-----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, VycAz9iMzJr267uz/Lw5QxwmMU548VxoHr2FrjQSzSgQMyZJ14XLiNQpi8G5UumH 4T3TTW6A8fTVOb7bnFcXag== 0001047469-98-014722.txt : 19980430 0001047469-98-014722.hdr.sgml : 19980430 ACCESSION NUMBER: 0001047469-98-014722 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980413 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US WEST INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 840926774 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-08611 FILM NUMBER: 98592491 BUSINESS ADDRESS: STREET 1: 7800 E ORCHARD RD STREET 2: STE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037936500 MAIL ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-K405/A 1 10-K405/A - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K/A (AMENDMENT NO. 1) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR / / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 1-8611
U S WEST, INC. A DELAWARE CORPORATION I.R.S. EMPLOYER IDENTIFICATION NO. 84-0926774 7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111 TELEPHONE NUMBER (303) 793-6500
-------------------------- Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - - --------------------------------------------------------------------------- ----------------------------- U S WEST Communications Group Common Stock New York Stock Exchange ($0.01 per share, par value) Pacific Stock Exchange U S WEST Media Group Common Stock New York Stock Exchange ($0.01 per share, par value) Pacific Stock Exchange 7.96% Trust Originated Preferred Securities New York Stock Exchange (Liquidation Amount $25 per Preferred Security) 8.25% Trust Originated Preferred Securities New York Stock Exchange (Liquidation Amount $25 per Preferred Security) U S WEST Series D Convertible Preferred Stock New York Stock Exchange ($1.00 per share, par value)
-------------------------- Securities registered pursuant to Section 12(g) of the Act:: None At January 30, 1998, 485,060,950 shares of U S WEST Communications Group common stock and 608,143,720 shares of U S WEST Media Group common stock were outstanding. At January 30, 1998, the aggregate market value of the U S WEST Communications Group voting stock held by non-affiliates was approximately $23,325,202,237, and the aggregate market value of the U S WEST Media Group voting stock held by non-affiliates was approximately $18,000,905,734. INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ____ DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's definitive Proxy Statement to be issued in connection with the 1998 Annual Meeting of Shareholders are incorporated by reference into Parts II and III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K /X/. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I
ITEM PAGE ---- ---- 1. Business.................................................................. 1 2. Properties................................................................ 8 3. Legal Proceedings......................................................... 9 4. Submission of Matters to a Vote of Security Holders....................... 9 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................................. 10 6. Selected Financial Data................................................... 10 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................. 10 7A. Quantitative and Qualitative Disclosures About Market Risk................ 10 8. Consolidated Financial Statements and Supplementary Data.................. 10 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................................. 10 PART III 10. Directors and Executive Officers of the Registrant........................ 10 11. Executive Compensation.................................................... 10 12. Security Ownership of Certain Beneficial Owners and Management............ 10 13. Certain Relationships and Related Transactions............................ 10 PART IV 14. Financial Statement Schedules, Reports on Form 8-K and Exhibits........... 11 Reports of Independent Public Accountants................................. 15
i PART I ITEM 1. BUSINESS GENERAL U S WEST, Inc. ("U S WEST" or the "Company") is incorporated under the laws of the State of Delaware and has its principal executive offices at 7800 East Orchard Road, Englewood, Colorado 80111, telephone number (303) 793-6500. U S WEST is a diversified global communications company, and conducts its operations through U S WEST Communications Group ("Communications Group") and U S WEST Media Group ("Media Group"). (Financial information concerning U S WEST's operations is set forth in the Consolidated Financial Statements and Notes thereto, which begin on page 61.) U S WEST and its subsidiaries had 67,461 employees at December 31, 1997. U S WEST has two classes of common stock: U S WEST Communications Group Common Stock (the "Communications Stock"), which is intended to reflect separately the performance of the Communications Group, and U S WEST Media Group Common Stock (the "Media Stock"), which is intended to reflect separately the performance of the Media Group. COMMUNICATIONS GROUP. The major component of the Communications Group is U S WEST Communications, Inc. ("U S WEST Communications"), which provides telecommunications services to more than 25 million residential and business customers in the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming (collectively, the "Region"). U S WEST Communications serves approximately 80 percent of the Region's population and approximately 40 percent of its geographic area. MEDIA GROUP. The Media Group has operations and investments in three principal areas: (i) domestic and international cable and broadband communications, (ii) domestic and international wireless communications, and (iii) domestic and international directory and information services. RECENT DEVELOPMENTS PROPOSED SEPARATION OF U S WEST. In October 1997, U S WEST announced a proposal to separate itself into two independent companies (the "Separation"). Under this proposal, the Communications Group would become a separately traded public company known as "U S WEST, Inc." and the Media Group would become a separately traded public company known as "MediaOne Group, Inc." As a result of developments in technology, the marketplace and the regulatory arena, the potential for synergies between the Communications Group and the Media Group has been greatly reduced. The Communications Group and the Media Group are currently implementing strategies based on distinct technologies, separate sets of customers and different regulatory environments. The Company believes that these strategies will be executed more efficiently, and that the Communications Group and the Media Group will be able to compete more effectively, if they are independent companies that are not restrained by the conflicts that result from a single corporate structure. As part of the Separation, the Company is proposing to align U S WEST Dex, Inc. ("Dex"), the domestic directories business of the Media Group, with the Communications Group (the "Dex Alignment"). In consultation with U S WEST's management and its financial advisors, the Board of Directors of U S WEST has valued Dex at $4.75 billion. In connection with the Dex Alignment, holders of Media Stock will be issued a total of $850 million in value of shares of common stock of New U S WEST ("New U S WEST Common Stock"), a newly formed indirect subsidiary of U S WEST. This amount represents the $4.75 billion value of Dex net of $3.9 billion of U S WEST debt currently allocated to the Media Group that will be refinanced by New U S WEST in connection with the Separation. In order to complete the Separation, the Company will contribute the businesses of the Communications Group and Dex to New U S WEST and then distribute all of the New U S WEST Common Stock to 1 the holders of the Communications Stock, other than the $850 million in value of New U S WEST Common Stock that will be distributed to holders of Media Stock pursuant to the Dex Alignment. After this distribution, the name of New U S WEST will be changed to "U S WEST, Inc." and the name of U S WEST will be changed to "MediaOne Group, Inc." AIRTOUCH TRANSACTION. On April 6, 1998, the Media Group sold its domestic wireless businesses to AirTouch Communications, Inc. ("AirTouch") in a tax-efficient transaction (the "AirTouch Transaction"). The AirTouch Transaction was consummated in accordance with the terms of an Agreement and Plan of Merger, dated as of January 29, 1998 (the "AirTouch Merger Agreement"), among U S WEST, U S WEST Media Group, Inc., U S WEST NewVector Group, Inc. ("NewVector"), U S WEST PCS Holdings, Inc. ("PCS Holdings") and AirTouch. The Media Group's domestic wireless business was conducted by NewVector, which conducted the Media Group's domestic cellular business, and by PCS Holdings, which held the Media Group's interest in PrimeCo Personal Communications, L.P., a provider personal communications services. Pursuant to the AirTouch Merger Agreement, NewVector and PCS Holdings merged with and into AirTouch and, as a result, AirTouch acquired the businesses of NewVector and PCS Holdings. COMMUNICATIONS GROUP OPERATIONS. The principal types of telecommunications services offered by the Communications Group are: (i) local exchange telephone services, (ii) exchange access services (which connects customers to facilities of carriers, including long-distance providers and wireless operators), and (iii) long-distance network services within Local Access and Transport Areas ("LATAs") in the Region. For the year ended December 31, 1997, local service, exchange access service and intraLATA long distance network service accounted for 33%, 22% and 6%, respectively, of the sales and other revenues of U S WEST. At December 31, 1997, U S WEST Communications had approximately 16,033,000 telephone network access lines in service, a 3.9% increase over year-end 1996. Excluding the effect of the sales of approximately 74,000 rural telephone access lines during 1997, access lines increased 4.4% over year-end 1996. In 1997, revenues from a single customer, AT&T Corp., accounted for approximately 9% of the sales and other revenues of the Communications Group. U S WEST Communications incurred capital expenditures of approximately $2.6 billion in 1997 and expects to incur approximately $2.6 billion in 1998. The 1997 capital expenditures of U S WEST Communications were substantially devoted to the continued modernization of telephone plant, to improve customer services, to accommodate additional line capability in several states, and to enter the personal communications services ("PCS") market. REGULATION. U S WEST Communications is subject to varying degrees of regulation by state commissions with respect to intrastate rates and service, and access charge tariffs. U S WEST is also subject to the jurisdiction of the Federal Communications Commission (the "FCC") with respect to interstate access tariffs (that specify the charges for the origination and termination of interstate communications) and other matters. The Telecommunications Act of 1996 (the "Telecommunications Act") has introduced new regulations affecting the Communications Group's businesses in many areas. U S WEST Communications is currently working with state regulators to gain approval of various initiatives, including efforts to rebalance prices, achieve accelerated capital recovery and eliminate subsidies. State and local regulatory authorities may also regulate certain terms and conditions of the offering of wireless services, such as the siting and construction of transmitter towers, antennas and equipment shelters and zoning and building permit approvals. See "Communications Group--Regulatory Environment" under Management's Discussion and Analysis of Financial Condition and Results of Operations on p. 51. 2 COMPETITION. The Communications Group faces competition in the local exchange business, exchange access and intraLATA long-distance markets, primarily from interexchange carriers ("IXCs"), competitive access providers ("CAPs") and competitive local exchange carriers ("CLECs"). CAPs and CLECs compete with the Communications Group by providing customers with network services that connect to carrier facilities or other business locations within a serving LATA. IXCs compete with the Communications Group by providing intraLATA long-distance services. Such competition is eroding U S WEST Communications' market share of intra-LATA long-distance services, including Wide Area Telephone Service and "800" services. IXCs are competing in this area by offering lower prices and packaging these services on an intraLATA and interLATA basis. The Telecommunications Act has altered the competitive landscape of the telecommunications industry by permitting competition among local telephone companies, long-distance companies and cable companies. As a result, it is expected that additional competitors will be introduced into the Communications Group's markets who will offer services similar to those offered by the Communications Group, including local exchange services. The Communications Group believes that these competitors have initially targeted high-volume business customers in densely populated urban areas and will selectively pursue business in smaller communities. The resulting loss of local service customers could affect multiple revenue streams and could have a material adverse effect on the Communications Group's operations. Court and state regulatory deliberations on interconnection rates and newly issued FCC rules on interstate access pricing could also result in significant changes in revenues received from carriers. The wireless services being introduced by the Communications Group will face competition from the two cellular providers in each of the markets in which it operates as well as from the other providers of PCS services in such markets. The high-speed data and Internet access services offered by the Communications Group face competition from local exchange carriers ("LECs"), IXCs, Internet service providers ("ISPs") and other providers of data services in the Communications Group's markets. Technological advancements will also increase competition in the future. New competitive carriers that are affiliates of cable television companies and power companies are expected to play a greater role in offering local exchange services. In addition to local exchange services, competitors are expected to offer services that will compete with those U S WEST Communications offers and plans to offer, including video programming and high-speed data and Internet services. The Communications Group expects to counter the competition by expanding services to include new retail as well as wholesale markets. Recently introduced service offerings include PCS, high-speed data and Internet services, and interconnection services provided for competing providers of local services. Planned future service offerings include interLATA long-distance services as the regulatory environment permits, while interconnection services will be expanded. The Company believes that the Communications Group's ability to bundle local, long-distance, PCS and other services will provide a significant opportunity to compete by offering one-stop shopping with a package of services similar to those that can be offered by IXCs and CLECs. MEDIA GROUP OPERATIONS The Media Group is the third largest cable television system operator in the United States. The Media Group has operations and investments in three principal areas: (i) domestic and international cable and broadband communications, (ii) domestic and international wireless communications, and (iii) domestic and international directory and information services. Among its investments, the Media Group holds a 25.51% interest in Time Warner Entertainment Company, L.P. ("TWE"), a provider of cable programming, filmed entertainment and broadband communications services that is the second largest cable television system operator in the United States. Primarily through Dex, the Media Group is engaged in the 3 directory and information services business. Dex is to be transferred to the Communications Group in connection with the Separation. DOMESTIC BROADBAND COMMUNICATIONS--MEDIAONE NETWORKS. As of December 31, 1997, the Media Group's cable television systems passed approximately 8.4 million homes and provided service to approximately 4.9 million basic cable subscribers. The Media Group's systems are organized into six operating regions, including large clusters in Atlanta, Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit, Michigan and Minneapolis/St. Paul, Minnesota. As of December 31, 1997, approximately 90% of the Media Group's total basic subscribers were located in clusters with a population greater than 100,000 (after giving effect to announced swaps). The Media Group believes that its operating scale in key markets generates significant benefits, including operating efficiencies, and enhances its ability to develop and deploy new broadband technologies and services. The Media Group's cable services are marketed under the "MediaOne" brand. The Media Group's cable systems offer customers various levels (or "tiers") of cable programming services consisting of broadcast television signals available off-the-air in any locality, televisions signals from so-called "super stations" originating in distant cities (such as WGN), various satellite-delivered non-broadcast channels (such as CNN, MTV, USA Network, ESPN, the Discovery Channel and Nickelodeon), displays of information featuring news, weather, stock and financial market reports and programming originated locally by the systems (such as public, governmental and educational access channels). The Media Group's systems also provide premium programming services to their customers for an extra monthly charge. These premium programming services include HBO, Cinemax, Showtime, The Movie Channel, Encore and regional sports networks. Customers generally pay initial connection charges and fixed monthly fees for a tier of programming services and additional fixed monthly fees for premium programming services. The Media Group also offers pay-per-view programming of movies and special events for an additional per-program charge. The Media Group's systems have channel capacity and addressability that are among the highest in the cable industry. The Media Group's systems are located primarily in suburban communities adjacent to major metropolitan markets and in mid-sized cities that generally are densely populated and geographically diverse. The Media Group believes that its technologically advanced broadband networks and the demographic profile of its subscriber base, coupled with its effective marketing, have been essential to its ability to sustain total monthly revenue per basic subscriber that is among the highest in the cable industry. The Media Group believes that the geographic diversity of its system clusters reduces its exposure to economic, competitive or regulatory factors of any particular region. The Media Group is upgrading its cable systems to create broadband hybrid fiber-coax ("HFC") networks. These HFC networks will provide increased channel capacity for the delivery of additional cable programming and facilitate the delivery of additional services, such as telephony services, enhanced video services, Internet access services and high-speed data services. The Media Group is selectively upgrading its systems and expects that it will have 60% to 70% of its systems upgraded by the end of 1998. The Media Group has already begun to offer additional services over upgraded HFC networks in certain markets. For example, the Media Group currently offers MediaOne Express, and Internet access service, over its HFC networks in Los Angeles, Boston, Detroit, Atlanta, Jacksonville, Richmond and Southern Florida. In late 1997, the Media Group and Time Warner, Inc. ("TWX") announced plans to merge the operations of MediaOne Express and Road Runner, the Internet access service offered by Time Warner Cable, to create the largest cable-based high-speed Internet access business in the United States. In addition, the Media Group began offering telephony services over its HFC networks in the Atlanta, Georgia metropolitan area in January 1998 and expects to begin offering telephony services in two additional markets in 1998. To further enhance the clustering of its cable systems, the Media Group has entered into a letter of intent with Tele-Communications, Inc. ("TCI") to exchange (the "TCI Exchange") certain cable television 4 systems serving approximately 500,000 subscribers. Consummation of the TCI Exchange is expected to occur in late 1998, subject to the receipt of certain franchise and other approvals. In May 1997, the Media Group entered into an agreement (the "Minnesota Sale Agreement") to sell its cable system (the "Minnesota System") serving the Minneapolis/St. Paul, Minnesota metropolitan area to Charter Communications, Inc. ("Charter") for $600 million. As of December 31, 1997, the Minnesota System served approximately 300,000 subscribers. The Minnesota System was acquired by the Media Group as of part of its acquisition of Continental Cablevision, Inc. ("Continental") in 1996. Under current FCC cross-ownership rules, the Media Group is prohibited from owning a cable network and a telephone network in the same geographic area. Because the Minnesota System is located in an area where U S WEST Communications owns the telephone network, the Media Group was mandated by the FCC to sell the Minnesota System in connection with the acquisition of Continental in order to comply with the cross-ownership rules. As a result of the Separation, U S WEST Communications and the Media Group will be independent companies and the Media Group will no longer be prohibited by federal law from owning the Minnesota System. In February 1998, in response to U S WEST's petition, the FCC granted to U S WEST a waiver which would permit the Media Group to retain the Minnesota System so long as the Separation is consummated by July 31, 1998. The Media Group has the right to terminate the Minnesota Sale Agreement at any time upon the payment to Charter of a $30 million termination fee. Media Group has terminated the Minnesota Sale Agreement pursuant to such right and otherwise settled all claims with Charter. DOMESTIC BROADBAND COMMUNICATIONS--TIME WARNER CABLE. The Media Group owns a 25.51% priority capital and residual equity interest in TWE. The remaining interests in TWE are owned by TWX. TWE is engaged in the cable programming, filmed entertainment and broadband communications businesses. TWE, through Time Warner Cable, its cable division, is the second-largest cable television system operator in the United States. Time Warner Cable owns or manages cable systems in 34 states. These systems include 34 clusters of more than 100,000 subscribers, including Time Warner Cable of New York City, the largest cluster in the United States. More than 55% of Time Warner Cable's subscribers are located in Florida, New York, North Carolina, Ohio and Texas. As of December 31, 1997, Time Warner Cable owned cable television systems that passed approximately 15.4 million homes and provided service to approximately 9.7 million basic cable subscribers. Of these systems, systems passing approximately 7.1 million homes and providing service to approximately 4.6 million subscribers are owned by Time Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N"), a partnership in which TWE owns a 66.7% interest, and the Advance/Newhouse Partnership ("A/N") owns a 33.3% interest. In addition, Time Warner Cable manages cable television systems owned by TWX which, as of December 31, 1997, passed approximately 3.8 million homes and provided service to approximately 2.3 million cable television subscribers. Time Warner Cable's cable services are marketed under the "Time Warner Cable" brand. Time Warner Cable offers cable programming services over its networks similar to those offered by the Media Group under the MediaOne brand. Like the Media Group, Time Warner Cable is upgrading its cable systems to provide increased channel capacity and to facilitate the delivery of additional services. In February 1998, TWX contributed cable systems serving approximately 675,000 subscribers to TWE-A/N, subject to approximately $1 billion in debt, in exchange for approximately $300 million of common and preferred interests. In connection with the transaction, A/N will make equity contributions to TWE-A/N to maintain its 33.3% interest therein. As a result, TWE-A/N is owned approximately 65.3% by TWE, 33.3% by A/N and 1.4% by TWX. INTERNATIONAL BROADBAND COMMUNICATIONS. The Media Group owns interests in various providers of broadband communications services in international markets in continental Europe, the United Kingdom and Asia. As of December 31, 1997, these interests represented approximately 2 million proportionate homes passed and 900,000 proportionate subscribers. 5 Among its international broadband interests, the Media Group holds a 26.8% interest in Telewest Communications plc ("Telewest"), the second-largest provider of combined cable and telecommunications services in the United Kingdom. Telewest is constructing broadband networks capable of providing a broad range of video, telephony and data services. As of December 31, 1997, Telewest had approximately 687,000 cable subscribers and 1,040,000 telephony lines. TCI also owns a 26.8% interest in Telewest. The Media Group also holds interests in other providers of cable and broadband communications services in international markets, including a 94% interest in Cable Plus, a provider of cable and telephony services in the Czech Republic; a 50% interest in A2000 (KTA), a provider of cable and telephony services in the Netherlands; a 25% interest in Telenet Flanders, a provider of cable and telephony services over an HFC network in portions of Belgium; a 35% interest in Aria WEST, a provider of telecommunications services in portions of Indonesia; a 25% interest in Singapore Cablevision Pte Ltd, a joint venture that is constructing a broadband network in Singapore; and a 25% interest in Titus Communications Corp. ("Titus") and a 19% interest in Chofu Cable Television ("Chofu"), each of which is constructing cable television systems in Japan. TWX also holds a 25% interest in Titus and a 19% interest in Chofu. INTERNATIONAL WIRELESS COMMUNICATIONS. The Media Group owns interests in various providers of wireless communications services in international markets in continental Europe, the United Kingdom and Asia. As of December 31, 1997, these interests represented 76.9 million proportionate potential customers and approximately 1,018,000 proportionate subscribers. Among its international wireless interests, Media Group owns a 50% interest in Mercury Personal Communications ("One 2 One"), which provides PCS services in the United Kingdom under the brand "One 2 One." The remaining 50% of One 2 One is owned by Cable & Wireless plc. One 2 One was the first PCS service in the world to commence operations in 1993. As of December 31, 1997, One 2 One's networks served approximately 1,014,000 subscribers and provided coverage to approximately 95% of Great Britain's population. The Media Group also holds interests in various other providers of wireless communications services in international markets, including a 46.6% interest in Westel 900 and a 49% interest in Westel Radiotelefon, providers of cellular service in Hungary; 24.5% interests in Eurotel Praha and Eurotel Bratislava, providers of wireless services in portions of the Czech and Slovak Republics; a 22.5% interest in Polska Telefonia Cyfrowa, a provider of Global Systems for Mobile Communications ("GSM") cellular services in Poland; a 49% interest in U S WEST BPL Cellular Telecommunications, a provider of GSM cellular services in certain regions of India; a 19% interest in Binariang, a provider of wireless, wireline, satellite and international gateway services in Malaysia; and a 66.5% interest in the Russian Telecommunications Development Corp., a provider of cellular services in certain cities in Russia. AIRTOUCH TRANSACTION. The Media Group consummated the AirTouch Transaction on April 6, 1998. Pursuant to the AirTouch Transaction, the Media Group received from AirTouch (i) $1.65 billion in liquidation preference of dividend bearing AirTouch preferred stock, and (ii) 59.5 million shares of AirTouch common stock. In addition, AirTouch assumed $1.35 billion of indebtedness of NewVector and PCS Holdings. Prior to the consummation of the AirTouch Transaction, the Media Group and AirTouch were parties to a multi-phased joint venture pursuant to which the parties had agreed to combine their domestic cellular businesses. The AirTouch Transaction was consummated in lieu of such joint venture. The Media Group intends to take appropriate actions to monetize the shares of the AirTouch preferred stock and AirTouch common stock that it received in the AirTouch Transaction. In connection with the AirTouch Transaction, the Media Group and AirTouch have entered into an Investment Agreement, pursuant to which AirTouch has agreed to provide to the Media Group registration rights with respect to the shares of AirTouch preferred stock and AirTouch common stock that it received in the AirTouch Transaction and to assist the Media Group in the monetization of such shares. 6 DIRECTORY AND INFORMATION SERVICES. The Media Group's directory and information services businesses develop and package content and information services, including telephone directories, database marketing, electronic directory and other interactive services in domestic and international markets. Dex publishes approximately 320 White and Yellow Pages directories in the Region. The Media Group also owns an interest in a Brazilian directory operation. During 1997, the Media Group sold Thomson Directories and U S WEST Polska, its directory operations in the United Kingdom and Poland, respectively. Upon the consummation of the Separation, Dex will be aligned with the Communications Group. REGULATION. The products and services of the Media Group are subject to varying degrees of regulation. Under the Telecommunications Act, the regulation of all but basic tier cable rates will be discontinued effective March 31, 1999, or earlier if competition exists. The Telecommunications Act also (i) eliminates certain cross-ownership restrictions among cable operations, broadcasters and multipoint multichannel distribution services ("MMDS") operations, (ii) removes barriers to competition with LECs, and (iii) eliminates restrictions that previously applied to the Media Group relating to long-distance services. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") authorizes the FCC to set standards for governmental authorities to regulate the rates for certain cable television services, except for services offered on a per-channel or per-program basis, and equipment. Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a series of rate regulations. The FCC also publicly announced that it would consider "social contracts" as an alternative form of rate regulation for cable operations. Continentals's social contract with the FCC was adopted by the FCC on August 3, 1995 and amended on August 21, 1996 and July 3, 1997 to include certain systems acquired by Continental. The social contract is a six-year agreement covering most of Continental's franchises, including those that were unregulated, and settled Continental's cost of service rate cases and benchmark cable programming service tier rate cases for the covered systems. Benchmark basic service tier rate cases in the covered systems are subject to review by local franchise authorities. As part of the resolution, Continental agreed to, among other things, invest at least $1.7 billion in domestic system rebuilds and upgrades through the year 2000 to expand channel capacity and improve system reliability and picture quality. At December 31, 1997, the investment commitment had been substantially met. Under the social contract, Continental also reduced its basic service tier rates for most of the subscribers covered by the social contract. These reductions were offset by a revenue neutral increase in cable programming service tier rates. The social contract allows for the funding of system rebuilds and upgrades by increasing cable programming service tier rates annually by one dollar per subscriber from 1997 through 1999 in most franchises, and from 1996 through 1999 for the systems incorporated under the 1996 amendment to the social contract. Rate adjustments are also allowed for inflation and external costs such as programming. The social contract also provides that, if the laws and regulations applicable to services offered in any Continental franchise change in a manner that would have a material favorable financial impact on Continental, the Media Group may petition the FCC to terminate the social contract. Cable television systems are also subject to local regulation, typically imposed through the franchising process. Local officials may be involved in the initial franchise selection, system design and construction, safety, rate regulation, customer service standards, billing practices, community-related programming and services, franchise renewal and imposition of franchise fees. The Media Group is also subject to various regulations in the foreign countries in which it has operations. In the United Kingdom, the licensing, construction, operation, sale and acquisition of cable and wireline and wireless communications systems are regulated by various government entities, including the Department of Trade and Industry and the Department of National Heritage. COMPETITION. The Media Group's cable television systems generally compete for viewer attention with other providers of video programming, including direct broadcast satellite ("DBS") systems, MMDS systems, local multipoint distribution services systems, satellite master antenna television ("SMATV") 7 systems and other cable companies providing services in areas where the Media Group operates. In addition, certain LECs, including regional bell operating companies ("RBOCs"), are beginning to offer video programming in competition with the Media Group's cable services. In the past, federal cross-ownership restrictions have limited entry by LECs into the cable television business. The Telecommunications Act has eliminated many of these barriers, thereby enhancing the ability of LECs to provide video programming in competition with the Media Group. The extent of such competition in any franchise area is dependent, in part, upon the quality, variety and price of the programming provided by these services. Many of these competitive services are generally not subject to the same local government regulation that affects cable television. The cable television services offered by the Media Group also face competition for viewers and advertising from other communications and entertainment media, including off-air television broadcasting services, movie theaters, video tape rentals and live sporting events. The competition faced by the Media Group's cable systems may increase in the future with the development and growth of new technologies. As the Media Group begins to offer additional services over its HFC networks, the Media Group will face additional competition. Telephony services offered by the Media Group will face competition from other providers of local exchange services, including RBOCs, LECs, IXCs and other providers of local exchange services. The degree of competition will be dependent upon the state and federal regulations concerning entry, interconnection requirements and the degree of unbundling of the LECs' networks. Competition will be based upon price, service quality and breadth of services offered. The Internet access and high-speed data services offered by the Media Group compete with other providers of such services, including LECs, IXCs, ISPs and other on-line service providers. The Media Group's international broadband and wireless communications businesses also face competition in their respective markets. Telewest's cable television services compete with broadcast television stations, DBS services, SMATV systems and certain narrowband operators in the United Kingdom. Telewest's communications services compete with domestic telephone companies in the United Kingdom, such as British Telecommunications plc. One 2 One competes with two cellular operators and one PCS operator in the United Kingdom. Competition is based upon price, geographic coverage and quality of the services offered. Dex competes with various other providers of directory services, including providers of electronic directory services. ITEM 2. PROPERTIES. The properties of U S WEST do not lend themselves to description by character and location of principal units. At December 31, 1997, the majority of U S WEST property was utilized in providing telecommunications services by U S WEST Communications. Substantially all of U S WEST Communications' central office equipment is located in owned buildings situated on land owned in fee, while many garages and administrative and business offices are in leased quarters. 8 ITEM 3. LEGAL PROCEEDINGS. U S WEST and its subsidiaries are subject to claims and proceedings arising in the ordinary course of business. At U S WEST Communications, there are pending certain regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. For a discussion of these actions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Contingencies," on p. 49. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF U S WEST, INC. Pursuant to General Instructions G(3), the following information is included as an additional item in Part I:
DATE ASSUMED PRESENT POSITION AGE POSITION ------------------------------------------------------ --- --------------- James T. Anderson Vice President & Treasurer 58 1984 Michael P. Glinsky Executive Vice President and Chief Financial Officer 53 1996(1) Charles M. Lillis Executive Vice President, and President & Chief 56 1987(2) Executive Officer, U S WEST Media Group Richard D. McCormick Chairman of the Board, Chief Executive Officer & 57 1991(3) President Charles P. Russ, III Executive Vice President-Law, Public Policy and Human 53 1992 Resources, General Counsel & Secretary Solomon D. Trujillo Executive Vice President, and President & Chief 46 1995(4) Executive Officer, U S WEST Communications Group
- - ------------------------ (1) Mr. Glinsky was elected Executive Vice President and Chief Financial Officer effective April 15, 1996. (2) Mr. Lillis was elected President and Chief Executive Officer, U S WEST Media Group effective August 22, 1995. (3) Mr. McCormick was elected Chairman of the Board effective May 1, 1992. (4) Mr. Trujillo was elected President and Chief Executive Officer of U S WEST Communications Group effective July 1, 1995, and Executive Vice President, U S WEST effective October 6, 1995. Previously, Mr. Trujillo was President and Chief Executive Officer of U S WEST Dex, Inc. Executive Officers are not elected for a fixed term of office, but serve at the discretion of the Board of Directors. Each of the above executive officers has held a managerial position with U S WEST or an affiliate of U S WEST since 1993, except for Mr. Glinsky. Mr. Glinsky was a managing partner of Coopers & Lybrand L.L.P., from 1967 to April 1996. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is included in Note 24, Quarterly Financial Data, on page 114. The U. S. markets for trading in U S WEST common stock are the New York Stock Exchange and the Pacific Stock Exchange. As of January 30, 1998, U S WEST Communications Group common stock was held by approximately 669,060 shareholders of record and U S WEST Media Group common stock was held by approximately 643,770 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA. Reference is made to the information set forth on pages 17 through 18. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Reference is made to the information set forth on pages 19 through 57. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Reference is made to the information set forth on pages 47 and 48. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to the information set forth on pages 61 through 116. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to executive officers is set forth in Part I, page 9, under the caption "Executive Officers of U S WEST." The information required by this item with respect to Directors is included in the U S WEST definitive Proxy Statement ("Proxy Statement") under "Election of Directors" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included in the Proxy Statement under "Compensation of Executive Officers" and "Director Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is included in the Proxy Statement under "Security Ownership of Management" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. 10 PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS. (a) Documents filed as part of this report:
PAGE ----------------- (1) Reports of Independent Accountants............................................... 58 through 59 (2) Consolidated Financial Statements: Consolidated Statements of Operations--for the years ended December 31, 1997, 1996 and 1995.................................................................. 61 through 62 Consolidated Balance Sheets as of December 31, 1997 and 1996..................... 63 through 64 Consolidated Statements of Cash Flows--for the years ended December 31, 1997, 1996 and 1995.................................................................. 65 Notes to Consolidated Financial Statements and supplementary data................ 66 through 116 (3) Consolidated Financial Statement Schedule: Reports of Independent Accountants............................................... 15 II--Valuation and Qualifying Accounts............................................ 16
Financial statement schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto, or because such schedules are not required or applicable. (b) Reports on Form 8-K: U S WEST filed the following reports on Form 8-K during the fourth quarter of 1997: (i) report dated October 27, 1997 notification of a press release regarding U S WEST. Inc's plan to split U S WEST Media Group and U S WEST Communications Group into separate public companies; notification of a press release by U S WEST Media Group regarding the sale of its interest in Video Cable Communications, an Argentinean joint venture; and notification of the release of third quarter earnings results by U S WEST Communications Group and U S WEST Media Group. 11 (c) Exhibits: Exhibits identified in parentheses below are on file with the Securities and Exchange Commission ("SEC") and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.
EXHIBIT NUMBER - - --------- 2-A --Form of Separation Agreement between U S WEST, Inc. (to be renamed "MediaOne Group, Inc.") and USW-C, Inc. (to be renamed "U S WEST, Inc.") 2-B --Form of Employee Matters Agreement between U S WEST, Inc. (to be renamed "MediaOne Group, Inc.") and USW-C, Inc. (to be renamed "U S WEST, Inc."). 2-C --Form of Tax Sharing Agreement between U S WEST, Inc. (to be renamed "MediaOne Group, Inc.") and USW-C, Inc. (to be renamed "U S WEST, Inc."). (3-A) --Form of Restated Certificate of Incorporation of U S WEST, Inc. (Annex II to Registration Statement No. 33-59315). 3-B --Form of Amended Bylaws of U S WEST, Inc. (4-A) --Form of Amended and Restated Rights Agreement between U S WEST, Inc. and State Street Bank and Trust Company, as Rights Agent (Exhibit 4-A to Registration Statement No. 33-59315). 4-B --No instrument which defines the rights of holders of long and intermediate term debt of U S WEST, Inc. and all of its subsidiaries is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10-A) --U S WEST, Inc. Short-Term Incentive Plan (Exhibit 10i to Form 10-K, date of report March 19, 1993, File No. 1-8611). (10-B) --U S WEST Executive Financial Counseling Plan (Exhibit 10j to Form 10-K, date of report March 28, 1997, File No. 1-8611). (10-C) --U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration Statement No. 2-87861). (10-D) --Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance (Exhibit 10-gg to Registration Statement No. 2-87861). (10-E) --Extract from the U S WEST Management Pension Plan regarding limitations on and payments of pension amounts which exceed the limitations contained in the Employee Retirement Income Security Act (Exhibit 10-hh to Registration Statement No. 2-87861). (10-F) --U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March 29, 1989, File No. 1-8611). (10-G) --Amended U S WEST Deferred Compensation Plan (Annex X to Registration Statement No. 33-59315). (10-H) --Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March 5, 1992, File No. 1-8611). (10-I) --Amended U S WEST 1994 Stock Plan (Annex IX to Registration Statement No. 33-59315). (10-J) --U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to Registration Statement No. 2-87861). (10-K) --Form of U S WEST, Inc. Non-Qualified Stock Option Agreement (Exhibit 10u to Form 10-K, date of report March 28, 1996, File No. 1-8611).
12
EXHIBIT NUMBER - - --------- (10-L) --Form of U S WEST, Inc. Restricted Stock Agreement (Exhibit 10v to Form 10-K, date of report March 28, 1996, File No. 1-8611). (10-M) --Employment letter from Richard D. McCormick to Charles P. Russ, III dated January 31, 1997 (Exhibit 10w to Form 10-K, date of report March 28, 1997, File No. 1-8611). (10-N) --Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and U S WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993, File No. 1-8611). (10-O) --Form of U S WEST, Inc. Executive Change of Control Agreement, Exhibit 10y to Form 10-K, date of report March 28, 1997, File No. 1-8611). (10-P) --Form of Change of Control Agreement for Chief Executive Officer (Exhibit 10-g to Form 10-K, date of report March 28, 1997, File, No. 1-8611). (10-Q) --Form of Group Executive Change of Control Agreement (Exhibit 10aa to Form 10-K, date of report March 28, 1997, File No. 1-8611). (10-R) --Form of Executive Severance Agreement (Exhibit 10ab to Form 10-K, date of report March 28, 1996, File No. 1-8611). (10-S) --U S WEST, Inc. Executive Short-Term Incentive Plan (Exhibit 10ae to Form 10-K, date of report March 7, 1995, File No. 1-8611). (10-T) --Amended U S WEST Communications Group Long-Term Incentive Plan. (10-U) --Employment letters from Richard D. McCormick to Michael P. Glinsky dated April 2, 1996 and January 31, 1997. (10-W) --364-Day and Five-Year Credit Agreements dated as of November 1, 1996, among U S WEST Capital Funding, Inc., U S WEST, Inc. and the Banks listed therein. 10-X --Agreement and Plan of Merger, dated as of January 29, 1998, among U S WEST, Inc., U S WEST Media Group, Inc., U S WEST NewVector Group, Inc., U S WEST PCS Holdings, Inc. and AirTouch Communications, Inc. 12 --Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial Services, Inc. 21 --Subsidiaries of U S WEST, Inc. 23 --Consent of Independent Accountants. 24 --Powers of Attorney. 27 --Financial Data Schedule. 99 --Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 1997, to be filed by amendment.
