amortization 1,257 1,257 (183) 1,074 ------------ ------------ ------------ ------------ ---------- Total Operating Expense 3,817 3,817 (1,078) 2,739 ------------- ------------- ------------- ------------- ---------- Operating income (loss) from (E) continuing operations 30 30 (350) (320) Other income (expense) (A) (E) Interest expense (678) 231 (447) 98 (349) Equity losses in unconsolidated (E) ventures (909) (909) 115 (794) (B) (E) Other income (expense) - net 350 37 387 133 520 ------------- ------------- ------------- ------------- ------------- Income (loss) from continuing operations before income taxes (1,207) 268 (939) (4) (943) (E) (Provision) benefit for income taxes 380 (99) 281 32 313 ------------- ------------- ------------- ------------- ------------- Income (loss) from continuing operations (827) 169 (658) 28 (630) ------------- ------------- ------------- ------------- ------------- Dividends on preferred stock (52) (52) (52) ------------- ------------- ------------- ------------- ------------- Earnings (loss) available for common stock $ (879) $ 169 $ (710) $ 28 $ (682) ============= ============= ============= ============= ============= Basic and diluted loss per share $ (1.45) $ (1.12) ============= ============= Basic and diluted average shares outstanding (in thousands) 606,749 606,749 ============= =============
Exhibit 99 (A) Reflects a reduction of historical interest expense of $109 million and $248 million for the six months ended June 30, 1998 and the year ended December 31, 1997, respectively, as a result of the Refinancing, including the refinancing by New U S WEST of the Dex Indebtedness and an increase in interest expense of $7 million and $17 million, for the same periods, for financing the costs of the Refinancing and Separation. Also includes a $16 million decrease in interest expense for the six months ended June 30, 1998 to reverse interest expense recognized on the early termination of interest rate contracts due to the Separation. (B) Reflects a reduction in guaranteed minority interest expense (included in other income (expense) - net) of $17 million and $37 million for the six months ended June 30, 1998 and the year ended December 31, 1997 respectively related to the Exchange Offer for Preferred Securities. (C) Reflects the estimated income tax effects of the pro forma adjustments and the Separation. (D) Reflects the reversal of the $53 million loss incurred due to the Exchange Offer on Preferred Securities associated with the Separation in the six months ended June 30, 1998. (E) Reflects the consumation of the AirTouch Transaction. The pro forma adjustments reflect the following: Receipt of 59,314,000 shares of AirTouch common stock accounted for as marketable equity securities. Receipt of $1,493 million of AirTouch preferred stock at market value (liquidation value of $1,650 million). Receipt of $93 million in dividends per year ($25 million in six months ended June 30, 1998 due to the April 6, 1988 consumation) from the AirTouch preferred stock. Reduction in debt of $1,350 million and a corresponding reduction of annual interest expense of $98 million ($26 million in six months ended June 30, 1998 due to the April 6, 1998 consumation). Removal of the consolidated revenues and expenses of MediaOne Group's domestic cellular operations. Removal of MediaOne Group's equity losses associated with its investment in PrimeCo. Reversal of the $3,869 million pre-tax gain and the associated $1,612 million tax expense recognized on the AirTouch Transaction in the six months ended June 30, 1998. EX-27 7 FINANCIAL DATA SCHEDULE
5 0000732718 MediaOne Group, Inc. 1,000,000 3-MOS 6-MOS DEC-31-1998 DEC-31-1998 APR-01-1998 JAN-01-1998 JUN-30-1998 JUN-30-1998 384 384 0 0 376 376 0 0 8 8 880 880 4,161 4,161 782 782 25,389 25,389 3,084 3,084 3,040 3,040 661 661 924 924 10,515 10,515 1,565 1,565 25,389 25,389 641 1,613 641 1,613 0 0 0 0 694 1,666 0 0 143 293 3,716 3,388 1,542 1,436 2,174 1,952 24,774 25,208 (333) (333) 0 0 26,615 26,827 43.19 42.98 40.27 40.12
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