13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Englewood, State of Colorado, on April 13, 1998. U S WEST, Inc. By: /s/ MICHAEL P. GLINSKY ----------------------------------------- Michael P. Glinsky EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. PRINCIPAL EXECUTIVE OFFICER /s/ Richard D. McCormick* Chairman of the Board, President and Chief Executive Officer PRINCIPAL FINANCIAL OFFICER: /s/ Michael P. Glinsky Executive Vice President and Chief Financial Officer DIRECTORS: /s/ Robert L. Crandall* /s/ Grant A. Dove* /s/ Allan D. Gilmour* /s/ Pierson M. Grieve* /s/ George J. Harad* /s/ Allen F. Jacobson* /s/ Charles M. Lillis* /s/ Richard D. McCormick* /s/ Marilyn Carlson Nelson* /s/ Frank Popoff* /s/ Charles P. Russ* /s/ Louis A. Simpson* /s/ John "Jack" Slevin* /s/ Solomon D. Trujillo* /s/ Jerry O. Williams* *By /s/ MICHAEL P. GLINSKY ------------------------- Michael P. Glinsky (FOR HIMSELF AND AS ATTORNEY-IN-FACT) Dated April 13, 1998 14 REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareowners of U S WEST, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in U S WEST, Inc.'s (the "Company") amended Annual Report on Form 10-K/A for the years ended December 31, 1997 and 1996, and have issued our reports thereon dated February 12, 1998 (except with respect to the matter discussed in Note 21 of the U S WEST, Inc. consolidated financial statements, as to which the date is April 6, 1998) appearing on page 58. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule appearing on page 16 of this Form 10-K/A is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The information for the years 1997 and 1996 on this schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Denver, Colorado, February 12, 1998 (except with respect to the matter discussed in Note 21 of the U S WEST, Inc. consolidated financial statements, as to which the date is April 6, 1998). To the Board of Directors and Shareowners of U S WEST, Inc.: Our report on the consolidated financial statements of U S WEST, Inc. is included on page 59 of this Form 10-K/A. In connection with our audit of such consolidated financial statements, we have also audited the related consolidated financial statement schedule listed in the index on page 11 of this Form 10-K/A for the year ended December 31, 1995. In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic information statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Denver, Colorado February 12, 1996 15 U S WEST, INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN MILLIONS)
BALANCE AT CHARGED TO BEGINNING OF CHARGED TO OTHER BALANCE AT PERIOD EXPENSE ACCOUNTS DEDUCTIONS END OF PERIOD ------------- ------------- ------------- ------------- ------------- ALLOWANCE FOR CREDIT LOSSES 1997.............................................. $ 125 $ 199(a) $ 20 $ 208(b) $ 136 1996.............................................. 88 160(a) 25 148(b) 125 1995.............................................. 62 122(a) 13 109(b) 88 RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING, INCLUDING WORKFORCE AND FACILITY CONSOLIDATION 1997.............................................. 126 -- -- 70 56 1996.............................................. 368 -- -- 242 126 1995.............................................. 702 -- -- 334 368 CAPITAL ASSETS SEGMENT: REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT (after tax) 1997.............................................. 100 -- -- (16) 116 1996.............................................. 56 -- -- (44) 100 1995.............................................. 77 -- -- 21 56
- - ------------------------------ (a) Does not include amounts charged directly to expense. These amounts were $8, $7 and $6 for 1997, 1996 and 1995, respectively. (b) Represents credit losses written off during the period, less collection of amounts previously written off. 16 U S WEST, INC. FINANCIAL HIGHLIGHTS
YEAR ENDED OR AS OF DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS) Sales and other revenues(1)......................................... $ 15,235 $ 12,911 $ 11,746 $ 10,953 $ 10,294 Income before extraordinary items and cumulative effect of change in accounting principles(2)....................... 700 1,144 1,329 1,426 476 Net income (loss)(3)................................................ 697 1,178 1,317 1,426 (2,806) Total assets........................................................ 39,740 40,855 25,071 23,204 20,680 Total debt(4)....................................................... 14,678 15,351 8,855 7,938 7,199 Mandatorily redeemable preferred stock and Preferred Securities(5)...................................................... 1,180 1,131 651 51 -- Shareowners' equity................................................. 11,324 11,549 7,948 7,382 5,861 Percentage of debt to total capital(4).............................. 54.0% 54.8% 50.7% 51.6% 55.1% Capital expenditures(4)............................................. $ 4,174 $ 3,474 $ 3,140 $ 2,820 $ 2,441 Employees........................................................... 67,461 69,286 61,047 61,505 60,778 COMMUNICATIONS GROUP INFORMATION:(2, 3, 6, 7) Basic earnings per common share................................... $ 2.43 $ 2.62 $ 2.50 Diluted earnings per common share................................. 2.41 2.58 2.46 Basic average common shares outstanding (thousands)............... 482,751 477,549 470,716 Diluted average common shares outstanding (thousands)............. 491,232 488,591 481,933 Dividends per common share........................................ $ 2.14 $ 2.14 $ 2.14 Number of common shareowners of record............................ 672,517 725,560 775,125 MEDIA GROUP INFORMATION:(2, 3, 6, 7) Basic and diluted earnings (loss) per common share................ $ (0.88) $ (0.16) $ 0.29 Basic average common shares outstanding (thousands)............... 606,749 491,924 470,549 Diluted average common shares outstanding (thousands)............. 606,749 491,924 471,612 Number of common shareowners of record............................ 648,077 705,341 770,346 U S WEST, INC. INFORMATION:(2, 3, 6, 7) Basic earnings per common share before extraordinary items and cumulative effect of change in accounting principle............. $ 3.14 $ 1.13 Basic earnings (loss) per common share............................ 3.14 (6.69) Diluted earnings (loss) per common share.......................... 3.12 (6.68) Basic weighted average common shares outstanding (thousands)...... 453,316 419,365 Diluted weighted average common shares outstanding (thousands).... 463,801 419,776 Dividends per common share........................................ $ 2.14 $ 2.14 Number of common shareowners of record............................ 816,099 836,328
- - ------------------------------ (1) 1997 and 1996 sales and other revenues include $2,070 and $252, respectively, related to the acquisition by U S WEST, Inc. ("U S WEST" or the "Company") of Continental Cablevision, Inc. ("Continental"), which was consummated on November 15, 1996 (the "Continental Acquisition" or the "Acquisition"). (2) 1997 income is before an extraordinary item and includes a $152 regulatory charge ($0.31 per share of Communications Stock) related primarily to the 1997 Washington State Supreme Court ruling that upheld a Washington State Utilities and Transportation Commission 1996 rate order, a gain of $32 ($0.07 per share of Communications Stock) on the sale of U S WEST Communications, Inc.'s ("U S WEST Communications") interest in Bell Communications Research, Inc. ("Bellcore") and a gain of $48 ($0.10 per share of Communications Stock) on the sales of certain rural telephone exchanges. Also included are net gains of $249 ($0.41 per share of Media Stock) on the sales of domestic and international investments, and net losses of $356 ($0.59 per share of Media Stock) related to the Continental Acquisition. 1996 income is before the cumulative effect of a change in accounting principle and includes a gain of $36 ($0.08 per share of Communications Stock) on the sales of certain rural telephone exchanges and the current effect of $15 ($0.03 per share of Communications Stock) from adopting Statement of Financial Accounting Standards ("SFAS") No. 121. Also included are net losses of $71 ($0.15 per share of Media Stock) related to the Continental Acquisition and a charge of $19 ($0.04 per share of Media Stock) from the sale of U S WEST's cable television interests in Norway, Sweden and Hungary. 1995 income is before an extraordinary item and includes a gain of $95 ($0.20 per share of Media Stock) from the merger of Telewest Communications plc ("Telewest") with SBC CableComms (UK), a gain of $85 ($0.18 per share of Communications Stock) on the sales of certain rural telephone exchanges and costs of $17 ($0.01 per share of Communications Stock and $0.02 per share of Media Stock) associated with the 1995 Recapitalization discussed in footnote 6 below. 1994 income includes a gain of $105 ($0.23 per share) on the partial sale of U S WEST's joint venture interest 17 U S WEST, INC. FINANCIAL HIGHLIGHTS in Telewest, a gain of $41 ($0.09 per share) on the sale of U S WEST's paging operations and a gain of $51 ($0.11 per share) on the sales of certain rural telephone exchanges. 1993 income is before extraordinary items and was reduced by a restructuring charge of $610 ($1.46 per share) and a charge of $54 ($0.13 per share) for the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. 1993 income is from continuing operations. (3) 1997 net income was reduced by an extraordinary charge of $3 ($0.01 per share of Communications Stock and no Media Stock impact) for the early extinguishment of debt. 1996 net income includes a gain of $34 ($0.07 per share of Communications Stock) for the cumulative effect of the adoption of SFAS No. 121. 1995 net income was reduced by an extraordinary item of $12 ($0.02 per share of Communications Stock and $0.01 per share of Media Stock) for the early extinguishment of debt. 1993 net income was reduced by extraordinary charges of $3,123 ($7.45 per share) for the discontinuance of SFAS No. 71 and $77 ($0.18 per share) for the early extinguishment of debt. 1993 net income also includes a charge of $120 ($0.28 per share) for U S WEST's decision to discontinue the operations of its capital assets segment. Discontinued operations provided net income of $38 ($0.09 per share) in 1993. (4) Debt at December 31, 1997 and 1996 includes debt related to the Continental Acquisition. Capital expenditures, debt and the percentage of debt to total capital excludes the capital assets segment, which has been discontinued and is held for sale. Percentage of debt to total capital includes Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures ("Preferred Securities") and mandatorily redeemable preferred stock as a component of total capital. (5) Includes Preferred Securities of $1,080 at December 31, 1997 and 1996, and $600 at December 31, 1995, and preferred stock subject to mandatory redemption of $100 at December 31, 1997, and $51 at December 31, 1996, 1995 and 1994. (6) The average common shares of Media Stock outstanding for the year ended December 31, 1996 include 150,615,000 shares issued in connection with the Continental Acquisition. Effective November 1, 1995, each share of common stock of U S WEST was converted into one share each of Communications Stock and Media Stock (the "1995 Recapitalization"). Earnings per common share and dividends per common share for 1995 have been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the 1995 Recapitalization, the average shares of Communications Stock and Media Stock outstanding are assumed to equal the average shares of U S WEST common stock outstanding for such periods. (7) In 1997, U S WEST adopted SFAS No. 128 "Earnings Per Share" which specifies new computation, presentation and disclosure requirements for earnings per share to be applied retroactively. SFAS No. 128 requires, among other things, presentation of basic and diluted earnings per share. See Note 16--Earnings Per Share--to the U S WEST, Inc. Consolidated Financial Statements. 18 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Some of the information presented in or in connection with this report constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include: (i) greater than anticipated competition from new entrants into the local exchange, intraLATA toll, cable, wireless, data and directories markets, (ii) changes in demand for the Company's products and services, including optional custom calling features, (iii) higher than anticipated employee levels, capital expenditures, and operating expenses (such as costs associated with year 2000 remediation), (iv) the loss of significant customers, (v) pending regulatory actions in state jurisdictions, (vi) regulatory changes affecting the cable and telecommunications industries, including changes that could have an impact on the competitive environment in the local exchange market, (vii) a change in economic conditions in the various markets served by the Company's operations, including international markets, that could adversely affect the level of demand for cable, telephone, wireless, directories or other services offered by the Company, (viii) greater than anticipated competitive activity requiring new pricing for services, (ix) higher than anticipated start-up costs associated with new business opportunities, (x) increases in fraudulent activity with respect to broadband and wireless services, (xi) delays in the Company's ability to begin offering interLATA long-distance services, (xii) consumer acceptance of broadband services, including telephony and data services, and wireless services, or (xiii) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. THE RECAPITALIZATION PLAN In 1995, U S WEST divided its businesses into two groups: U S WEST Communications Group (the "Communications Group") and U S WEST Media Group (the "Media Group") and created two separate classes of common stock under the 1995 Recapitalization. One class of stock, U S WEST Communications Group Common Stock (the "Communications Stock"), reflects the performance of the communications businesses comprising the Communications Group and the other class of stock, U S WEST Media Group Common Stock (the "Media Stock"), reflects the performance of the multimedia businesses comprising the Media Group. Effective November 1, 1995, each share of common stock of U S WEST was converted into one share each of Communications Stock and Media Stock. THE SEPARATION On October 25, 1997, the Board of Directors of U S WEST (the "Board") adopted a proposal to separate U S WEST into two independent companies (the "Separation"). As a result of the Separation, the Communications Group will become an independent public company and will be renamed "U S WEST, Inc." ("New U S WEST"). In addition, the Media Group's directory business known as U S WEST Dex, Inc. ("Dex") will be aligned with New U S WEST (the "Dex Alignment"). The assets of New U S WEST will be accounted for at the historical values at which they were carried by U S WEST prior to the Separation. Following the Separation, U S WEST will continue as an independent public company comprised of the current businesses of Media Group other than Dex and will be renamed "MediaOne Group, Inc." ("MediaOne"). The Separation will be implemented pursuant to the terms of a separation agreement between U S WEST and New U S WEST (the "Separation Agreement"). Under the Separation Agreement, U S WEST will redeem each issued and outstanding share of Communications Stock (other than shares of 19 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Communications Stock held as treasury stock by U S WEST) for one share of New U S WEST Common Stock, and each outstanding share of Media Stock will remain outstanding and will thereafter represent one share of MediaOne Common Stock. Each share of Communications Stock held as treasury stock by U S WEST will be cancelled. Each share of Media Stock held as treasury stock by U S WEST will remain outstanding as one share of MediaOne Common Stock held as treasury stock by MediaOne. In connection with the Dex Alignment, (i) U S WEST will distribute, as a dividend, an aggregate of $850 in value of New U S WEST Common Stock to holders of Media Stock (the "Dex Dividend") and (ii) $3.9 billion of U S WEST debt, currently allocated to Media Group, will be refinanced by New U S WEST (the "Dex Indebtedness"). MediaOne will account for the Separation as a discontinuance of the businesses comprising New U S WEST. The measurement date for discontinued operations accounting purposes will be the date upon which U S WEST stockholder approval is obtained. On such date, MediaOne will recognize a gain on the distribution of New U S WEST. Because the distribution is non pro-rata, as compared with the businesses previously attributed to U S WEST's two classes of stockholders, it will be accounted for at fair value. Based on the number of shares of Communications Stock outstanding and market price as of February 20, 1998, the gain (net of Separation costs) is estimated at approximately $25.2 billion. The Company will incur Separation costs during 1998 of approximately $150, which includes cash payments under severance agreements of $45 and financial advisory, legal, registration fee, printing and mailing costs. Separation costs also include a one-time payment to terminate the sale of the Media Group cable systems in Minnesota. The transaction is subject to shareowner approval and is expected to be complete by mid-1998. THE COMMUNICATIONS GROUP The Communications Group provides telecommunications services to more than 25 million residential and business customers in the Communications Group 14 state region (the "Region"). The Region includes the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Primary telecommunications services offered include local exchange telephone services, exchange access services (which connect customers to the facilities of carriers, including long-distance providers and wireless operators), and long-distance services within Local Access and Transport Areas ("LATAs") in the Region. Other products and services include wireless personal communications services ("PCS"), high-speed data and Internet access services, and certain other communications equipment sales and services for business customers and governmental agencies. THE MEDIA GROUP The Media Group has operations and investments in three principal areas: (i) cable and broadband network businesses primarily outside of the Region and internationally, (ii) domestic and international wireless communications network businesses and (iii) domestic and international directory and information services businesses. CABLE AND BROADBAND. Media Group is the third largest cable operator in the United States serving 4.9 million cable customers and passing 8.4 million homes. Media Group's cable systems are organized into six operating regions, including large clusters in Atlanta, Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit, Michigan and Minneapolis/St. Paul, Minnesota. The cable systems 20 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) offer customers various levels of cable programming services, including premium programming services such as HBO, Cinemax, Showtime, The Movie Channel and Encore, as well as pay-per-view movies and special events. On November 15, 1996, U S WEST acquired Continental. The aggregate consideration paid by U S WEST to shareowners of Continental consisted of 150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of U S WEST Series D Preferred Stock (the "Series D Preferred Stock") with a market value of $920 and $1.15 billion in cash. In connection with the Acquisition, U S WEST also assumed all of Continental's outstanding indebtedness and other liabilities as of November 15, 1996, which approximated $7.1 billion for a total purchase price of $11.8 billion. The Acquisition was accounted for by the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values. In 1997 Continental was renamed MediaOne of Delaware, Inc. ("MediaOne Delaware"). In addition to its cable operations, Media Group also holds significant domestic cable and broadband investments including an investment in Time Warner Entertainment Company L.P. ("TWE" or "Time Warner Entertainment"), the second largest provider of cable television services in the United States, an approximate 10 percent interest in PrimeStar, Inc. ("PrimeStar"), a provider of direct broadcast satellite ("DBS") services, telephone access businesses in Florida and Virginia, and interests in programming that include E! Entertainment Television. Internationally, Media Group holds an investment in Telewest, the second-largest provider of combined cable and broadband communications services in the United Kingdom. The Media Group also holds interests in cable and broadband properties in Singapore, the Netherlands, Belgium, the Czech Republic, Malaysia, Indonesia and Japan. WIRELESS COMMUNICATIONS. On April 6, 1998, U S WEST 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"), a provider of PCS services. Pursuant to the AirTouch Merger Agreement, AirTouch acquired these cellular and PCS interests. Consideration under the AirTouch Transaction consists of (i) debt reduction of $1.35 billion, (ii) the issuance to U S WEST of $1.65 billion in liquidation preference of dividend bearing AirTouch preferred stock (fair value of approximately $1.5 billion), and (iii) the issuance to U S WEST of 59.5 million shares of AirTouch common stock. This transaction resulted in the disposition of Media Group's domestic wireless businesses. Applying the terms of the AirTouch Merger Agreement, this transaction will result in a gain of approximately $2.3 billion, net of deferred taxes of $1.7 billion. Media Group will retain its international wireless interests which include a 50 percent joint venture interest in Mercury Personal Communications ("One 2 One"), a provider of PCS services in the United Kingdom. Additionally, Media Group owns interests in wireless properties in Hungary, the Czech and Slovak Republics, Russia, Malaysia, India and Poland. DIRECTORY AND INFORMATION SERVICES. The Media Group's directory and information services businesses develop and package content and information services, including telephone directories, database marketing, electronic directory and other interactive services in domestic and international markets. Dex publishes approximately 320 White and Yellow Pages directories in the Region and will be aligned with the 21 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Communications Group as part of the Separation. Media Group also owns an interest in a Brazilian directory operation. During 1997, Media Group sold Thomson Directories and U S WEST Polska, its directory operations in the United Kingdom and Poland, respectively. The following discussion is based on the U S WEST, Inc. Consolidated Financial Statements prepared in accordance with generally accepted accounting principles ("GAAP"). RESULTS OF OPERATIONS--1997 COMPARED WITH 1996 NET INCOME (LOSS)
NET INCOME (LOSS) BASIC EARNINGS (LOSS) PER SHARE(1) ------------------------------------------ ------------------------------------------ DECREASE DECREASE -------------------- -------------------- 1997 1996 $ % 1997 1996 $ % --------- --------- --------- --------- --------- --------- --------- --------- Communications Group...................... $ 1,177 $ 1,249 $ (72) (5.8) $ 2.43 $ 2.62 $ (0.19) (7.3) Media Group............................... (480) (71) (409) -- (0.88) (0.16) (0.72) -- --------- --------- --------- --------- Total net income.......................... $ 697 $ 1,178 $ (481) (40.8) --------- --------- --------- --------- --------- --------- --------- ---------
- - ------------------------------ (1) In 1997, U S WEST adopted SFAS No. 128, "Earnings Per Share," which specifies new computation, presentation and disclosure requirements for earnings per share. SFAS No. 128 requires, among other things, presentation of basic and diluted earnings per share on the face of the income statement. The following discussion and analysis of operations is based upon basic weighted average common shares outstanding. For the calculation of diluted earnings (loss) per share see Note 16--Earnings Per Share-- to the U S WEST, Inc. Consolidated Financial Statements. COMMUNICATIONS GROUP NET INCOME
NET INCOME BASIC EARNINGS PER SHARE ------------------------------------------ ------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) -------------------- --------- 1997 1996 $ % 1997(1) 1996 $(1) --------- --------- --------- --------- --------- --------- --------- Reported net income.............................. $ 1,177 $ 1,249 $ (72) (5.8) $ 2.43 $ 2.62 $ (0.19) Adjustments to reported net income: Gains on sales of rural telephone exchanges.... (48) (36) (12) 33.3 (0.10) (0.08) (0.02) Gain on sale of investment in Bellcore......... (32) -- (32) -- (0.07) -- (0.07) Cumulative effect of change in accounting principle(2)................................. -- (34) 34 -- -- (0.07) 0.07 Current year effect of change in accounting principle(2)................................. -- (15) 15 -- -- (0.03) 0.03 Early extinguishment of debt(3)................ 3 -- 3 -- 0.01 -- 0.01 --------- --------- --- --------- --------- --------- --------- Normalized income................................ $ 1,100 $ 1,164 $ (64) (5.5) $ 2.28 $ 2.44 $ (0.16) --------- --------- --- --------- --------- --------- --------- --------- --------- --- --------- --------- --------- --------- % --------- Reported net income.............................. (7.3) Adjustments to reported net income: Gains on sales of rural telephone exchanges.... 25.0 Gain on sale of investment in Bellcore......... -- Cumulative effect of change in accounting principle(2)................................. -- Current year effect of change in accounting principle(2)................................. -- Early extinguishment of debt(3)................ -- --------- Normalized income................................ (6.6) --------- ---------
- - ------------------------------ (1) Column does not add due to rounding of individual components. (2) Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which, among other things, requires that companies no longer record depreciation expense on assets held for sale. (3) Reflects a third-quarter 1997 charge of $3 (net of income tax benefits of $2) related to the early extinguishment of debt. 22 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In 1997, normalized income decreased $64, or 5.5 percent, to $1,100 as compared with $1,164 in 1996. Normalized earnings per share of Communications Stock were $2.28, a decrease of $0.16, or 6.6 percent, as compared to 1996. The decrease is primarily due to a $152 after-tax regulatory charge ($250 pretax), or $0.31 per share of Communications Stock, in the fourth quarter of 1997. The charge primarily relates to a liability for revenues that were collected subject to refund (with interest) in the state of Washington from May 1, 1996 through December 31, 1997. The liability was recognized in light of the Washington State Supreme Court's ruling on December 24, 1997 that upheld a Washington State Utilities Transportation Commission ("WUTC") 1996 rate order (the "Washington Rate Order"). Absent the effects of the charge, Communications Group's adjusted earnings per share were $2.59, an increase of 6.1 percent as compared to 1996. The prospective revenue reduction as a result of the Washington Rate Order approximates $115 annually. In a separate action in January 1998 the WUTC authorized a rate increase of approximately $60 annually. Tariffs implementing both orders became effective February 1, 1998. See "Contingencies." Income in 1997 was favorably impacted by strong demand for services. Partially offsetting the effects of increased demand were higher expenses related to interconnection, provisions for estimated regulatory liabilities other than Washington, and start-up costs associated with growth initiatives, including PCS. MEDIA GROUP NET LOSS
NET LOSS BASIC LOSS PER SHARE --------------------------------- --------------------------------- DECREASE DECREASE ----------- ----------- 1997 1996 $ 1997 1996 $ --------- --------- ----------- --------- --------- ----------- Reported net loss........................................ $ (480) $ (71) $ (409) $ (0.88) $ (0.16) $ (0.72) Adjustments to reported net loss: Gains on sales of investments.......................... (249) -- (249) (0.41) -- (0.41) --------- --- ----- --------- --------- ----------- Normalized loss.......................................... $ (729) $ (71) $ (658) $ (1.29) $ (0.16) $ (1.13) --------- --- ----- --------- --------- ----------- --------- --- ----- --------- --------- -----------
During 1997, the Media Group reported a normalized net loss of $729 ($1.29 per share of Media Stock), compared with a net loss of $71, ($0.16 per share of Media Stock) in 1996. The Continental Acquisition contributed approximately $356 ($0.59 per share of Media Stock) of the increase. The Continental Acquisition resulted in significant increases in interest and depreciation and amortization charges. The remaining increase in net loss is primarily due to greater losses from unconsolidated ventures, partially offset by increased earnings from domestic cellular and directories operations. During June 1997, Media Group incurred an extraordinary gain of $3 (net of income tax expenses of $2) related to the early extinguishment of debt of MediaOne Delaware. During August 1997, Media Group incurred an extraordinary loss of $3 (net of income tax benefits of $2) related to the early extinguishment of debt. 23 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SALES AND OTHER REVENUES
INCREASE (DECREASE) -------------------- 1997 1996 $ % --------- --------- --------- --------- Communications Group....................................................... $ 10,319 $ 10,079 $ 240 2.4 Media Group................................................................ 5,043 2,955 2,088 70.7 Intergroup eliminations.................................................... (127) (123) (4) 3.2 --------- --------- --------- --- Total sales and other revenues............................................. $ 15,235 $ 12,911 $ 2,324 18.0 --------- --------- --------- --- --------- --------- --------- ---
COMMUNICATIONS GROUP OPERATING REVENUES
INCREASE (DECREASE) -------------------- 1997 1996 $ % --------- --------- --------- --------- Local service.............................................................. $ 5,016 $ 4,770 $ 246 5.2 Interstate access service.................................................. 2,666 2,507 159 6.3 Intrastate access service.................................................. 761 770 (9) (1.2) Long-distance network services............................................. 885 1,100 (215) (19.5) Other services............................................................. 991 932 59 6.3 --------- --------- --------- --------- Total...................................................................... $ 10,319 $ 10,079 $ 240 2.4 --------- --------- --------- --------- --------- --------- --------- ---------
Approximately 97 percent of the Communications Group's revenues are attributable to the operations of U S WEST Communications, of which approximately 67 percent are derived from the states of Arizona, Colorado, Minnesota, Oregon and Washington. The primary factors that influence changes in revenues are customer demand for products and services, price changes (including those related to regulatory proceedings) and refunds. Approximately 30 percent of the access lines in service at December 31, 1997 are devoted to providing services to business customers. The access line growth rate for business customers, who tend to be heavier users of the network, has consistently exceeded the growth rate of residential customers. During 1997, business access lines grew 5.8 percent while residential access lines increased 3.9 percent, when adjusted for the 1997 sales of rural telephone access lines. During 1997, the Communications Group's operating revenues increased 2.4 percent, to $10,319. Revenue growth was impacted by the $250 regulatory charge in the fourth quarter of 1997. The regulatory charge was allocated among local service revenues, interstate and intrastate access services revenues, long- distance network service revenues and interest expense. Absent the effects of the charge, revenues were $10,549, an increase of 4.7 percent as compared with 1996. LOCAL SERVICE REVENUES. Local service revenues include local telephone exchange, local private line and public telephone services. During 1997, local service revenues increased 5.2 percent, or $246, as compared with 1996. Local service revenue growth of 5.2 percent declined from 9.8 percent in 1996 due to the effects of an $86 accrual recognized during fourth-quarter 1997 as part of the Washington Rate Order and additional provisions of approximately $95 during the year for other estimated state regulatory liabilities. See "Contingencies." Lower wireless interconnection access prices mandated by the Telecommunications Act of 1996 (the "Telecommunications Act") and the effects of rural exchange sales also impacted local service revenue growth in 1997. 24 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The increase in local service revenues is primarily attributable to access line growth and increased demand for new product and service offerings and existing central office features. Total reported access lines increased 609,000 during 1997, or 3.9 percent, of which 294,000 is attributed to second lines. Second line installations increased 28.2 percent compared with 1996. Access lines grew 683,000, or 4.4 percent, when adjusted for sales of approximately 74,000 rural telephone access lines during 1997. Also contributing to the revenues increase were rate increases of $37 in various states and interim compensation revenues from interexchange carriers ("IXCs") as a result of the Federal Communications Commission ("FCC") payphone orders which took effect in April 1997. INTERSTATE ACCESS SERVICE REVENUES. Access charges are collected primarily from IXCs for their use of the local exchange network. For interstate access services there is also a fee collected directly from telephone customers. Approximately 28 percent of access revenues and 9 percent of total revenues are derived from providing access services to AT&T Corp. ("AT&T"). During 1997, interstate access service revenues increased $159, or 6.3 percent, to $2,666. The increase in interstate access service revenues resulted primarily from greater demand for private line services, access line growth and an increase of 6.4 percent in billed interstate access minutes of use. Also contributing to the increase were the effects of higher accruals for refunds to IXCs in 1996. Lower prices under the FCC's current price cap plan and a $25 charge during fourth-quarter 1997 for an FCC-ordered refund to IXCs for access revenues collected during the last half of 1997 partially offset the effects of greater demand for interstate access services. The Communications Group reduced prices for interstate access services, effective July 1, 1997, as a result of the FCC's current price cap plan. The access rate reductions, which are being reflected through lower interstate rates over twelve months beginning July 1, 1997, have an on-going annual revenue impact of approximately $160. The rate of growth in interstate access service revenues could decline in 1998 as a result of the FCC's May 1997 decisions to establish rules to restructure the access charge system (the "Access Reform Order") and the current price cap plan (the "Price Cap Order"). See "Communications Group--Regulatory Environment." INTRASTATE ACCESS SERVICE REVENUES. The decrease of $9, or 1.2 percent, in intrastate access service revenues is primarily due to the effects of a $68 accrual recognized during fourth-quarter 1997 as part of the Washington Rate Order. A 12.2 percent increase in billed intrastate minutes of use, higher demand for private line services and $7 of rate increases in local jurisdictions largely offset the effects of the Washington Rate Order. LONG-DISTANCE NETWORK SERVICES REVENUES. Long-distance network services revenues are derived from calls which both originate and terminate within the LATA boundaries of the Region. In 1997, long-distance network services revenues decreased $215, or 19.5 percent, as compared with 1996. The decline is partially due to the effects of a $51 accrual recognized during fourth-quarter 1997 as part of the Washington Rate Order. The decrease in long-distance network services revenues is also due to the effects of competition and the implementation of multiple toll carrier plans ("MTCPs") in various jurisdictions in 1997 and 1996. The MTCPs essentially allow independent telephone companies to act as toll carriers and are net income neutral with the reduction in toll revenues largely offset by increased intrastate access service revenues and lower access expense. Rate decreases of $20 in local jurisdictions also contributed to the decrease in long-distance network services revenues. Long-distance network services revenues have declined over the last several years as customers have migrated to IXCs that have the ability to offer long-distance services on both an intraLATA and interLATA basis. A portion of revenues lost to competition, however, is recovered through access charges paid by the 25 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) IXCs. The Communications Group believes that erosion of long-distance network services revenues will continue due to the loss of exclusivity of 1+ dialing in Minnesota and Arizona in February and April of 1996, respectively, and in New Mexico and Wyoming in September and December of 1997, respectively, and the effects of continued competitive dial-around activity in other states within the Region. The Communications Group is responding to competition through competitive pricing of intraLATA long-distance network services and increased promotional efforts to retain customers. OTHER SERVICES REVENUES. Revenues from other services primarily consist of voice messaging services, inside wire installation and maintenance services, billing and collection services, and the provision of customer premises equipment ("CPE"). Other services revenues increased $59, or 6.3 percent, as compared with 1996, primarily as a result of continued market penetration of voice messaging services and greater sales of inside wire maintenance and certain other unregulated products and services. Also contributing to the increase were revenues from the launch of PCS services. Partially offsetting these increases was a reduction in contract revenues due to the completion of a large federal government telephony project in 1996. MEDIA GROUP SALES AND OTHER REVENUES
INCREASE (DECREASE) PRO INCREASE (DECREASE) FORMA(1) -------------------- ----------- -------------------- 1997 1996 $ % 1996 $ % --------- --------- --------- --------- ----------- --------- --------- CABLE AND BROADBAND: Domestic....................................... $ 2,323 $ 488 $ 1,835 -- $ 2,125 $ 198 9.3 International.................................. 18 6 12 -- 6 12 -- --------- --------- --------- --------- ----------- --------- --------- 2,341 494 1,847 -- 2,131 210 9.9 --------- --------- --------- --------- ----------- --------- --------- WIRELESS COMMUNICATIONS: Domestic: Cellular service............................. 1,276 1,078 198 18.4 1,078 198 18.4 Cellular equipment........................... 152 105 47 44.8 105 47 44.8 --------- --------- --------- --------- ----------- --------- --------- 1,428 1,183 245 20.7 1,183 245 20.7 --------- --------- --------- --------- ----------- --------- --------- DIRECTORY AND INFORMATION SERVICES: Domestic....................................... 1,197 1,120 77 6.9 1,120 77 6.9 International.................................. 48 139 (91) (65.5) 139 (91) (65.5) --------- --------- --------- --------- ----------- --------- --------- 1,245 1,259 (14) (1.1) 1,259 (14) (1.1) --------- --------- --------- --------- ----------- --------- --------- Other............................................ 29 19 10 52.6 19 10 52.6 --------- --------- --------- --------- ----------- --------- --------- Total............................................ $ 5,043 $ 2,955 $ 2,088 70.7 $ 4,592 $ 451 9.8 --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- --------- ---------
- - ------------------------------ (1) Gives effect to the Continental Acquisition as though it had occurred on January 1, 1996. The pro forma increase in Media Group sales and other revenues was primarily due to growth in domestic cable and broadband and cellular service revenues. CABLE AND BROADBAND. Cable and broadband revenues consist primarily of basic cable programming and premium cable television services, the rental of converters and remote control devices, cable installation fees, advertising and PrimeStar DBS services. 26 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Prior to April 1, 1998, Media Group held a 10.4 percent interest in PrimeStar Partners, L.P. ("Old PrimeStar"). In addition, Media Group distributed PrimeStar 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, Media Group contributed its interests in Old PrimeStar, as well as its PrimeStar subscribers and certain related assets, to PrimeStar in exchange for an approximate 10 percent interest in PrimeStar and cash. As a result, Media Group will no longer reflect consolidated operating results for PrimeStar DBS services. On a pro forma basis, domestic cable and broadband revenues increased 9.3 percent, to $2,323, in 1997. Basic cable programming services revenues increased $146, or 10.6 percent, to $1,518, primarily a result of rate increases. Rate increases averaged approximately 6 to 8 percent and were primarily related to an increase in programming costs and the addition of channels. This contributed to the 4.7 percent increase in core cable revenue per average cable subscriber to $37.76 in 1997, from $36.06 in 1996. Basic subscriber growth of 1.6 percent, adjusted for dispositions and an acquisition, also contributed to the increase in revenues along with growth in equipment rental and installation revenues. Partially offsetting the increase in revenues was a decline in premium services revenues as a result of moving the Disney Channel to the basic service tier in several markets and discounting of premium service packages. PrimeStar DBS services contributed $40 to the increase in domestic cable and broadband revenues principally as a result of a 31 percent increase in DBS customers to 181,000 at December 31, 1997. International cable and broadband revenues reflect the consolidation of Cable Plus a.s. ("Cable Plus"), a cable operator in the Czech Republic, in fourth-quarter 1996. The consolidation of Cable Plus is associated with a restructuring in 1996 whereby Media Group's ownership interest increased to 94 percent. WIRELESS COMMUNICATIONS. Cellular service revenues increased 18.4 percent, to $1,276 in 1997, due to a 27 percent increase in subscribers during the year, partially offset by a 12 percent drop in average revenue per subscriber to $46.42 per month. The increase in subscribers relates to continued growth in demand for wireless services, as well as the 1997 introduction of digital wireless services in several major markets. Cellular equipment revenues increased 44.8 percent, to $152 in 1997, as a result of a 14 percent increase in gross customer additions and the introduction of digital handsets. These volume increases were partially offset by decreased selling prices for analog handsets. On April 6, 1998, Media Group sold its domestic wireless businesses to AirTouch pursuant to the AirTouch Transaction. DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages directory advertising, which represents 99 percent of domestic directory and information services revenues, increased 7.2 percent, to $1,181 in 1997. The increases are largely a result of a 7.3 percent increase in revenue per local advertiser, primarily resulting from price increases of 4.6 percent and an increase in volume and complexity of advertisements sold. These increases were offset slightly by decreased revenues associated with exited product lines which were nonstrategic to the directory business. Interactive and other services, which comprise the remaining domestic directory and information services revenues, totaled $16 and $18 for the years ended December 31, 1997 and 1996, respectively. In conjunction with the proposed Separation, the domestic directory business will be aligned with New U S WEST. 27 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) During 1997, Media Group sold its wholly owned international directory and information services operations. OPERATING INCOME
INCREASE (DECREASE) -------------------- 1997 1996 $ % --------- --------- --------- --------- Communications Group........................................................ $ 2,210 $ 2,340 $ (130) (5.6) Media Group................................................................. 596 515 81 15.7 --------- --------- --------- --- Total operating income...................................................... $ 2,806 $ 2,855 $ (49) (1.7) --------- --------- --------- --- --------- --------- --------- ---
COMMUNICATIONS GROUP OPERATING INCOME
INCREASE (DECREASE) -------------------- 1997 1996 $ % --------- --------- --------- --------- Operating revenues.......................................................... $ 10,319 $ 10,079 $ 240 2.4 Operating expenses: Employee-related expenses................................................. 3,697 3,594 103 2.9 Other operating expenses.................................................. 1,870 1,634 236 14.4 Taxes other than income taxes............................................. 416 389 27 6.9 Depreciation and amortization............................................. 2,126 2,122 4 0.2 --------- --------- --------- --- Total operating expenses................................................ 8,109 7,739 370 4.8 --------- --------- --------- --- Operating income............................................................ $ 2,210 $ 2,340 $ (130) (5.6) --------- --------- --------- --- --------- --------- --------- ---
Operating income declined $130, or 5.6 percent, to $2,210 in 1997. Revenue growth of $240, or 2.4 percent, was more than offset by an increase of $370, or 4.8 percent, in operating costs, including approximately $150 of expenses related to interconnection. See "Communications Group--Regulatory Environment." In addition, revenue growth was negatively impacted by the fourth-quarter 1997 regulatory charge. See "Sales and Other Revenues." Absent the effects of the regulatory charge, operating income was $2,440, an increase of 4.3 percent, as compared with 1996. Operating expense growth was primarily due to increases in employee-related and other operating expenses. Employee-related expenses include salaries and wages (including both basic and performance-based pay), overtime, benefits (including pension, postretirement and health care), payroll taxes and contract labor. During 1997, total employee-related expenses increased $103, or 2.9 percent, to $3,697, primarily due to higher contract labor costs. The contract labor costs were predominately a result of increased systems development work (which includes expenses related to interconnection and year 2000 costs) and marketing and sales efforts. Increases in certain employee-related benefit costs also contributed to the growth in total employee-related expenses. Partially offsetting these increases were lower salaries and wages related to headcount reductions, lower conference and travel expenses and decreases in overtime costs. Other operating expenses include access charges paid to independent local exchange carriers ("LECs") (incurred for the routing of long-distance traffic through their facilities), network software expenses and other general and administrative costs, including allocated costs from U S WEST. During 28 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 1997, other operating expenses increased $236, or 14.4 percent, to $1,870, primarily due to a $92 increase in advertising costs and approximately $90 of interconnection expenses. Costs associated with strategic and growth initiatives (primarily PCS) and increased equipment rentals also contributed to the increase. Partially offsetting these cost increases were reduced access expenses (primarily related to the implementation of the MTCPs in 1997 and 1996), the completion of a large federal government telephony project in 1996 and lower material and supplies expense. A 1996 charge of $11 to discontinue the Omaha broadband video service trial also partially offset the increase in other operating expenses. At December 31, 1997, approximately 69 percent of the Communications Group's employees were represented by unions. The Communications Group's principal collective bargaining agreements expire in August 1998. Negotiations with respect to future collective bargaining agreements are underway. Taxes other than income taxes, which consist primarily of property taxes, increased $27, or 6.9 percent, to $416, primarily due to the effects of property tax adjustments in 1996 and increased 1997 use taxes. Partially offsetting the increases were the effects of favorable tax valuations and mill levies on 1997 property taxes as compared with 1996. MEDIA GROUP OPERATING INCOME
INCREASE PRO INCREASE (DECREASE) FORMA(1) (DECREASE) ----------- -------- ----------- 1997 1996 $ % 1996 $ % ----- ----- ----- ---- -------- ---- ----- CABLE AND BROADBAND: Domestic... $(111) $ (13) $ (98) -- $ (73) $(38) 52.1 International... (15) (7) (8) -- (7) (8) -- ----- ----- ----- ---- -------- ---- ----- (126) (20) (106) -- (80) (46) 57.5 ----- ----- ----- ---- -------- ---- ----- WIRELESS COMMUNICATIONS: Domestic... 353 243 110 45.3 243 110 45.3 International... (13) (3) (10) -- (3) (10) -- ----- ----- ----- ---- -------- ---- ----- 340 240 100 41.7 240 100 41.7 ----- ----- ----- ---- -------- ---- ----- DIRECTORY AND INFORMATION SERVICES: Domestic... 548 452 96 21.2 452 96 21.2 International... (11) 2 (13) -- 2 (13) -- ----- ----- ----- ---- -------- ---- ----- 537 454 83 18.3 454 83 18.3 ----- ----- ----- ---- -------- ---- ----- Other(2)... (155) (159) 4 (2.5) (159) 4 (2.5) ----- ----- ----- ---- -------- ---- ----- Operating income... $ 596 $ 515 $ 81 15.7 $ 455 $141 31.0 ----- ----- ----- ---- -------- ---- ----- ----- ----- ----- ---- -------- ---- -----
- - ------------------------------ (1) Gives effect to the Continental Acquisition as though it had occurred on January 1, 1996. (2) Primarily includes headquarters expenses for shared services and divisional expenses associated with equity investments. The Media Group pro forma operating income increases were due primarily to growth in domestic wireless and domestic directory operations, partially offset by higher domestic cable operating losses. CABLE AND BROADBAND. Domestic cable and broadband operating losses increased 52.1 percent, or $38, to $111, as compared with pro forma 1996. Revenue growth of $198, or 9.3 percent, to $2,323, was more than offset by increases in programming costs, including programming for PrimeStar DBS services, 29 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of $71, or 15.6 percent, to $525, increases in operating, marketing and advertising, and general and administrative costs of $89, or 11.4 percent, to $868, and increases in depreciation and amortization expense of $76, or 7.9 percent, to $1,041. Programming cost increases are primarily a result of rate increases and subscriber growth. Increases in operating, marketing and advertising, and general and administrative costs are primarily a function of customer service initiatives, costs associated with deployment of new services such as high-speed data, advertising costs to implement the "MediaOne" brand and increased professional fees. A reduction in the estimated remaining useful lives of certain assets in accordance with planned re-build activities resulted in a depreciation adjustment of $61 which accounts for the majority of the increase in depreciation and amortization expense during 1997. The domestic cable and broadband business will continue to generate operating losses for the foreseeable future due to the amortization of intangible assets associated with the Continental Acquisition and depreciation associated with network upgrades. WIRELESS COMMUNICATIONS. Domestic cellular operating income increased 45.3 percent, to $353, in 1997. The increase in operating income is a result of revenue increases associated with the expanding subscriber base combined with efficiency gains. These increases were somewhat offset by a decline in revenue per subscriber, caused primarily by promotional pricing to retain subscribers and remain competitive with other wireless service providers. On a per subscriber basis, the 1997 decline in revenue of 11.6 percent has been more than offset by a combined decrease of 19.4 percent in the costs incurred to acquire and support customers. Customer acquisition costs include sales commissions, advertising, other selling costs and equipment costs. Customer support costs include charges for access and usage of land-line telecommunications networks, subscriber billing, customer service and general support costs, as well as costs associated with roaming, toll calls within LATA boundaries, and fraud. Support costs per subscriber declined 17.6 percent in 1997. The decline is generally a result of the efficiencies gained from an expanding customer base without corresponding increases in headcount and infrastructure. Competitive activity increased in U S WEST's domestic cellular markets in the second half of the year, particularly with the introduction of new PCS wireless services in several markets. In many cases, discounted cellular service price plans were offered in response to competition. This resulted in slowing operating income growth during the fourth quarter of 1997. Domestic cellular depreciation and amortization increased 22.4 percent, to $180, largely as a result of network upgrades. DIRECTORY AND INFORMATION SERVICES. During 1997, operating income related to domestic Yellow Pages directory advertising increased 14 percent to $582. Revenue increases of 7.2 percent were partially offset by an 11 percent increase in paper and printing costs, and a 7 percent increase in sales support costs. These cost increases were associated with an increase in the volume and complexity of advertisements sold. Additionally, 1996 results include a charge of $25 incurred to reorganize and reduce management headcount. During 1997, the Yellow Pages operation completed its reorganization. Centralized operating management was divided into three regions to establish greater accountability and to move decision making closer to the customers. Operating losses associated with ongoing product development activities, which include development costs for Internet content services, are included in domestic directory and information services operating income. Such losses reduced domestic directory and information services operating income by $34 in 1997, 30 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) compared with a reduction of $59 in 1996. The decrease in losses is primarily the result of cost containment efforts in 1997 and discontinuing various product development activities in 1996. At December 31, 1997, approximately 64 percent of the directory and information services segment employees were represented by unions. The principal collective bargaining agreements expire in May and October 1998. Negotiations with respect to future collective bargaining agreements are underway. OTHER. Other operating losses include costs related to general and administrative services provided by U S WEST to the Media Group, including executive management, legal, accounting and auditing, tax, treasury, strategic planning, and public policy. Also included are costs related to managing the various Media Group operations, predominantly the international operations. The 1997 results include a $30 charge for management changes and moving costs related to relocating MediaOne Delaware's operations from Boston to Denver. This charge was partially offset by savings associated with lower international staff levels in 1997, combined with a 1996 charge of $10 related to the staff reductions at international headquarters. INTEREST EXPENSE AND OTHER
INCREASE (DECREASE) -------------------- 1997 1996 $ % --------- --------- --------- --------- Interest expense......................................................... $ (1,083) $ (612) $ 471 77.0 Equity losses in unconsolidated ventures................................. (909) (346) 563 -- Gains on sales of investments............................................ 474 -- 474 -- Gains on sales of rural telephone exchanges.............................. 77 59 18 30.5 Guaranteed minority interest expense..................................... (87) (55) 32 58.2 Other expense--net....................................................... (56) (61) (5) (8.2)
INTEREST EXPENSE. Interest expense increased $471, or 77.0 percent, primarily as a result of assuming, at market value, $6.5 billion of debt related to the Continental Acquisition. Partially offsetting the increase were lower average debt levels at the Communications Group in 1997. U S WEST's weighted average borrowing cost was 7.0 percent in 1997, compared with 6.85 percent in 1996. See "Liquidity and Capital Resources." EQUITY LOSSES IN UNCONSOLIDATED VENTURES. Equity losses increased $563 in 1997, predominantly a result of greater losses generated from international ventures and the domestic investment in PrimeCo. PrimeCo launched service in November 1996, and losses associated with this venture have increased $68 as a result of start-up and other costs. International equity losses increased $455 in 1997. Ventures located in Asia, which includes Indonesia, India, Malaysia, Japan and Singapore, contributed $397 to the increase. During the twelve month period ending December 31, 1997, the value of the Malaysian currency declined 36 percent and the Indonesian currency declined 57 percent as compared with the U. S. dollar. As a result of this significant decline, the Company reviewed its investments in Malaysia and Indonesia for impairment. Management concluded that each of its investments in Malaysia and Indonesia was impaired and in each case the fair value of the investment was zero as of December 31, 1997. The Company recorded pretax charges of $145 and $55 related to the ventures in Malaysia and Indonesia, respectively. 31 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In the case of Malaysia, the charge of $145 was to recognize that the investment was impaired and to write down the carrying value of the investment to its fair value of zero. The following factors were considered by management in determining that the investment was impaired: - The venture has negative cash flow and no ability to meet its debt obligations of $482 due in 1998. Total venture debt and vendor payables exceeded $800 at December 31, 1997. The venture debt is subject to cross default provisions so that failure to pay any material obligation is highly likely to accelerate the total balance due. Management has no intention of funding future operating losses or debt obligations. The venture debt is primarily denominated in U. S. dollars with the revenues and operating expenses of the business denominated in local currency. - As determined on a U. S. GAAP basis, the venture's liabilities exceeded its assets as of December 31, 1997, making the venture insolvent at that time. - The business plan for the venture contemplated a significant contribution to cash flows from the wireline business. The actual and potential cash flows of the venture have been severely diminished by the inability of the venture to effectively establish the wireline business. The venture has other lines of business (gateway switch, satellite and wireless communications) which do not generate sufficient cash flow to fund the operations and to retire the debt. Management believes that such condition is other than temporary and its investment is impaired as of December 31, 1997. The following table shows summarized financial information for the Malaysian venture, Binariang SDN BHD:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- RESULTS OF OPERATIONS Revenues............................................................ $ 268 $ 90 $ 20 Operating losses.................................................... (72) (73) (145) Net loss............................................................ (361) (120) (139)
DECEMBER 31, -------------------- 1997 1996 --------- --------- FINANCIAL POSITION Current assets............................................................... $ 151 $ 99 Property, plant and equipment--net........................................... 695 671 Other assets................................................................. 23 15 --------- --------- Total assets................................................................. $ 869 $ 785 --------- --------- --------- --------- Current liabilities and current debt......................................... $ 891 $ 302 Long-term debt............................................................... -- 282 Equity (deficit)............................................................. (22) 201 --------- --------- Total liabilities and equity (deficit)....................................... $ 869 $ 785 --------- --------- --------- ---------
In the case of Indonesia, the net book value of the venture had been reduced to its fair value of zero through recognition of $43 of equity losses during 1997. The $55 charge was to recognize probable funding commitments in connection with a shareholder support agreement. The probable funding commitments consist of the Company's remaining contractual commitment under the shareholder support agreement of 32 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) $19 and its partners' remaining commitments of $36. Under the terms of the shareholder support agreement, each shareholder is responsible for the full unfunded liability if the other shareholders do not meet their proportionate obligations. Although the lenders have not formally declared default, the venture is in default of its debt agreements. Management believes that it is probable that default will be declared by the lenders and that the other shareholders will not meet their proportionate obligations. As a result, the Company has accrued for its partners' share of the commitment under the shareholder support agreement. The following factors were considered by managment in determining that the Indonesian investment was impaired and that accrual of the Company's and its partners' funding liabilities were necessary: - As determined on a U. S. GAAP basis, the venture's liabilities, predominantly U. S. dollar denominated debt, exceeded its assets as of December 31, 1997. - Management believes the venture is not viable given the political and economic uncertainties in Indonesia. - The venture has ceased funding capital projects. The Company's other ventures in Asia, located in Japan, Singapore and India, were evaluated for impairment at December 31, 1997. Such evaluation indicated there was no impairment as the fair value of these ventures exceeded their recorded values. GAINS ON SALES OF INVESTMENTS. During 1997, Media Group sold: (i) its 90 percent interest in Fintelco, S.A. ("Fintelco"), a cable and telecommunications venture located in Argentina, for a pretax gain of $135 ($80 after tax), (ii) its shares of Teleport Communications Group, Inc. ("TCG"), acquired in the Continental Acquisition, for a pretax gain of $162 ($96 after tax), (iii) its shares of Time Warner Inc. ("TWX" or "Time Warner"), acquired in the Continental Acquisition, for a pretax gain of $44 ($25 after tax), (iv) its five percent interest in a French wireless venture, for a pretax gain of $51 ($31 after tax), and (v) U S WEST Polska, its wholly owned directory operation in Poland, for a pretax gain of $29 ($17 after tax). Additionally, U S WEST Communications and the other Regional Bell Operating Companies ("RBOCs") sold their equity interests in Bellcore. As a result of the sale, U S WEST Communications recorded a pretax gain of $53 ($32 after tax). GAINS ON SALES OF RURAL TELEPHONE EXCHANGES. During 1997, the Communications Group sold selected rural telephone exchanges in Iowa, South Dakota, Nebraska, Idaho, and Minnesota for pretax gains of $77. The 1996 gains were a result of sales in Utah, North Dakota, South Dakota, Idaho and New Mexico. GUARANTEED MINORITY INTEREST EXPENSE. Guaranteed minority interest expense reflects an increase of $32 related to the October 29, 1996 issuance of Preferred Securities totaling $480. OTHER EXPENSE--NET. Other expense decreased $5 in 1997, due primarily to a 1996 pretax charge of $31 associated with the sale of the Media Group's cable television interests in Norway, Sweden and Hungary. Largely offsetting this decrease was additional interest expense associated with the Communications Group's state regulatory and interstate sharing liabilities, and increased foreign exchange transaction losses associated with loans to international ventures. 33 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) PROVISION FOR INCOME TAXES
DECREASE -------------------- 1997 1996 $ % --------- --------- --------- --------- Provision for income taxes.................................................... $ 522 $ 696 $ (174) (25.0) Effective tax rate............................................................ 42.7% 37.8% -- --
The increase in the effective tax rate is primarily a result of the effects of goodwill amortization associated with the Continental Acquisition. RESTRUCTURING CHARGE In 1993, U S WEST incurred a $1 billion restructuring charge (pretax). The related restructuring plan was designed to provide faster, more responsive customer services, while reducing the costs of providing these services. During 1997, the restructuring reserve decreased $70, to $56. Reserve usage was primarily a result of 645 employee separations and systems development costs during 1997. The restructuring plan is substantially complete as of December 31, 1997. RESULTS OF OPERATIONS--1996 COMPARED WITH 1995 NET INCOME (LOSS)
NET INCOME (LOSS) BASIC EARNINGS (LOSS) PER SHARE ------------------------------------------ --------------------------------- INCREASE INCREASE (DECREASE) (DECREASE) -------------------- --------- 1996 1995 $ % 1996 1995(1) $ --------- --------- --------- --------- --------- ----------- --------- Communications Group....................... $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12 Media Group................................ (71) 141 (212) -- (0.16) 0.29 (0.45) --------- --------- --------- --------- Total net income........................... $ 1,178 $ 1,317 $ (139) (10.6) --------- --------- --------- --------- --------- --------- --------- --------- % --- Communications Group....................... 4.8 Media Group................................ -- Total net income...........................
- - ------------------------------ (1) As a result of the 1995 Recapitalization, basic earnings (loss) per share have been presented on a pro forma basis as if the Communications Stock and Media Stock had been outstanding since January 1, 1995. For periods prior to the 1995 Recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST. 34 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COMMUNICATIONS GROUP NET INCOME
NET INCOME BASIC EARNINGS PER SHARE(1) ------------------------------------------ ------------------------------------------ INCREASE INCREASE (DECREASE) (DECREASE) -------------------- -------------------- 1996 1995 $ % 1996 1995(1) $ % --------- --------- --------- --------- --------- --------- --------- --------- Reported net income....................... $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12 4.8 Adjustments to reported net income: Gains on sales of rural telephone exchanges............................. (36) (85) 49 (57.6) (0.08) (0.18) 0.10 (55.6) Cumulative effect of change in accounting principle(2)............... (34) -- (34) -- (0.07) -- (0.07) -- Current year effect of change in accounting principle(2)............... (15) -- (15) -- (0.03) -- (0.03) -- Recapitalization costs.................. -- 8 (8) -- -- 0.01 (0.01) -- Early extinguishment of debt(3)......... -- 8 (8) -- -- 0.02 (0.02) -- --------- --------- --- --------- --------- --------- --------- --------- Normalized income......................... $ 1,164 $ 1,107 $ 57 5.1 $ 2.44 $ 2.35 $ 0.09 3.8 --------- --------- --- --------- --------- --------- --------- --------- --------- --------- --- --------- --------- --------- --------- ---------
- - ------------------------------ (1) As a result of the 1995 Recapitalization, basic earnings per share have been presented on a pro forma basis as if the Communications Stock had been outstanding since January 1, 1995. For periods prior to the 1995 Recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST. (2) Effective January 1, 1996, U S WEST adopted SFAS No. 121 which, among other things, requires that companies no longer record depreciation expense on assets held for sale. (3) Represents an extraordinary charge of $8 (net of income tax benefits of $5) related to the refinancing of $145 of long-term debt. The Communications Group's 1996 normalized income was $1,164, an increase of $57, or 5.1 percent, compared with $1,107 in 1995. Normalized earnings per share of Communications Stock were $2.44, an increase of $0.09, or 3.8 percent, as compared to 1995. The increase in normalized income is primarily attributable to increased demand for services. Partially offsetting the increased revenues were higher costs incurred to address business growth, service-improvement initiatives and costs related to new business opportunities. 35 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MEDIA GROUP NET INCOME (LOSS)
BASIC EARNINGS (LOSS) PER NET INCOME (LOSS) SHARE(1) --------------------------------- --------------------------------- INCREASE INCREASE (DECREASE) (DECREASE) ----------- ----------- 1996 1995 $ 1996 1995(1) $ --------- --------- ----------- --------- --------- ----------- Reported net income (loss)............................. $ (71) $ 141 $ (212) $ (0.16) $ 0.29 $ (0.45) Adjustments to reported net income (loss): Merger of joint venture(2)........................... -- (95) 95 -- (0.20) 0.20 Recapitalization costs............................... -- 9 (9) -- 0.02 (0.02) Early extinguishment of debt(3)...................... -- 4 (4) -- 0.01 (0.01) --- --------- ----- --------- --------- ----------- Normalized income (loss)............................... $ (71) $ 59 $ (130) $ (0.16) $ 0.12 (0.28) --- --------- ----- --------- --------- ----------- --- --------- ----- --------- --------- -----------
- - ------------------------------ (1) As a result of the 1995 Recapitalization, basic earnings (loss) per share have been presented on a pro forma basis as if the Media Stock had been outstanding since January 1, 1995. For periods prior to the 1995 Recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST. (2) Relates to the merger of Telewest with SBC CableComms (UK). (3) Media Group incurred an extraordinary loss of $4 (net of income tax benefits of $2) related to the early retirement of debt by TWE. During 1996, the Media Group recorded a net loss of $71 compared to normalized income of $59 in 1995. Excluding the effects of the Continental Acquisition, the Media Group would have been break-even in 1996. The decline in 1996 normalized income (loss), excluding Continental, is primarily due to higher equity losses related to international and domestic growth initiatives, partially offset by improvement in domestic cellular operations. SALES AND OTHER REVENUES
INCREASE (DECREASE) -------------------- 1996 1995 $ % --------- --------- --------- --------- Communications Group...................................................... $ 10,079 $ 9,484 $ 595 6.3 Media Group............................................................... 2,955 2,374 581 24.5 Intergroup eliminations................................................... (123) (112) (11) 9.8 --------- --------- --------- --------- Total sales and other revenues............................................ $ 12,911 $ 11,746 $ 1,165 9.9 --------- --------- --------- --------- --------- --------- --------- ---------
36 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COMMUNICATIONS GROUP OPERATING REVENUES
INCREASE (DECREASE) -------------------- 1996 1995 $ % --------- --------- --------- --------- Local service................................................................. $ 4,770 $ 4,344 $ 426 9.8 Interstate access service..................................................... 2,507 2,378 129 5.4 Intrastate access service..................................................... 770 747 23 3.1 Long-distance network services................................................ 1,100 1,189 (89) (7.5) Other services................................................................ 932 826 106 12.8 --------- --------- --------- --- Total......................................................................... $ 10,079 $ 9,484 $ 595 6.3 --------- --------- --------- --- --------- --------- --------- ---
LOCAL SERVICE REVENUES. Local service revenues increased principally as a result of access line growth and increased demand for new product and service offerings, and existing central office features. Total reported access lines increased 629,000 during 1996, or 4.3 percent, of which 244,000 was attributed to second lines. Second line installations increased 30.5 percent compared with 1995. Access line growth was 5.0 percent when adjusted for sales of rural telephone access lines during 1996. INTERSTATE AND INTRASTATE ACCESS SERVICE REVENUES. Higher revenues from interstate access services were driven by access line growth and an increase of 8.9 percent in interstate billed access minutes of use. The increased business volume was partially offset by the effects of price reductions and sharing related accrued refunds to IXCs. Intrastate access service revenues increased primarily due to higher demand partially offset by the effects of price reductions. LONG-DISTANCE NETWORK SERVICES REVENUES. Long-distance network services revenues decreased primarily due to the effects of competition and the implementation of MTCPs in 1996. The 1996 impact of the MTCPs was a $27 reduction in long-distance network services revenues, partially offset by an increase in intrastate access service revenues of $5 and a decrease in other operating expenses (primarily access expense) of $21. OTHER SERVICES REVENUES. During 1996, revenues from other services increased primarily as a result of continued market penetration in voice messaging services and increased inside wire maintenance services. Also contributing to other services revenue growth were increased contract revenues related to a large federal government telephony project and CPE sales. 37 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MEDIA GROUP SALES AND OTHER REVENUES
INCREASE (DECREASE) -------------------- 1996 1995 $ % --------- --------- --------- --------- CABLE AND BROADBAND: Domestic.................................................................... $ 488 $ 215 $ 273 -- International............................................................... 6 -- 6 -- --------- --------- --------- --------- 494 215 279 -- --------- --------- --------- --------- WIRELESS COMMUNICATIONS: Domestic: Cellular service.......................................................... 1,078 845 233 27.6 Cellular equipment........................................................ 105 96 9 9.4 --------- --------- --------- --------- 1,183 941 242 25.7 --------- --------- --------- --------- DIRECTORY AND INFORMATION SERVICES: Domestic.................................................................... 1,120 1,058 62 5.9 International............................................................... 139 122 17 13.9 --------- --------- --------- --------- 1,259 1,180 79 6.7 --------- --------- --------- --------- Other......................................................................... 19 38 (19) (50.0) --------- --------- --------- --------- Total......................................................................... $ 2,955 $ 2,374 $ 581 24.5 --------- --------- --------- --------- --------- --------- --------- ---------
Media Group sales and other revenues increased 24.5 percent, to $2,955 in 1996 due primarily to the Continental Acquisition and to strong growth in cellular service revenue. Excluding the effects of the Continental Acquisition, sales and other revenues increased 13.9 percent. CABLE AND BROADBAND. Domestic cable and broadband revenues increased $273, to $488 in 1996, due primarily to the Continental Acquisition. Excluding the effects of the Continental Acquisition, domestic cable and broadband revenues increased $21, or 9.8 percent, to $236. The normalized increase was due to higher revenues from the Media Group's cable systems in Atlanta, as a result of a 3.9 percent increase in revenue per subscriber to $39.36 per month and a basic subscriber increase of 4.5 percent. The increase in revenue per subscriber was primarily a result of price increases of 6 to 7 percent. International cable and broadband revenues reflect the consolidation in the fourth quarter of 1996 of Cable Plus. WIRELESS COMMUNICATIONS. Cellular service revenues increased 27.6 percent, to $1,078 in 1996, due to a 40 percent increase in subscribers during the year. The increase in subscribers was partially offset by a 12 percent drop in average revenue per subscriber to $53.00 per month. The increase in subscribers relates to continued growth in demand for wireless services, especially among consumers. Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a result of a 61 percent increase in units sold which was somewhat offset by lower equipment prices. A 30 percent increase in customers added during the year and the implementation of a phone exchange program for existing customers led to the increase in units sold. 38 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages directory advertising, which represents 98 percent of the domestic directory and information services revenue, increased 7.4 percent, to $1,102 in 1996. The increases are largely a result of a 5.7 percent increase in revenue per local advertiser (primarily a result of price increases of approximately 4.0 percent) combined with an increase of 3,000 in local advertisers during the year. OPERATING INCOME
INCREASE -------------------- 1996 1995 $ % --------- --------- --------- --------- Communications Group.......................................................... $ 2,340 $ 2,178 $ 162 7.4 Media Group................................................................... 515 467 48 10.3 --------- --------- --------- --------- Total operating income........................................................ $ 2,855 $ 2,645 $ 210 7.9 --------- --------- --------- --------- --------- --------- --------- ---------
COMMUNICATIONS GROUP OPERATING INCOME
INCREASE -------------------- 1996 1995 $ % --------- --------- --------- --------- Operating revenues........................................................... $ 10,079 $ 9,484 $ 595 6.3 Operating expenses: Employee-related expenses.................................................. 3,594 3,341 253 7.6 Other operating expenses................................................... 1,634 1,543 91 5.9 Taxes other than income taxes.............................................. 389 380 9 2.4 Depreciation and amortization.............................................. 2,122 2,042 80 3.9 --------- --------- --------- --------- Total operating expenses................................................. 7,739 7,306 433 5.9 --------- --------- --------- --------- Operating income............................................................. $ 2,340 $ 2,178 $ 162 7.4 --------- --------- --------- --------- --------- --------- --------- ---------
Communications Group operating income increased $162, or 7.4 percent, to $2,340 in 1996. Revenues increased $595, or 6.3 percent, and were partially offset by an increase of $433, or 5.9 percent, in operating costs. Total operating expense growth was primarily due to increases in employee-related costs, other operating expenses and depreciation expense. Total employee-related expenses increased $253 primarily due to continued efforts to address increased business growth, service-improvement initiatives and new business opportunities. Salaries and wages increased primarily due to inflation-driven and contractual wage increases. Contract labor costs increased to support business growth and additional marketing organization costs related to the launch of new products and services. Employee-related expenses also included approximately $15 for contract labor and overtime as a result of flooding in Washington and Oregon in first-quarter 1996. Partially offsetting these increases were a reduction in postretirement benefit costs due to changes in actuarial assumptions and favorable cost trends, lower conference and travel expenses and decreased overtime as a result of accelerated cost reduction efforts in the latter half of 1996. Other operating expenses increased $91, or 5.9 percent, primarily due to higher advertising and bad debt expenses and costs associated with greater sales of CPE. Also contributing to the increase was a reserve adjustment associated with billing and collection activities performed for IXCs, and an $11 charge related to the discontinuance of the Omaha broadband video service trial. Reduced access expense (a 39 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) portion of which relates to the 1996 implementation of MTCPs) and a reduction in allocated costs from U S WEST partially offset these increases. Allocated costs from U S WEST were $88 and $116 in 1996 and 1995, respectively. Taxes other than income taxes were relatively flat as compared with 1995. In fourth-quarter 1996, taxes other than income taxes increased by $24, or 32.4 percent, due to favorable property tax valuations and mill levies recognized during fourth-quarter 1995. Depreciation and amortization expense increased $80, or 3.9 percent, due to the effects of a higher depreciable asset base, partially offset by the effects of 1995 sales of certain rural telephone exchanges and the adoption of SFAS No. 121. MEDIA GROUP OPERATING INCOME
INCREASE (DECREASE) -------------------- 1996 1995 $ % --------- --------- --------- --------- CABLE AND BROADBAND: Domestic...................................................................... $ (13) $ 23 $ (36) -- International................................................................. (7) -- (7) -- --------- --------- --------- --------- (20) 23 (43) -- --------- --------- --------- --------- WIRELESS COMMUNICATIONS: Domestic...................................................................... 243 147 96 65.3 International................................................................. (3) -- (3) -- --------- --------- --------- --------- 240 147 93 63.3 --------- --------- --------- --------- DIRECTORY AND INFORMATION SERVICES: Domestic...................................................................... 452 399 53 13.3 International................................................................. 2 (1) 3 -- --------- --------- --------- --------- 454 398 56 14.1 --------- --------- --------- --------- Other(1)........................................................................ (159) (101) (58) 57.4 --------- --------- --------- --------- Operating income................................................................ $ 515 $ 467 $ 48 10.3 --------- --------- --------- --------- --------- --------- --------- ---------
- - ------------------------------ (1) Primarily includes headquarters expenses for shared services and divisional expenses associated with equity investments. During 1996, Media Group operating income increased 10.3 percent, to $515, due primarily to strong subscriber growth in wireless operations. Excluding the effects of the Continental Acquisition, Media Group operating income increased $73, or 15.6 percent. CABLE AND BROADBAND. Domestic cable and broadband operating income decreased $36, to a loss of $13, in 1996 due primarily to the Continental Acquisition. Continental contributed losses of $25 since the date of the Continental Acquisition. The Atlanta cable systems contributed operating income of $12 in 1996, compared with $23 in 1995. An increase in depreciation expense related to system upgrade activity at the Atlanta cable systems contributed to the decrease in operating income. International cable and broadband operating losses reflect the fourth-quarter 1996 consolidation of Cable Plus. 40 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) WIRELESS COMMUNICATIONS. Cellular operating income increased 65.3 percent, to $243 in 1996. The increase in operating income is a result of revenue increases associated with the rapidly expanding subscriber base combined with efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has been more than offset by a combined decrease of 18 percent in the costs incurred to acquire and support customers. DIRECTORY AND INFORMATION SERVICES. During 1996, operating income related to domestic Yellow Pages directory advertising increased 1.6 percent to $511. Revenue increases of 7.4 percent were offset by an approximate 10 percent increase in paper, printing, delivery and distribution costs and a charge of $25 to reorganize and reduce headcount in 1996. Operating losses associated with on-going product development activities reduced domestic directory and information services operating income by $59 in 1996, compared with a reduction of $104 in 1995. The decrease in operating losses is primarily the result of exiting various product development activities in 1995. OTHER. Other operating losses increased in 1996 primarily as a result of a change in cost allocation policy. Beginning in 1996, other operating losses include costs that are not specifically identifiable with an operating company. Previously such costs were allocated to the operating companies. Other operating losses also include a charge of $10 related to staff reductions at international headquarters in 1996. INTEREST EXPENSE AND OTHER
INCREASE (DECREASE) -------------------- 1996 1995 $ % --------- --------- --------- --------- Interest expense.............................................................. $ (612) $ (527) $ 85 16.1 Equity losses in unconsolidated ventures...................................... (346) (207) 139 67.1 Gains on sales of rural telephone exchanges................................... 59 136 (77) (56.6) Gain on merger of joint venture interest...................................... -- 157 (157) -- Guaranteed minority interest expense.......................................... (55) (14) 41 -- Other expense--net............................................................ (61) (36) 25 69.4
INTEREST EXPENSE. Interest expense increased primarily as a result of assuming, at market value, $6.5 billion of debt related to the Continental Acquisition. Also contributing to the increase was a higher average debt level at the Communications Group and a decrease in the amount of interest capitalized resulting from a lower average balance of telecommunications plant under construction at the Communications Group. EQUITY LOSSES. Equity losses increased primarily due to: (1) network expansion and additional financing costs at Telewest and One 2 One, (2) rapid customer growth at One 2 One, (3) start-up and other costs associated with new international investments located in Poland and Malaysia, and (4) losses related to Continental's cable and telecommunications investments. Domestically, improved results from the TWE partnership, related to improvements in cable and programming operations, were more than offset by increased losses at PrimeCo which launched service in the fourth quarter of 1996. GAINS ON SALES OF RURAL TELEPHONE EXCHANGES. During 1996, the Communications Group sold selected rural telephone exchanges in Utah, North Dakota, South Dakota, Idaho and New Mexico for pretax gains of $59. The 1995 gains were a result of sales in Colorado, Washington, Oregon and Arizona. 41 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) GAIN ON MERGER OF JOINT VENTURE INTEREST. During 1995, Telewest merged with SBC CableComms (UK) resulting in a pretax gain of $157. GUARANTEED MINORITY INTEREST EXPENSE. Guaranteed minority interest expense reflects an increase of $34 related to the September 11, 1995 issuance of Preferred Securities totaling $600, and an increase of $7 related to an additional $480 issuance of Preferred Securities on October 29, 1996. OTHER EXPENSE--NET. Other expense increased primarily as a result of a pretax charge of $31, associated with the sale of U S WEST's cable television interests in Norway, Sweden and Hungary, and a $13 adjustment related to U S WEST Communications' equity investment in Bellcore. Partially offsetting the increase in other expense were foreign currency translation gains associated with loans to international ventures and costs incurred in 1995 associated with the 1995 Recapitalization. PROVISION FOR INCOME TAXES
DECREASE -------------------- 1996 1995 $ % --------- --------- --------- --------- Provision for income taxes....................................................... $ 696 $ 825 $ (129) (15.6) Effective tax rate............................................................... 37.8% 38.3% -- --
The decrease in the effective tax rate is primarily a result of a one-time benefit associated with the leveraged lease portfolio. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Communications Group(1).............................................................. $ 3,848 $ 3,306 $ 2,719 Media Group(1)....................................................................... 1,318 724 640 Other................................................................................ -- -- 61 --------- --------- --------- Total cash provided by operating activities.......................................... $ 5,166 $ 4,030 $ 3,420 --------- --------- --------- --------- --------- ---------
- - ------------------------------ (1) Individual group cash flow statements are provided in Note 23--Supplemental Communications Group and Media Group Combined Statements--to the U S WEST, Inc. Consolidated Financial Statements. During 1997, the increase in the Communications Group's operating cash flow reflects business growth, efforts to manage working capital, lower restructuring expenditures, and a decrease in the cash funding of postretirement benefits during 1997. Operating cash flow at Media Group increased primarily due to the effects of the Continental Acquisition and growth in the domestic cellular and Yellow Pages businesses. Partially offsetting the increase were higher financing costs resulting from greater debt levels associated with the Continental Acquisition. During 1996, cash provided by operating activities increased $610 due primarily to growth in Communications Group operations. The increase in operating cash flows at the Communications Group also reflects a $157 decrease in the cash funding of postretirement benefits and lower restructuring 42 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) expenditures. Media Group operating cash flow increased due to growth in the cellular and Yellow Pages businesses. Future cash needs of the Communications Group could increase with the pursuit of new business opportunities, including PCS. Future cash needs could also increase as the Communications Group implements the interconnection requirements and other provisions of the Telecommunications Act. However, the impact will depend on the nature and timing of the requirements and the type of recovery mechanisms provided for by the FCC and state commissions. See "Communications Group--Regulatory Environment." The Communications Group expects that such cash needs will be funded through operations and, when necessary, the issuance of debt securities. Media Group expects that its future cash needs, primarily associated with the domestic cable capital expenditures, will exceed cash generated from operations during the next several years. Additional financing is expected to come primarily from a combination of new debt and the monetization of the securities received by Media Group from AirTouch in connection with the AirTouch Transaction. See "Effects of the Separation, the Refinancing and the AirTouch Transaction." INVESTING ACTIVITIES
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Communications Group(1).............................................................. $ 2,058 $ 2,230 $ 2,268 Media Group(1)....................................................................... 1,242 818 1,238 --------- --------- --------- Total cash used for investing activities............................................. $ 3,300 $ 3,048 $ 3,506 --------- --------- --------- --------- --------- ---------
- - ------------------------------ (1) Individual group cash flow statements are provided in Note 23--Supplemental Communications Group and Media Group Combined Statements--to the U S WEST, Inc. Consolidated Financial Statements. Total capital expenditures, on a cash basis, were $3,690, $3,071, and $2,825 in 1997, 1996 and 1995, respectively. Communications Group capital expenditures were $2,139, $2,419 and $2,462, and Media Group capital expenditures were $1,551, $652 and $363 in 1997, 1996 and 1995, respectively. The majority of the Communication Group's 1997 capital expenditures related to access line growth, continued modernization of the telecommunications network and Telecommunications Act requirements including interconnection and local number portability costs. Expenditures associated with entering wireless communications markets with the launch of PCS also impacted capital expenditures. Media Group capital expenditures increased in 1997 associated with its domestic cable network upgrade. In 1998, capital expenditures are expected to approximate $4.3 billion, of which $2.6 billion pertains to the Communications Group and $1.7 billion pertains to the Media Group. Included in the 1998 capital expenditure estimates are Communications Group entry costs for the launch of PCS in new markets and additional interconnection costs. Also included are Media Group domestic cable capital expenditures of $1.6 billion, primarily to expand and upgrade the domestic cable network, as well as to prepare for the provision of new and enhanced services. In 1998, the domestic cellular business incurred approximately $60 in capital expenditures prior to consummation of the AirTouch Transaction on April 6, 1998. Media Group has invested $213, $132 and $268 in PrimeCo in 1997, 1996 and 1995, respectively. Such funding was for network build activities in 1997 and 1996, and the purchase of PCS licenses in 11 markets 43 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) in 1995. In 1998, Media Group invested an additional $65 in PrimeCo prior to consummation of the AirTouch Transaction on April 6, 1998. Investing activities of Media Group include equity investments in international ventures. Media Group invested $325, $243 and $681 in international ventures in 1997, 1996 and 1995, respectively. Investments in 1997 included an additional 40 percent interest in Fintelco and capital contributions to a wireless venture in India. Investments in 1996 included loans provided to One 2 One, the purchase of a 23 percent interest in Polska Telefonia Cyfrowa, a venture to provide wireless service in Poland, and the purchase of a 28 percent interest in Telenet Flanders, a venture in Belgium to provide telephony services on the cable network. In 1995, U S WEST invested $681 in international ventures in Malaysia, the Netherlands, the Czech Republic and the United Kingdom. U S WEST anticipates that investments in international ventures will approximate $290 in 1998 to fund continued expansion in India, Japan, Belgium, and at One 2 One. On March 29, 1998, Telewest announced that merger discussions were underway for Telewest to acquire General Cable plc ("General Cable") for Telewest shares and cash. A 40 percent shareholder of General Cable has agreed to accept Telewest's offer if made on or before April 15, 1998 and involved 1.243 new Telewest shares and 65 pence in cash for each General Cable share (or an aggregate of approximately L426 million in Telewest shares and L240 million in cash). Telewest intends to raise the cash portion of the purchase price through a rights offering to Telewest's existing shareholders, including Media Group. It is currently contemplated that Media Group and certain of Telewest's other principal shareholders may purchase any Telewest shares not purchased by Telewest's other shareholders in the rights offering. There can be no assurance that any transaction involving the acquisition of General Cable will be consummated. During 1997, Media Group paid the cash portion of the Continental Acquisition consideration of $1,150 to the Continental shareowners. In addition, the Communications Group paid $73 to purchase PCS licenses in connection with its launch of PCS service in various markets. Throughout 1997, Media Group pursued a plan to monetize nonstrategic assets, including various domestic and international investments. Such asset sales generated total proceeds of $2,058. Proceeds from sales of international investments totaled $887, domestic investments totaled $931, assets held for sale totaled $231, and disposals of property, plant and equipment totaled $9. International sales consisted of: (a) a five percent interest in a French wireless venture for proceeds of $81, (b) a 90 percent interest in Fintelco for proceeds of $641, (c) Thomson Directories, the directory operation in the United Kingdom, and U S WEST Polska, the directory operation in Poland, for net proceeds of $121 and $27, respectively, and (d) other miscellaneous international investment sales for proceeds of $17. Domestic sales were comprised of the sale of shares of TCG, for net proceeds of $678, shares of TWX, for net proceeds of $220, and miscellaneous asset sales, for proceeds of $33. In addition, U S WEST Communications sold its equity interest in Bellcore for proceeds of $65. The Communications Group received cash proceeds of $67, $174 and $214 during 1997, 1996 and 1995, respectively, for the sales of certain rural telephone exchanges. Since implementing its rural telephone exchange sales program, the Communications Group has sold approximately 342,000 access lines. 44 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FINANCING ACTIVITIES
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Communications Group(1)............................................................. $ (1,843) $ (1,168) $ (395) Media Group(1)...................................................................... (13) 195 525 Other............................................................................... -- -- (61) --------- --------- --------- Total cash (used for) provided by financing activities.............................. $ (1,856) $ (973) $ 69 --------- --------- --------- --------- --------- ---------
- - ------------------------------ (1) Individual group cash flow statements are provided in Note 23--Supplemental Communications Group and Media Group Combined Statements--to the U S WEST, Inc. Consolidated Financial Statements. DIVIDENDS U S WEST paid dividends on the Communications Stock totaling $992, $939 and $926 during 1997, 1996 and 1995, respectively. DEBT ACTIVITY Total debt at December 31, 1997 was $14,678, a decrease of $673 compared to December 31, 1996. This decrease was due primarily to debt redemptions. During 1996, debt increased $6,496 primarily a result of assuming, at market value, Continental debt totaling $6,525 in conjunction with the Continental Acquisition. Concurrently, U S WEST refinanced $3,657 of Continental's debt with U S WEST commercial paper. In January 1997, U S WEST issued medium- and long-term debt totaling $4.1 billion, at a weighted-average interest rate of 7.47 percent. The proceeds were used to refinance the commercial paper. Accordingly, such commercial paper is classified as long-term debt at December 31, 1996. During 1997, U S WEST redeemed its zero coupon subordinated notes, which had a recorded value of $571. In addition, MediaOne Delaware redeemed a 10 5/8 percent senior subordinated note with a recorded value of $110, including a premium of $10. U S WEST financed both redemptions with floating-rate commercial paper. In June 1997, U S WEST acquired cable systems serving approximately 40,000 subscribers in Michigan for cash of $25 and the issuance of approximately $50 in liquidation value of U S WEST Series E Preferred Stock (the "Series E Preferred Stock"). The Series E Preferred Stock is redeemable at U S WEST's option beginning five years from the date of issuance. The stockholders have the right to elect cash upon redemption, or to convert their shares into Media Stock based on a predetermined formula. In 1996, U S WEST issued $254 of exchangeable notes, or Debt Exchangeable for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each such DECS will be exchanged by U S WEST for shares of common stock of Financial Security Assurance Holdings Ltd. ("FSA") held by U S WEST or, at U S WEST's option, redeemed at the cash equivalent. The capital assets segment currently holds approximately 42.1 percent of the outstanding FSA common stock. On October 29, 1996, U S WEST refinanced commercial paper through the issuance of 8.25 percent Preferred Securities totaling $480. The payment of interest and redemption amounts to holders of the Preferred Securities are fully and unconditionally guaranteed by U S WEST. In 1995, U S WEST issued $130 of DECS due December 31, 1998. Upon maturity, each such DECS will be exchanged by U S WEST for shares of Enhance Financial 45 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Services Group, Inc. ("Enhance") or, at U S WEST's option, redeemed at the cash equivalent. The capital assets segment currently holds approximately 29.2 percent of the outstanding Enhance common stock. During 1995, increases in debt were partially offset by reductions in debt related to the Media Group's investment in TWE and a refinancing of commercial paper by issuing $600 of 7.96 percent Preferred Securities. U S WEST refinanced $2.6 billion of commercial paper to take advantage of favorable long-term interest rates. In addition to the commercial paper, U S WEST Communications refinanced $145 of long-term debt. Excluding debt associated with the capital assets segment, U S WEST's percentage of debt to total capital at December 31, 1997, was 54.0 percent compared with 54.8 percent at December 31, 1996. Including debt associated with the capital assets segment, Preferred Securities and mandatorily redeemable preferred stock, U S WEST's percentage of debt to total capital was 58.9 percent at December 31, 1997 compared with 59.5 percent at December 31, 1996. The decrease in the percentage of debt to total capital in 1997 is primarily a result of decreased debt levels. U S WEST COMMUNICATIONS CREDIT RATINGS During the first quarter of 1997, Standard & Poor's lowered U S WEST Communications' senior unsecured debt rating from A+ to A as a result of a modified rating criteria implemented by Standard & Poor's to reflect the increased competitive telecommunications environment. In connection with U S WEST's announcement of the Separation, Standard & Poor's placed U S WEST Communications' senior unsecured debt on credit watch with positive implications and reaffirmed U S WEST Communications' commercial paper ratings, and Duff & Phelps reaffirmed U S WEST Communications' senior unsecured debt and commercial paper ratings. During the first quarter of 1998, Moody's downgraded U S WEST Communications' senior unsecured debt from Aa3 to A2 due to recent regulatory rulings and financial challenges associated with the Separation. See "Contingencies." U S WEST Communications' debt remains under review by Moody's for possible downgrade pending clarification of New U S WEST's corporate structure and future strategic initiatives. U S WEST Communications' current senior unsecured debt and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps are A2, A and AA-, and P1, A1 and D1+, respectively. U S WEST CAPITAL FUNDING, INC. AND PREFERRED SECURITIES CREDIT RATINGS As a result of the Separation announcement, the credit ratings for U S WEST Capital Funding, Inc. ("Capital Funding"), a wholly owned subsidiary of U S WEST, and for the Preferred Securities of U S WEST Financing I ("Financing I") and U S WEST Financing II ("Financing II"), wholly owned subsidiaries of U S WEST, are under review by Standard & Poor's (with negative implications), Moody's and Duff & Phelps. Senior debt at MediaOne Delaware was downgraded by Moody's from Baa2 to Baa3 and subordinated debt from Baa3 to Ba1, and is under review by Standard & Poor's, with negative implications. The MediaOne Delaware debt remains under review for further downgrading by Moody's. For all outstanding debt securities issued or guaranteed by U S WEST, U S WEST intends to take appropriate steps to preserve bondholder value in connection with the Separation. Capital Funding's senior unsecured debt and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps were Baa1, BBB+ and BBB+, and P2, A2, and D-2, respectively, at 46 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) December 31, 1997. The Preferred Securities' ratings by Moody's, Standard & Poor's, and Duff & Phelps were baa2, BBB+ and BBB, respectively, at December 31, 1997. OTHER ITEMS U S WEST commitments and debt guarantees associated with Media Group international and domestic investments totaled approximately $650 and $100, respectively, at December 31, 1997. In addition, a Media Group subsidiary guarantees debt, nonrecourse to U S WEST, associated with its international investment in the principal amount of approximately $600. U S WEST maintains a commercial paper program to finance short-term cash flow requirements, as well as to maintain a presence in the short-term debt market. In addition, U S WEST maintains lines of credit aggregating approximately $4.5 billion, all of which were available at December 31, 1997. Under registration statements filed with the Securities and Exchange Commission, as of December 31, 1997, U S WEST is permitted to issue up to approximately $900 of new debt securities. U S WEST from time to time engages in preliminary discussions regarding restructurings, dispositions and other similar transactions. Any such transaction may include, among other things, the transfer of certain assets, businesses or interests, or the incurrence or assumption of indebtedness, and could be material to the financial condition and results of operations of U S WEST. There is no assurance that any such discussions will result in the consummation of any such transaction. RISK MANAGEMENT U S WEST is exposed to market risks arising from changes in interest rates, foreign exchange rates and equity prices. Derivative financial instruments are used to selectively manage these risks. U S WEST does not use derivative financial instruments for trading purposes. INTEREST RATE RISK MANAGEMENT. The objective of the interest rate risk management program is to minimize the total cost of debt over time and the interest rate variability. This is achieved through the use of interest rate swaps, which adjust the ratio of fixed- to variable-rate debt. Approximately $270 of U S WEST's floating rate debt is exposed to changes in interest rates. Such exposure is primarily linked to the 30-day commercial paper rate. A hypothetical 10 percent change in the 30-day commercial paper rate would not have a material effect on the annual earnings of U S WEST. FOREIGN EXCHANGE RISK MANAGEMENT. U S WEST selectively enters into forward and option contracts to manage the market risks associated with fluctuations in foreign exchange rates after considering offsetting foreign exposures among international operations. The use of forward and option contracts allows U S WEST to fix or cap the cost of firm foreign investment commitments, the amount of foreign currency proceeds from sales of foreign investments, the repayment of foreign currency denominated receivables and the repatriation of dividends. The market values of the foreign exchange positions, including the hedging instruments, are continuously monitored and compared with predetermined levels of acceptable risk. All foreign exchange contracts have maturities of one year or less. The use of such contracts was limited in 1997 and as of December 31, 1997, the market value of foreign exchange contracts outstanding was not material. U S WEST is exposed to foreign exchange risk associated with its cash deposits and notes receivable and payable denominated in foreign currencies. As of December 31, 1997, Media Group has British pound-denominated notes receivable and cash deposits in the translated amount of $245, a Czech Koruna- 47 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) denominated note receivable and cash deposits in the translated amount of $50 and a Czech Koruna-denominated note payable in the translated amount of $17. A hypothetical adverse change of 10 percent in the British Pound and Czech Koruna exchange rates as compared with the U. S. dollar would reduce the market value of the cash deposits and notes receivable and payable by $28 as of December 31, 1997. EQUITY-PRICE RISK MANAGEMENT. U S WEST is exposed to market risks associated with fluctuations in equity security prices related to its investments in marketable equity securities. On a selective basis, U S WEST enters into option contracts to manage the market risks associated with fluctuations in equity security prices. At December 31, 1997, U S WEST had sold call options to complete exit strategies with regard to certain individual marketable equity securities. A hypothetical 10 percent decline in equity security prices related to U S WEST's combined position in marketable equity securities and option contracts would reduce the market value of the combined position at December 31, 1997, by $12. The changes in interest rates, foreign exchange rates and equity security prices are based on hypothetical movements in future market rates and are not necessarily indicative of actual results which may occur. Future gains and losses will be affected by actual changes in interest rates, foreign exchange rates and equity security prices and market exposures, and changes in derivative financial instruments employed during the year. EFFECTS OF THE SEPARATION, THE REFINANCING AND THE AIRTOUCH TRANSACTION The following discussion should be read in conjunction with the U S WEST unaudited pro forma condensed combined financial statements. In connection with the Separation, New U S WEST and MediaOne will seek to refinance certain indebtedness issued or guaranteed by U S WEST (the "U S WEST Indebtedness") through a combination of tender offers, prepayments, defeasance, consent solicitations and/or exchange offers (the "Refinancing"). At December 31, 1997, after giving effect to a reduction of $1.35 billion of indebtedness in connection with the AirTouch Transaction, the U S WEST Indebtedness totaled approximately $6.2 billion and included Preferred Securities of $1,080. As of February 20, 1998, the estimated cost of the Refinancing is $346 (net of income tax benefits of $231). In addition to refinancing costs, such costs include the difference between the market and face value of the U S WEST Indebtedness and a charge for unamortized debt issuance costs. The businesses comprising New U S WEST and Media Group's domestic wireless business generated operating cash flow during 1997 of approximately $4.6 billion. Upon consummation of the Separation, MediaOne will no longer have access to the operating cash flows of New U S WEST. As a result of the AirTouch Transaction, MediaOne no longer has access to the operating cash flows of the Media Group's domestic wireless business. Operating cash flows of MediaOne will consist primarily of the cash generated by its domestic cable business. MediaOne expects that its future cash needs, primarily associated with domestic cable capital expenditures ($1.6 billion in 1998) and debt service, will exceed cash generated from operations during the next several years. Additional financing will come primarily from a combination of new debt and the monetization of the securities received by Media Group from AirTouch in connection with the AirTouch Transaction. 48 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Following the Separation, Refinancing and AirTouch Transaction, total indebtedness of MediaOne will approximate $4,039. This represents a reduction of $10,639 as compared with total U S WEST indebtedness of $14,678 as of December 31, 1997. Such debt reduction is comprised of $5,715 related to the discontinuance of the businesses of New U S WEST, $3,831 related to the Refinancing, including the refinancing by New U S WEST of the Dex Indebtedness, and $1,354 related to the AirTouch Transaction. Also included are increases in debt of $243 for financing the costs of the Refinancing and Separation and $18 for financing the costs of the AirTouch Transaction. As a result, the ratio of total debt to earnings before interest, taxes, depreciation, amortization and other ("EBITDA") for MediaOne will be approximately 5.4x. Including the Preferred Securities, such ratio would be 6.8x. Following the Separation, Refinancing and AirTouch Transaction, annual interest expense of MediaOne will approximate $299. This represents a reduction of $784 as compared with total U S WEST annual interest expense of $1,083 during 1997. Such interest expense reduction is comprised of $405 related to the discontinuance of the businesses of New U S WEST, $304 related to the Refinancing, including the refinancing by New U S WEST of the Dex Indebtedness, and $90 related to the AirTouch Transaction. Also included is an increase in interest expense of $15 for financing the costs of the Refinancing and Separation. U S WEST intends to take appropriate actions to monetize the shares of AirTouch preferred stock and AirTouch common stock which it received in the AirTouch Transaction. Under the terms of the AirTouch Transaction, U S WEST and AirTouch entered into an investment agreement, pursuant to which AirTouch has agreed to provide to U S WEST registration rights with respect to the shares of AirTouch preferred stock and AirTouch common stock which it received in the AirTouch Transaction and to assist U S WEST in the monetization of such shares. The market value of such shares was approximately $4.4 billion upon consummation of the AirTouch Transaction. U S WEST believes that the consummation of the AirTouch Transaction will likely improve the credit rating to be assigned to MediaOne in the Separation. MediaOne's access to the capital markets and the cost of financing available to it will depend on its post-Separation credit rating. MediaOne's management anticipates that such credit rating, although lower than the current credit rating of U S WEST, will allow MediaOne sufficient ability to access the capital markets. In conjunction with the Refinancing, management expects that the increase in the cost of debt associated with the anticipated lower credit rating will be offset by a reduction in the market rate of interest on the refinanced debt as compared with the historical rates on U S WEST debt. CONTINGENCIES COMMUNICATIONS GROUP At U S WEST Communications, there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. WASHINGTON. In 1996, the WUTC acted on U S WEST Communications' 1995 rate request. U S WEST Communications had sought to increase revenues by raising rates primarily for basic residential services over a four-year period. Instead of granting U S WEST Communications' request, the WUTC ordered $91.5 in annual net revenue reductions, effective May 1, 1996. On December 24, 1997, the Washington State Supreme Court upheld the WUTC ruling. The Washington State Supreme Court's ruling resulted in an estimated liability for the revenues that were collected subject to refund from May 1, 1996 through December 31, 1997, including interest, in the amount 49 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of $225. The prospective revenue reduction as a result of this ruling approximates $115 annually, which includes the effects of business growth. In a separate action, the WUTC authorized a rate increase of approximately $60 annually that partially mitigates the effect of the Washington State Supreme Court's ruling. Tariffs implementing both orders became effective February 1, 1998. OREGON. On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a stipulation terminating prematurely U S WEST Communications' alternative form of regulation ("AFOR") plan, and it then undertook a review of U S WEST Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications to reduce its annual revenues by $97, effective May 1, 1997, and to issue a one-time refund, including interest, of approximately $102 to reflect the revenue reduction for the period May 1, 1996 through April 30, 1997. The one-time refund is for interim rates which became subject to refund when U S WEST Communications' AFOR plan was terminated on May 1, 1996. U S WEST Communications filed an appeal of the order and asked for an immediate stay of the refund with the Oregon Circuit Court for the County of Marion (the "Oregon Circuit Court") which granted U S WEST Communications' request for a stay, pending a full review of the OPUC's order. On February 19, 1998, the Oregon Circuit Court entered a judgment in U S WEST Communications' favor on most of the appealed issues. The OPUC has announced its intent to appeal. The potential exposure, including interest, at December 31, 1997, is not expected to exceed $180. UTAH. In another proceeding, the Utah Supreme Court has remanded a Utah Public Service Commission ("UPSC") order to the UPSC for hearing, thereby establishing two exceptions to the rule against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2) misconduct. The UPSC's initial order denied a refund request from IXCs and other parties related to the Tax Reform Act of 1986. The potential exposure, including interest, at December 31, 1997, is not expected to exceed $160. STATE REGULATORY ACCRUALS. U S WEST Communications has accrued $348 at December 31, 1997, which represents its estimated liability for all state regulatory proceedings, predominately the items discussed above. Approximately $225 of the total estimated liability was recognized during fourth-quarter 1997. It is possible that the ultimate liability could exceed the recorded liability by an amount up to approximately $230. U S WEST Communications will continue to monitor and evaluate the risks associated with its local regulatory jurisdictions, and will adjust estimates as new information becomes available. MEDIA GROUP Prior to April 6, 1998, Media Group and AirTouch were parties to a multi-phased joint venture (the "AirTouch Joint Venture") pursuant to which they had agreed to combine their domestic cellular businesses. In February 1997, the King County Superior Court in Washington state ruled that a subsidiary of Media Group violated the terms of its partnership agreement with its minority partners in the Seattle cellular partnership by entering into the AirTouch Joint Venture. Similar litigation was filed in other jurisdictions regarding other cellular partnerships by the same minority partner that brought the Seattle litigation. On December 1, 1997, this minority partner announced it was selling its minority interests in the eight cellular properties where it was a partner with a Media Group subsidiary to AirTouch. As a result of the minority partner's actions, litigation in the states of Washington, Arizona, Colorado, Minnesota, Idaho and Delaware has now been stayed or dismissed pending consummation of the transfer of the minority partner's interest to AirTouch. The AirTouch Transaction, which was entered into in lieu of the AirTouch Joint Venture, was consummated on April 6, 1998. 50 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COMPETITIVE AND REGULATORY ENVIRONMENT COMMUNICATIONS GROUP--COMPETITIVE ENVIRONMENT The Communications Group faces competition in the local exchange business, exchange access and intraLATA long-distance markets, primarily from IXCs, competitive local exchange carriers ("CLECs") and competitive access providers ("CAPs"). CLECs and CAPs compete with the Communications Group by providing customers with network services that connect to carrier facilities or other business locations within a serving LATA. IXCs compete with the Communications Group by providing intraLATA long-distance services. Such competition is eroding U S WEST Communications' market share of intraLATA long-distance services, including Wide Area Telephone Service and "800" services. IXCs are competing in this area by offering lower prices and packaging these services on an intraLATA and interLATA basis. The Telecommunications Act has altered the competitive landscape of the telecommunications industry by permitting competition among local telephone companies, long-distance companies and cable companies. As a result, it is expected that additional competitors will be introduced into the Communications Group's markets who will offer services similar to those offered by the Communications Group, including local exchange services. The Communications Group believes that these competitors have initially targeted high-volume business customers in densely populated urban areas and will selectively pursue business in smaller communities. The resulting loss of local service customers could affect multiple revenue streams and could have a material, adverse effect on the Communications Group's operations. Court and state regulatory commission deliberations on interconnection rates and newly issued FCC rules on interstate access pricing could also result in significant changes in revenues received from carriers. The wireless services being introduced by the Communications Group will face competition from the two cellular providers in each of the markets in which it operates as well as from the other providers of PCS services in such markets. The high-speed data and Internet access services offered by the Communications Group face competition from LECs, IXCs, Internet service providers and other providers of data services in the Communications Group's markets. Technological advancements will also increase competition in the future. New competitive carriers that are affiliates of cable television companies and power companies are expected to play a greater role in offering local exchange services. In addition to local exchange services, competitors are expected to offer services that will compete with those U S WEST Communications offers and plans to offer, including video programming and high-speed data and Internet services. The Communications Group expects to counter the competition by expanding services to include new retail as well as wholesale markets. Recently introduced service offerings include PCS, high-speed data and Internet services, and interconnection services provided for competing providers of local services. Planned future service offerings include interLATA long-distance services as the regulatory environment permits, while interconnection services will be expanded. See "Communications Group--Regulatory Environment." Management believes that the Communications Group's ability to bundle local, long-distance, PCS and other services will provide a significant opportunity to compete by offering one-stop shopping with a package of services similar to those that can be offered by IXCs and CLECs. COMMUNICATIONS GROUP--REGULATORY ENVIRONMENT THE TELECOMMUNICATIONS ACT OF 1996. Under the Telecommunications Act, the RBOCs are permitted to provide interLATA long-distance services by opening their local networks to facilities-based competition and satisfying a detailed list of 51 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) requirements, including providing interconnection and number portability. The Telecommunications Act also reaffirms the concept of universal service and directs the FCC and state regulators to determine universal service funding policy. The FCC and state regulators have been given the responsibility to interpret and oversee implementation of large portions of the Telecommunications Act. On December 31, 1997, the U. S. District Court for the Northern District of Texas (the "U. S. District Court") declared that the restrictions placed on RBOCs relating to the provision of in-region interLATA long-distance services were unconstitutional and discriminatory. The FCC, the Department of Justice, AT&T and other IXCs requested the U. S. District Court to stay its order pending a full review and appealed the U. S. District Court's order to the Fifth Circuit Court of Appeals. On February 11, 1998, the U. S. District Court issued a stay of the order while denying a separate request from IXCs to prevent the RBOCs from preparing to sell interLATA long-distance service. As a result of the U. S. District Court's ruling, absent reversal, U S WEST intends to offer interLATA long-distance services in the Region in 1998. INTERCONNECTION The FCC issued an order (the "FCC Order") in August of 1996 establishing a framework of rules that enable the states and the FCC to implement the local competition provisions of the Telecommunications Act. The FCC Order established interconnection costing and pricing rules which, from U S WEST's perspective, significantly impeded negotiations with new entrants to the local exchange market, state public policy interconnection rulemakings, and interconnection arbitration proceedings. U S WEST appealed the FCC Order and sought a stay of certain of its provisions, including certain pricing provisions, pending appellate review. On July 18, 1997, the Eighth Circuit Court of Appeals (the "Eighth Circuit") vacated significant portions of the FCC Order. Most significantly, the Eighth Circuit ruled that jurisdiction over local interconnection prices rests with the states, not the FCC. The Eighth Circuit also determined that the Telecommunications Act does not require LECs to provide "superior" service to their competitors or to "rebundle" network elements for their competitors. The effect of the Eighth Circuit's decision is to have interconnection and unbundled network element pricing be resolved through negotiations or state commission arbitration proceedings. Some of the FCC's unbundling rules, as well as its "pick and choose" provisions, were also vacated by the Eighth Circuit. The Eighth Circuit is also reviewing the FCC's August 1997 order that required shared transport be made available in combination with local switching as an unbundled element. This review is pending. On October 14, 1997, the Eighth Circuit clarified that incumbent telecommunications providers are not required to make rebundled service offerings available to competitors at unbundled element pricing. This decision substantially reduces new entrants' ability to arbitrage between resale of finished services and the pricing of unbundled network elements. On January 26, 1998, the U. S. Supreme Court agreed to review the Eighth Circuit decision. Interconnection proceedings throughout local regulatory jurisdictions are continuing. U S WEST Communications has secured approximately 220 interconnection agreements with 85 carriers as of December 31, 1997. At December 31, 1997, U S WEST Communications had completed or settled over 85 state arbitrations. U S WEST Communications advocates that LECs have the right for timely recovery of the full costs of providing interconnection services and that they must not be placed at a competitive disadvantage if local and long-distance markets are opened to competition at different times. U S WEST Communications is aggressively defending its views in arbitration proceedings and, when necessary, in the 52 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) courts. U S WEST Communications cannot provide assurance that it will be able to fully recover its costs related to providing interconnection services. NUMBER PORTABILITY The FCC has established a schedule for deployment of number portability during 1998 that includes 10 markets in the Region. The FCC is in the final stages of issuing its cost recovery rules as required by the Telecommunications Act. U S WEST Communications will seek cost recovery of expenses of providing number portability through state rate-making proceedings and interconnection cost recovery dockets, if necessary. U S WEST Communications expects its estimated costs for deployment of number portability to be significant over the next few years. Due to legal and regulatory uncertainties, U S WEST Communications cannot provide assurance that one-time costs of deploying number portability and other interconnection related costs will be recovered. UNIVERSAL SERVICE, ACCESS REFORM AND PRICE CAP ORDER On May 7, 1997, the FCC announced three decisions that established rules to implement the Universal Service provisions of the Telecommunications Act (the "Universal Service Order"), as well as the Access Reform Order and the Price Cap Order. UNIVERSAL SERVICE. Under the Universal Service Order, all providers of interstate telecommunications services will contribute to universal service funding, which will be based on retail telecommunications revenues. The Universal Service Order deferred establishing, until January 1, 1999, a new explicit mechanism to support high-cost service in areas served by non-rural telephone companies such as U S WEST Communications. Until the explicit mechanism is put in place, the existing universal service support mechanisms were left intact, except to the extent modified by the FCC's Access Reform and Price Cap Orders discussed below. The FCC's Universal Service Order also includes the establishment of two separate funds to help connect: 1) eligible schools and libraries, and 2) rural health care providers to the global telecommunications network. These funds were initially capped at $2.25 billion and $400, respectively. The FCC has now directed that these funds be phased in during 1998. Additionally, the FCC reduced the funding amount for the first six months of 1998 by approximately 50 percent. On July 17, 1997, U S WEST filed a petition with the FCC for reconsideration and clarification of certain issues in the Universal Service Order. Among other things, U S WEST requested the FCC to reconsider: (i) establishing a national fund to ensure high-cost support is sufficient and (ii) assessing contributions as explicit end-user surcharges. Appeals of other issues addressed by the Universal Service Order have been filed by various other companies. ACCESS REFORM. In its Access Reform Order, the FCC has ordered a substantial restructuring of interstate access pricing. A significant portion of the services that had been charged using minutes-of-use pricing will now be charged using a combination of minutes-of-use rates, flat-rate presubscribed interexchange carrier charges ("PICCs") and subscriber line charges ("SLCs"). Although an increase in the SLC to multi-line business users occurred on July 1, 1997, the bulk of the mandated pricing changes occurred on January 1, 1998. Additional mandated pricing changes will also occur on each January 1 of 1999 through 2001. The net effect of these changes will be to decrease minutes-of-use charges up to 60 percent and increase flat-rate charges (i.e., PICCs and SLCs). The Access Reform Order, coupled with the 53 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Price Cap Order, will over time, significantly reduce the revenues U S WEST derives from interstate access charges. The Access Reform Order also continued in place the current rules by which incumbent LECs may not assess interstate access charges on information service providers and purchasers of unbundled network elements. The FCC will separately address issues surrounding information service providers' usage of the public switched network in a related notice of inquiry. U S WEST and other incumbent LECs have appealed the Access Reform Order. U S WEST's primary challenge is that the FCC acted unlawfully by exempting purchasers of unbundled network elements from payment of interstate access charges, while not providing for the immediate replacement of subsidies contained within those same access charges. U S WEST's position is that the new access charge structure is contrary to the universal service provisions of the Telecommunications Act and fails to make subsidies explicit. This case is pending in the Eighth Circuit and was argued on January 15, 1998. PRICE CAP ORDER. U S WEST's interstate services have been subject to price cap regulation since January 1991. Price caps are an alternative form of regulation designed to limit prices rather than profits. The FCC's previous price cap plan included sharing of earnings in excess of authorized levels. The price cap index for most services was subject to annual adjustments for inflation, productivity level and exogenous costs. The previous price cap plan provided for three productivity options, including a no-sharing option, and for increased flexibility for adjusting prices downward in response to competition. The FCC's May 1997 Price Cap Order required LECS that were subject to price cap regulation to increase their price cap index productivity factor to 6.5 percent. The order eliminated the lower productivity factor options ( i.e., 4.0 percent and 4.7 percent) that required sharing of earnings above a specified level. The order further required LECs that were subject to price cap regulation to set their 1997 price cap index assuming that the 6.5 percent factor had been in effect at the time of the 1996 tariff filing. Under the FCC's previous price cap plan, U S WEST Communications had elected the lowest productivity factor resulting in U S WEST Communications remaining subject to sharing requirements for the first half of 1997. On June 26, 1997, the FCC granted U S WEST Communications' request for a waiver of the price cap sharing rules for the first half of 1997, resulting in a one-time exogenous cost adjustment of $22, reflected in the consolidated financial statements as a reduction of 1997 interstate access revenues. The access rate reductions in U S WEST Communications' 1997 interstate access tariff filing as determined under the Price Cap Order, which have an on-going annual revenue impact of $160, are being reflected through lower interstate rates over twelve months beginning July 1, 1997. On June 23, 1997, U S WEST petitioned the Tenth Circuit Court of Appeals (the "Tenth Circuit") for a review of the Price Cap Order. The Tenth Circuit has transferred review of the Price Cap Order to the District of Columbia Court of Appeals. Among other things, U S WEST and other appellants are requesting the District of Columbia Court of Appeals to review the use of a 6.5 percent productivity factor and the retroactive application of the 6.5 percent productivity factor to July 1, 1996 when determining the price cap index for the 1997 price cap filing. This case will be heard in 1998. Due to legal and regulatory uncertainties, the impact of the Telecommunications Act on U S WEST's future results remains unclear. 54 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MEDIA GROUP COMPETITIVE AND REGULATORY ENVIRONMENT CABLE AND BROADBAND. The Media Group's cable television systems generally compete for viewer attention with other providers of video programming, including DBS systems, multipoint multichannel distributions services ("MMDS") systems, local multipoint distribution services ("LMDS") systems, satellite master antenna service ("SMATV") systems and other cable companies providing services in areas where the Media Group operates. In addition, certain LECs, including RBOC's, are beginning to offer video programming in competition with the Media Group's cable services. In the past, federal cross-ownership restrictions have limited entry by LEC's into the cable television business. The Telecommunications Act has eliminated many of these barriers, thereby enhancing the ability of LEC's to provide video programming in competition with the Media Group. The cable television services offered by the Media Group also face competition for viewers and advertising from other communications and entertainment media, including off-air television broadcasting services, movie theaters, video tape rentals and live sporting events. The competition faced by the Media Group's cable systems may increase in the future with the development and growth of new technologies. As the Media Group begins to offer additional services over its hybrid fiber-coax ("HFC") networks, the Company will face additional competition. Telephone services offered by the Media Group will face competition from other providers of local exchange services, including RBOC's, LEC's, IXCs and other providers of local exchange services. The degree of competition will be dependent upon the state and federal regulations concerning entry, interconnection requirements and the degree of unbundling of the LEC's networks. Competition will be based upon price, service quality and breadth of services offered. Internet access and high-speed data services offered by MediaOne compete with other providers of such services, including LEC's, IXCs, Internet service providers ("ISPs") and other on-line service providers. The products and services of the Media Group are subject to varying degrees of regulation. Under the Telecommunications Act, the regulation of all but basic tier cable rates will be discontinued effective March 31, 1999, or earlier if competition exists. The Telecommunications Act also (i) eliminates certain cross-ownership restrictions among cable operations, broadcasters and MMDS operations, (ii) removed barriers to competition with LEC's, and (iii) eliminated restrictions that previously applied to the Media Group relating to long-distance services. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") authorizes the FCC to set standards for governmental authorities to regulate the rates for certain cable television services, except for services offered on a per-channel or per-program basis, and equipment. Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a series of rate regulations. The FCC also publicly announced that it would consider "social contracts" as an alternative form of rate regulation for cable operators. Continental's social contract with the FCC was adopted by the FCC on August 3, 1995 and amended on August 21, 1996 and July 3, 1997 to include certain systems acquired by Continental. The social contract is a six-year agreement covering most of Continental's franchises, including those that were unregulated, and settled Continental's cost of service rate cases and benchmark cable programming service tier rate cases for the covered systems. Benchmark basic service tier rate cases in the covered systems are subject to review by local franchise authorities. As part of the resolution, Continental agreed to, among other things, invest at least $1.7 billion in domestic system rebuilds and upgrades through the year 2000 to expand channel capacity and improve system reliability and picture quality. At December 31, 1997, the investment commitment has been substantially met. Under the social contract, Continental also reduced its basic service tier rates for most of the subscribers covered by the social contract. These reductions were offset by a revenue neutral increase in cable programming service 55 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) tier rates. The social contract allows for the funding of system rebuilds and upgrades by increasing cable programming service tier rates annually by one dollar per subscriber from 1997 through 1999 in most franchises, and from 1996 through 1999 for the systems incorporated under the 1996 amendment to the social contract. Rate adjustments are also allowed for inflation and external costs such as programming. The social contract also provides that, if the laws and regulations applicable to services offered in any Continental franchise change in a manner that would have a material favorable financial impact on Continental, Media Group may petition the FCC to terminate the social contract. Cable television systems are also subject to local regulation, typically imposed through the franchising process. Local officials may be involved in the initial franchise selection, system design and construction, safety, rate regulation, customer service standards, billing practices, community-related programming and services, franchise renewal and imposition of franchise fees. DIRECTORY AND INFORMATION SERVICES. Information services may face emerging competition in the provision of interactive services from cable and entertainment companies, on-line services and other information providers. Directory listings are being offered via electronic databases through telephone company and third party networks. As such offerings expand and are enhanced through interactivity and other features, the directory publishing businesses may experience heightened competition. INTERNATIONAL. Media Group's international broadband and wireless communications businesses also face competition in their respective markets. Telewest's cable television services compete with broadcast television stations, DBS services, satellite master antenna service systems and certain narrowband operators in the United Kingdom. Telewest's telecommunications services compete with domestic telephone companies in the United Kingdom, such as British Telecommunications plc. One 2 One competes with two cellular operators and one PCS operator in the United Kingdom. Competition is based upon price, geographic coverage and the quality of the services offered. YEAR 2000 COSTS COMMUNICATIONS GROUP During 1997 the Communications Group conducted a comprehensive review of its computer systems and related software to ensure systems properly recognize the year 2000 and continue to process data. The systems evaluated include all internal systems and those that manage the public switched network. This evaluation includes the Communications Group's significant vendors in determining the impact on the Communications Group if those third parties fail to remediate their own year 2000 issues. Based on its internal assessment, the Communications Group has determined that it will have to modify or replace certain portions of its internal use software, whether developed by U S WEST or provided by a third party. For public network software, there are central office and remote switches from a variety of vendors in addition to interoffice and loop transport equipment that also require conversion. To date, inventory is complete for all major network elements, compliance standards have been published and key vendors have agreed to compliance dates. Detailed plans for the year 2000 project for all systems have been completed and conversion activity is underway. The estimated remaining costs of the related projects approximate $150 through 1999. Management's estimate of the costs and completion dates of the year 2000 project are dependent on various factors including availability of skilled resources, the ability to locate and modify all relevant software code and vendor compliance. The Communications Group cannot provide assurance that actual results will not 56 U S WEST, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) differ from management's estimates. Failure to complete the project in a timely or complete manner, or within its estimate of project costs, could have a material impact on future results of operations. MEDIA GROUP Media Group uses software and related technologies throughout its businesses that will be affected by the date change in the year 2000. Media Group has established accountabilities and priorities for addressing the issue. Media Group is now in the process of finalizing its assessment of the impact of the year 2000 date change on its operations. An internal study is underway to determine the full scope of the issue and related costs. Media Group's assessment should be complete in mid-1998. Media Group anticipates that costs related to year 2000 remediation will begin to be incurred in 1998. NEW ACCOUNTING STANDARDS In 1997, U S WEST adopted SFAS No. 128, "Earnings Per Share." This accounting standard specifies new computation, presentation and disclosure requirements for earnings per share to be applied retroactively. SFAS No. 128 requires, among other things, presentation of basic and diluted earnings per common share on the face of the income statement. In 1998, U S WEST will adopt SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 requires that the components and total amount of comprehensive income be displayed in the financial statements for interim and annual periods beginning in 1998. Comprehensive income includes net income and all changes in equity during a period that arise from nonowner sources, such as foreign currency items and unrealized gains and losses on certain investments in equity securities. SFAS No. 131 requires, among other things, the reporting of detailed operating segment information of an enterprise for annual periods beginning in 1998 and for interim periods beginning in 1999. Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued in March 1998. SOP 98-1, among other things, requires that certain costs of internal use software, whether purchased or developed internally, be capitalized and amortized over the estimated useful life of the software. Adoption of SOP 98-1 is required as of January 1, 1999, but earlier adoption is allowed. U S WEST is currently evaluating the impact of SOP 98-1 and believes that it could initially have a significant impact upon results of operations. 57 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareowners of U S WEST, Inc.: We have audited the accompanying Consolidated Balance Sheets of U S WEST, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related Consolidated Statements of Operations and Cash Flows for the years then ended. These consolidated financial statements and the Supplementary Selected Proportionate Results of Operations referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and supplementary information based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U S WEST, Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. We have also audited the Supplementary Selected Proportionate Results of Operations for the years ended December 31, 1997 and 1996, presented on page 116. The Supplementary Selected Proportionate Results of Operations have been prepared by management to present relevant financial information that is not provided by the consolidated financial statements and is not intended to be a presentation in conformity with generally accepted accounting principles. In our opinion, the Supplementary Selected Proportionate Results of Operations referred to above fairly states, in all material respects, the information set forth therein on the basis of accounting described on page 116. ARTHUR ANDERSEN LLP Denver, Colorado, February 12, 1998 (except with respect to the matter discussed in Note 21 as to which the date is April 6, 1998). 58 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of U S WEST, Inc.: We have audited the accompanying Consolidated Statements of Operations and Cash Flows of U S WEST, Inc. for the year ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations of U S WEST, Inc. and its cash flows for the year ended December 31, 1995, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Denver, Colorado February 12, 1996 59 REPORT OF MANAGEMENT The Consolidated Financial Statements of U S WEST have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The integrity and objectivity of information in these financial statements, including estimates and judgments, are the responsibility of management, as is all other financial information included in this report. U S WEST maintains a system of internal accounting controls designed to provide reasonable assurance as to the integrity and reliability of financial statements, the safeguarding of assets and the prevention and detection of material errors or fraudulent financial reporting. Monitoring of such systems includes an internal audit program designed to objectively assess the effectiveness of internal controls and recommend improvements therein. Limitations exist in any system of internal accounting controls based upon the recognition that the cost of the system should not exceed the benefits derived. U S WEST believes that the Company's system does provide reasonable assurance that transactions are executed in accordance with management's general or specific authorizations and is adequate to accomplish the stated objectives. The independent certified public accountants, whose reports are included herein, were engaged to express an opinion on our Consolidated Financial Statements. Their opinions are based on procedures performed in accordance with generally accepted auditing standards, including examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. In an attempt to assure objectivity, the financial information contained in this report is subject to review by the Audit Committee of the Board of Directors. The Audit Committee is composed of outside directors who meet regularly with management, internal auditors and independent auditors to review financial reporting matters, the scope of audit activities and the resolution of audit findings. Richard D. McCormick CHAIRMAN AND CHIEF EXECUTIVE OFFICER Michael P. Glinsky EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER February 12, 1998 60 U S WEST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- DOLLARS IN MILLIONS Sales and other revenues......................................................... $ 15,235 $ 12,911 $ 11,746 Operating expenses: Employee-related expenses...................................................... 4,917 4,412 4,071 Other operating expenses....................................................... 3,617 2,671 2,323 Taxes other than income taxes.................................................. 475 429 416 Depreciation and amortization.................................................. 3,420 2,544 2,291 --------- --------- --------- Total operating expenses..................................................... 12,429 10,056 9,101 --------- --------- --------- Operating income................................................................. 2,806 2,855 2,645 Interest expense................................................................. (1,083) (612) (527) Equity losses in unconsolidated ventures......................................... (909) (346) (207) Gains on asset sales: Investments.................................................................... 474 -- -- Rural telephone exchanges...................................................... 77 59 136 Merger of joint venture interest............................................... -- -- 157 Guaranteed minority interest expense............................................. (87) (55) (14) Other expense--net............................................................... (56) (61) (36) --------- --------- --------- Income before income taxes, extraordinary items and cumulative effect of change in accounting principle........................................................ 1,222 1,840 2,154 Provision for income taxes....................................................... (522) (696) (825) --------- --------- --------- Income before extraordinary items and cumulative effect of change in accounting principle...................................................................... 700 1,144 1,329 Extraordinary items--early extinguishment of debt--net of tax.................... (3) -- (12) --------- --------- --------- Income before cumulative effect of change in accounting principle................ 697 1,144 1,317 Cumulative effect of change in accounting principle--net of tax.................. -- 34 -- --------- --------- --------- NET INCOME....................................................................... $ 697 $ 1,178 $ 1,317 --------- --------- --------- --------- --------- --------- Dividends on preferred stock..................................................... (52) (9) (3) --------- --------- --------- EARNINGS AVAILABLE FOR COMMON STOCK.............................................. $ 645 $ 1,169 $ 1,314 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the Consolidated Financial Statements. 61 U S WEST, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- IN THOUSANDS (EXCEPT PER SHARE AMOUNTS) COMMUNICATIONS GROUP BASIC EARNINGS PER COMMON SHARE: (See Note 16) Income before extraordinary items and cumulative effect of change in accounting principle.................................................................... $ 2.44 $ 2.55 $ 2.52 Extraordinary items--early extinguishment of debt.............................. (0.01) -- (0.02) Cumulative effect of change in accounting principle............................ -- 0.07 -- --------- --------- --------- COMMUNICATIONS GROUP BASIC EARNINGS PER COMMON SHARE............................. $ 2.43 $ 2.62 $ 2.50 --------- --------- --------- --------- --------- --------- COMMUNICATIONS GROUP BASIC AVERAGE COMMON SHARES OUTSTANDING..................... 482,751 477,549 470,716 --------- --------- --------- --------- --------- --------- COMMUNICATIONS GROUP DILUTED EARNINGS PER COMMON SHARE: (See Note 16) Income before extraordinary items and cumulative effect of change in accounting principle.................................................................... $ 2.42 $ 2.51 $ 2.48 Extraordinary items--early extinguishment of debt.............................. (0.01) -- (0.02) Cumulative effect of change in accounting principle............................ -- 0.07 -- --------- --------- --------- COMMUNICATIONS GROUP DILUTED EARNINGS PER COMMON SHARE........................... $ 2.41 $ 2.58 $ 2.46 --------- --------- --------- --------- --------- --------- COMMUNICATIONS GROUP DILUTED AVERAGE COMMON SHARES OUTSTANDING................... 491,232 488,591 481,933 --------- --------- --------- --------- --------- --------- MEDIA GROUP BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE: (See Note 16) Income (loss) before extraordinary item........................................ $ (0.88) $ (0.16) $ 0.30 Extraordinary item--early extinguishment of debt............................... -- -- (0.01) --------- --------- --------- MEDIA GROUP BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE................... $ (0.88) $ (0.16) $ 0.29 --------- --------- --------- --------- --------- --------- MEDIA GROUP BASIC AVERAGE COMMON SHARES OUTSTANDING.............................. 606,749 491,924 470,549 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the Consolidated Financial Statements. 62 U S WEST, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- 1997 1996 --------- --------- DOLLARS IN MILLIONS ASSETS Current assets: Cash and cash equivalents................................................................. $ 211 $ 201 Accounts and notes receivable, less allowance for credit losses of $136 and $125, respectively................................................... 2,249 2,113 Inventories and supplies.................................................................. 179 159 Deferred directory costs.................................................................. 257 259 Deferred tax asset........................................................................ 373 213 Prepaid and other......................................................................... 130 167 --------- --------- Total current assets........................................................................ 3,399 3,112 Property, plant and equipment--net.......................................................... 18,580 18,281 Investment in Time Warner Entertainment..................................................... 2,486 2,477 Net investment in international ventures.................................................... 475 1,548 Net investment in assets held for sale...................................................... 419 409 Intangible assets--net...................................................................... 12,674 12,595 Other assets................................................................................ 1,707 2,433 --------- --------- Total assets................................................................................ $ 39,740 $ 40,855 --------- --------- --------- ---------
The accompanying notes are an integral part of the Consolidated Financial Statements. 63 U S WEST, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, -------------------- 1997 1996 --------- --------- DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS) LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt........................................................................... $ 1,430 $ 1,051 Accounts payable.......................................................................... 1,751 1,316 Due to Continental Cablevision shareowners................................................ -- 1,150 Employee compensation..................................................................... 521 470 Dividends payable......................................................................... 268 263 Deferred revenues and customer deposits................................................... 444 379 Other..................................................................................... 1,901 1,445 --------- --------- Total current liabilities................................................................... 6,315 6,074 Long-term debt.............................................................................. 13,248 14,300 Postretirement and other postemployment benefit obligations................................. 2,570 2,479 Deferred income taxes....................................................................... 4,068 4,349 Unamortized investment tax credits.......................................................... 168 173 Deferred credits and other.................................................................. 867 800 Commitments and contingencies Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures...................................................... 1,080 1,080 Preferred stock subject to mandatory redemption............................................. 100 51 Shareowners' equity: Series D Preferred Stock--$1.00 per share par value, 20,000,000 shares authorized, 19,999,478 shares issued and outstanding................................................ 923 920 Common shares-- Communications Stock--$0.01 per share par value, 2,000,000,000 shares authorized, 484,522,015 and 480,460,536 issued, 484,515,415 and 480,457,336 outstanding, respectively.......................................................................... Media Stock--$0.01 per share par value, 2,000,000,000 shares authorized, 626,565,410 and 624,782,710 issued, 607,807,934 and 608,863,327 outstanding, respectively............. 10,876 10,741 Retained earnings (deficit)............................................................... (334) 18 LESOP guarantee........................................................................... (46) (91) Foreign currency translation adjustments.................................................. (95) (39) --------- --------- Total shareowners' equity................................................................... 11,324 11,549 --------- --------- Total liabilities and shareowners' equity................................................... $ 39,740 $ 40,855 --------- --------- --------- ---------
The accompanying notes are an integral part of the Consolidated Financial Statements. 64 U S WEST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- DOLLARS IN MILLIONS OPERATING ACTIVITIES Net income...................................................................... $ 697 $ 1,178 $ 1,317 Adjustments to net income: Depreciation and amortization................................................. 3,420 2,544 2,291 Equity losses in unconsolidated ventures...................................... 909 346 207 Gains on asset sales: Rural telephone exchanges................................................... (77) (59) (136) Merger of joint venture interest............................................ -- -- (157) Investments................................................................. (474) -- -- Cumulative effect of change in accounting principle........................... -- (34) -- Deferred income taxes and amortization of investment tax credits.............. (164) 18 274 Changes in operating assets and liabilities: Restructuring payments........................................................ (70) (242) (334) Postretirement medical and life costs, net of cash fundings................... 90 39 (24) Accounts and notes receivable................................................. (138) (56) (169) Inventories, supplies and other current assets................................ (104) 31 (79) Accounts payable and accrued liabilities...................................... 782 225 45 Other--net...................................................................... 295 40 185 --------- --------- --------- Cash provided by operating activities........................................... 5,166 4,030 3,420 --------- --------- --------- INVESTING ACTIVITIES Expenditures for property, plant and equipment.................................. (3,690) (3,071) (2,825) Payment to Continental Cablevision shareowners.................................. (1,150) -- -- Investments in international ventures........................................... (325) (243) (681) Proceeds from sales of investments.............................................. 1,883 -- -- Proceeds from disposals of property, plant and equipment........................ 98 189 201 Cash from net investment in assets held for sale................................ 231 213 -- Other--net...................................................................... (347) (136) (201) --------- --------- --------- Cash (used for) investing activities............................................ (3,300) (3,048) (3,506) --------- --------- --------- FINANCING ACTIVITIES Net proceeds from (repayments of) short-term debt............................... (4,195) 3,987 (1,281) Repayments of long-term debt.................................................... (824) (4,699) (1,058) Proceeds from issuance of Preferred Securities--net............................. -- 465 581 Proceeds from issuance of long-term debt........................................ 4,152 383 2,732 Proceeds from issuance of common stock.......................................... 106 136 87 Purchases of treasury stock..................................................... (53) (297) (63) Dividends paid on common and preferred stock.................................... (1,042) (948) (929) --------- --------- --------- Cash (used for) provided by financing activities................................ (1,856) (973) 69 --------- --------- --------- CASH AND CASH EQUIVALENTS Increase (decrease)............................................................. 10 9 (17) Beginning balance............................................................... 201 192 209 --------- --------- --------- Ending balance.................................................................. $ 211 $ 201 $ 192 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the Consolidated Financial Statements. 65 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NOTE 1: RECAPITALIZATION PLAN In 1995, U S WEST divided its businesses into two groups: the Communications Group and the Media Group and created two separate classes of common stock under the 1995 Recapitalization. One class of stock, the Communications Stock, reflects the performance of the communications businesses comprising the Communications Group, and the other class of stock, the Media Stock, reflects the performance of the multimedia businesses comprising the Media Group. Effective November 1, 1995, each share of common stock of U S WEST was converted into one share each of Communications Stock and Media Stock. The Communications Group is comprised of U S WEST Communications, U S WEST Communications Services, Inc., U S WEST Federal Services, Inc., U S WEST Advanced Technologies, Inc., U S WEST Business Resources, Inc., U S WEST Long Distance, Inc. and U S WEST Information Technologies, Inc. Primary services provided include telecommunications services for more than 25 million residential and business customers in the Communications Group's 14 state Region. The Region includes the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Primary telecommunications services offered include local telephone services, exchange access services (which connect customers to the facilities of carriers, including long-distance providers and wireless operators), and long-distance services within LATAs in the Region. Other products and services include wireless PCS, high-speed data and Internet access services, and certain other communications equipment sales and services for business customers and governmental agencies. Media Group is the third largest cable operator in the United States, organized into six operating regions including large clusters in Atlanta, Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit, Michigan, and Minneapolis/St. Paul, Minnesota. Media Group is comprised of MediaOne Delaware, formerly Continental; U S WEST Multimedia Communications, Inc., which owns an investment in Time Warner Entertainment; Dex, which publishes White and Yellow Pages telephone directories and provides directory and information services; U S WEST NewVector Group, Inc., which provides communications and information products and services over wireless networks; and U S WEST International Holdings, Inc., which primarily owns investments in international cable and broadband, wireless communications and directory publishing operations. NOTE 2: U S WEST SEPARATION On October 25, 1997, the Board adopted a proposal to separate U S WEST into two independent companies. As a result of the Separation, the Communications Group will become an independent public company and will be renamed U S WEST, Inc. ("New U S WEST"). In addition, the Media Group's directory business known as Dex will be aligned with New U S WEST. The assets of New U S WEST will be accounted for at the historical values at which they were carried by U S WEST prior to the Separation. Following the Separation, U S WEST will continue as an independent public company comprised of the current businesses of Media Group other than Dex and will be renamed "MediaOne Group, Inc." The Separation will be implemented pursuant to the terms of the Separation Agreement between U S WEST and New U S WEST. Under the Separation Agreement, U S WEST will redeem each issued and outstanding share of Communications Stock (other than shares of Communications Stock held as treasury stock by U S WEST) for one share of New U S WEST Common Stock, and each outstanding share of Media Stock will remain outstanding and will thereafter represent one share of MediaOne Common Stock. Each share of Communications Stock held as treasury stock by U S WEST will be 66 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2: U S WEST SEPARATION (CONTINUED) cancelled. Each share of Media Stock held as treasury stock by U S WEST will remain outstanding as one share of MediaOne Common Stock held as treasury stock by MediaOne. In connection with the Dex Alignment, (i) U S WEST will distribute, as a dividend, an aggregate of $850 in value of New U S WEST Common Stock to holders of Media Stock and (ii) $3.9 billion of U S WEST debt, currently allocated to Media Group, will be refinanced by New U S WEST. The transaction is subject to shareowner approval and is expected to be complete by mid-1998. MediaOne will account for the Separation as a discontinuance of the businesses comprising New U S WEST. The measurement date for discontinued operations accounting purposes will be the date upon which U S WEST stockholder approval is obtained. On such date, MediaOne will recognize a gain on the distribution of New U S WEST. Because the distribution is non pro-rata, as compared with the businesses previously attributed to U S WEST's two classes of stockholders, it will be accounted for at fair value. Based on the number of shares of Communications Stock outstanding and market price as of February 20, 1998, the gain (net of Separation costs) is estimated at approximately $25.2 billion. The Company will incur Separation costs during 1998 of approximately $150, which includes cash payments under severance agreements of $45 and financial advisory, legal, registration fee, printing and mailing costs. Separation costs also include a one-time payment to terminate the sale of the Media Group cable systems in Minnesota. In connection with the Separation, U S WEST's existing employee benefit and incentive compensation plans will be amended and adjusted. In addition, New U S WEST and MediaOne will enter into a series of agreements governing the allocation of tax and certain other liabilities and obligations arising from periods prior to the Separation. The effects of such items will be included in the financial statements upon effectiveness of the Separation. Following is a summary of the more significant items: - STOCK INCENTIVE PLANS. Stock options, whether held by those individuals who will become employees of MediaOne or New U S WEST, will continue to remain outstanding as stock options for MediaOne and New U S WEST Common Stock following the Separation. In the case of MediaOne, the number of shares subject to and the exercise price of such stock options will be adjusted to reflect the fact that holders of such stock options will not receive the Dex Dividend. - PENSION PLAN. Effective immediately prior to the Separation, New U S WEST will assume sponsorship of the U S WEST pension plan (the "New U S WEST Pension Plan"). Effective as of the Separation date, MediaOne will establish a new defined benefit pension plan for eligible MediaOne employees (the "MediaOne Pension Plan"). In connection with the Separation, a portion of the existing assets of the U S WEST pension plan will be transferred at fair value to the MediaOne Pension Plan such that, immediately following consummation of the Separation, the ratio of plan assets to plan liabilities, calculated on a projected benefit obligations basis as determined by independent actuaries, will be the same for the New U S WEST Pension Plan and the MediaOne Pension Plan. The U S WEST pension plan has approximately $12 billion of assets. Subject to final adjustments, it is anticipated that the MediaOne Pension Plan will receive approximately $190 of such assets, with the remainder of such assets being retained by the New U S WEST Pension Plan. It is currently anticipated that the benefit expense and required cash contributions by MediaOne to the MediaOne Pension Plan after the Separation will be substantially the same as the benefit expense and required cash contributions of the Media Group to the U S WEST pension plan prior to the Separation. 67 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2: U S WEST SEPARATION (CONTINUED) - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. U S WEST currently maintains an employee welfare benefit program that includes retiree medical and life insurance benefits for its employees. Under such program, U S WEST maintains three funded retiree medical and life insurance benefits trusts. One of these trusts covers hourly employees only and will be transferred in its entirety to New U S WEST. The remaining two trusts will be transferred to New U S WEST, and MediaOne will establish new trusts. A portion of the assets of the U S WEST trusts will be transferred at fair value to the MediaOne trusts based upon the same methodology used to transfer assets of the U S WEST pension plan to the MediaOne Pension Plan, except that the liabilities will be calculated by independent actuaries using the accumulated postretirement benefit obligations basis. It is anticipated that approximately $2 and $1, respectively, will be transferred by the U S WEST trusts to the MediaOne trusts out of the total assets of $225 and $600, respectively, of the U S WEST trusts. - TAX SHARING AGREEMENT. U S WEST and New U S WEST will enter into a tax sharing agreement that will govern the allocation between U S WEST and New U S WEST of federal, state, local and foreign tax liabilities that pertain to taxable periods ending on or prior to the Separation. The tax sharing agreement also governs related tax matters such as the preparation and filing of tax returns and the conduct of audits and other tax proceedings for taxable periods before and after the Separation. In general, the tax sharing agreement will provide that (i) New U S WEST will be responsible for and will indemnify U S WEST against tax liabilities relating to the Communications Group for taxable periods ending on or prior to the Separation, and (ii) MediaOne will be responsible for and will indemnify New U S WEST against tax liabilities relating to the Media Group for taxable periods ending on or prior to the Separation. NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The Consolidated Financial Statements include the accounts of U S WEST and its majority-owned subsidiaries, except for the capital assets segment, which is held for sale. All significant intercompany amounts and transactions have been eliminated. Investments in less than majority-owned ventures are generally accounted for using the equity method. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. INDUSTRY SEGMENTS. The Communications Group operates in one industry segment (communications and related services) and the Media Group operates in four industry segments (cable and broadband, wireless communications, directory and information services, and capital assets, which is held for sale) as defined in SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." USE OF ESTIMATES. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid investments with original maturities of three months or less that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. INVENTORIES AND SUPPLIES. New and reusable materials of U S WEST Communications are carried at average cost, except for significant individual items that are valued based on specific costs. Nonreusable 68 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) material is carried at its estimated salvage value. Inventories of all other U S WEST subsidiaries are carried at the lower of cost or market on a first-in, first-out basis. PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and equipment is carried at cost less accumulated depreciation. Additions, replacements and substantial betterments are capitalized. Costs for normal repair and maintenance of property, plant and equipment are expensed as incurred. U S WEST Communications and in certain cases, MediaOne Delaware, provide for depreciation of property, plant and equipment using various straight-line group methods and remaining useful (economic) lives based on industry-wide studies. When the depreciable property, plant and equipment of U S WEST Communications and MediaOne Delaware is retired or sold, the original cost less the net salvage value is generally charged to accumulated depreciation. The remaining assets are depreciated using the straight-line method. When such depreciable property, plant and equipment is retired or sold, the resulting gain or loss is included in income. Communications Group average depreciable lives for major categories of property, plant and equipment follow:
AVERAGE LIFE CATEGORY (YEARS) - - -------------------------------------------------------------------------- ------------------- General purpose computers................................................. 6 Digital switching and circuit equipment................................... 10 Aerial and underground copper cable....................................... 15 Buried copper and fiber cable............................................. 20 Buildings................................................................. 27-49
Media Group depreciates buildings between 10 to 40 years, cable distribution systems between 3 to 15 years, cellular systems between 5 to 15 years, and general purpose computers and other between 3 to 20 years. Depreciation expense was $2,890, $2,411 and $2,215 in 1997, 1996 and 1995, respectively. Interest related to qualifying construction projects, including construction projects of equity method investees, is capitalized and reflected as a reduction of interest expense. Amounts capitalized were $56, $67 and $72 in 1997, 1996 and 1995, respectively. COMPUTER SOFTWARE. Communications Group capitalizes and amortizes initial operating systems software over the life of the related hardware. Also, initial network applications software costs are capitalized and amortized over three years. All other computer software costs, whether purchased or developed internally, are expensed. MediaOne Delaware capitalizes computer software, whether purchased or developed internally. Capitalized software costs are amortized over five years. All other Media Group computer software costs, whether purchased or developed internally, are expensed. Capitalized computer software of $157 and $223 at December 31, 1997 and 1996, respectively, is recorded in property, plant and equipment. The Company amortized capitalized computer software costs of $87, $83 and $70 in 1997, 1996 and 1995, respectively. INTANGIBLE ASSETS. Intangible assets are recorded when the cost of acquired companies exceeds the fair value of their tangible assets. The costs of identified intangible assets and goodwill are amortized by the straight-line method over periods ranging from 5 to 40 years. These assets are evaluated for 69 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) impairment, with other related assets, using the methodology as prescribed by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and equity securities are classified as available for sale and are carried at fair market value with unrealized gains and losses included in equity. FOREIGN CURRENCY TRANSLATION. Assets and liabilities of international subsidiaries and investments are translated at year-end exchange rates, and income statement items are translated at average exchange rates for the year. Resulting translation adjustments are recorded as a separate component of equity. Gains and losses resulting from foreign currency transactions are included in income. FINANCIAL INSTRUMENTS. Synthetic instrument accounting is used for interest rate swaps and foreign currency swaps if the index, maturity, and amount of the instrument match the terms of the underlying debt. Net interest accrued is recognized over the life of the instruments as an adjustment to interest expense and is a component of cash provided by operating activities. Any gain or loss on the termination of an instrument that qualifies for synthetic instrument accounting would be deferred and amortized over the remaining life of the original instrument. Hedge accounting is used for foreign currency forward and option contracts which qualify for and are designated as hedges of firm equity investment commitments and for forward and option contracts which qualify as hedges of future debt issues or investments in equity securities. To qualify for hedge accounting, the contracts must have a high inverse correlation to the exposure being hedged, and reduce the risk or volatility associated with changes in foreign exchange rates, interest rates or equity prices. Qualified foreign exchange contracts and equity contracts are carried at market value with gains and losses recorded in equity until sale of the investment. Qualified interest rate contracts are associated with the related debt and amortized as yield adjustments. Any gain or loss on the termination of a contract that qualifies for hedge accounting would be deferred and accounted for with the underlying transaction being hedged. Market value accounting is used for derivative contracts which do not qualify for synthetic instrument or hedge accounting. Market value accounting is also used for foreign exchange contracts designated as hedges of foreign denominated receivables and payables. These contracts are carried at market value in other assets or liabilities with gains and losses recorded as other income (expense). U S WEST does not use derivative financial instruments for trading purposes. STOCK OPTIONS. The Company accounts for its stock incentive plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Effective January 1, 1996, U S WEST adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." See Note 17--Stock Incentive Plans--to the Consolidated Financial Statements. REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS. Local telephone, wireless, cellular and cable television services are generally billed monthly in advance, and revenues are recognized the following month when services are provided. Revenues derived from other cable television services, including pay- per-view and advertising, other telephone services, including exchange access and long-distance, and wireless airtime usage are billed and recognized monthly as services are provided. Directory advertising revenues and related directory costs of selling, composition, printing and distribution are generally deferred and recognized over the period during which directories are used, normally 12 months. 70 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ADVERTISING COSTS. Costs related to advertising are expensed as incurred. Advertising expense was $421, $190 and $135 in 1997, 1996 and 1995, respectively. INCOME TAXES. The provision for income taxes consists of an amount for taxes currently payable and an amount for tax consequences deferred to future periods. For financial statement purposes, investment tax credits of U S WEST Communications are being amortized over the economic lives of the related property, plant and equipment in accordance with the deferred method of accounting for such credits. EARNINGS PER COMMON SHARE. In 1997, U S WEST adopted SFAS No. 128, "Earnings Per Share." This accounting standard specifies new computation, presentation and disclosure requirements for earnings per share to be applied retroactively. SFAS No. 128, among other things, requires presentation of basic and diluted earnings per common share on the face of the income statement. See Note 16--Earnings Per Share--to the Consolidated Financial Statements. Unless otherwise indicated, all per share amounts in the notes to the Consolidated Financial Statements are computed on basic weighted average common shares outstanding. For 1995, earnings per share for Communications Stock and Media Stock have been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST. NEW ACCOUNTING STANDARDS. In 1998, U S WEST will adopt SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 requires that the components and total amount of comprehensive income be displayed in the financial statements for interim and annual periods beginning in 1998. Comprehensive income includes net income and all changes in equity during a period that arise from nonowner sources, such as foreign currency items and unrealized gains and losses on certain investments in equity securities. SFAS No. 131 requires, among other things, the reporting of detailed operating segment information of an enterprise for annual periods beginning in 1998 and for interim periods beginning in 1999. SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued in March 1998. SOP 98-1, among other things, requires that certain costs of internal use software, whether purchased or developed internally, be capitalized and amortized over the estimated useful life of the software. Adoption of SOP 98-1 is required as of January 1, 1999, but earlier adoption is allowed. The Company is currently evaluating the impact of SOP 98-1 and believes that it could initially have a significant impact upon results of operations. NOTE 4: CONTINENTAL ACQUISITION On November 15, 1996, U S WEST acquired Continental, the third largest cable operator in the United States. The aggregate consideration paid by U S WEST to shareowners of Continental consisted of 150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of U S WEST Series D Preferred Stock with a market value of $920 and $1.15 billion in cash. In connection with the Acquisition, U S WEST also assumed all of Continental's outstanding indebtedness and other liabilities as of November 15, 1996, which approximated $7.1 billion for a total purchase price of $11.8 billion. The Acquisition was accounted for by the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values. Because Continental was acquired late in 1996 and is a large and complex operation, a comprehensive 71 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4: CONTINENTAL ACQUISITION (CONTINUED) appraisal of asset values and liabilities was not completed until 1997. The determination of the final fair value resulted in an increase to intangibles and a decrease to property, plant and equipment. The $8.7 billion excess of purchase price over net tangible assets acquired and goodwill related to a deferred income tax liability of $3.0 billion are being amortized over 25 years. Intangible amortization related to Continental's equity method investments is recorded as a component of equity losses in unconsolidated ventures. The intangible assets acquired consist principally of the cable television franchises of Continental and goodwill. Continental's results of operations have been included in the consolidated results of operations since the Acquisition date. Following are summarized, combined, unaudited pro forma results of operations for U S WEST for the years ended December 31, 1996 and 1995. Amounts are before non-recurring items directly attributable to the Acquisition and assume that the Acquisition occurred as of the beginning of the respective periods:
YEAR ENDED DECEMBER 31, -------------------- SUMMARIZED RESULTS OF OPERATIONS 1996 1995 - - ---------------------------------------------------------------------------- --------- --------- Revenues.................................................................... $ 14,618 $ 13,528 Income before extraordinary item and cumulative effect of change in accounting principle....................................................... 702 835 Net income.................................................................. 736 823 Media Group basic and diluted loss per common share*........................ (0.90) (0.64)
------------------------------------- * Before extraordinary item. In May 1997, pursuant to an FCC order, U S WEST entered into an agreement to sell its cable systems in Minnesota for proceeds of $600. Under the terms of the agreement, Media Group had the right to terminate the agreement at any time upon payment of a $30 termination fee. As a result of the Separation, Media Group will no longer be prohibited by federal law from owning the Minnesota cable systems. In February 1998, in response to U S WEST's petition, the FCC granted to U S WEST a waiver which would permit Media Group to retain the Minnesota cable systems so long as the Separation is consummated by July 31, 1998. Media Group has terminated the agreement to sell the Minnesota cable systems and otherwise settled all claims related thereto. Media Group owns an approximate 10 percent interest in PrimeStar. Media Group received its interest in PrimeStar on April 1, 1998, as part of a transaction in which Media Group and the other partners of Old PrimeStar contributed their interests in Old PrimeStar, their DBS customers and certain related assets to the newly formed PrimeStar. In exchange, Media Group received its 10 percent interest in PrimeStar and cash. NOTE 5: INDUSTRY SEGMENTS The businesses comprising the Communications Group operate in a single industry segment-- communications and related services. Approximately 97 percent of the revenues of the Communications Group are attributable to the operations of U S WEST Communications, of which approximately 67 percent are derived from the states of Arizona, Colorado, Minnesota, Oregon and Washington. The Media Group operates in four industry segments: cable and broadband, wireless communications, directory and information services, and capital assets, which is held for sale. The cable and broadband 72 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5: INDUSTRY SEGMENTS (CONTINUED) segment consists of cable television properties serving 4.9 million domestic subscribers and passing 8.4 million domestic homes. The wireless communications segment provides information products and services over wireless networks in 12 western and midwestern states. The directory and information services segment publishes White and Yellow Pages telephone directories, and provides database marketing and interactive services in domestic markets. Yellow Pages advertising generates approximately 95 percent of the revenue of the directory and information services segment. On June 4, 1997, U S WEST sold Thomson Directories, its directory operation in the United Kingdom, for proceeds of $121. On October 1, 1997, U S WEST sold U S WEST Polska, its directory operation in Poland, for proceeds of $30, and a pretax gain of $29. These sales have resulted in the disposition of U S WEST's wholly owned international directory operations. Industry segment financial information follows:
COMMUNI- CATIONS AND CABLE AND WIRELESS DIRECTORY AND CORPORATE INTER- RELATED BROAD- COMMUNI- INFORMATION AND SEGMENT SERVICES BAND(1) CATIONS(2) SERVICES(3) OTHER ELIMINATIONS ----------- ----------- ----------- --------------- ----------- --------------- 1997 Sales and other revenues........ $ 10,319 $ 2,341 $ 1,428 $ 1,245 $ 29 $ (127) Operating income (loss)......... 2,210 (126) 340 537 (155) -- Identifiable assets............. 17,246 18,687 2,370 606 951 (120) Depreciation and amortization... 2,126 1,050 182 45 17 -- Capital expenditures............ 2,643 1,232 258 31 10 -- 1996 Sales and other revenues........ 10,079 494 1,183 1,259 19 (123) Operating income (loss)......... 2,340 (20) 240 454 (159) -- Identifiable assets............. 16,915 20,146 2,371 716 828 (121) Depreciation and amortization... 2,122 212 150 48 12 -- Capital expenditures............ 2,806 353 266 36 13 -- 1995 Sales and other revenues........ 9,484 215 941 1,180 38 (112) Operating income (loss)......... 2,178 23 147 398 (101) -- Identifiable assets............. 16,585 5,163 2,000 614 838 (129) Depreciation and amortization... 2,042 77 121 36 15 -- Capital expenditures............ 2,739 64 277 37 23 -- CONSOLIDATED ------------- 1997 Sales and other revenues........ $ 15,235 Operating income (loss)......... 2,806 Identifiable assets............. 39,740 Depreciation and amortization... 3,420 Capital expenditures............ 4,174 1996 Sales and other revenues........ 12,911 Operating income (loss)......... 2,855 Identifiable assets............. 40,855 Depreciation and amortization... 2,544 Capital expenditures............ 3,474 1995 Sales and other revenues........ 11,746 Operating income (loss)......... 2,645 Identifiable assets............. 25,071 Depreciation and amortization... 2,291 Capital expenditures............ 3,140
- - ------------------------------ (1) Includes results for Continental since the date of Acquisition. Includes revenues of $18 and $6, operating losses of $15 and $7, and identifiable assets of $103 and $122 associated with cable operations in the Czech Republic for 1997 and 1996, respectively. (2) Includes operating losses from wireless operations in Russia of $(13) and $(3), and identifiable assets of $105 and $121 in 1997 and 1996, respectively. (3) Includes revenues from directory publishing activities in the United Kingdom and Poland of $48, $139 and $122, and operating income (loss) of $(11), $2, and $(1) for 1997, 1996 and 1995, respectively, and identifiable assets of $154 and $133 in 1996 and 1995, respectively. Operating income (loss) represents sales and other revenues less operating expenses, and excludes interest expense, equity losses in unconsolidated ventures, other expense (income) and income taxes. Certain costs relating to U S WEST's general and administrative services, including executive management, legal, tax, accounting and auditing, treasury, strategic planning and public policy services, are directly assigned by U S WEST to the Communications Group (the communications and related services segment) and the Media Group (the cable and broadband, wireless communications, and directory and 73 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5: INDUSTRY SEGMENTS (CONTINUED) information services segments). U S WEST costs are directly assigned based on actual utilization or are allocated based on operating expenses, number of employees, external revenues, average capital and/or average equity. Corporate and other operating losses include such U S WEST costs related to services provided by U S WEST to the Media Group. Also included are Media Group costs related to managing its international operations. Corporate and other operating losses increased in 1996 primarily as a result of a change in cost allocation policy. Identifiable assets are those assets and investments that are used in, or pertain to, each segment's operations. Corporate and other assets consist primarily of cash, debt and equity securities, the net investment in assets held for sale and other corporate assets. SIGNIFICANT CONCENTRATIONS. The largest volume of the Communications Group's services are provided to AT&T. During 1997, 1996 and 1995, revenues from services provided to AT&T were $1,049, $1,046 and $1,085, respectively. Related accounts receivable at December 31, 1997 and 1996, totaled $80 and $89, respectively. As of December 31, 1997, the Communications Group is not aware of any other significant concentration of business transacted with a particular customer or supplier that could, if suddenly eliminated, severely impact operations. At December 31, 1997, approximately 69 percent of the communications and related services segment employees and 64 percent of the directory and information services segment employees are represented by unions. The Company's principal collective bargaining agreements expire in May, August and October 1998. Negotiations with respect to future collective bargaining agreements are underway. NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority capital and residual equity interests ("equity interests") in Time Warner Entertainment for an aggregate purchase price of $2.553 billion. TWE owns and operates substantially all of the entertainment assets previously owned by Time Warner, consisting primarily of its filmed entertainment, programming-HBO and cable television businesses. U S WEST has an option to increase its pro-rata priority capital and residual equity interests in TWE from 25.51 percent up to 31.84 percent depending upon cable operating performance. The option is exercisable, in whole or part, between January 1, 1999 and May 31, 2005, for an aggregate cash exercise price ranging from $1.25 billion to $1.8 billion, depending upon the year of exercise. Either TWE or U S WEST may elect that the exercise price for the option be paid with partnership interests rather than cash. Pursuant to the TWE Partnership Agreement, there are four levels of capital. From the most to least senior, the capital accounts are: senior preferred (held by the general partners); A preferred priority capital (held pro rata by the general and limited partners); B preferred priority capital (held by the general partners); and residual equity capital (held pro rata by the general and limited partners). Of the $2.553 billion contributed by U S WEST, $1.658 billion represents A preferred priority capital and $895 represents residual equity capital. The TWE Partnership Agreement provides for special allocations of income and distributions of partnership capital. Partnership income, to the extent earned, is allocated as follows: (1) to the partners so that the economic burden of the income tax consequences of partnership operations is borne as though the partnership was taxed as a corporation ("special tax allocations"); (2) to the partners' 74 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED) preferred capital accounts in order of priority described above, at various rates of return ranging from 8 percent to 13.25 percent; and (3) to the partners' residual equity capital accounts according to their residual partnership interests. To the extent partnership income is insufficient to satisfy all special allocations in a particular accounting period, the unearned portion is carried over until satisfied out of future partnership income. Partnership losses generally are allocated in reverse order, first to eliminate prior allocations of partnership income, except senior preferred and special tax income, next to reduce initial capital amounts, other than senior preferred, then to reduce the senior preferred account and finally, to eliminate special tax allocations. A summary of the contributed capital and priority capital rates of return follows:
PRIORITY CAPITAL RATES LIMITED PARTNERS OF RETURN(D) TIME (OWNERSHIP %) UNDISTRIBUTED CUMULATIVE (% PER ANNUM WARNER -------------------- CONTRIBUTED PRIORITY COMPOUNDED GENERAL TIME U S PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) CAPITAL(B) QUARTERLY) PARTNERS WARNER WEST - - ------------------------------------- ------------- ----------- ------------- ---------- --------- --------- Senior preferred..................... $ 900 $ 1,100(c) 8.00% 100.00% -- -- A preferred priority capital......... 5,600 11,300 13.00% 63.27% 11.22% 25.51% B preferred priority capital......... 2,900 6,000 13.25% 100.00% -- -- Residual equity capital.............. 3,300 3,300 -- 63.27% 11.22% 25.51%
- - ------------------------------ (a) Represents the estimated fair value of net assets contributed as of formation of TWE, excluding partnership income or loss allocated thereto. (b) Cumulative priority capital is not necessarily indicative of the fair value of the underlying priority capital interests. (c) Net of $900 of cumulative cash distributions received by Time Warner. (d) To the extent income allocations are concurrently distributed, the priority capital rates of return on the A preferred capital and the B preferred capital are 11% and 11.25%, respectively. Cash distributions are required to be made to the partners to permit them to pay income taxes at statutory rates based on their allocable taxable income from TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is computed generally by reference to the taxes that TWE would have been required to pay if it were a corporation. Tax Distributions are paid to the partners on a current basis. For distributions other than those related to taxes or the senior preferred, the TWE Partnership Agreement requires certain cash distribution thresholds be met to the limited partners before the general partners receive their full share of distributions. No cash distributions have been made to U S WEST. Through the TWE management committee, U S WEST and Time Warner jointly direct the businesses and affairs of TWE cable systems, subject in certain cases to regulatory approval. The TWE management committee has full discretion and final authority with respect to the businesses and affairs of such cable systems. The TWE management committee consists of six voting members, of which three members are designated by U S WEST and three members are designated by Time Warner. Each voting member of the TWE management committee has one vote. Any action required or permitted to be taken by the TWE management committee must be approved by a majority of its members. Determinations of the TWE management committee are binding upon TWE and the TWE board of representatives. U S WEST accounts for its investment in TWE under the equity method of accounting. The excess of fair market value over the book value of total partnership net assets implied by U S WEST's initial investment was $5.7 billion. This excess is being amortized on a straight-line basis over 25 years. U S WEST's recorded share of TWE operating results represents allocated TWE net income or loss adjusted for the amortization of the excess of fair market value over the book value of the partnership net 75 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED) assets. As a result of this amortization and the special income allocations described above, U S WEST's recorded pretax share of TWE operating results before extraordinary item was $11, $(4) and $(31) in 1997, 1996 and 1995, respectively. In addition, TWE recorded an extraordinary loss for the early extinguishment of debt in 1995. U S WEST's share of this extraordinary loss was $4, net of income tax benefits of $2. As consideration for its expertise and participation in the cable operations of TWE, U S WEST earns a management fee of $130 over five years, which is payable over a four-year period beginning in 1995. Management fees of $26 were recorded to other income in each of 1997, 1996 and 1995. The Consolidated Balance Sheets include management fee receivables of $42 and $56 at December 31, 1997 and 1996, respectively. In addition, Media Group purchases cable television programming from TWE at market prices. These services totaled $110, $23 and $10 in 1997, 1996 and 1995, respectively. Summarized financial information for TWE is presented below:
YEAR ENDED DECEMBER 31, ------------------------------- SUMMARIZED OPERATING RESULTS 1997 1996 1995 - - ---------------------------------------------------------------------------------- --------- --------- --------- Revenues.......................................................................... $ 11,318 $ 10,852 $ 9,517 Operating expenses(1, 2).......................................................... 9,874 9,774 8,557 Interest and other expense, net(3, 4)............................................. 722 798 777 Income before income taxes and extraordinary item................................. 722 280 183 Income before extraordinary item.................................................. 637 210 97 Net income........................................................................ 614 210 73
- - ------------------------------ (1) Includes depreciation and amortization of $1,370, $1,235, and $1,039 in 1997, 1996 and 1995, respectively. (2) 1997 operating expenses are reflected net of approximately $200 of net gains related to the sale or exchange of certain cable television systems. (3) Includes corporate services of $72, $69 and $64 in 1997, 1996 and 1995, respectively, and minority interest expense of $305, $207 and $133 in 1997, 1996 and 1995, respectively. (4) 1997 interest and other expense includes a gain of approximately $250 related to the sale of TWE's interest in E! Entertainment Television, Inc.
DECEMBER 31, -------------------- SUMMARIZED FINANCIAL POSITION 1997 1996 - - -------------------------------------------------------------------------------------------- --------- --------- Current assets(5)........................................................................... $ 3,622 $ 3,146 Noncurrent assets(6)........................................................................ 17,109 16,827 Current liabilities......................................................................... 3,974 4,075 Noncurrent liabilities, including minority interest......................................... 9,306 7,781 Senior preferred capital.................................................................... 1,118 1,543 Partners' capital(7)........................................................................ 6,333 6,574
- - ------------------------------ (5) Includes cash of $322 and $216 at December 31, 1997 and 1996, respectively. (6) Includes a loan receivable from Time Warner of $400 at December 31, 1997 and 1996. (7) Contributed capital is based on the estimated fair value of the net assets that each partner contributed to the partnership. The aggregate of such amounts is significantly higher than TWE's partners' capital as reflected in this Summarized Financial Position, which is based on the historical cost of the contributed net assets. 76 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES U S WEST's equity method investments in international ventures follow:
PERCENTAGE OF OWNERSHIP DECEMBER 31, -------------------- VENTURE 1997 1996 - - ------------------------------------------------------------------------------ --------- --------- CABLE AND BROADBAND Telewest Communications, United Kingdom....................................... 26.8 26.8 Binariang SDN BHD, Malaysia................................................... 19.0(1) 20.0 A2000 (KTA), Netherlands...................................................... 50.0 50.0 Fintelco, S.A., Argentina..................................................... -- 50.0 Telenet Flanders, Belgium..................................................... 25.0(1) 28.0 Aria WEST, Indonesia.......................................................... 35.0 35.0 Singapore Cablevision, Singapore.............................................. 25.0 25.0 Titus Communications Corp., Japan............................................. 25.0 25.0 Chofu Cable Television, Japan................................................. 19.1 19.1 WIRELESS One 2 One, United Kingdom..................................................... 50.0 50.0 Delta Telecommunications, Russia(2)........................................... 42.5 42.5 Moscow Cellular Communications, Russia(2)..................................... 22.0 22.0 Westel Radiotelefon, Hungary.................................................. 49.0 49.0 Westel 900 GSM Mobile Telecommunications, Hungary............................. 46.6 46.6 Eurotel Praha, Czech Republic................................................. 24.5 24.5 Eurotel Bratislava, Slovak Republic........................................... 24.5 24.5 Polska Telefonia Cyfrowa, Poland.............................................. 22.5 22.5 U S WEST BPL Cellular Telecommunications, India............................... 49.0 49.0 DIRECTORY Listel, Brazil................................................................ 50.0 50.0
-------------------------------------- (1) Decrease in ownership reflects venture equity issuances in 1997. Through its representation on the board of directors and participation in management of the operations, U S WEST believes it has significant influence with regards to the Malaysian venture and applied the equity method of accounting. (2) Investments are held by Russian Telecommunications Development Corporation owned 66.5 percent by U S WEST. At December 31, 1997 and 1996, the difference between the carrying amount and U S WEST's interest in the underlying equity of the international ventures was approximately $42 and $365, respectively. This difference has been allocated primarily to licenses and is being amortized over lives ranging from 5 to 20 years. During the twelve month period ending December 31, 1997, the value of the Malaysian currency declined 36 percent and the Indonesian currency declined 57 percent as compared with the U. S. dollar. As a result of this significant decline, the Company reviewed its investments in Malaysia and Indonesia for impairment. Management concluded that each of its investments in Malaysia and Indonesia was impaired and in each case the fair value of the investment was zero as of December 31, 1997. The Company recorded pretax charges of $145 and $55 related to the ventures in Malaysia and Indonesia, respectively. 77 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED) In the case of Malaysia, the charge of $145 was to recognize that the investment was impaired and to write down the carrying value of the investment to its fair value of zero. The following factors were considered by management in determining that the investment was impaired: - The venture has negative cash flow and no ability to meet its debt obligations of $482 due in 1998. Total venture debt and vendor payables exceeded $800 at December 31, 1997. The venture debt is subject to cross default provisions so that failure to pay any material obligation is highly likely to accelerate the total balance due. Management has no intention of funding future operating losses or debt obligations. The venture debt is primarily denominated in U. S. dollars with the revenues and operating expenses of the business denominated in local currency. - As determined on a U. S. GAAP basis, the venture's liabilities exceeded its assets as of December 31, 1997, making the venture insolvent at that time. - The business plan for the venture contemplated a significant contribution to cash flows from the wireline business. The actual and potential cash flows of the venture have been severely diminished by the inability of the venture to effectively establish the wireline business. The venture has other lines of business (gateway switch, satellite and wireless communications) which do not generate sufficient cash flow to fund the operations and to retire the debt. Management believes that such condition is other than temporary and its investment is impaired as of December 31, 1997. The following table shows summarized financial information for the Malaysian venture, Binariang SDN BHD:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- RESULTS OF OPERATIONS Revenues............................................................ $ 268 $ 90 $ 20 Operating losses.................................................... (72) (73) (145) Net loss............................................................ (361) (120) (139)
DECEMBER 31, -------------------- 1997 1996 --------- --------- FINANCIAL POSITION Current assets............................................................... $ 151 $ 99 Property, plant and equipment--net........................................... 695 671 Other assets................................................................. 23 15 --------- --------- Total assets................................................................. $ 869 $ 785 --------- --------- --------- --------- Current liabilities and current debt......................................... $ 891 $ 302 Long-term debt............................................................... -- 282 Equity (deficit)............................................................. (22) 201 --------- --------- Total liabilities and equity (deficit)....................................... $ 869 $ 785 --------- --------- --------- ---------
In the case of Indonesia, the net book value of the venture had been reduced to its fair value of zero through recognition of $43 of equity losses during 1997. The $55 charge was to recognize probable funding commitments in connection with a shareholder support agreement. The probable funding commitments consist of the Company's remaining contractual commitment under the shareholder support agreement of 78 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED) $19 and its partners' remaining commitments of $36. Under the terms of the shareholder support agreement, each shareholder is responsible for the full unfunded liability if the other shareholders do not meet their proportionate obligations. Although the lenders have not formally declared default, the venture is in default of its debt agreements. Management believes that it is probable that default will be declared by the lenders and that the other shareholders will not meet their proportionate obligations. As a result, the Company has accrued for its partners' share of the commitment under the shareholder support agreement. The following factors were considered by management in determining that the Indonesian investment was impaired and that accrual of the Company's and its partners' funding liabilities were necessary: - As determined on a U. S. GAAP basis, the venture's liabilities, predominantly U. S. dollar denominated debt, exceeded its assets as of December 31, 1997. - Management believes the venture is not viable given the political and economic uncertainties in Indonesia. - The venture has ceased funding capital projects. The Company's other ventures in Asia, located in Japan, Singapore and India, were evaluated for impairment at December 31, 1997. Such evaluation indicated there was no impairment as the fair value of these ventures exceeded their recorded values. The following table shows summarized combined financial information for U S WEST's investments in international ventures, including Binariang SDN BHD, accounted for on the equity method:
YEAR ENDED DECEMBER 31, ------------------------------- COMBINED RESULTS OF OPERATIONS 1997 1996 1995 - - -------------------------------------------------------------------- --------- --------- --------- Revenues............................................................ $ 3,353 $ 1,869 $ 1,163 Operating losses.................................................... (601) (540) (373) Net loss............................................................ (1,696) (857) (514)
------------------------------------- Note: Combined Results of Operations for Continental ventures have been included since the date of Acquisition.
DECEMBER 31, -------------------- COMBINED FINANCIAL POSITION 1997 1996 - - ------------------------------------------------------------------------------- --------- --------- Current assets................................................................. $ 1,140 $ 1,126 Property, plant and equipment--net............................................. 6,625 5,105 Other assets................................................................... 1,610 2,226 --------- --------- Total assets................................................................... $ 9,375 $ 8,457 --------- --------- --------- --------- Current liabilities............................................................ $ 1,570 $ 1,275 Long-term debt................................................................. 5,527 3,880 Other liabilities.............................................................. 389 478 Equity......................................................................... 1,889 2,824 --------- --------- Total liabilities and equity................................................... $ 9,375 $ 8,457 --------- --------- --------- ---------
During the first quarter of 1997, U S WEST sold its five percent interest in a French wireless venture for proceeds of $81. U S WEST recognized a gain of $31, net of income tax expenses of $20. 79 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED) On October 27, 1997, U S WEST sold its 90 percent interest in Fintelco, for proceeds of $641. U S WEST acquired a 50 percent interest in Fintelco in connection with the Continental Acquisition and then acquired an additional 40 percent interest in August 1997, to bring its total interest in Fintelco to 90 percent. U S WEST recognized a gain on the sale of $80, net of income tax expenses of $55. On October 2, 1995, Telewest and SBC CableComms (UK) completed a merger of their UK cable television and telecommunications interests, creating the largest provider of combined cable and broadband services in the United Kingdom. U S WEST recognized a gain of $95, net of $62 in deferred income taxes, in conjunction with the merger. Telewest, which is the only equity method investment of U S WEST for which a quoted market price is available, had a market value of $464 and $786 at December 31, 1997 and 1996, respectively. FOREIGN CURRENCY TRANSACTIONS. U S WEST selectively enters into forward and option contracts to manage the market risks associated with fluctuations in foreign exchange rates after considering offsetting foreign exposures among international operations. The use of forward and option contracts allows U S WEST to fix or cap the cost of firm foreign investment commitments, the amount of foreign currency proceeds from sales of foreign investments, the repayment of foreign currency denominated receivables and the repatriation of dividends. All foreign exchange contracts have maturities of one year or less. The use of such contracts was limited in 1997 and 1996. As of December 31, 1997, the market value of foreign exchange contracts outstanding was not material and there were none outstanding at December 31, 1996. Forward contracts were selectively used to hedge foreign denominated proceeds from the sale of foreign investments and foreign denominated receivables during 1997 and 1996. Foreign currency pretax hedging gains of $5 and pretax hedging losses of $24 were included in earnings in the years ended December 31, 1997 and 1996, respectively. The counterparties to these contracts are major financial institutions. U S WEST is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not have significant exposure to an individual counterparty and does not anticipate nonperformance by any counterparty. Foreign currency transaction pretax losses of $40 and pretax gains of $27 were included in earnings in the years ended December 31, 1997 and 1996, respectively. 80 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8: PROPERTY, PLANT AND EQUIPMENT The composition of property, plant and equipment follows:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Land and buildings...................................................... $ 2,764 $ 2,722 Telecommunications network equipment.................................... 13,513 12,925 Telecommunications outside plant........................................ 13,802 13,148 Cable distribution systems.............................................. 2,787 2,640 Cellular systems........................................................ 1,124 897 General purpose computers and other..................................... 4,137 4,414 Construction in progress................................................ 1,096 1,010 --------- --------- 39,223 37,756 Less accumulated depreciation........................................... 20,643 19,475 --------- --------- Property, plant and equipment--net...................................... $ 18,580 $ 18,281 --------- --------- --------- ---------
Property, plant and equipment balances at December 31, 1997 include the results of a comprehensive appraisal conducted on the Continental properties. As compared with estimated amounts recorded at December 31, 1996, cable distribution systems decreased approximately $630. In 1997, U S WEST Communications sold certain rural telephone exchanges with a cost basis of $160. Consideration received for the sales was $237, including $67 in cash. In 1996 and 1995, U S WEST Communications sold certain rural telephone exchanges with a cost basis of $243 and $258, respectively, and received consideration of $306 (including $174 in cash) during 1996, and $388 (including $214 in cash) during 1995. Effective January 1, 1996, U S WEST adopted SFAS No. 121. SFAS No. 121 requires that long-lived assets and associated intangibles be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. SFAS No. 121 also requires that a company no longer record depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted in income of $34 (net of income tax expense of $22) in 1996 from the cumulative effect of reversing depreciation expense recorded in prior years related to rural telephone exchanges held for sale. Depreciation expense was reversed from the date U S WEST formally committed to a plan to dispose of the rural telephone exchange assets to January 1, 1996. The income was recorded as a cumulative effect of change in accounting principle in accordance with SFAS No. 121. As a result of adopting SFAS No. 121, depreciation expense for 1996 was reduced by $24. 81 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9: INTANGIBLE ASSETS The composition of intangible assets follows:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Identified intangibles, primarily franchise value....................... $ 9,263 $ 8,388 Goodwill................................................................ 4,159 4,465 --------- --------- 13,422 12,853 Less accumulated amortization........................................... 748 258 --------- --------- Total intangible assets--net............................................ $ 12,674 $ 12,595 --------- --------- --------- ---------
Intangible balances at December 31, 1997 include the results of a comprehensive appraisal conducted on the Continental cable properties. As compared with estimated amounts recorded at December 31, 1996, franchise value increased approximately $770 and goodwill decreased approximately $300. Amortization expense for 1997, 1996 and 1995 was $530, $133 and $76, respectively. NOTE 10: DEBT SHORT-TERM DEBT The components of short-term debt follow:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Notes payable: Commercial paper......................................................... $ 812 $ 842 Bank loan................................................................ 17 -- Other.................................................................... -- 55 Current portion of long-term debt.......................................... 701 300 Allocated to the capital assets segment--net............................... (100) (146) --------- --------- Total...................................................................... $ 1,430 $ 1,051 --------- --------- --------- ---------
The weighted-average interest rate on commercial paper was 6.15 percent and 5.73 percent at December 31, 1997 and 1996, respectively. The bank loan at December 31, 1997 is a floating-rate loan denominated in Czech Koruna. Other notes payable at December 31, 1996 included $50 associated with U S WEST's increase in ownership of Cable Plus. This note was repaid in January 1997. In January 1997, U S WEST paid the cash portion of the Continental Acquisition consideration totaling $1,150. This payment was financed with commercial paper. In 1995, U S WEST issued $130 of DECS, due December 15, 1998, in the principal amount of $24.00 per note. The notes bear annual interest at 7.625 percent. Upon maturity, each DECS will be redeemed by U S WEST for shares of Enhance held by U S WEST or the cash equivalent, at U S WEST's option. The number of shares to be delivered at maturity varies based on the per share market price of Enhance. If the market price is $24.00 per share or less, one share of Enhance will be delivered for each note; if the market price is between $24.00 and $28.32 per share, a fractional share equal to $24.00 is delivered; if the market 82 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10: DEBT (CONTINUED) price is greater than $28.32 per share, .8475 of a share is delivered for each note. At December 31, 1997, the Enhance shares had a market price of $59.50 per share. The capital assets segment currently owns 29.2 percent of the outstanding Enhance common stock. U S WEST maintains a commercial paper program to finance short-term cash flow requirements, as well as to maintain a presence in the short-term debt market. U S WEST is permitted to borrow up to approximately $4.5 billion under lines of credit, all of which were available at December 31, 1997. LONG-TERM DEBT On November 15, 1996, U S WEST assumed Continental debt totaling $6,525 (at market value) in conjunction with the Acquisition. Concurrently, U S WEST refinanced $3,657 of the assumed debt with commercial paper. In January 1997, U S WEST issued medium- and long-term debt totaling $4.1 billion, at a weighted-average interest rate of 7.47 percent. The net proceeds were used to refinance outstanding commercial paper. At December 31, 1996, such commercial paper was classified as long-term debt in the accompanying Consolidated Balance Sheets and the following table. The components of long-term debt follow:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Senior unsecured notes, debentures, medium-term notes and refinanced commercial paper...................................................... $ 12,246 $ 12,536 Zero coupon subordinated notes, 7.3 percent yield to maturity convertible at any time into equal shares of Communications Stock and Media Stock........................................................... -- 1,529 Senior subordinated debt................................................ 300 400 Debt exchangeable for common stock...................................... 254 384 Insurance company notes................................................. 36 68 Leveraged employee stock ownership plans (LESOP)........................ -- 53 Capital lease obligations............................................... 88 140 Other................................................................... 169 134 Unamortized discount--net............................................... (132) (1,118) Unamortized premium--net................................................ 287 335 Allocated to the capital assets segment--net............................ -- (161) --------- --------- Total................................................................... $ 13,248 $ 14,300 --------- --------- --------- ---------
Senior unsecured notes and debentures and senior subordinated debt totaling $2.3 billion as of December 31, 1997 were assumed by U S WEST in connection with the Continental Acquisition and are not guaranteed by U S WEST. These notes and debentures limit MediaOne Delaware's ability to, among other things, pay dividends, create liens, incur additional debt, dispose of property, investments and leases, and require certain minimum ratios of cash flow to debt and cash flow to related fixed charges. During 1997, U S WEST redeemed its zero coupon subordinated notes due June 25, 2011. Upon redemption, the notes had a recorded value of $571. The debt extinguishment resulted in a loss of $6 (net of income tax benefits of $4) primarily related to the write-off of deferred debt issuance costs. Also during 1997, MediaOne Delaware redeemed a 10 5/8 percent senior subordinated note with a recorded value of 83 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10: DEBT (CONTINUED) $110, including a premium of $10. The debt extinguishment resulted in a gain of $3 (net of income tax expenses of $2). The net loss on the redemptions is reflected as an extraordinary charge in the accompanying Consolidated Statements of Operations. U S WEST financed the redemptions with floating-rate commercial paper. On May 13, 1996, U S WEST issued $254 of DECS due May 15, 1999, in the principal amount of $26.63 per note. The notes bear annual interest at 7.625 percent. Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of FSA held by U S WEST or the cash equivalent, at U S WEST's option. The number of shares to be delivered at maturity varies based on the per share market price of FSA. If the market price is $26.63 per share or less, one share of FSA will be delivered for each note; if the market price is between $26.63 and $32.48 per share, a fractional share is delivered so that the value at maturity is equal to $26.63; if the market price is greater than $32.48 per share, .8197 of a share is delivered for each note. At December 31, 1997, the FSA shares had a market price of $48.25 per share. The capital assets segment currently owns approximately 42.1 percent of the outstanding FSA common stock. Interest rates and maturities of long-term debt at December 31 follow:
MATURITIES ------------------------------------------------------- TOTAL TOTAL INTEREST RATES 1999 2000 2001 2002 THEREAFTER 1997 1996 - - ---------------------------------------------- --------- --------- --------- --------- ----------- --------- --------- Up to 5%...................................... $ -- $ 90 $ -- $ 100 $ 50 $ 240 $ 275 Above 5% to 6%................................ -- -- 50 -- 221 271 701 Above 6% to 7%................................ 380 304 170 1,012 2,877 4,743 4,728 Above 7% to 8%................................ -- -- -- 10 4,365 4,375 5,876 Above 8% to 9%................................ 2 -- 240 -- 1,725 1,967 2,018 Above 9% to 10%............................... 15 200 10 -- 525 750 750 Above 10%..................................... 35 -- -- -- 300 335 467 Variable-rate debt indexed to two- and ten-year constant maturity U. S. Treasury rates....................................... 155 -- -- -- -- 155 155 --------- --------- --------- --------- ----------- --------- --------- $ 587 $ 594 $ 470 $ 1,122 $ 10,063 12,836 14,970 --------- --------- --------- --------- ----------- --------- --------- --------- --------- ----------- Capital lease obligations and other........... 257 274 Unamortized discount--net..................... (132) (1,118) Unamortized premium--net...................... 287 335 Allocated to the capital assets segment--net................................ -- (161) --------- --------- Total......................................... $ 13,248 $ 14,300 --------- --------- --------- ---------
Interest payments, net of amounts capitalized, were $946, $658 and $518 for 1997, 1996 and 1995, respectively, of which $47, $59 and $87, respectively, related to the capital assets segment. Total debt at December 31, 1997 was approximately $14.6 billion and Preferred Securities totaled approximately $1.1 billion. The total debt and Preferred Securities of approximately $15.7 billion includes $5.5 billion of U S WEST Communications debt, $2.7 billion of MediaOne Delaware debt and $7.5 billion of U S WEST Indebtedness. 84 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10: DEBT (CONTINUED) In connection with the Separation, New U S WEST and MediaOne will seek to refinance the U S WEST Indebtedness through a combination of tender offers, prepayments, defeasance, consent solicitations and/or exchange offers. As of February 20, 1998, the estimated cost of the Refinancing is $346 ($231 after tax). In addition to refinancing costs, such costs include the difference between the market and face value of the U S WEST Indebtedness and a charge for unamortized debt issuance costs. INTEREST RATE RISK MANAGEMENT The objective of the interest rate risk management program is to minimize the total cost of debt over time and the interest rate variability. This is achieved through the use of interest rate swaps, which adjust the ratio of fixed- to variable-rate debt. Under an interest rate swap, U S WEST agrees with another party to exchange interest payments at specified intervals over a defined term. Interest payments are calculated by reference to the notional amount based on the fixed- and variable-rate terms of the swap agreements. U S WEST Communications entered into currency swaps to convert Swiss franc-denominated debt to U. S. dollar-denominated debt. This allowed U S WEST Communications to achieve interest savings over issuing fixed-rate, dollar-denominated debt. The currency swap and foreign currency debt are combined and accounted for as if fixed-rate, dollar-denominated debt were issued directly. The following table summarizes terms of swaps and interest rate contracts. Variable rates are indexed to two- and ten-year constant maturity U. S. Treasury and 30-day commercial paper rates.
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------------------------------ ------------------------------------------------ WEIGHTED- AVERAGE RATE WEIGHTED- AVERAGE RATE NOTIONAL ---------------------- NOTIONAL ---------------------- AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY ----------- ----------- ----------- --------- ----------- ----------- ----------- --------- Variable to fixed............... $ 700 1998-2004 5.68 6.93 $ 1,235 1997-2004 5.70 6.89 Currency........................ 204 1999-2001 -- 6.55 204 1999-2001 -- 6.55
During fourth-quarter 1996, U S WEST purchased $1.5 billion notional of put options on U. S. Treasury Bonds to protect against an increase in interest rates in conjunction with the 1997 debt refinancing. The contracts closed in January 1997 and a deferred gain of $5 was recognized. U S WEST Communications executed forward U. S. Treasury Bond contracts to lock in the U. S. Treasury rate component of future debt issues. At December 31, 1997, deferred gains of $8 and deferred losses of $50 on the closed forward contracts are included as part of the carrying value of the underlying debt. The deferred gains and losses are being recognized as yield adjustments over the life of the related debt, which mature at various dates through 2043. The counterparties to swaps or other interest rate contracts are major financial institutions. U S WEST is exposed to credit loss in the event of nonperformance by these counterparties. U S WEST manages this exposure by monitoring the credit standing of the counterparty and establishing dollar and term limitations which correspond to the respective credit rating of each counterparty. U S WEST does not have significant exposure to an individual counterparty and does not anticipate nonperformance by any counterparty. 85 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS Fair values of cash equivalents, other current amounts receivable and payable, and short-term debt approximate carrying values due to their short-term nature. The carrying values of mandatorily redeemable preferred stock and long-term receivables approximate the fair values based on quoted market prices or discounting future cash flows. The carrying value of foreign exchange contracts approximate the carrying values based on estimated amounts U S WEST would receive or pay to terminate such agreements. It is not practicable to estimate the fair value of financial guarantees because there are no quoted market prices for similar transactions. The fair values of interest rate swaps are based on estimated amounts U S WEST would receive or pay to terminate such agreements taking into account current interest rates and creditworthiness of the counterparties. The fair values of long-term debt, including debt associated with the capital assets segment, Preferred Securities and Series D Preferred Stock, are based on quoted market prices where available or, if not available, are based on discounting future cash flows using current interest rates.
DECEMBER 31, ------------------------------------------ 1997 1996 -------------------- -------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE --------- --------- --------- --------- Debt (includes short-term portion).................................... $ 15,050 $ 15,770 $ 15,832 $ 15,850 Interest rate swap agreements--assets................................. -- -- -- (22) Interest rate swap agreements--liabilities............................ -- 47 17 47 --------- --------- --------- --------- Debt--net............................................................. $ 15,050 $ 15,817 $ 15,849 $ 15,875 --------- --------- --------- --------- --------- --------- --------- --------- Preferred Securities.................................................. $ 1,080 $ 1,110 $ 1,080 $ 1,074 Series D Preferred Stock.............................................. 923 1,234 920 960
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:
DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------------------------------------- --------------------------------------- GROSS GROSS GROSS GROSS UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES - - ---------------------------------- --- ------------- ------------- --------- --------- ------------- ------------- Equity securities................. $ 21 $ 19 $ -- $ 40 $ 713 $ 2 $ -- Debt securities................... 18 -- -- 18 20 -- -- Securitized loan.................. 55 -- (3) 52 55 -- (6) -- -- --- --- --------- --------- --- Total............................. $ 94 $ 19 $ (3) $ 110 $ 788 $ 2 $ (6) -- -- -- -- --- --- --------- --------- --- --- --- --------- --------- --- FAIR SECURITIES VALUE - - ---------------------------------- --------- Equity securities................. $ 715 Debt securities................... 20 Securitized loan.................. 49 --------- Total............................. $ 784 --------- ---------
During 1997, U S WEST received proceeds of $898 from the sales of TCG and TWX shares and realized pretax gains totaling $206. Net unrealized gains and losses on marketable securities are included 86 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) in equity. The 1997 net unrealized gains were $13 (net of deferred taxes of $6). The 1996 net unrealized gains were $1 (net of deferred taxes). NOTE 12: LEASING ARRANGEMENTS U S WEST has entered into operating leases for office facilities, equipment and real estate. Rent expense under operating leases was $304, $245 and $263 in 1997, 1996 and 1995, respectively. Future minimum lease payments as of December 31, 1997, under noncancelable operating leases, follow:
YEAR - - ------------------------------------------------------------------------------------- 1998................................................................................. $ 194 1999................................................................................. 187 2000................................................................................. 157 2001................................................................................. 149 2002................................................................................. 108 Thereafter........................................................................... 777 --------- Total................................................................................ $ 1,572 --------- ---------
Minimum rentals to be received under noncancelable subleases total $52. The minimum future lease payments have not been reduced by the minimum sublease rentals. NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES On October 29, 1996, Financing II issued $480 of 8.25 percent Preferred Securities and $15 of common securities. U S WEST holds all of the outstanding common securities of Financing II. Financing II used the proceeds from such issuance to purchase from Capital Funding $495 principal amount of Capital Funding's 8.25 percent Subordinated Deferrable Interest Notes (the "Subordinated Debt Securities") due 2036, the obligations under which are fully and unconditionally guaranteed by U S WEST (the "Debt Guarantee"). The sole assets of Financing II are and will be the Subordinated Debt Securities and the Debt Guarantee. On September 11, 1995, Financing I issued $600 of 7.96 percent Preferred Securities and $19 of common securities. U S WEST holds all of the outstanding common securities of Financing I. Financing I used the proceeds from such issuance to purchase from Capital Funding $619 principal amount of Capital Funding's 7.96 percent Subordinated Debt Securities due 2025, the obligations under which are fully and unconditionally guaranteed by U S WEST. The sole assets of Financing I are and will be the Subordinated Debt Securities and the Debt Guarantee. U S WEST has guaranteed the payment of interest and redemption amounts to holders of Preferred Securities when Financing I and II have funds available for such payments (the "Payment Guarantee") as well as Capital Funding's undertaking to pay all of Financing I and II's costs, expenses and other obligations (the "Expense Undertaking"). The Payment Guarantee and the Expense Undertaking, including U S WEST's guarantee with respect thereto, considered together with Capital Funding's obligations under the indenture and Subordinated Debt Securities and U S WEST's obligations under the indenture, declaration and Debt Guarantee, constitute a full and unconditional guarantee by U S WEST of Financing I and II's obligations under the Preferred Securities. The interest and other payment dates on 87 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES (CONTINUED) the Subordinated Debt Securities correspond to the distribution and other payment dates on the Preferred Securities. Under certain circumstances, the Subordinated Debt Securities may be distributed to the holders of Preferred Securities and common securities in liquidation of Financing I and II. The 7.96 percent Subordinated Debt Securities are redeemable in whole or in part by Capital Funding at any time on or after September 11, 2000, at a redemption price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest. If Capital Funding redeems the Subordinated Debt Securities, Financing I is required to redeem the Preferred Securities concurrently at $25.00 per share plus accrued and unpaid distributions. As of December 31, 1997 and 1996, 24,000,000 shares of the 7.96 percent Preferred Securities were outstanding. The 8.25 percent Subordinated Debt Securities are redeemable in whole or in part by Capital Funding at any time on or after October 29, 2001, at a redemption price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest. If Capital Funding redeems the Subordinated Debt Securities, Financing II is required to redeem the Preferred Securities concurrently at $25.00 per share plus accrued and unpaid distributions. As of December 31, 1997 and 1996, 19,200,000 shares of the 8.25 percent Preferred Securities were outstanding. In connection with the Separation, MediaOne will seek to refinance the Preferred Securities. See Note 10--Debt--to the Consolidated Financial Statements. NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION On June 30, 1997, U S WEST acquired cable systems serving approximately 40,000 subscribers in Michigan for cash of $25 and the issuance of 994,082 shares of U S WEST Series E Preferred Stock. Dividends are payable quarterly at the annual rate of 6.34 percent. The Series E Preferred Stock was recorded at fair value of $50.00 per share at June 30, 1997, which was equal to its liquidation value. Upon redemption, the preferred stockholders may elect to receive cash or convert their Series E Preferred Stock into Media Stock. Cash redemption is equal to the Series E Preferred Stock's liquidation value of $50.00 per share, plus accrued dividends. The number of shares of Media Stock to be received upon conversion is $47.50 per share divided by the then current market price of Media Stock. The conversion rate is subject to adjustment by U S WEST under certain circumstances. The Series E Preferred Stock is redeemable as follows: (a) U S WEST may call for redemption all or any part of the Series E Preferred Stock beginning on June 30, 2002; (b) on a yearly basis beginning August 1, 2007, and continuing through August 1, 2016, U S WEST will redeem 49,704 shares of Series E Preferred Stock, and on June 30, 2017, all of the remaining outstanding shares of Series E Preferred Stock; or (c) all of the outstanding Series E Preferred Stock shall be redeemed upon the occurrence of certain events, including the dissolution or sale of all or substantially all of Media Group. On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") for a total of $50. See Note 22--Net Investment in Assets Held for Sale--to the Consolidated Financial Statements. The preferred stock was recorded at the fair market value of $51 at the issue date. Media Group has the right commencing September 2, 1999, to redeem the shares for one thousand dollars per share plus unpaid dividends and a redemption premium. The shares are mandatorily 88 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (CONTINUED) redeemable in 2004 at face value plus unpaid dividends. At the option of FFC, the preferred stock also can be redeemed for common shares of FSA. The market value of the option was $71 and $35 (based on the Black-Scholes model) at December 31, 1997 and 1996, respectively, with no carrying value. The Series E and Series C Preferred Stocks rank senior to all classes of U S WEST common stock, are subordinated to any senior debt and the Preferred Securities, and rank equally with the Series D Preferred Stock. 89 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15: SHAREOWNERS' EQUITY
MEDIA COMMON RETAINED COMMUNICATIONS STOCK U S WEST STOCK PREFERRED EARNINGS STOCK SHARES SHARES SHARES AMOUNT STOCK AMOUNT (DEFICIT) ----------------- --------- ----------- ----------- ------------- ----------- SHARES IN THOUSANDS Balance December 31, 1994............ 469,343 $ 8,056 $ (458) Issuance of common stock........... 2,791 117 Benefit trust contribution (OPEB)........................... 1,500 61 Purchase of treasury stock......... (1,705) (63) Other.............................. 3 November 1, 1995..................... Recapitalization Plan.............. 471,929 471,922 (471,929) Recapitalization Plan dissenters(1).................... (6) Issuance of Communications Stock... 1,712 52 Issuance of Media Stock............ 392 7 Net income......................... 1,317 Common dividends declared ($2.14 per Communications share)........ (1,010) Preferred dividends................ (3) Market value adjustment for debt securities....................... 36 Foreign currency translation....... Other.............................. (5) 3 ------- --------- ----------- ----------- ----- ----------- Balance December 31, 1995............ 473,635 472,314 -- 8,228 (115) Issuance of Communications Stock... 6,822 216 Issuance of Media Stock for Continental Acquisition.......... 150,615 2,590 Other issuances of Media Stock..... 1,853 38 Issuance of Series D Preferred Stock............................ $ 920 Purchase of treasury stock......... (15,919) (297) Net income......................... 1,178 Common dividends declared ($2.14 per Communications share)........ (1,024) Preferred dividends................ (9) Market value adjustment for debt and equity securities............ (6) Foreign currency translation....... Other.............................. (34) (6) ------- --------- ----------- ----------- ----- ----------- Balance December 31, 1996............ 480,457 608,863 -- 10,741 920 18 Issuance of Communications Stock... 4,058 138 Issuance of Media Stock............ 1,783 40 Purchase of treasury stock......... (2,838) (53) Net income......................... 697 Common dividends declared ($2.14 per Communications share)........ (1,034) Preferred dividends................ (52) Market value adjustment for debt and equity securities............ 35 Foreign currency translation....... Other.............................. 10 3 2 ------- --------- ----------- ----------- ----- ----------- Balance December 31, 1997............ 484,515 607,808 -- $ 10,876 $ 923 $ (334) ------- --------- ----------- ----------- ----- ----------- ------- --------- ----------- ----------- ----- ----------- FOREIGN CURRENCY LESOP TRANSLATION GUARANTEE --------------- ------------- Balance December 31, 1994............ $ (29) $ (187) Issuance of common stock........... Benefit trust contribution (OPEB)........................... Purchase of treasury stock......... Other.............................. November 1, 1995..................... Recapitalization Plan.............. Recapitalization Plan dissenters(1).................... Issuance of Communications Stock... Issuance of Media Stock............ Net income......................... Common dividends declared ($2.14 per Communications share)........ Preferred dividends................ Market value adjustment for debt securities....................... Foreign currency translation....... (9) Other.............................. 60 --- ----- Balance December 31, 1995............ (38) (127) Issuance of Communications Stock... Issuance of Media Stock for Continental Acquisition.......... Other issuances of Media Stock..... Issuance of Series D Preferred Stock............................ Purchase of treasury stock......... Net income......................... Common dividends declared ($2.14 per Communications share)........ Preferred dividends................ Market value adjustment for debt and equity securities............ Foreign currency translation....... (1) Other.............................. 36 --- ----- Balance December 31, 1996............ (39) (91) Issuance of Communications Stock... Issuance of Media Stock............ Purchase of treasury stock......... Net income......................... Common dividends declared ($2.14 per Communications share)........ Preferred dividends................ Market value adjustment for debt and equity securities............ Foreign currency translation....... (56) Other.............................. 45 --- ----- Balance December 31, 1997............ $ (95) $ (46) --- ----- --- -----
- - ------------------------------ (1) Under the Recapitalization Plan, Media Stock was not issued to shareowners who elected to receive cash rather than Communications Stock and Media Stock. Dissenting shareowners were paid $47.9375 per U S WEST share on December 15, 1995. 90 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15: SHAREOWNERS' EQUITY (CONTINUED) SERIES D PREFERRED STOCK. On November 15, 1996, U S WEST issued 19,999,478 shares of 4.5 percent, 20 year, Series D Preferred Stock to Continental shareowners. Dividends are payable quarterly on the nonvoting Series D Preferred Stock as and when declared by the Board out of funds legally available. The Series D Preferred Stock has a liquidation value of $50 per share and was recorded at the November 15, 1996 fair value of $46 per share. The Series D Preferred Stock is convertible, at the option of the holder, into shares of Media Stock at $26.25 per share. Between November 15, 1999 and November 15, 2001, the Series D Preferred Stock is redeemable at par, at the option of U S WEST, into shares of Media Stock if the market price of Media common shares have closed at $35.44 per share for at least 20 of the 30 consecutive trading days prior to the notice of redemption. After November 15, 2001, the Series D Preferred Stock is redeemable at par, at the option of U S WEST, in cash, Media Stock, or any combination of cash and stock. If Media Stock is elected, the number of shares to be issued will be determined based on the average market price for the ten consecutive trading days ending on the third business day prior to redemption, reduced by five percent. On November 15, 2016, U S WEST is required to redeem the Series D Preferred Stock, at its election, for cash, Media Stock, or any combination of cash and stock. Upon certain events, including the disposition of all or substantially all of the properties and assets attributed to the Media Group, the Series D Preferred Stock becomes mandatorily redeemable. The Series D Preferred Stock ranks senior to all classes of U S WEST common stock, is subordinated to any senior debt and the Preferred Securities, and ranks equally with the Series E and C Preferred Stocks. COMMON STOCK. In connection with the November 15, 1996, Continental Acquisition, U S WEST issued 150,615,000 shares of Media Stock to Continental shareowners, valued at $2,590. SHARE REPURCHASE. During 1997 and 1996, U S WEST purchased and placed into treasury 2,838,000 and 15,919,000 shares of Media Stock, at an average price per share of $18.71 and $18.66, and a cost basis of $53 and $297, respectively. Under the 1995 Recapitalization, shares of U S WEST stock held in treasury were canceled. FOREIGN CURRENCY TRANSLATION. Included in U S WEST's cumulative foreign currency translation adjustment are cumulative tax benefits of $61, $24 and $24 at December 31, 1997, 1996 and 1995, respectively. LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). U S WEST maintains a defined contribution savings plan for substantially all management and occupational employees of the Company, except for employees of the Atlanta cable systems and foreign national employees. U S WEST matches a percentage of eligible employee contributions with shares of Communications Stock and/or Media Stock in accordance with participant elections. Participants may also elect to reallocate past Company contributions between Communications Stock and Media Stock. In 1989, U S WEST established two LESOPs to provide Company stock for matching contributions to the savings plan. Shares in the LESOP are released as principal and interest are paid on the debt. At December 31, 1997, 11,966,157 shares of Communications Stock and 12,100,791 shares of Media Stock had been allocated from the LESOP to participants' accounts, while 918,494 and 1,050,657 shares of Communications Stock and Media Stock, respectively, remained unallocated. The borrowings associated with the LESOP, which are unconditionally guaranteed by U S WEST, are included in the accompanying Consolidated Balance Sheets and corresponding amounts have been recorded as reductions to shareowners' equity. Contributions from U S WEST as well as dividends on unallocated shares held by the LESOP ($3, $5 and $8 in 1997, 1996 and 1995, respectively) are used for 91 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15: SHAREOWNERS' EQUITY (CONTINUED) debt service. Beginning with the dividend paid in fourth-quarter 1995, dividends on allocated shares are being paid annually to participants. Previously, dividends on allocated shares were used for debt service with participants receiving additional shares from the LESOP in lieu of dividends. U S WEST recognizes expense based on the cash payments method. Total Company contributions to the plan (excluding dividends) were $89, $77 and $86 in 1997, 1996 and 1995, respectively, of which $7, $10 and $15, respectively, have been classified as interest expense. SHAREHOLDER RIGHTS PLAN. The Board has adopted a shareholder rights plan which, in the event of a takeover attempt, would entitle existing shareowners to certain preferential rights. The rights expire on April 6, 1999, and are redeemable by the Company at any time prior to the date they would become effective. NOTE 16: EARNINGS PER SHARE In 1997, the Company adopted SFAS No. 128 which specifies new computation, presentation and disclosure requirements for earnings per share to be applied retroactively. Among other things, SFAS No. 128 requires presentation of basic and diluted earnings per common share on the face of the income statement. The following reflects the computation of diluted earnings (loss) per share for Communications Stock and Media Stock. Income and earnings per share are before extraordinary items and the cumulative effect of change in accounting principle.
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- SHARES IN THOUSANDS COMMUNICATIONS GROUP Income used for basic earnings per share......................................... $ 1,180 $ 1,215 $ 1,184 Interest on convertible zero coupon subordinated notes, net of tax............... 9 13 12 --------- --------- --------- Income used for diluted earnings per share....................................... $ 1,189 $ 1,228 $ 1,196 --------- --------- --------- --------- --------- --------- Weighted average number of shares used for basic earnings per share.............. 482,751 477,549 470,716 Effect of dilutive securities: Stock options.................................................................. 2,386 1,536 1,459 Convertible zero coupon subordinated notes..................................... 6,095 9,506 9,758 --------- --------- --------- Weighted average number of shares used for diluted earnings per share............ 491,232 488,591 481,933 --------- --------- --------- --------- --------- --------- Communications Group basic earnings per share.................................... $ 2.44 $ 2.55 $ 2.52 Communications Group diluted earnings per share.................................. $ 2.42 $ 2.51 $ 2.48
The Communications Group dilutive securities represent the incremental weighted average shares from the assumed exercise of Communications Group stock options and the assumed conversion of the 92 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16: EARNINGS PER SHARE (CONTINUED) zero coupon subordinated notes for the period they were outstanding. The zero coupon subordinated notes were redeemed in August 1997.
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- SHARES IN THOUSANDS MEDIA GROUP Income (loss).................................................................... $ (480) $ (71) $ 145 Dividends on preferred stock..................................................... (52) (9) (3) --------- --------- --------- Income (loss) available to common shareowners used for basic and diluted earnings per share...................................................................... $ (532) $ (80) $ 142 --------- --------- --------- --------- --------- --------- Weighted average number of shares used for basic earnings per share.............. 606,749 491,924 470,549 Effect of dilutive securities: Stock options.................................................................. -- -- 1,063 --------- --------- --------- Weighted average number of shares used for diluted earnings per share............ 606,749 491,924 471,612 --------- --------- --------- --------- --------- --------- Media Group basic and diluted earnings (loss) per share.......................... $ (0.88) $ (0.16) $ 0.30
Media Group diluted loss per share for 1997 and 1996 does not include potential share issuances associated with stock options, convertible zero coupon subordinated notes and the convertible Series D Preferred Stock due to their antidilutive effects. In 1995, convertible zero coupon subordinated notes are not included in Media Group's diluted earnings per share due to their antidilutive effects. The zero coupon subordinated notes were redeemed in August 1997. NOTE 17: STOCK INCENTIVE PLANS U S WEST maintains stock incentive plans for executives and other employees and nonemployees, primarily members of the Board. The Amended 1994 Stock Plan (the "Plan") was approved by shareowners on October 31, 1995, in connection with the Recapitalization Plan. The Plan is a successor plan to the U S WEST Stock Incentive Plan and the U S WEST 1991 Stock Incentive Plan (the "Predecessor Plans"). No further grants of options or restricted stock may be made under the Predecessor Plans. The Plan is administered by the Human Resources Committee of the Board of Directors with respect to officers, executive officers and outside directors and by a special committee with respect to all other eligible employees and eligible nonemployees. Effective November 1, 1995, each outstanding U S WEST stock option was converted into one Communications Group and one Media Group stock option. Subsequent to November 1, 1995, each Group grants options primarily to its own employees. The maximum aggregate number of shares of Communications Stock and Media Stock that may be granted in any calendar year for all purposes under the Plan is nine-tenths of one percent (0.90 percent) and three-quarters of one percent (0.75 percent), respectively, of the shares of such class outstanding (excluding shares held in U S WEST's treasury) on the first day of such calendar year. In the event that fewer than the full aggregate number of shares of either class available for issuance in any calendar year are issued in any such year, the shares not issued shall be added to the shares of such class available for issuance in any subsequent year or years. Options granted vest over periods up to three years and may be exercised no later than 10 years after the grant date. 93 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17: STOCK INCENTIVE PLANS (CONTINUED) During 1995, U S WEST modified the Plan to allow employees who terminate and are eligible for a full service pension, or who terminate under the long-term disability plan, to exercise their existing stock options according to their original terms. Additionally, U S WEST allows employees who separate under a management separation plan to retain unvested stock options. The compensation cost that has been included in income in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," was $1, $3 and $7 in 1997, 1996 and 1995, respectively, all of which related to the Plan modifications. U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but continues to account for the Plan under APB Opinion No. 25. Had compensation cost for the Plan been determined consistent with the fair value based accounting method under SFAS No. 123, the pro forma net income and earnings per share for U S WEST and both the Communications and Media Groups would have been the following:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------- 1997 1996 1995 ----------------------------------- ----------------------------------- ------------------------ EARNINGS (LOSS) EARNINGS (LOSS) EARNINGS PER SHARE PER SHARE PER SHARE NET INCOME ---------------------- NET INCOME ---------------------- ----------- (LOSS) BASIC DILUTED (LOSS) BASIC DILUTED NET INCOME BASIC ----------- --------- ----------- ----------- --------- ----------- ----------- ----- COMMUNICATIONS GROUP: As reported................... $ 1,177 $ 2.43 $ 2.41 $ 1,249 $ 2.62 $ 2.58 $ 1,176 $ 2.50 Pro forma..................... 1,164 2.41 2.40 1,247 2.61 2.58 1,178 2.50 MEDIA GROUP: As reported................... (480) (0.88) (0.88) (71) (0.16) (0.16) 141 0.29 Pro forma..................... (501) (0.91) (0.91) (82) (0.18) (0.18) 140 0.29 DILUTED ----------- COMMUNICATIONS GROUP: As reported................... $ 2.46 Pro forma..................... 2.48 MEDIA GROUP: As reported................... 0.29 Pro forma..................... 0.29
The fair value based method of accounting for stock-based compensation plans under SFAS No. 123 recognizes the value of options granted as compensation cost over the option's vesting period and has not been applied to options granted prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost is not representative of what compensation cost will be in future years. Following are the weighted-average assumptions used in connection with the Black-Scholes option-pricing model to estimate the fair value of options granted during 1997, 1996 and 1995:
YEAR ENDED DECEMBER 31, ---------------------------------- 1997 1996 1995 ---------- ---------- ---------- COMMUNICATIONS GROUP: Risk-free interest rate.................................................... 6.40% 6.50% 6.00% Expected dividend yield.................................................... 5.80% 6.70% 6.70% Expected life.............................................................. 4.0 years 4.5 years 4.5 years Expected volatility........................................................ 25.0% 19.6% 19.6% MEDIA GROUP: Risk-free interest rate.................................................... 6.40% 6.30% 6.00% Expected life.............................................................. 5.0 years 5.0 years 5.0 years Expected volatility........................................................ 30.0% 28.5% 28.5%
94 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17: STOCK INCENTIVE PLANS (CONTINUED) Data for outstanding options under the Plan is summarized as follows:
COMMUNICATIONS GROUP MEDIA GROUP U S WEST, INC. ------------------------- ------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES* PRICE ------------ ----------- ------------ ----------- ----------- ----------- Outstanding January 1, 1995.......... 7,386,037 $ 38.66 ----------- ----------- Granted(1)......................... 4,814,856 41.12 Exercised.......................... (430,631) 34.03 Canceled or expired(1)............. (1,927,083) 37.02 ----------- ----------- Outstanding October 31, 1995......... 9,843,179 $ 40.39 ----------- ----------- Recapitalization Plan................ 9,843,179 $ 24.11 9,843,179 $ 16.28 (9,843,179) $ (40.39) ------------ ----------- ------------ ----------- ----------- ----------- ----------- ----------- Granted............................ 138,309 32.16 71,580 18.51 Exercised.......................... (543,037) 21.23 (191,243) 14.71 Canceled or expired................ (15,350) 24.91 (15,350) 16.82 ------------ ----------- ------------ ----------- Outstanding December 31, 1995........ 9,423,101 $ 24.39 9,708,166 $ 16.33 ------------ ----------- ------------ ----------- Granted............................ 3,624,602 30.97 5,523,728 19.36 Exercised.......................... (1,205,730) 22.37 (507,329) 14.93 Canceled or expired................ (429,058) 25.01 (610,471) 17.86 ------------ ----------- ------------ ----------- Outstanding December 31, 1996........ 11,412,915 $ 26.67 14,114,094 $ 17.49 ------------ ----------- ------------ ----------- Granted............................ 9,491,642 34.87 8,733,782 20.33 Exercised.......................... (2,648,569) 25.41 (1,371,529) 16.30 Canceled or expired................ (637,411) 27.54 (1,027,388) 18.35 ------------ ----------- ------------ ----------- Outstanding December 31, 1997........ 17,618,577 $ 31.23 20,448,959 $ 18.74 ------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
- - ------------------------------ * Includes options granted in tandem with stock appreciation rights. (1) Amounts have been restated to include modified options which, under the provisions of SFAS No. 123, are treated as an exchange of the original award (i.e., canceled) for a new award (i.e., stock grant). The number of exercisable options under the Plan and the weighted-average exercise prices follow:
COMMUNICATIONS GROUP MEDIA GROUP ----------------------- ----------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE EXERCISABLE OPTIONS AT: SHARES PRICE SHARES PRICE - - ----------------------------------------------------------------- ---------- ----------- ---------- ----------- December 31, 1995................................................ 2,672,666 $ 22.22 3,021,166 $ 14.89 December 31, 1996................................................ 3,881,100 25.71 4,867,207 16.74 December 31, 1997................................................ 5,299,955 25.72 7,235,685 16.54
95 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 17: STOCK INCENTIVE PLANS (CONTINUED) The following table summarizes the status of outstanding and exercisable options under the Plan at December 31, 1997:
OUTSTANDING OPTIONS ------------------------------------------ EXERCISABLE OPTIONS WEIGHTED- ----------------------- AVERAGE WEIGHTED- WEIGHTED- REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE - - --------------------------------------------------- ------------ --------------- ----------- ---------- ----------- COMMUNICATIONS GROUP $16.08 - $26.11.................................... 4,449,954 6.63 $ 23.71 3,518,013 $ 23.12 $26.34 - $33.13.................................... 4,238,914 7.99 31.03 1,577,356 30.30 $33.25........................................... 4,637,013 9.31 33.25 6,375 33.25 $33.63 - $46.13.................................... 4,292,696 9.19 37.02 198,211 35.36 ------------ --- ----------- ---------- ----------- Total............................................ 17,618,577 8.28 $ 31.23 5,299,955 $ 25.72 ------------ --- ----------- ---------- ----------- ------------ --- ----------- ---------- ----------- MEDIA GROUP $10.86 - $16.13.................................... 4,632,940 5.88 $ 14.92 3,994,271 $ 14.73 $16.17 - $18.50.................................... 6,009,898 8.46 18.06 1,627,574 17.59 $18.54 - $20.50.................................... 4,276,400 8.00 19.56 1,477,907 19.89 $20.56 - $22.13.................................... 4,241,765 8.69 21.32 135,933 20.65 $22.31 - $28.88.................................... 1,287,956 9.80 24.47 -- -- ------------ --- ----------- ---------- ----------- Total............................................ 20,448,959 7.91 $ 18.74 7,235,685 $ 16.54 ------------ --- ----------- ---------- ----------- ------------ --- ----------- ---------- -----------
A total of 9,491,642, 3,624,602 and 4,953,165 Communications Group options and 8,733,782, 5,523,728 and 4,886,436 Media Group options were granted in 1997, 1996 and 1995, respectively. Included in the total grants were 198,027 and 1,751,936 of modified Communications Group options and 249,827 and 1,751,936 of modified Media Group options revalued as new grants during 1996 and 1995, respectively. The modified Communications Group or Media Group options were not significant during 1997. The weighted-average grant date fair value of Communications Group and Media Group options granted during the year, inclusive of modified options, using the Black-Scholes option-pricing model was $3.87 and $7.10, respectively, for 1996, and $3.19 and $6.07, respectively, for 1995. Excluding the modifications, the weighted-average grant date fair value was $5.70 and $7.81, respectively, for 1997, $3.67 and $7.23, respectively, for 1996, and $2.92 and $6.45, respectively, for 1995. The exercise price of Communications Group and Media Group stock options, excluding modified options, equals the market price on the grant date. The exercise prices of modified stock options may be greater or less than the market price on the revaluation date. Approximately 3,100,000 and 2,950,000 shares of Communications Stock and 2,700,000 and 2,200,000 of Media Stock were available for grant under the plans in effect at December 31, 1997 and 1996, respectively. Approximately 20,720,000 shares of Communications Stock and 23,150,000 shares of Media Stock were reserved for issuance under the Plan at December 31, 1997. 96 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18: EMPLOYEE BENEFITS PENSION PLAN U S WEST sponsors a defined benefit pension plan covering substantially all management and occupational employees of the Company, except for foreign national employees. Effective January 1, 1997, Continental's defined benefit pension plan was merged into the U S WEST plan. On April 1, 1997, employees of the cable systems in Atlanta, Georgia joined the U S WEST plan. Management benefits are based on a final pay formula while occupational benefits are based on a flat benefit formula. U S WEST uses the projected unit credit method for the determination of pension cost for financial reporting purposes and the aggregate cost method for funding purposes. U S WEST's policy is to fund amounts required under the Employee Retirement Income Security Act of 1974 and no funding was required in 1997, 1996 and 1995. The composition of the net pension cost (credit) and the actuarial assumptions of the plan follow:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Details of pension cost: Service cost--benefits earned during the period.............................. $ 189 $ 203 $ 173 Interest cost on projected benefit obligation................................ 612 575 558 Actual return on plan assets................................................. (1,996) (1,509) (1,918) Net amortization and deferral................................................ 1,159 726 1,185 --------- --------- --------- Net pension credit $ (36) $ (5) $ (2) --------- --------- --------- --------- --------- ---------
The expected long-term rate of return on plan assets used in determining net pension cost was 8.50 percent for 1997, 1996 and 1995. The funded status of the U S WEST plan follows:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Accumulated benefit obligation, including vested benefits of $7,404 and $6,544, respectively.............................................................................. $ 8,278 $ 7,446 --------- --------- --------- --------- Plan assets at fair value, primarily stocks and bonds(1).................................... $ 12,260 $ 10,958 Less: Projected benefit obligation.......................................................... 9,167 8,310 --------- --------- Plan assets in excess of projected benefit obligation....................................... 3,093 2,648 Unrecognized net (gain)..................................................................... (1,966) (1,502) Prior service cost not yet recognized in net periodic pension cost.......................... 6 31 Balance of unrecognized net asset at January 1, 1987........................................ (546) (626) --------- --------- Prepaid pension cost........................................................................ $ 587 $ 551 --------- --------- --------- ---------
- - ------------------------------ (1) Pension plan assets include Communications Stock and Media Stock of $12 and $8, respectively, in 1997, and $8 and $7, respectively, in 1996. 97 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18: EMPLOYEE BENEFITS (CONTINUED) The actuarial assumptions used to calculate the projected benefit obligation follow:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Discount rate.................................................................................. 7.00% 7.50% Weighted-average rate of compensation increase................................................. 5.50% 5.50%
Anticipated future benefit changes have been reflected in the above calculations. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS U S WEST and most of its subsidiaries provide certain health care and life insurance benefits to retired employees. In conjunction with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," U S WEST immediately recognized the accumulated postretirement benefit obligation for current and future retirees. However, the FCC and certain state jurisdictions permit amortization of the transition obligation over the average remaining service period of active employees for regulatory accounting purposes with most jurisdictions requiring funding as a stipulation for rate recovery. U S WEST uses the projected unit credit method for the determination of postretirement medical and life costs for financial reporting purposes. The composition of net medical and life postretirement benefit costs and actuarial assumptions underlying plan benefits follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Service cost--benefits earned during the period........................................... $ 66 $ 70 $ 65 Interest on accumulated benefit obligation................................................ 296 259 267 Actual return on plan assets.............................................................. (394) (231) (415) Net amortization and deferral............................................................. 211 68 286 --------- --------- --------- Net postretirement benefit costs.......................................................... $ 179 $ 166 $ 203 --------- --------- --------- --------- --------- ---------
The expected long-term rate of return on plan assets used in determining postretirement benefit costs was 8.50 percent for 1997, 1996 and 1995. 98 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 18: EMPLOYEE BENEFITS (CONTINUED) The funded status of the plans follows:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Accumulated postretirement benefit obligation attributable to: Retirees................................................................................... $ 2,403 $ 2,255 Fully eligible plan participants........................................................... 820 347 Other active plan participants............................................................. 1,183 1,289 --------- --------- Total accumulated postretirement benefit obligation.......................................... 4,406 3,891 Unrecognized net gain........................................................................ 631 534 Unamortized prior service cost............................................................... (160) 32 Fair value of plan assets, primarily stocks, bonds and life insurance(1)..................... (2,413) (2,063) --------- --------- Accrued postretirement benefit obligation.................................................... $ 2,464 $ 2,394 --------- --------- --------- ---------
- - ------------------------------ (1) Medical plan assets include Communications Stock and Media Stock of $155 and $94, respectively, in 1996. The actuarial assumptions used to calculate the accumulated postretirement benefit obligation follow:
DECEMBER 31, -------------- 1997 1996 ------ ------ Discount rate..................................... 7.00% 7.50% Medical cost trend rate*.......................... 8.00% 8.00%
- - ------------------------------ * Medical cost trend rate gradually declines to an ultimate rate of 5.5 percent in 2011. A one-percent increase in the assumed health care cost trend rate for each future year would have increased the aggregate of the service and interest cost components of 1997 net postretirement benefit cost by approximately $11 and increased the 1997 accumulated postretirement benefit obligation by approximately $394. For U S WEST, the annual funding amount is based on its cash requirements, with the funding at U S WEST Communications based on regulatory accounting requirements. Anticipated future benefit changes have been reflected in these postretirement benefit calculations. 99 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19: INCOME TAXES The components of the provision for income taxes follow:
YEAR ENDED DECEMBER 31, ---------------- 1997 1996 1995 ---- ---- ---- FEDERAL: Current......................................... $587 $601 $481 Deferred........................................ (147) 5 225 Investment tax credits--net..................... (15) (28) (38) ---- ---- ---- 425 578 668 ---- ---- ---- STATE AND LOCAL: Current......................................... 100 75 64 Deferred........................................ (16) 11 54 ---- ---- ---- 84 86 118 ---- ---- ---- FOREIGN: Current......................................... (1) 2 6 Deferred........................................ 14 30 33 ---- ---- ---- 13 32 39 ---- ---- ---- Provision for income taxes........................ $522 $696 $825 ---- ---- ---- ---- ---- ----
U S WEST paid $636, $693 and $566 for income taxes in 1997, 1996 and 1995, respectively, inclusive of the capital assets segment. The effective tax rate differs from the statutory tax rate as follows:
YEAR ENDED DECEMBER 31, ------------------- 1997 1996 1995 ----- ----- ----- (IN PERCENT) Federal statutory tax rate........................ 35.0 35.0 35.0 State income taxes--net of federal effect......... 4.4 3.0 3.5 Foreign taxes--net of federal effect.............. 0.7 1.1 1.2 Goodwill amortization............................. 4.6 0.8 0.4 Investment tax credit amortization................ (0.8) (0.9) (1.2) Other............................................. (1.2) (1.2) (0.6) ----- ----- ----- Effective tax rate................................ 42.7 37.8 38.3 ----- ----- ----- ----- ----- -----
100 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 19: INCOME TAXES (CONTINUED) The components of the net deferred tax liability follow:
DECEMBER 31, -------------- 1997 1996 ------ ------ Intangible assets................................. $2,605 $2,414 Property, plant and equipment..................... 1,862 1,891 State deferred taxes--net of federal effect....... 871 1,141 Leases............................................ 591 679 Investments....................................... -- 373 Other............................................. 345 126 ------ ------ Deferred tax liabilities........................ 6,274 6,624 ------ ------ Postemployment benefits, including pension........ 768 698 State deferred taxes--net of federal effect....... 221 223 Restructuring, assets held for sale and other..... 209 301 Investments....................................... 203 -- Net operating loss and tax credit carryforwards... 155 466 Unamortized investment tax credit................. 59 61 Valuation allowance............................... (320) (387) Other............................................. 615 455 ------ ------ Deferred tax assets............................. 1,910 1,817 ------ ------ Net deferred tax liability........................ $4,364 $4,807 ------ ------ ------ ------
In connection with the Continental Acquisition, U S WEST has net operating loss carryforwards of approximately $300 for federal income tax purposes, expiring in various years through 2011. U S WEST also acquired investment tax credit carryforwards of approximately $50, expiring in various years through 2005. A valuation allowance of $320 has been established for the carryforwards and a deferred tax asset associated with an investment due to potential limitations on utilization which may exist for U S WEST. If in future periods the realization of the carryforwards or deferred tax asset becomes more likely than not, any reduction in the valuation allowance will be allocated to reduce goodwill and acquired intangible assets. The current portion of the deferred tax asset was $373 and $213 at December 31, 1997 and 1996, respectively, resulting primarily from restructuring charges and compensation-related items. The net deferred tax liability includes $669 and $671 in 1997 and 1996, respectively, related to the capital assets segment. Foreign operations contributed pretax losses of $604, $362, and $35 during 1997, 1996 and 1995, respectively. NOTE 20: COMMITMENTS AND CONTINGENCIES COMMUNICATIONS GROUP CONTINGENCIES At U S WEST Communications, there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. 101 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED) WASHINGTON. In 1996, the WUTC acted on U S WEST Communications' 1995 rate request. U S WEST Communications had sought to increase revenues by raising rates primarily for basic residential services over a four-year period. Instead of granting U S WEST Communications' request, the WUTC ordered $91.5 in annual net revenue reductions, effective May 1, 1996. On December 24, 1997, the Washington State Supreme Court upheld the WUTC ruling. The Washington State Supreme Court's ruling resulted in an estimated liability for the revenues that were collected subject to refund from May 1, 1996 through December 31, 1997, including interest, in the amount of $225. The prospective revenue reduction as a result of this ruling approximates $115 annually, which includes the effects of business growth. In a separate action, the WUTC authorized a rate increase of approximately $60 annually that partially mitigates the effect of the Washington State Supreme Court's ruling. Tariffs implementing both orders became effective February 1, 1998. OREGON. On May 1, 1996, the OPUC approved a stipulation terminating prematurely U S WEST Communications' AFOR plan, and it then undertook a review of U S WEST Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications to reduce its annual revenues by $97, effective May 1, 1997, and to issue a one-time refund, including interest, of approximately $102 to reflect the revenue reduction for the period May 1, 1996 through April 30, 1997. The one-time refund is for interim rates which became subject to refund when U S WEST Communications' AFOR plan was terminated on May 1, 1996. U S WEST Communications filed an appeal of the order and asked for an immediate stay of the refund with the Oregon Circuit Court which granted U S WEST Communications' request for a stay, pending a full review of the OPUC's order. On February 19, 1998, the Oregon Circuit Court entered a judgment in U S WEST Communications' favor on most of the appealed issues. The OPUC has announced its intent to appeal. The potential exposure, including interest, at December 31, 1997, is not expected to exceed $180. UTAH. In another proceeding, the Utah Supreme Court has remanded a UPSC order to the UPSC for hearing, thereby establishing two exceptions to the rule against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2) misconduct. The UPSC's initial order denied a refund request from interexchange carriers and other parties related to the Tax Reform Act of 1986. The potential exposure, including interest, at December 31, 1997, is not expected to exceed $160. STATE REGULATORY ACCRUALS. U S WEST Communications has accrued $348 at December 31, 1997, which represents its estimated liability for all state regulatory proceedings, predominately the items discussed above. Approximately $225 of the total estimated liability was recognized during fourth-quarter 1997. It is possible that the ultimate liability could exceed the recorded liability by an amount up to approximately $230. U S WEST Communications will continue to monitor and evaluate the risks associated with its local regulatory jurisdictions, and will adjust estimates as new information becomes available. MEDIA GROUP CONTINGENCIES Prior to April 6, 1998, Media Group and AirTouch were parties to the AirTouch Joint Venture pursuant to which they had agreed to combine their domestic cellular businesses. In February 1997, the King County Superior Court in Washington state ruled that a subsidiary of Media Group violated the 102 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 20: COMMITMENTS AND CONTINGENCIES (CONTINUED) terms of its partnership agreement with its minority partners in the Seattle cellular partnership by entering into the AirTouch Joint Venture. Similar litigation was filed in other jurisdictions regarding other cellular partnerships by the same minority partner that brought the Seattle litigation. On December 1, 1997, this minority partner announced it was selling its minority interests in the eight cellular properties where it was a partner with a Media Group subsidiary to AirTouch. As a result of the minority partner's actions, litigation in the states of Washington, Arizona, Colorado, Minnesota, Idaho and Delaware has now been stayed or dismissed pending consummation of the transfer of the minority partner's interest to AirTouch. The AirTouch Transaction, which was entered into in lieu of the AirTouch Joint Venture, was consummated on April 6, 1998. U S WEST GUARANTEES U S WEST commitments and debt guarantees associated with Media Group international and domestic investments totaled approximately $650 and $100, respectively, at December 31, 1997. In addition, a Media Group subsidiary guarantees debt, non-recourse to U S WEST, associated with its international investment in the principal amount of approximately $600. NOTE 21: SUBSEQUENT EVENT SALE OF DOMESTIC WIRELESS BUSINESSES On April 6, 1998, U S WEST sold its domestic wireless businesses to AirTouch in a tax-efficient transaction. The AirTouch Transaction was consummated pursuant to 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. Pursuant to the AirTouch Merger Agreement, AirTouch acquired these cellular and PCS interests. Consideration under the AirTouch Transaction consists of (i) debt reduction of $1.35 billion, (ii) the issuance to U S WEST of $1.65 billion in liquidation preference of dividend bearing AirTouch preferred stock (fair value of approximately $1.5 billion), and (iii) the issuance to U S WEST of 59.5 million shares of AirTouch common stock. This transaction resulted in the disposition of Media Group's domestic wireless businesses. Applying the terms of the AirTouch Merger Agreement, this transaction will result in a gain of approximately $2.3 billion, net of deferred taxes of $1.7 billion. In connection with this transaction, U S WEST and AirTouch have entered into an investment agreement, pursuant to which AirTouch has agreed to provide to U S WEST registration rights with respect to the shares of AirTouch preferred stock and AirTouch common stock which U S WEST received in the AirTouch Transaction and to assist U S WEST in the monetization of such shares. Prior to April 6, 1998, U S WEST and AirTouch were parties to a multi-phased joint venture pursuant to which they had agreed to combine their domestic cellular businesses. The AirTouch Transaction was consummated in lieu of such joint venture. NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE The Consolidated Financial Statements include the discontinued operations of the capital assets segment. In 1993, the Board approved a plan to dispose of the capital assets segment through the sale of 103 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED) segment assets and businesses. The capital assets segment includes activities related to financial services and financial guarantee insurance operations. Also included in the segment is U S WEST Real Estate, Inc., for which disposition was announced in 1991. Effective January 1, 1995, the capital assets segment has been accounted for in accordance with Staff Accounting Bulletin No. 93, issued by the Securities and Exchange Commission, which requires discontinued operations not disposed of within one year of the measurement date to be accounted for prospectively in continuing operations as a "net investment in assets held for sale." The net realizable value of the assets is evaluated on an ongoing basis with adjustments to the existing reserve, if any, charged to continuing operations. No such adjustment was required in 1997, 1996 or 1995. In second-quarter 1996, U S WEST received proceeds of $98 from the sale of 3,750,000 shares of FSA common stock. This sale reduced U S WEST's ownership in FSA to approximately 40 percent. Also in second-quarter 1996, U S WEST issued DECS due May 15, 1999. The shares of FSA to be delivered upon maturity of the DECS, combined with the exercise of outstanding options held by Fund American Enterprises Holdings, Inc. to purchase FSA shares would, if consummated, substantially dispose of U S WEST's ownership in FSA. See Note 10--Debt and Note 14--Preferred Stock Subject to Mandatory Redemption--to the Consolidated Financial Statements. In fourth-quarter 1995, U S WEST issued DECS to reduce its investment in Enhance by December 1998. During 1997, in order to monetize unrealized gains associated with its investment in Enhance, U S WEST sold options for the purchase of 828,000 residual shares of Enhance common stock at the DECS maturity. At December 31, 1997, an unrecognized loss of $10 (net of income tax benefits of $7) was included in equity related to these contracts. The shares of Enhance to be delivered upon maturity of the DECS combined with the option would, if consummated, result in a complete disposition of U S WEST's ownership in Enhance. See Note 10--Debt--to the Consolidated Financial Statements. U S WEST Real Estate, Inc. has sold various assets for proceeds of $88, $156 and $120 in each of the three years ended December 31, 1997, respectively. The sales proceeds were in line with estimates. Proceeds from sales were primarily used to repay related debt. U S WEST expects to substantially complete the liquidation of this portfolio by the end of 1998. The balance of real estate and related assets subject to sale is approximately $213, net of reserves, as of December 31, 1997. Building sales and operating revenues of the capital assets segment were $116, $223 and $237 in 1997, 1996 and 1995, respectively. Income or losses from the capital assets segment are being deferred and are included within the reserve for assets held for sale. The assets and liabilities of the capital assets segment have been separately classified on the Consolidated Balance Sheets as net investment in assets held for sale. 104 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED) The components of net investment in assets held for sale follow:
DECEMBER 31, -------------- 1997 1996 ------ ------ ASSETS Cash and cash equivalents......................... $ 54 $ 21 Finance receivables--net.......................... 777 869 Investment in real estate--net of valuation allowance....................................... 156 182 Bonds, at market value............................ 119 146 Investment in FSA................................. 365 326 Other assets...................................... 197 165 ------ ------ Total assets...................................... $1,668 $1,709 ------ ------ ------ ------ LIABILITIES Debt.............................................. $ 372 $ 481 Deferred income taxes............................. 669 671 Accounts payable, accrued liabilities and other... 197 137 Minority interests................................ 11 11 ------ ------ Total liabilities................................. 1,249 1,300 ------ ------ Net investment in assets held for sale............ $ 419 $ 409 ------ ------ ------ ------
Finance receivables primarily consist of contractual obligations under long-term leases that U S WEST intends to run off. These long-term leases consist mostly of leveraged leases related to aircraft and power plants. For leveraged leases, the cost of the assets leased is financed primarily through nonrecourse debt which is netted against the related lease receivable. The components of finance receivables follow:
DECEMBER 31, -------------- 1997 1996 ------ ------ Receivables....................................... $ 719 $ 821 Unguaranteed estimated residual values............ 431 444 ------ ------ 1,150 1,265 Less: Unearned income............................. 355 380 Credit loss and other allowances.................. 18 16 ------ ------ Finance receivables--net.......................... $ 777 $ 869 ------ ------ ------ ------
Investments in debt securities are classified as available for sale and are carried at market value. Any resulting unrealized holding gains or losses, net of applicable deferred income taxes, are reflected as a component of equity. The amortized cost of $117 and $147 at December 31, 1997 and 1996, respectively, of investments in debt securities approximates market value. Total net unrealized gains in 1997 of $22 (net of deferred taxes of $16) and 1996 net unrealized losses of $7 (net of deferred taxes of $5) are included in equity. 105 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED) DEBT Interest rates and maturities of debt associated with the capital assets segment at December 31 follow:
MATURITIES -------------------------------------------------------------------------- TOTAL TOTAL INTEREST RATES 1998 1999 2000 2001 2002 THERE- AFTER 1997 1996 - - ---------------------------------- ----- --------- ----- ----- ----- ----------- --------- --------- Above 6% to 7%.................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 15 Above 7% to 8%.................... 12 12 -- -- 1 148 173 -- Above 8% to 9%.................... -- 95 4 -- -- -- 99 154 Above 9% to 10%................... -- -- -- -- -- -- -- 5 --- --------- --- --- --- ----- --------- --------- $ 12 $ 107 $ 4 $ -- $ 1 $ 148 272 174 --- --------- --- --- --- ----- --- --------- --- --- --- ----- Allocated to the capital assets segment--net.................... 100 307 --------- --------- Total............................. $ 372 $ 481 --------- --------- --------- ---------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK--FINANCIAL GUARANTEES U S WEST retained certain risks in asset-backed obligations related to the commercial real estate portfolio. The principal amounts insured on the asset-backed obligations follow:
DECEMBER 31, -------------------- TERMS OF MATURITY 1997 1996 - - ------------------------------------------------------------------------------ --------- --------- 0 to 5 Years.................................................................. $ 449 $ 416 5 to 10 Years................................................................. 266 436 10 to 15 Years................................................................ -- 8 --------- --------- Total......................................................................... $ 715 $ 860 --------- --------- --------- ---------
Concentrations of collateral associated with insured asset-backed obligations follow:
DECEMBER 31, -------------------- TYPE OF COLLATERAL 1997 1996 - - ------------------------------------------------------------------------------ --------- --------- Commercial mortgages: Commercial real estate...................................................... $ 319 $ 341 Corporate secured........................................................... 396 519 --------- --------- Total......................................................................... $ 715 $ 860 --------- --------- --------- ---------
106 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 22: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED) ADDITIONAL FINANCIAL INFORMATION Information for U S WEST Financial Services, Inc. ("USWFS"), a member of the capital assets segment, follows:
YEAR ENDED OR AS OF DECEMBER 31, ------------------------------- SUMMARIZED FINANCIAL INFORMATION 1997 1996 1995 - - ----------------------------------------------------------------- --------- --------- --------- Revenue.......................................................... $ 23 $ 26 $ 44 Net finance receivables.......................................... 824 859 931 Total assets..................................................... 1,208 1,058 1,085 Total debt....................................................... 363 236 274 Total liabilities................................................ 1,121 998 1,024 Equity........................................................... 87 60 61
In September 1997, USWFS pledged certain finance receivables as collateral for a nonrecourse loan totaling $173. The loan bears interest at an annual rate of 7.2 percent and matures in the year 2009. NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS The Supplemental Combined Statements of the Communications Group and the Media Group (collectively the "Groups") comprise all of the accounts included in the corresponding Consolidated Financial Statements of U S WEST. Investments in less than majority-owned ventures are generally accounted for using the equity method. The separate Supplemental Group Combined Statements have been prepared on a basis that management believes to be reasonable and appropriate and include: (i) the combined historical balance sheets, results of operations and cash flows of the businesses that comprise each of the Groups, with all significant intra-group amounts and transactions eliminated; (ii) in the case of the Communications Group Supplemental Combined Statements, certain corporate assets and liabilities of U S WEST and related transactions identified with the Communications Group; (iii) in the case of the Media Group Supplemental Combined Statements, all other corporate assets and liabilities and related transactions of U S WEST; and (iv) an allocated portion of the corporate expense of U S WEST. Transactions between the Communications Group and the Media Group have not been eliminated. Certain reclassifications within the Supplemental Group Combined Statements have been made to conform to the current year presentation. Notwithstanding the allocation of assets and liabilities (including contingent liabilities) and shareowners' equity between the Communications Group and the Media Group for the purpose of preparing the respective supplemental statements of such Group, owners of Communications Stock and Media Stock are subject to risks associated with an investment in a single company and all of U S WEST's businesses, assets and liabilities. Financial effects arising from either Group that affect U S WEST's results of operations or financial condition could, if significant, affect the results of operations or financial position of the other Group or the market price of the class of common stock relating to the other Group. Any net losses of the Communications Group or the Media Group, and dividends or distributions on, or repurchases of Communications Stock, Media Stock or preferred stock, will reduce the funds of U S WEST legally available for payment of dividends on both the Communications Stock and Media Stock. Accordingly, each of the Group's Supplemental Combined Statements should be read in conjunction with U S WEST's Consolidated Financial Statements and the other Group's Supplemental Combined Statements. 107 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, U S WEST COMMUNICATIONS GROUP COMBINED STATEMENTS ------------------------------- OF INCOME 1997 1996 1995 --------- --------- --------- DOLLARS IN MILLIONS Operating revenues: Local service................................................................... $ 5,016 $ 4,770 $ 4,344 Interstate access service....................................................... 2,666 2,507 2,378 Intrastate access service....................................................... 761 770 747 Long-distance network services.................................................. 885 1,100 1,189 Other services.................................................................. 991 932 826 --------- --------- --------- Total operating revenues...................................................... 10,319 10,079 9,484 Operating expenses: Employee-related expenses....................................................... 3,697 3,594 3,341 Other operating expenses........................................................ 1,870 1,634 1,543 Taxes other than income taxes................................................... 416 389 380 Depreciation and amortization................................................... 2,126 2,122 2,042 --------- --------- --------- Total operating expenses...................................................... 8,109 7,739 7,306 --------- --------- --------- Operating income.................................................................. 2,210 2,340 2,178 Interest expense.................................................................. (403) (445) (427) Gains on sales of rural telephone exchanges....................................... 77 59 136 Gain on sale of investment in Bellcore............................................ 53 -- -- Other expense--net................................................................ (73) (41) (41) --------- --------- --------- Income before income taxes, extraordinary items and cumulative effect of change in accounting principle............................................................ 1,864 1,913 1,846 Provision for income taxes........................................................ (684) (698) (662) --------- --------- --------- Income before extraordinary items and cumulative effect of change in accounting principle....................................................................... 1,180 1,215 1,184 Extraordinary items--early extinguishment of debt--net of tax..................... (3) -- (8) --------- --------- --------- Income before cumulative effect of change in accounting principle................. 1,177 1,215 1,176 Cumulative effect of change in accounting principle--net of tax................... -- 34 -- --------- --------- --------- NET INCOME........................................................................ $ 1,177 $ 1,249 $ 1,176 --------- --------- --------- --------- --------- ---------
108 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS (CONTINUED)
DECEMBER 31, -------------------- U S WEST COMMUNICATIONS GROUP COMBINED BALANCE SHEETS 1997 1996 --------- --------- DOLLARS IN MILLIONS ASSETS Current assets: Cash and cash equivalents................................................................. $ 27 $ 80 Accounts and notes receivable, less allowance for credit losses of $54 and $40, respectively..................................................... 1,681 1,622 Inventories and supplies.................................................................. 150 144 Deferred tax asset........................................................................ 247 171 Prepaid and other......................................................................... 77 65 --------- --------- Total current assets........................................................................ 2,182 2,082 Gross property, plant and equipment......................................................... 33,408 32,645 Less accumulated depreciation............................................................... 19,176 18,639 --------- --------- Property, plant and equipment--net.......................................................... 14,232 14,006 Other assets................................................................................ 832 827 --------- --------- Total assets................................................................................ $ 17,246 $ 16,915 --------- --------- --------- --------- LIABILITIES AND EQUITY Current liabilities: Short-term debt........................................................................... $ 626 $ 834 Accounts payable.......................................................................... 1,325 897 Employee compensation..................................................................... 375 342 Dividends payable......................................................................... 259 257 Advanced billings and customer deposits................................................... 292 250 Current portion state regulatory liability................................................ 225 -- Accrued property taxes.................................................................... 205 193 Payable to Media Group.................................................................... 90 92 Other..................................................................................... 603 602 --------- --------- Total current liabilities................................................................... 4,000 3,467 Long-term debt.............................................................................. 5,020 5,664 Postretirement and other postemployment benefit obligations................................. 2,468 2,387 Deferred income taxes....................................................................... 805 749 Unamortized investment tax credits.......................................................... 168 173 Deferred credits and other.................................................................. 586 558 Contingencies Communications Group equity................................................................. 4,199 3,917 --------- --------- Total liabilities and equity................................................................ $ 17,246 $ 16,915 --------- --------- --------- ---------
109 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------- U S WEST COMMUNICATIONS GROUP COMBINED STATEMENTS OF CASH FLOWS 1997 1996 1995 --------- --------- --------- DOLLARS IN MILLIONS OPERATING ACTIVITIES Net income...................................................................... $ 1,177 $ 1,249 $ 1,176 Adjustments to net income: Depreciation and amortization................................................. 2,126 2,122 2,042 Gains on sales of rural telephone exchanges................................... (77) (59) (136) Gain on sale of investment in Bellcore........................................ (53) -- -- Cumulative effect of change in accounting principle........................... -- (34) -- Deferred income taxes and amortization of investment tax credits..................................................................... (18) 91 172 Changes in operating assets and liabilities: Restructuring payments........................................................ (67) (226) (315) Postretirement medical and life costs, net of cash fundings................... 80 28 (90) Accounts receivable........................................................... (46) (5) (117) Inventories, supplies and other current assets................................ (45) 27 (51) Accounts payable and accrued liabilities...................................... 564 98 7 Other--net...................................................................... 207 15 31 --------- --------- --------- Cash provided by operating activities........................................... 3,848 3,306 2,719 --------- --------- --------- INVESTING ACTIVITIES Expenditures for property, plant and equipment.................................. (2,139) (2,419) (2,462) Purchase of PCS licenses........................................................ (73) -- -- Proceeds from sales of rural telephone exchanges................................ 67 174 214 Proceeds from sale of investment in Bellcore.................................... 65 -- -- Proceeds from (payments on) disposals of property, plant and equipment.......... 22 15 (18) Other--net...................................................................... -- -- (2) --------- --------- --------- Cash (used for) investing activities............................................ (2,058) (2,230) (2,268) --------- --------- --------- FINANCING ACTIVITIES Net proceeds from (repayments of) short-term debt............................... (510) 96 (832) Proceeds from issuance of long-term debt........................................ 29 23 1,647 Repayments of long-term debt.................................................... (445) (482) (334) Dividends paid on common stock.................................................. (992) (939) (926) Proceeds from issuance of common stock.......................................... 75 134 50 --------- --------- --------- Cash (used for) financing activities............................................ (1,843) (1,168) (395) --------- --------- --------- CASH AND CASH EQUIVALENTS Increase (decrease)............................................................. (53) (92) 56 Beginning balance............................................................... 80 172 116 --------- --------- --------- Ending balance.................................................................. $ 27 $ 80 $ 172 --------- --------- --------- --------- --------- ---------
110 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------- U S WEST MEDIA GROUP COMBINED STATEMENTS OF OPERATIONS 1997 1996 1995 --------- --------- --------- DOLLARS IN MILLIONS Sales and other revenues: Cable and broadband................................................................ $ 2,341 $ 494 $ 215 Wireless communications............................................................ 1,428 1,183 941 Directory and information services................................................. 1,245 1,259 1,180 Other.............................................................................. 29 19 38 --------- --------- --------- Total sales and other revenues................................................... 5,043 2,955 2,374 Operating expenses: Cost of sales and other revenues................................................... 1,666 966 772 Selling, general and administrative expenses....................................... 1,487 1,052 886 Depreciation and amortization...................................................... 1,294 422 249 --------- --------- --------- Total operating expenses......................................................... 4,447 2,440 1,907 --------- --------- --------- Operating income..................................................................... 596 515 467 Interest expense..................................................................... (680) (168) (100) Equity losses in unconsolidated ventures............................................. (909) (346) (207) Gains on sales of investments........................................................ 421 -- -- Gain on merger of joint venture interest............................................. -- -- 157 Guaranteed minority interest expense................................................. (87) (55) (14) Other income (expense)--net.......................................................... 17 (19) 5 --------- --------- --------- Income (loss) before income taxes and extraordinary item............................. (642) (73) 308 (Provision) benefit for income taxes................................................. 162 2 (163) --------- --------- --------- Income (loss) before extraordinary item.............................................. (480) (71) 145 Extraordinary item--early extinguishment of debt--net of tax......................... -- -- (4) --------- --------- --------- NET INCOME (LOSS).................................................................... $ (480) $ (71) $ 141 --------- --------- --------- --------- --------- --------- Dividends on preferred stock......................................................... (52) (9) (3) --------- --------- --------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK........................................... $ (532) $ (80) $ 138 --------- --------- --------- --------- --------- ---------
111 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS (CONTINUED)
DECEMBER 31, -------------------- U S WEST MEDIA GROUP COMBINED BALANCE SHEETS 1997 1996 --------- --------- DOLLARS IN MILLIONS ASSETS Current assets: Cash and cash equivalents................................................................. $ 184 $ 121 Accounts and notes receivable, less allowance for credit losses of $82 and $85, respectively..................................................... 589 508 Deferred directory costs.................................................................. 257 259 Receivable from Communications Group...................................................... 90 92 Marketable securities..................................................................... -- 58 Deferred tax asset........................................................................ 126 43 Other..................................................................................... 82 58 --------- --------- Total current assets........................................................................ 1,328 1,139 Property, plant and equipment--net.......................................................... 4,348 4,275 Investment in Time Warner Entertainment..................................................... 2,486 2,477 Net investment in international ventures.................................................... 475 1,548 Net investment in assets held for sale...................................................... 419 409 Intangible assets--net...................................................................... 12,597 12,595 Other assets................................................................................ 961 1,618 --------- --------- Total assets................................................................................ $ 22,614 $ 24,061 --------- --------- --------- --------- LIABILITIES AND EQUITY Current liabilities: Short-term debt........................................................................... $ 804 $ 217 Due to Continental Cablevision shareholders............................................... -- 1,150 Accounts payable.......................................................................... 432 425 Accrued interest payable.................................................................. 212 84 Deferred revenue and customer deposits.................................................... 152 129 Employee compensation..................................................................... 146 128 Other..................................................................................... 680 583 --------- --------- Total current liabilities................................................................... 2,426 2,716 Long-term debt.............................................................................. 8,228 8,636 Deferred income taxes....................................................................... 3,262 3,600 Deferred credits and other.................................................................. 393 346 Commitments and contingencies Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures...................................................... 1,080 1,080 Preferred stock subject to mandatory redemption............................................. 100 51 Media Group equity.......................................................................... 7,171 7,723 Company LESOP guarantee..................................................................... (46) (91) --------- --------- Total equity................................................................................ 7,125 7,632 --------- --------- Total liabilities and equity................................................................ $ 22,614 $ 24,061 --------- --------- --------- ---------
112 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 23: SUPPLEMENTAL COMMUNICATIONS GROUP AND MEDIA GROUP COMBINED STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, ------------------------------- U S WEST MEDIA GROUP COMBINED STATEMENTS OF CASH FLOWS 1997 1996 1995 --------- --------- --------- DOLLARS IN MILLIONS OPERATING ACTIVITIES Net income (loss)............................................................... $ (480) $ (71) $ 141 Adjustments to net income (loss): Depreciation and amortization................................................. 1,294 422 249 Equity losses in unconsolidated ventures...................................... 909 346 207 Gains on sales of investments................................................. (421) -- -- Gain on merger of joint venture interest...................................... -- -- (157) Deferred income taxes......................................................... (146) (73) 102 Provision for uncollectibles.................................................. 95 65 55 Changes in operating assets and liabilities: Restructuring payments........................................................ (3) (16) (19) Accounts and notes receivable................................................. (189) (101) (103) Deferred directory costs, prepaid and other................................... (60) 4 (28) Accounts payable and accrued liabilities...................................... 218 112 36 Other adjustments--net.......................................................... 101 36 157 --------- --------- --------- Cash provided by operating activities........................................... 1,318 724 640 --------- --------- --------- INVESTING ACTIVITIES Expenditures for property, plant and equipment.................................. (1,551) (652) (363) Payment to Continental Cablevision shareowners.................................. (1,150) -- -- Investments in international ventures........................................... (325) (243) (681) Investment in PCS............................................................... (213) (132) (286) Proceeds from sales of investments.............................................. 1,827 28 127 Cash from net investment in assets held for sale................................ 231 213 -- Other--net...................................................................... (61) (32) (35) --------- --------- --------- Cash (used for) investing activities............................................ (1,242) (818) (1,238) --------- --------- --------- FINANCING ACTIVITIES Net proceeds from (repayments of) short-term debt............................... (3,685) 3,891 (449) Proceeds from issuance of long-term debt........................................ 4,123 360 1,085 Repayments of long-term debt.................................................... (379) (4,217) (724) Proceeds from issuance of Preferred Securities--net............................. -- 465 581 Proceeds from issuance of common stock.......................................... 31 2 57 Purchase of treasury stock...................................................... (53) (297) -- Dividends paid on preferred stock............................................... (50) (9) (3) Other--net...................................................................... -- -- (22) --------- --------- --------- Cash (used for) provided by financing activities................................ (13) 195 525 --------- --------- --------- CASH AND CASH EQUIVALENTS Increase (decrease)............................................................. 63 101 (73) Beginning balance............................................................... 121 20 93 --------- --------- --------- Ending balance.................................................................. $ 184 $ 121 $ 20 --------- --------- --------- --------- --------- ---------
113 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA -------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- 1997 Sales and other revenues................................................... $ 3,766 $ 3,787 $ 3,918 $ 3,764 Income before income taxes and extraordinary item.......................... 400 415 333 74 Income before extraordinary item........................................... 230 235 198 37 Net income................................................................. 230 238 192 37 COMMUNICATIONS GROUP: Basic earnings per common share before extraordinary item................ 0.70 0.69 0.70 0.35 Basic earnings per common share.......................................... 0.70 0.69 0.69 0.35 Diluted earnings per common share before extraordinary item.............. 0.70 0.68 0.69 0.35 Diluted earnings per common share........................................ 0.70 0.68 0.69 0.35 MEDIA GROUP: Basic and diluted loss per common share before extraordinary item........ (0.20) (0.17) (0.26) (0.24) Basic and diluted loss per common share.................................. (0.20) (0.17) (0.26) (0.24) 1996 Sales and other revenues................................................... $ 3,050 $ 3,124 $ 3,179 $ 3,558 Income before income taxes and cumulative effect of change in accounting principle................................................................ 489 519 494 338 Income before cumulative effect of change in accounting principle.......... 297 313 304 230 Net income................................................................. 331 313 304 230 COMMUNICATIONS GROUP: Basic earnings per common share before cumulative effect of change in accounting principle................................................... 0.62 0.68 0.60 0.65 Basic earnings per common share.......................................... 0.69 0.68 0.60 0.65 Diluted earnings per common share before cumulative effect of change in accounting principle................................................... 0.61 0.67 0.59 0.64 Diluted earnings per common share........................................ 0.68 0.67 0.59 0.64 MEDIA GROUP: Basic and diluted earnings (loss) per common share....................... -- (0.03) 0.04 (0.16)
1997 first-quarter net income includes a gain of $31 ($0.05 per share of Media Stock) related to the sale of the Company's wireless interest in France and $11 ($0.02 per share of Communications Stock) from gains on the sales of certain rural telephone exchanges. 1997 second-quarter net income includes a gain of $25 ($0.04 per share of Media Stock) related to the sales of TCG and Time Warner shares, $18 ($0.04 per share of Communications Stock) from gains on the sales of certain rural telephone exchanges, and a gain of $3 (no per share Media Stock impact) on the early extinguishment of debt. 1997 third-quarter net income includes $19 ($0.04 per share of Communications Stock) from gains on the sales of certain rural telephone exchanges, a $6 charge ($0.01 per share of Communications Stock and no per share Media Stock impact) for the early extinguishment of debt, and a gain of $7 ($0.01 per share of Media Stock) related to sales of TCG shares. 1997 fourth-quarter net income includes a $120 charge ($0.20 per share of Media Stock) related to Asian investments, and a $152 regulatory charge ($0.31 per share of Communications Stock) related primarily to the 1997 Washington State Supreme Court ruling that upheld a WUTC 1996 rate order. Also included is a gain of $89 ($0.15 per share of Media Stock) related to the sale of TCG shares, a gain of $80 ($0.13 per share of Media Stock) on the sale of Fintelco, a gain of $32 ($0.07 per share of Communications Stock) from the sale of U S WEST Communications' investment in Bellcore, and a gain of $17 ($0.03 per share of Media Stock) from the sale of U S WEST Polska. 114 U S WEST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 24: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED) 1996 first-quarter net income includes the cumulative and current effects of $34 ($0.07 per share of Communications Stock) and $5 ($0.01 per share of Communications Stock), respectively, from adopting SFAS No. 121. 1996 second-quarter net income includes $30 ($0.06 per share of Communications Stock) from gains on the sales of certain rural telephone exchanges, a charge of $19 ($0.04 per share of Media Stock) related to the sale of the Company's cable television interests in Norway, Sweden and Hungary and the current effects of $5 ($0.01 per share of Communications Stock) from adopting SFAS No. 121. 1996 third-quarter net income includes $1 (no per share of Communications Stock impact) from gains on the sales of certain rural telephone exchanges and the current effects of $3 ($0.01 per share of Communications Stock) from adopting SFAS No. 121. 1996 fourth-quarter net income includes $5 ($0.01 per share of Communications Stock) from gains on the sales of certain rural telephone exchanges, losses of $71 and losses available for common stock of $77 ($0.15 per share of Media Stock) related to the Continental Acquisition and the current effects of $2 ($0.01 per share of Communications Stock) from adopting SFAS No. 121.
MARKET PRICE ---------------------------------- PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS - - ------------------------------------------------------------------ ---------- ---------- ---------- ----------- (WHOLE DOLLARS) 1997 COMMUNICATIONS STOCK First quarter................................................... $ 37.2500 $ 31.7500 $ 33.8750 $ 0.5350 Second quarter.................................................. 38.5000 31.1250 37.6875 0.5350 Third quarter................................................... 39.4375 35.6250 38.5000 0.5350 Fourth quarter.................................................. 46.9375 36.8750 45.1250 0.5350 MEDIA STOCK First quarter................................................... $ 20.6250 $ 17.6250 $ 18.5000 $ -- Second quarter.................................................. 22.3750 16.0000 20.2500 -- Third quarter................................................... 24.2500 19.8125 22.3125 -- Fourth quarter.................................................. 29.1250 22.3125 28.8750 -- 1996 COMMUNICATIONS STOCK First quarter................................................... $ 37.5000 $ 30.2500 $ 32.3750 $ 0.5350 Second quarter.................................................. 34.6250 31.1250 32.0000 0.5350 Third quarter................................................... 32.2500 27.2500 29.8750 0.5350 Fourth quarter.................................................. 33.6250 29.2500 32.2500 0.5350 MEDIA STOCK First quarter................................................... $ 23.0000 $ 18.8750 $ 20.6250 $ -- Second quarter.................................................. 21.0000 16.8750 18.2500 -- Third quarter................................................... 18.8750 14.3750 16.8750 -- Fourth quarter.................................................. 19.8750 15.3750 18.3750 --
115 U S WEST, INC. SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS (DOLLARS IN MILLIONS) U S WEST believes that proportionate financial data facilitates the understanding and assessment of its Consolidated Financial Statements. The following proportionate accounting table reflects the relative weight of U S WEST's ownership interest in its domestic and international investments in cable and broadband, wireless communications and directory and information services operations. The financial information included below departs materially from GAAP because it aggregates the revenues and operating income of entities not controlled by U S WEST with those of the consolidated operations of U S WEST. This table is not intended to replace the Consolidated Financial Statements prepared in accordance with GAAP. U S WEST considers earnings before interest, taxes, depreciation, amortization and other ("EBITDA") an important indicator of the operating performance of its businesses. This calculation of EBITDA may not be comparable to other similarly titled measures of other companies. EBITDA, however, should not be considered as an alternative to operating or net income as an indicator of performance, or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP.
COMMUNICATIONS MEDIA GROUP GROUP ELIMINATIONS TOTAL --------------- --------- ------------- --------- 1997 Sales and other revenues.................................... $ 10,319 $ 9,107 $ (127) $ 19,299 Operating expenses.......................................... 5,983 6,486 (127) 12,342 ------- --------- ----- --------- EBITDA...................................................... 4,336 2,621 -- 6,957 Depreciation and amortization............................... 2,126 2,136 -- 4,262 ------- --------- ----- --------- Operating income............................................ 2,210 485 -- 2,695 Income (loss) before extraordinary items.................... 1,180 (480) -- 700 Net income (loss)........................................... 1,177 (480) -- 697 - - -------------------------------------------------------------------------------------------------------------------- 1996 Sales and other revenues.................................... $ 10,079 $ 6,367 $ (123) $ 16,323 Operating expenses.......................................... 5,617 4,894 (123) 10,388 ------- --------- ----- --------- EBITDA...................................................... 4,462 1,473 -- 5,935 Depreciation and amortization............................... 2,122 1,014 -- 3,136 ------- --------- ----- --------- Operating income............................................ 2,340 459 -- 2,799 Income (loss) before cumulative effect of change in accounting principle...................................... 1,215 (71) -- 1,144 Net income (loss)........................................... 1,249 (71) -- 1,178 - - -------------------------------------------------------------------------------------------------------------------- 1995 (UNAUDITED) Sales and other revenues.................................... $ 9,484 $ 5,115 $ (112) $ 14,487 Operating expenses.......................................... 5,264 3,966 (112) 9,118 ------- --------- ----- --------- EBITDA...................................................... 4,220 1,149 -- 5,369 Depreciation and amortization............................... 2,042 673 -- 2,715 ------- --------- ----- --------- Operating income............................................ 2,178 476 -- 2,654 Income before extraordinary item............................ 1,184 145 -- 1,329 Net income.................................................. 1,176 141 -- 1,317 - - --------------------------------------------------------------------------------------------------------------------
116 EX-2.A 2 EXHIBIT 2-A - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SEPARATION AGREEMENT between U S WEST, INC. (to be renamed MEDIAONE GROUP, INC.) and USW-C, INC. (to be renamed U S WEST, INC.) Dated as of _________ __, 1998 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- TABLE OF CONTENTS
ARTICLE I DEFINITIONS 1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Terms Defined Elsewhere in the Agreement. . . . . . . . . 15 1.3 Other Definitional Provisions . . . . . . . . . . . . . . 17 1.4 References to Time. . . . . . . . . . . . . . . . . . . . 17 ARTICLE II CERTAIN PRE-SEPARATION TRANSACTIONS 2.1 Certificates of Incorporation; Bylaws; Name Changes . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.2 Stockholders' Meeting . . . . . . . . . . . . . . . . . . 18 2.3 Registration and Listing. . . . . . . . . . . . . . . . . 18 2.4 Boards of Directors . . . . . . . . . . . . . . . . . . . 19 2.5 Rights Agreements . . . . . . . . . . . . . . . . . . . . 20 2.6 The Transaction Documents . . . . . . . . . . . . . . . . 20 2.7 U S WEST Approval of Certain New U S WEST Actions . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE III REORGANIZATION; CONTRIBUTION; REFINANCING OF INDEBTEDNESS 3.1 Reorganization. . . . . . . . . . . . . . . . . . . . . . 21 3.2 Refinancing of Indebtedness . . . . . . . . . . . . . . . 23 3.3 Contribution. . . . . . . . . . . . . . . . . . . . . . . 28 3.4 Discharge of Liabilities. . . . . . . . . . . . . . . . . 32 3.5 Closing; Delivery; Methods of Transfer and Assumption . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE IV THE SEPARATION 4.1 The Separation. . . . . . . . . . . . . . . . . . . . . . 35 4.2 Separation Time . . . . . . . . . . . . . . . . . . . . . 35 4.3 Certain Determinations. . . . . . . . . . . . . . . . . . 36
i 4.4 New U S WEST SIP Accounts; Certificates; Distribution Procedures . . . . . . . . . . . . . . . . . 36 4.5 Conditions to the Separation. . . . . . . . . . . . . . . 41 ARTICLE V POST-SEPARATION INTERCOMPANY BUSINESS RELATIONSHIPS 5.1 Pending Litigation. . . . . . . . . . . . . . . . . . . . 43 5.2 Settlements for Cash Collections and Disbursements After the Separation Time . . . . . . . . . 44 5.3 Transition Services . . . . . . . . . . . . . . . . . . . 45 5.4 U S WEST Name . . . . . . . . . . . . . . . . . . . . . . 46 5.5 Transfer Taxes. . . . . . . . . . . . . . . . . . . . . . 47 5.6 Intellectual Property . . . . . . . . . . . . . . . . . . 47 ARTICLE VI EMPLOYEE MATTERS 6.1 Employees . . . . . . . . . . . . . . . . . . . . . . . . 48 6.2 Employee Benefit Plans and Employee Arrangements. . . . . . . . . . . . . . . . . . . . . . . 48 6.3 Internal Revenue Service Forms. . . . . . . . . . . . . . 49 ARTICLE VII INSURANCE MATTERS 7.1 Policies and Rights Included Within AssetS. . . . . . . . 49 7.2 Administration; Other Matters . . . . . . . . . . . . . . 50 7.3 Cooperation; Disagreements. . . . . . . . . . . . . . . . 51 ARTICLE VIII INDEMNIFICATION 8.1 New U S WEST's Agreement to Indemnify . . . . . . . . . . 52 8.2 U S WEST's Agreement to Indemnify . . . . . . . . . . . . 53 8.3 Procedure for Indemnification . . . . . . . . . . . . . . 54 8.4 Miscellaneous Indemnification Provisions. . . . . . . . . 58 8.5 Contribution. . . . . . . . . . . . . . . . . . . . . . . 59 8.6 Tax Matters; Construction of Agreements . . . . . . . . . 60 8.7 Remedies Cumulative . . . . . . . . . . . . . . . . . . . 60
ii ARTICLE IX CERTAIN ADDITIONAL COVENANTS 9.1 Licenses and Permits. . . . . . . . . . . . . . . . . . . 60 9.2 Intercompany Agreements . . . . . . . . . . . . . . . . . 61 9.3 Guarantee Obligations . . . . . . . . . . . . . . . . . . 61 9.4 Further Assurances. . . . . . . . . . . . . . . . . . . . 62 9.5 National Contracts. . . . . . . . . . . . . . . . . . . . 64 9.6 Non-Solicitation of Employees . . . . . . . . . . . . . . 65 9.7 Lock Boxes. . . . . . . . . . . . . . . . . . . . . . . . 65 9.8 Agreements with Respect to Common Stock Received by Savings Plan/ESOPs. . . . . . . . . . . . . . 66 9.9 AirTouch Transaction. . . . . . . . . . . . . . . . . . . 66 ARTICLE X ACCESS TO INFORMATION 10.1 Provision of Corporate Records. . . . . . . . . . . . . . 67 10.2 Access to Information . . . . . . . . . . . . . . . . . . 68 10.3 Production of Witnesses . . . . . . . . . . . . . . . . . 70 10.4 Retention of Records. . . . . . . . . . . . . . . . . . . 70 10.5 Confidentiality . . . . . . . . . . . . . . . . . . . . . 71 10.6 Cooperation with Respect to Government Reports and Filings . . . . . . . . . . . . . . . . . . . 71 10.7 Certain Limitations with Respect to Information . . . . . . . . . . . . . . . . . . . . . . . 71 10.8 Protective Arrangements . . . . . . . . . . . . . . . . . 72 ARTICLE XI MUTUAL RELEASE; NO REPRESENTATIONS OR WARRANTIES 11.1 Mutual Release . . . . . . . . . . . . . . . . . . . . . 73 11.2 No Representations or Warranties . . . . . . . . . . . . 74 ARTICLE XII GENERAL PROVISIONS 12.1 Merger or Consolidation . . . . . . . . . . . . . . . . . 75 12.2 Separation Committee; Dispute Resolution. . . . . . . . . 75 12.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . 77 12.4 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 78
iii 12.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . 78 12.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 78 12.7 Entire Agreement. . . . . . . . . . . . . . . . . . . . . 79 12.8 Headings; References. . . . . . . . . . . . . . . . . . . 79 12.9 Schedules . . . . . . . . . . . . . . . . . . . . . . . . 79 12.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . 79 12.11 Parties in Interest; Assignment; Successors. . . . . . . . . . . . . . . . . . . . . . . 79 12.12 Severability; Enforcement . . . . . . . . . . . . . . . 80 12.13 Amendment . . . . . . . . . . . . . . . . . . . . . . . 80 12.14 Termination . . . . . . . . . . . . . . . . . . . . . . 80 EXHIBITS Exhibit A - Employee Matters Agreement Exhibit B - Tax Sharing Agreement
iv SEPARATION AGREEMENT SEPARATION AGREEMENT, dated as of _______ __, 1998, between U S WEST, INC., a Delaware corporation ("U S WEST"), to be renamed "MEDIAONE GROUP, INC.," and USW-C, INC., a Delaware corporation and indirect wholly owned subsidiary of U S WEST ("NEW U S WEST"), to be renamed "U S WEST, INC." W I T N E S S E T H: WHEREAS, pursuant to the Restated Certificate of Incorporation of U S WEST (the "RESTATED CERTIFICATE"), U S WEST's assets, liabilities and businesses are divided between the Communications Group (as defined in the Restated Certificate) and the Media Group (as defined in the Restated Certificate); WHEREAS, pursuant to the Restated Certificate, the domestic directories business of U S WEST (the "DIRECTORIES BUSINESS") conducted by U S WEST Dex, Inc., a Colorado corporation ("DEX"), is currently attributed to the Media Group; WHEREAS, the Board of Directors of U S WEST has determined that it is in the best interests of U S WEST and its stockholders to (i) align the Directories Business with the Communications Group and (ii) separate the Communications Group and the Media Group into two separately traded public companies; WHEREAS, in furtherance of the foregoing, the Board of Directors of U S WEST and New U S WEST have approved this Agreement, pursuant to which, among other things, (a) U S WEST shall effect a restructuring of certain of its assets, liabilities and businesses, as a result of which New U S WEST shall own the Directories Business and the businesses currently attributed to the Communications Group and (b) U S WEST shall distribute all of the outstanding capital stock of New U S WEST to its stockholders, all on the terms and subject to the conditions described herein; WHEREAS, it is the intention of the parties hereto that the transactions contemplated by this Agreement shall be tax-free transactions under Sections 332, 368(a) and 355 of the Internal Revenue Code of 1986, as amended (the "CODE"), and the rules and regulations promulgated thereunder; and WHEREAS, the parties hereto desire to make certain covenants and agreements and to allocate certain assets, liabilities and obligations in connection with the transactions contemplated hereby and to prescribe various conditions to the transactions contemplated hereby. NOW, THEREFORE, in furtherance of the foregoing and in consideration of the mutual promises and undertakings contained herein and in any other document executed in connection with this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS 1.1 GENERAL. For the purposes of this Agreement, the following terms shall have the meanings set forth below: "ACTION" shall mean any action, claim (whether or not filed), suit, arbitration, inquiry, demand proceeding or investigation. "AFFILIATE" shall mean, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such specified Person; PROVIDED, HOWEVER, that for purposes of this Agreement, no member of either Group shall, after giving effect to the Separation, be deemed to be an Affiliate of any member of the other Group. "AGREEMENT" shall mean this Separation Agreement, together with all exhibits and schedules hereto, as the same may be amended from time to time in accordance with the terms hereof. "AIRTOUCH" shall mean AirTouch Communications, Inc., a Delaware corporation. "AIRTOUCH FUNDS" shall mean the portion of the funds received in the AirTouch Transaction which is not used to repay outstanding indebtedness. 2 "AIRTOUCH MERGER AGREEMENT" shall mean Agreement and Plan of Merger, dated as of January 29, 1998, among U S WEST, MGI, NewVector, PCS Holdings and AirTouch. "AIRTOUCH STOCK" shall mean all of the shares of common stock and preferred stock of AirTouch which MGI receives in connection with the AirTouch Transaction. "AIRTOUCH TRANSACTION" shall mean the merger of NewVector and PCS Holdings with and into AirTouch pursuant to the terms of the AirTouch Merger Agreement. "APPLICABLE LAW" shall mean, with respect to any Person, all statutes, laws, ordinances, rules, orders and regulations of any Governmental Authority applicable to such Person and its business, properties and assets. "ASSET" shall mean any and all right, title and interest in and to all of the rights, properties, assets, claims, Contracts and businesses of every kind, character and description, whether real, personal or mixed, whether accrued, contingent or otherwise, and wherever located, including, without limitation, the following: (i) all Cash Equivalents, notes, prepaid expenses and accounts receivable (whether current or non-current); (ii) all capital stock, partnership interests and other equity or ownership interests or rights, directly or indirectly, in any entity; (iii) debentures, evidences of indebtedness, certificates of interest or participation, collateral trust certificates, preorganization certificates or subscriptions, investment contracts, foreign currency and interest rate contracts (including, without limitation, forward, option, cap and swap contracts), trust certificates, puts, calls, straddles, options and other securities or hedging arrangements of any kind; (iv) all registered and unregistered trademarks, service marks, service names, trade styles and trade names (including, without limitation, trade dress and other names, marks and slogans) and all associated goodwill; all statutory, common law and registered copyrights; all patents; all applications for any of the foregoing together with all rights to use all of the foregoing and all other rights in, to and under the foregoing; and all know-how, inventions, discoveries, improvements, processes, formulae (secret or otherwise), specifications, trade secrets (whether patentable or not), licenses and other similar agreements, confidential information, and all drawings, records, books or other indicia, however evidenced, of the foregoing; (v) all Contracts and rights existing thereunder 3 and under all other business arrangements; (vi) all real estate and all plants, buildings and other improvements thereon; (vii) all leasehold improvements and all machinery, tools, dies, equipment (including all transportation and office equipment), fixtures, trade fixtures and furniture; (viii) all ingredients, supplies, spare parts, other miscellaneous supplies and other tangible property of any kind; (ix) all raw materials, work-in-process, finished goods, consigned goods and other inventories; (x) all computer hardware, software, computer programs, systems and codes and documentation relating thereto and all databases and reference and resource materials; (xi) all prepayments of prepaid expenses; (xii) all claims, causes of action, choses in action, rights under express or implied warranties, rights of recovery and rights of set-off of any kind; (xiii) the right to receive mail, accounts receivable payments and other communications; (xiv) all customer lists and records pertaining to customers and accounts, personnel records, all lists and records pertaining to suppliers and agents, and all books, ledgers, files and business records of every kind; (xv) all advertising materials and all other printed or written materials; (xvi) all permits, licenses, approvals and authorizations issued by any Governmental Authority or third party; (xvii) all goodwill as a going concern and all other intangible properties; and (xviii) all employee Contracts, including, without limitation, the right thereunder to restrict the employee from competing in certain respects. "BUSINESS DAY" shall mean a day other than a Saturday, Sunday or other day on which banks located in New York City are authorized or required by law to close. "CAPITAL FUNDING" shall mean U S WEST Capital Funding, Inc., a Colorado corporation. "CAPITAL FUNDING INDEBTEDNESS" shall mean the Capital Funding Private Indebtedness, the Capital Funding Public Indebtedness and the Capital Funding Trust Indebtedness. "CAPITAL FUNDING PRIVATE INDEBTEDNESS" shall mean all of the indebtedness owed by Capital Funding to third parties immediately prior to the Separation Time other than the Capital Funding Public Indebtedness and the Capital Funding Trust Indebtedness. 4 "CAPITAL FUNDING PUBLIC INDEBTEDNESS" shall mean all of the indebtedness of Capital Funding listed in Section 1.1(a) of the Separation Disclosure Schedule. "CAPITAL FUNDING TRUST INDEBTEDNESS" shall mean all of the indebtedness owed by Capital Funding to the Trusts (other than a portion of such indebtedness equal to the liquidation value of the common securities of the Trusts). "CASH EQUIVALENTS" shall mean cash on hand, all other cash in any bank, savings or similar accounts at any financial institution, and checks, drafts and similar instruments and any bonds or similar marketable securities, certificates of deposit, commercial paper, eurodollar deposits and any other cash equivalents, held in the name of or for the account of U S WEST or any of its Subsidiaries. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C. SECTION SECTION 9601 ET SEQ.). "CODE" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "COMMUNICATIONS EMPLOYEES" shall have the meaning ascribed to such term in the Employee Matters Agreement. "COMMUNICATIONS EMPLOYEE ARRANGEMENTS" shall have the meaning ascribed to such term in the Employee Matters Agreement. "COMMUNICATIONS EMPLOYEE BENEFIT PLANS" shall have the meaning ascribed to such term in the Employee Matters Agreement. "COMMUNICATIONS STOCK" shall mean the U S WEST Communications Group Common Stock, par value $.01 per share, of U S WEST. "CONTRACT" shall mean any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment, written or oral, that is binding on any Person or any part of its property under Applicable Law. 5 "COVERED EMPLOYEE" shall mean an employee of the U S WEST Group or the New U S WEST Group at the grade 5 manager level or above. "EMPLOYEE ARRANGEMENTS" shall mean all employment or consulting agreements, and all bonus or other incentive compensation, deferred compensation, disability, severance, stock award, stock option or stock purchase agreements, policies or arrangements with respect to the employment and termination of employment of any employee, officer, director or other Person employed at any time by U S WEST or any of its Subsidiaries. "EMPLOYEE BENEFIT PLAN" shall mean (i) each employee benefit plan, as defined in Section 3(3) of the Employment Retirement Income Security Act of 1974, as amended ("ERISA"), together with the regulations promulgated thereunder, and (ii) each international employee benefit plan, whether or not each plan in (i) and (ii) is covered by ERISA, which U S WEST or any of its Subsidiaries maintains or to which U S WEST or any of its Subsidiaries has an obligation to make contributions. "EMPLOYEE MATTERS AGREEMENT" shall mean the Employee Matters Agreement, substantially in the form of EXHIBIT A to this Agreement. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "FINANCIAL SERVICES" shall mean U S WEST Financial Services, Inc., a Colorado corporation. "FINANCIAL SERVICES INDEBTEDNESS" shall mean all of the indebtedness of Financial Services listed in Section 1.1(b) of the Separation Disclosure Schedule. "GOVERNMENTAL AUTHORITY" shall mean any foreign, federal, state or local government, court, agency or commission or other governmental or regulatory body or authority. "GROUP" shall mean either the New U S WEST Group or the U S WEST Group and "GROUPS" shall mean the New U S WEST Group and the U S WEST Group, collectively. 6 "INDEMNIFIABLE LOSSES" shall mean, with respect to any claim by an Indemnified Party for indemnification under this Agreement, any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, fines, interest, costs and expenses (including, without limitation, the costs and expenses of any and all Actions, demands, assessments, judgments, settlements and compromises relating thereto and the reasonable costs and expenses of attorneys', accountants', consultants' and other professionals' fees and expenses incurred in the investigation or defense thereof or the enforcement of rights thereunder), including direct, consequential, exemplary, special and punitive damages and lost profits. "INDEMNIFIED PARTY" shall mean any Person that is seeking indemnification from an Indemnifying Party pursuant to the provisions of this Agreement. "INDEMNIFYING PARTY" shall mean any party hereto from which any Indemnified Party is seeking indemnification pursuant to the provisions of this Agreement. "INFORMATION" shall mean all records, books, Contracts, instruments, computer data and other data and information. "INSURANCE ADMINISTRATION" shall mean, with respect to each Joint Insurance Arrangement, (i) the accounting for premiums, retrospectively rated premiums, defense costs, indemnity payments, deductibles and retentions, as appropriate under the terms and conditions of each of the Joint Insurance Arrangements, (ii) the reporting to Insurers of any losses or claims that may cause the per-occurrence, per claim or aggregate limits of any Joint Insurance Arrangement to be exceeded and (iii) the processing of claims made under the Joint Insurance Arrangements, including, without limitation, the reporting of claims to the Insurers' management and defense of claims and providing for appropriate releases upon settlement of claims. "INSURANCE ARRANGEMENT" shall mean insurance policies and insurance contracts of any kind (other than insurance policies and insurance contracts which are Employee Benefit Plans), including, without limitation, primary and excess policies, commercial general liability policies, automobile policies, product liability policies, directors' and officers' liability policies, fiduciary 7 liability policies, workers' compensation policies, and self-insurance programs and captive insurance company arrangements, together with the rights, benefits and privileges thereunder. "INSURANCE PROCEEDS" shall mean those monies received by an insured from an Insurer or paid by an Insurer on behalf of an insured, in either case net of any applicable premium adjustment, retrospectively rated premium, deductible, retention or cost of reserve paid or held by or for the benefit of such insured. "INSURED CLAIMS" shall mean those Liabilities which, individually or in the aggregate, are covered within the terms and conditions of any of the Joint Insurance Arrangements, whether or not subject to deductibles, co-insurance, uncollectibility or retrospectively rated premium adjustments. "INSURER" shall mean a third party insurance carrier. "INTERCOMPANY INDEBTEDNESS" shall mean, with respect to any Subsidiary of U S WEST, the aggregate principal amount of indebtedness owed by such Subsidiary to Capital Funding immediately prior to the Reorganization. "JOINT INSURANCE ARRANGEMENTS" shall mean the Insurance Arrangements of U S WEST existing at the Separation Time and/or prior thereto that are owned or maintained by or on behalf of U S WEST or any of its predecessors (other than Insurance Arrangements of Western Range) and that relate to both (a) the MediaOne Business and/or the MediaOne Liabilities and (b) the New U S WEST Business and/or the New U S WEST Liabilities. "JOINT OTHER INTELLECTUAL PROPERTY" shall mean all Other Intellectual Property of U S WEST and its Subsidiaries that is not either MediaOne Other Intellectual Property or New U S WEST Other Intellectual Property, and shall include Other Intellectual Property licensed to or acquired by U S WEST and its Subsidiaries for use by both the New U S WEST Business and the MediaOne Business, or which is created by or for both the New U S WEST Business and the MediaOne Business prior to the Separation Time (including all Other Intellectual Property which is created by or for U S WEST prior to the Separation Time). 8 "JOINT PATENTS" shall mean the U.S. patents (and any non-U.S. patents corresponding thereto) listed in Section 1.1(c) of the Separation Disclosure Schedule, as well as any divisions, continuations, continuations-in-part (but only to the extent claims are supported by the specification of the patents listed in Section 1.1(c) of the Separation Disclosure Schedule), re-examinations, reissues, extensions or renewals of such U.S. or non-U.S. patents. "LESOP NOTES" shall mean the indebtedness of the U S WEST Savings Plan/ESOP, all of which is guaranteed by U S WEST. "LIABILITY" shall mean, with respect to any Person, except as otherwise expressly provided herein, any direct or indirect liability (whether absolute, accrued or unaccrued, contingent, liquidated or unliquidated, matured or unmatured or known or unknown), indebtedness, obligation, expense, claim, deficiency, guarantee or endorsement of or by such Person (including, without limitation, those arising under any Applicable Law or Action or under any award of any court, tribunal or arbitrator of any kind, and those arising under any Contract or undertaking). "LITIGATION MATTERS" shall mean actual, threatened or future Actions that have been or may be asserted against, or otherwise adversely affect, any member of either Group. "MARKET VALUE" on any Trading Day shall mean the average of the high and low reported sales prices regular way of a share of Communications Stock as reported on the NYSE Composite Tape; PROVIDED, HOWEVER, that, for purposes of determining the market value of a share of Communications Stock for any period, the high and low sales prices of a share of Communications Stock on any day prior to any "ex-dividend" date occurring during such period for any dividend paid or to be paid with respect to the Communications Stock shall be reduced by the amount of such dividend. "MEDIA EMPLOYEES" shall have the meaning ascribed to such term in the Employee Matters Agreement. "MEDIA EMPLOYEE ARRANGEMENTS" shall have the meaning ascribed to such term in the Employee Matters Agreement. 9 "MEDIA EMPLOYEE BENEFIT PLANS" shall have the meaning ascribed to such term in the Employee Matters Agreements. "MEDIAONE BUSINESS" shall mean the businesses of U S WEST currently attributed to the Media Group pursuant to the Restated Certificate other than the Directories Business (including the domestic wireless business attributed to the Media Group being transferred to AirTouch pursuant to the AirTouch Transaction). "MEDIAONE INSURANCE ARRANGEMENTS" shall mean the Insurance Arrangements of U S WEST existing at the Separation Time and/or prior thereto which are owned or maintained by or on behalf of U S WEST or any of its predecessors and which relate only to the MediaOne Business and/or the MediaOne Liabilities (other than Shared Liabilities), including, without limitation, the Insurance Arrangements provided by Western Range (other than the Western Range Transferred Insurance Arrangements). "MEDIAONE PATENTS" shall mean the U.S. patents (and any non-U.S. patents corresponding thereto) listed in Section 1.1(d) of the Separation Disclosure Schedule, as well as any divisions, continuations, continuations-in-part, re-examinations, reissues, extensions or renewals of such U.S. or non-U.S. patents. "MEDIAONE OTHER INTELLECTUAL PROPERTY" shall mean all Other Intellectual Property licensed to or acquired by U S WEST and its Subsidiaries for use only by the MediaOne Business or which is created by or for only the MediaOne Business prior to the Separation Time. "MEDIAONE TRADEMARKS" shall mean the Trademarks listed in Section 1.1(e) of the Separation Disclosure Schedule. "MEDIA SAVINGS PLAN/ESOP" shall have the meaning ascribed to such term in the Employee Matters Agreement. "MEDIA STOCK" shall mean the U S WEST Media Group Common Stock, par value $.01 per share, of U S WEST. "MGI" shall mean U S WEST Media Group, Inc., a Delaware corporation. 10 "NEW TRUST" shall mean a newly formed Delaware statutory business trust, all of the common securities of which shall be owned by U S WEST. "NEW U S WEST" shall have the meaning set forth in the preamble to this Agreement. "NEW U S WEST BUSINESS" shall mean (i) all of the businesses of U S WEST currently attributed to the Communications Group pursuant to the Restated Certificate and (ii) the Directories Business. "NEW U S WEST GROUP" shall mean, at and after the Separation Time, New U S WEST and all of its Subsidiaries. "NEW U S WEST INSURANCE ARRANGEMENTS" shall mean the Insurance Arrangements of U S WEST existing at the Separation Time and/or prior thereto which are owned or maintained by or on behalf of U S WEST or any of its predecessors and which relate only to the New U S WEST Business and/or the New U S WEST Liabilities (other than Shared Liabilities) including, without limitation, the Western Range Transferred Insurance Arrangements. "NEW U S WEST OTHER INTELLECTUAL PROPERTY" shall mean all Other Intellectual Property licensed to or acquired by U S WEST and its Subsidiaries for use only by the New U S WEST Business or which is created by or for only the New U S WEST Business prior to the Separation Time. "NEW U S WEST PATENTS" shall mean the U.S. patents (and any non-U.S. patents corresponding thereto) listed in Section 1.1(f) of the Separation Disclosure Schedule, as well as any divisions, continuations, continuations-in-part, re-examinations, reissues, extensions or renewals of such U.S. or non-U.S. patents. "NEW U S WEST TRADEMARKS" shall mean the Trademarks listed in Section 1.1(g) of the Separation Disclosure Schedule. "NEWVECTOR" shall mean U S WEST NewVector Group, Inc., a Colorado corporation. "OTHER INTELLECTUAL PROPERTY" shall mean all registered and unregistered copyrights, all know-how, discoveries, inventions, improvements, processes, formulae, specifications, trade secrets (whether patentable or not), 11 business plans, marketing data, software, tools and documentation and all drawings, records, books or other indicia, however evidenced, of the foregoing, but excluding patents, patent applications and Trademarks. "PERSON" or "PERSON" shall mean and include any individual, partnership, joint venture, corporation, association, joint stock company, limited liability company, trust, unincorporated organization or similar entity. "PCS HOLDINGS" shall mean U S WEST PCS Holdings, Inc., a Delaware corporation. "PRIVILEGED INFORMATION" shall mean, with respect to either Group, Information regarding a member of such Group, or any of its operations, Assets or Liabilities (whether in documents or stored in any other form or known to its employees or agents) that is or may be protected from disclosure pursuant to the attorney-client privilege, the work-product doctrine or other applicable privileges. "REPRESENTATIVE" shall mean, with respect to any Person, any of such Person's directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives. "SEC" shall mean the United States Securities and Exchange Commission. "SEC FILINGS" shall mean the Proxy Statement, the Form S-4, the Form 8-A and the Form 8-B/A (and all documents incorporated therein by reference). "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "SEPARATION DISCLOSURE SCHEDULE" shall mean the Separation Disclosure Schedule, dated as of the date hereof, as the same may be amended or supplemented pursuant to this Agreement. "SHARED CONTINGENT GAIN" shall mean any right of U S WEST and its Subsidiaries against any Person to the extent such right (i) does not relate primarily to the New U S WEST Business or the MediaOne Business or (ii) relates primarily to both the New U S WEST Business and the MediaOne 12 Business, including, without limitation, the rights listed in Section 1.1(h) of the Separation Disclosure Schedule. "SHARED LIABILITY" shall mean any Liability of U S WEST or any of its Subsidiaries (whether arising prior to, at or following the Separation Time) which (i) arises out of or is in connection with or otherwise relates to the management or conduct prior to the Separation Time of the businesses of U S WEST and its Subsidiaries and is not otherwise included in the definition of "New U S WEST Liabilities" or "MediaOne Liabilities" or allocated to one of the Groups pursuant to this Agreement or the Tax Sharing Agreement or (ii) arises out of any Transaction Suit, including, without limitation, the Liabilities listed in Section 1.1(i) of the Separation Disclosure Schedule, but excluding Transaction Costs. "SUBSIDIARY" shall mean, with respect to any Person, (i) each corporation, partnership, joint venture or other legal entity of which such Person owns, either directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or similar governing body of such corporation, partnership, joint venture or other legal entity and (ii) each partnership in which such Person or another Subsidiary of such Person is the general partner or otherwise controls such partnership. "TAX" or "TAXES" shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and shall include any transferee liability in respect of Taxes. "TAX SHARING AGREEMENT" shall mean the Tax Sharing Agreement, substantially in the form of EXHIBIT B to this Agreement. 13 "TERMINATED COMMUNICATIONS EMPLOYEES" shall have the meaning ascribed to such term in the Employee Matters Agreement. "TERMINATED MEDIA EMPLOYEES" shall have the meaning ascribed to such term in the Employee Matters Agreement. "TRADEMARKS" shall mean all registered and unregistered trademarks, service marks, service names, trade styles and trade names (including, without limitation, trade dress and other names, marks and slogans) and all associated goodwill and all applications for any of the foregoing, together with all rights to use any of the foregoing. "TRADING DAY" shall mean each weekday other than any day on which the Communications Stock is not traded on the NYSE. "TRANSACTION COSTS" shall mean the costs and expenses associated with the transactions contemplated by this Agreement listed in Section 1.1(j) of the Separation Disclosure Schedule. "TRANSACTION DOCUMENTS" shall mean this Agreement, the Employee Matters Agreement and the Tax Sharing Agreement and documents, schedules, exhibits and annexes attached hereto or thereto or delivered pursuant hereto or thereto, including, without limitation, the deeds, lease assignments and assumptions, leases, subleases and sub-subleases, and the supplemental and other agreements and instruments relative thereto. "TRANSACTION SUIT" shall mean any Action that (i) is commenced against any member of the U S WEST Group or any member of the New U S WEST Group or any of their respective directors, officers or employees challenging this Agreement or any other Transaction Document or any of the transactions contemplated hereby or thereby or any of the terms thereof or (ii) arises out of any untrue statement or alleged untrue statement of a material fact contained in any of the SEC Filings, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (but only with respect to information relating to transactions contemplated by this Agreement or any other Transaction Document contained in or omitted from the SEC 14 Filings); PROVIDED, HOWEVER, that any Action arising out of or relating to the transfer of Assets between employee benefits trusts sponsored by the Groups shall not be a "Transaction Suit" and shall be governed by the provisions of the Employee Matters Agreement. "TRUSTS" shall mean U S WEST Financing I, a Delaware statutory business trust, and U S WEST Financing II, a Delaware statutory business trust. "TRUST SECURITIES" shall mean the 7.96% Trust Originated Preferred Securities of U S WEST Financing I, a Delaware statutory business trust, and the 8 1/4% Trust Originated Preferred Securities of U S WEST Financing II, a Delaware statutory business trust. "U S WEST" shall have the meaning set forth in the preamble to this Agreement. "U S WEST GROUP" shall mean, at and after the Separation Time, U S WEST and all of its Subsidiaries (other than New U S WEST and its Subsidiaries). "U S WEST SAVINGS PLAN/ESOP" shall have the meaning ascribed to such term in the Employee Matters Agreement. 1.2 TERMS DEFINED ELSEWHERE IN THE AGREEMENT. For the purposes of this Agreement, the following terms have the meanings set forth in the Sections indicated:
Term Section - - ---- ------- AAA Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Asserted Liability. . . . . . . . . . . . . . . . . . . . . . . . .8.3(a) AT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.3(c) Beneficial Holder . . . . . . . . . . . . . . . . . . . . . . . . .9.4(c) Borrower Subsidiaries . . . . . . . . . . . . . . . . . . . . . . .3.2(k) Charter Amendments. . . . . . . . . . . . . . . . . . . . . . . . .2.1(b) Claim Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . .8.3(a) CGI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(g) Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .recitals Communications. . . . . . . . . . . . . . . . . . . . . . . . . . .3.3(c) Communications Certificates . . . . . . . . . . . . . . . . . . . .4.4(b) Communications Group. . . . . . . . . . . . . . . . . . . . . . .recitals Communications Redemption . . . . . . . . . . . . . . . . . . . . .4.1(a) Communications Rights . . . . . . . . . . . . . . . . . . . . . 2.6(b)(i) Contribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3
15 Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Dex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .recitals Directories Business. . . . . . . . . . . . . . . . . . . . . . .recitals Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Distribution Agent. . . . . . . . . . . . . . . . . . . . . . . . .4.4(c) Dividend Number . . . . . . . . . . . . . . . . . . . . . . . . . .4.3(b) Domestic Cable. . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(c) Exchange Agent. . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(l) Exchange Offers . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(j) Federal Relations . . . . . . . . . . . . . . . . . . . . . . . . .3.2(f) FinanceCo . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(a) Financially Reasonable Terms. . . . . . . . . . . . . . . . . .8.3(c)(i) Form 8-A. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3(b)(i) Form 8-B/A. . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(b)(ii) Form S-4. . . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(a)(ii) International . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(e) Interactive Services. . . . . . . . . . . . . . . . . . . . . . . .3.1(e) Media Certificates. . . . . . . . . . . . . . . . . . . . . . . . .4.4(b) Media Dividend. . . . . . . . . . . . . . . . . . . . . . . . . . .4.1(b) Media Group . . . . . . . . . . . . . . . . . . . . . . . . . . .recitals Media Rights. . . . . . . . . . . . . . . . . . . . . . . . . . 2.6(b)(i) MediaOne Assets . . . . . . . . . . . . . . . . . . . . . . . . . .3.3(b) MediaOne Common Stock . . . . . . . . . . . . . . . . . . . . . . .4.1(c) MediaOne Delaware . . . . . . . . . . . . . . . . . . . . . . . . .3.1(d) MediaOne Exchange Securities. . . . . . . . . . . . . . . . . . . .3.2(j) MediaOne Georgia. . . . . . . . . . . . . . . . . . . . . . . . . .3.1(a) MediaOne Liabilities. . . . . . . . . . . . . . . . . . . . . . . .3.4(b) MediaOne New Indebtedness . . . . . . . . . . . . . . . . . . . . .3.2(a) Multimedia. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(b) National Contract . . . . . . . . . . . . . . . . . . . . . . . . .9.4(e) New U S WEST . . . . . . . . . . . . . . . . . . . . . . . . . .Recitals New U S WEST Action . . . . . . . . . . . . . . . . . . . . . . . .5.1(a) New U S WEST Assets . . . . . . . . . . . . . . . . . . . . . . . .3.3(a) New U S WEST Common Stock . . . . . . . . . . . . . . . . . . . . .2.1(a) New U S WEST DRS System . . . . . . . . . . . . . . . . . . . . . .4.4(d) New U S WEST Exchange Securities. . . . . . . . . . . . . . . . . .3.2(j) New U S WEST Indemnified Parties. . . . . . . . . . . . . . . . 8.2(a) New U S WEST Liabilities. . . . . . . . . . . . . . . . . . . . . .3.4(a) New U S WEST New Indebtedness . . . . . . . . . . . . . . . . . . .3.2(h) New U S WEST Right. . . . . . . . . . . . . . . . . . . . . . . . .2.6(a) New U S WEST Rights Agreement . . . . . . . . . . . . . . . . . . .2.6(a) New U S WEST SIP. . . . . . . . . . . . . . . . . . . . . . . . . .4.4(a) New U S WEST SIP Account. . . . . . . . . . . . . . . . . . . . . .4.4(a) Non-Managing Party. . . . . . . . . . . . . . . . . . . . . . . . .8.3(b) Non-Receiving Party . . . . . . . . . . . . . . . . . . . . . . . .8.3(b) Notice Period . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(a) NYSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(b) Panel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2
16 Party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Pre-Separation Adjustment . . . . . . . . . . . . . . . . . . . . .3.3(d) Provider. . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 5.3 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . 2.3(a)(i) PSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.3(b) Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1(e) Recipient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Receiving Party . . . . . . . . . . . . . . . . . . . . . . . . . .8.3(b) Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3(a)(i) Record Holder . . . . . . . . . . . . . . . . . . . . . . . . . . .9.4(c) Redemption Date . . . . . . . . . . . . . . . . . . . . . . . 4.3(a)(iii) Refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(j) Reorganization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Restated Certificate. . . . . . . . . . . . . . . . . . . . . . .recitals Separation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Separation Committee. . . . . . . . . . . . . . . . . . . . . . . . .12.2 Separation Time . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Shared Asserted Liability . . . . . . . . . . . . . . . . . . . . .8.3(b) Shared Claim Notice . . . . . . . . . . . . . . . . . . . . . . . .8.3(b) Shared Liability Insurance Proceeds . . . . . . . . . . . . . . . .7.2(c) SIP Participant . . . . . . . . . . . . . . . . . . . . . . . . . .4.4(a) Stockholders' Meeting . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . .3.2(j) Trust Exchange Securities . . . . . . . . . . . . . . . . . . . . .3.2(j) U S WEST. . . . . . . . . . . . . . . . . . . . . . . . . . . . .Recitals U S WEST Action . . . . . . . . . . . . . . . . . . . . . . . . . .5.1(b) U S WEST Indemnified Parties. . . . . . . . . . . . . . . . . . . .8.1(a) U S WEST Rights Agreement . . . . . . . . . . . . . . . . . . . . .2.6(b) U S WEST SIP. . . . . . . . . . . . . . . . . . . . . . . . . . . .4.4(a) U S WEST SIP Account. . . . . . . . . . . . . . . . . . . . . . . .4.4(a) Western Range . . . . . . . . . . . . . . . . . . . . . . . . . 3.3(b)(i) Western Range Transferred Insurance Arrangements. . . . . . . . . .7.1(a)
1.3 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (c) The terms "dollars" and "$" shall mean United States dollars. 1.4 REFERENCES TO TIME. All references in this Agreement to times of the day shall be to Mountain time. 17 ARTICLE II CERTAIN PRE-SEPARATION TRANSACTIONS 2.1 CERTIFICATES OF INCORPORATION; BYLAWS; NAME CHANGES. (a) Prior to the Separation Time, U S WEST shall cause New U S WEST to take all actions necessary to amend its Certificate of Incorporation and Bylaws in the manner specified by U S WEST. The Certificate of Incorporation of New U S WEST shall, among other things, authorize (i) 2,000,000,000 shares of Common Stock, par value $.01 per share ("NEW U S WEST COMMON STOCK"), of New U S WEST and (ii) 200,000,000 shares of Preferred Stock, par value $.01 per share, of New U S WEST. (b) Prior to the Separation Time, U S WEST shall take all actions necessary in accordance with Applicable Law and the Restated Certificate to amend the Restated Certificate (the "CHARTER AMENDMENTS") as specified by U S WEST to, among other things, (i) permit the redemption of the Communications Stock in exchange for shares of New U S WEST Common Stock pursuant to Section 4.1 and (ii) following such redemption, delete all references to the Communications Stock and amend certain terms of the Media Stock set forth therein. (c) Prior to the Separation Time, the parties hereto shall take all actions necessary so that, immediately after the Separation Time, (i) New U S WEST's name shall be changed to "U S WEST, Inc." and (ii) U S WEST's name shall be changed to "MediaOne Group, Inc." 2.2 STOCKHOLDERS' MEETING. U S WEST shall take all actions necessary in accordance with Applicable Law, the Restated Certificate and U S WEST's Bylaws to call, give notice of, convene and hold a meeting of its stockholders (the "STOCKHOLDERS' MEETING") as soon as practicable for the purpose of obtaining (i) the adoption of the Charter Amendments by the stockholders of U S WEST and (ii) such other approvals as may be determined by the Board of Directors of U S WEST. 2.3 REGISTRATION AND LISTING. (a) Prior to the Separation Time, (i) U S WEST shall prepare and file with the SEC a proxy statement under the Exchange Act relating to the Stockholders' Meeting (the "PROXY STATEMENT") and (ii) New U S WEST shall prepare and file with the SEC a 18 registration statement on Form S-4 registering under the Securities Act the shares of New U S WEST Common Stock to be issued to stockholders of U S WEST pursuant to Section 4.1, in which the Proxy Statement shall be included as a prospectus (the "FORM S-4"). The parties hereto shall use their reasonable best efforts to have the Form S-4 declared effective under the Securities Act as promptly as practicable after the filing thereof. U S WEST shall cause the Proxy Statement to be mailed to U S WEST's stockholders as promptly as practicable after the Form S-4 is declared effective under the Securities Act. New U S WEST shall use its reasonable best efforts to take all such actions as may be necessary or appropriate under state securities and "blue sky" laws in connection with the Separation. (b) Prior to the Separation Time, (i) New U S WEST shall prepare and file with the SEC a registration statement on Form 8-A registering under the Exchange Act the New U S WEST Common Stock (the "FORM 8-A") and (ii) U S WEST shall prepare and file with the SEC an amendment to U S WEST's existing registration statement on Form 8-B amending the terms of the Media Stock to reflect the changes set forth in the Charter Amendments (the "FORM 8-B/A"). New U S WEST shall prepare, file and seek to make effective an application for the listing of the New U S WEST Common Stock on The New York Stock Exchange ("NYSE") and the Pacific Stock Exchange (the "PSE"), subject to official notice of issuance. U S WEST shall prepare, file and seek to make effective amendments to U S WEST's listing applications with the NYSE and the PSE to provide for the delisting of the Communications Stock and the amendment of the terms of the Media Stock to reflect the changes set forth in the Charter Amendments. (c) The parties hereto shall cooperate in preparing and filing with the SEC and causing to be declared effective any registration statements or amendments thereto that are necessary or appropriate in order to reflect the establishment of, or amendments to, any employee benefit plans contemplated by this Agreement or any other Transaction Document requiring registration under the Securities Act. 2.4 BOARDS OF DIRECTORS. Prior to the Separation Time, the parties hereto shall take all actions necessary so that, effective immediately after the Separation Time, the Boards of Directors of U S WEST and New U S WEST shall be 19 comprised of the individuals so named in the Proxy Statement. 2.5 RIGHTS AGREEMENTS. (a) Prior to the Separation Time, New U S WEST shall enter into a Rights Agreement (the "NEW U S WEST RIGHTS AGREEMENT") on terms specified by U S WEST pursuant to which one Preferred Stock Purchase Right of New U S WEST (a "NEW U S WEST RIGHT") will be attached to each share of New U S WEST Common Stock issued to U S WEST pursuant to Section 4.1. All references in this Agreement to New U S WEST Common Stock shall be deemed to include such New U S WEST Rights. (b) Prior to the Separation Time, the Amended and Restated Rights Agreement, dated as of October 31, 1995 (the "U S WEST RIGHTS AGREEMENT"), between U S WEST and State Street Bank and Trust Company, as rights agent, shall be amended to provide (i) that the U S WEST Communications Group Rights (as defined in the U S WEST Rights Agreement) (the "COMMUNICATIONS RIGHTS") and the U S WEST Media Group Rights (as defined in the U S WEST Rights Agreement) (the "MEDIA RIGHTS") shall not become exercisable, distributed or unredeemable as a result of the consummation of the Separation; (ii) that the Communications Rights will expire at the Separation Time; and (iii) for certain amendments to the terms of the Media Rights. 2.6 THE TRANSACTION DOCUMENTS. Prior to the Separation Time, each of U S WEST and New U S WEST shall enter into, or cause the appropriate members of the Group of which it is a member to enter into, the Transaction Documents. 2.7 U S WEST APPROVAL OF CERTAIN NEW U S WEST ACTIONS. Prior to the Separation Time, U S WEST shall take and/or ratify all actions necessary under Applicable Law, as the sole stockholder of New U S WEST, to effectuate the transactions contemplated by this Agreement, including, without limitation, adopting and implementing appropriate plans, agreements and arrangements for New U S WEST Employees. 20 ARTICLE III REORGANIZATION; CONTRIBUTION; REFINANCING OF INDEBTEDNESS 3.1 REORGANIZATION. Subject to the terms and conditions of this Agreement, at such time as determined by U S WEST in its sole discretion, U S WEST shall cause the following transactions to occur in the order set forth below (collectively, the "REORGANIZATION"): (a) MediaOne, Inc., a Georgia corporation ("MEDIAONE GEORGIA"), shall cause: (i) MediaOne Business Services, Inc., a Colorado corporation, to be merged with and into MediaOne Georgia; (ii) MediaOne of Clayton County, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia; (iii) MediaOne of Cobb County, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia; (iv) MediaOne of Conyers Rockdale, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia; (v) MediaOne of Fayette County, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia; (vi) MediaOne of Fulton County, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia; (vii) MediaOne of Georgia, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia; (viii) MediaOne of Henry County, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia; 21 (ix) Peachtree SMATV Corporation, a Georgia corporation, to be merged with and into MediaOne Georgia; and (x) Atlanta Home Network, Inc., a Georgia corporation, to be merged with and into MediaOne Georgia. (b) U S WEST Multimedia Communications, Inc., a Colorado corporation ("MULTIMEDIA"), shall cause MediaOne Georgia to be merged with and into Multimedia. (c) MGI shall assume from U S WEST Domestic Cable, Inc., a Delaware corporation ("DOMESTIC CABLE"), all of the Intercompany Indebtedness of Domestic Cable, in repayment of a corresponding amount of the indebtedness owed by MGI to Domestic Cable. (d) MediaOne of Delaware, Inc., a Delaware corporation ("MEDIAONE DELAWARE"), shall assume from MGI all of the indebtedness owed by MGI to Domestic Cable (after giving effect to the repayment contemplated by Section 3.1(c)). (e) MediaOne Delaware shall assume from MGI a portion of the Intercompany Indebtedness of MGI equal to the difference between (A) the total amount of Intercompany Indebtedness of MGI (after giving effect to the assumption contemplated by Section 3.2(c)) and (B) the sum of (1) the difference between (x) $3.9 billion and (y) the Intercompany Indebtedness of Dex plus (2) the principal amount of the indebtedness owed by Capital Funding to U S WEST. (f) MGI shall contribute as a capital contribution to Multimedia: (i) all of the issued and outstanding shares of capital stock of: (A) U S WEST Capital Corporation, a Colorado corporation; (B) U S WEST Interactive Services, Inc., a Colorado corporation ("INTERACTIVE SERVICES"); (C) U S WEST International Holdings, Inc., a Delaware corporation ("INTERNATIONAL"); (D) U S WEST Investments, Inc., a Colorado corporation; (E) MediaOne Delaware; (F) if the AirTouch Transaction has not been consummated, NewVector; (G) if the AirTouch Transaction has not been consummated, PCS Holdings; (H) Far East Investment Company, a Colorado corporation; (I) Domestic Cable; (J) U S WEST Cellular Holdings, Inc., a 22 Delaware corporation; and (K) U S WEST PCS Services, Inc., a Delaware corporation; (ii) if the AirTouch Transaction has not been consummated, a note, payable by NewVector to MGI in the aggregate principal amount of $900,000,000; and (iii) if the AirTouch Transaction has been consummated, all of the AirTouch Stock. (g) MGI shall distribute as a dividend all of the issued and outstanding capital stock of Multimedia to U S WEST. (h) U S WEST shall merge U S WEST Communications Group, Inc., a Colorado corporation ("CGI"), with and into New U S WEST, with New U S WEST continuing as the surviving corporation. Pursuant to such merger, the issued and outstanding capital stock of CGI shall be converted into a number of shares of New U S WEST Common Stock equal to the sum of (i) the number of shares of Communications Stock that will be issued and outstanding immediately prior to the Separation Time plus (ii) the aggregate number of shares of New U S WEST Common Stock to be issued to holders of Media Stock in connection with the Separation pursuant to Section 4.1. Each share of New U S WEST Common Stock so issued to U S WEST shall be fully paid, nonassessable and free of preemptive rights. 3.2 REFINANCING OF INDEBTEDNESS. Following consummation of the Reorganization, U S WEST shall cause the following actions to be taken with respect to certain indebtedness of U S WEST and its Subsidiaries (as used in this Section 3.2, all references to "amounts" or "aggregate principal amounts" of any indebtedness shall refer to the face amount of such indebtedness): (a) A newly formed direct or indirect Subsidiary of U S WEST ("FINANCECO") shall incur an aggregate principal amount of indebtedness equal to the difference between (i) the sum of (A) the total aggregate principal amount of the Capital Funding Indebtedness attributed to the Media Group plus (B) the total aggregate principal amount of the Financial Services Indebtedness plus (C) an aggregate principal amount of indebtedness sufficient to fund the costs and expenses payable by the U S WEST Group in connection with the Separation, as well as any negative Pre-Separation Adjustment and (ii) the sum of (A) $3.9 billion 23 plus (B) if the AirTouch Transaction is consummated, the amount of the AirTouch Funds (the "MEDIAONE NEW INDEBTEDNESS"). All of the indebtedness incurred by FinanceCo shall be guaranteed by U S WEST. (b) FinanceCo shall lend to Financial Services an amount of funds equal to the total aggregate principal amount of the Financial Services Indebtedness. (c) FinanceCo shall lend to each of (i) PCS Holdings, (ii) Interactive Services, (iii) Financial Services and (iv) U S WEST Real Estate, Inc., a Colorado corporation ("REAL ESTATE"), an amount of funds equal to the Intercompany Indebtedness of such entity. Each such entity shall, in turn, use the funds so borrowed from FinanceCo to repay its Intercompany Indebtedness. (d) FinanceCo shall lend to International an amount of funds equal to the difference between (i) the Intercompany Indebtedness of International and (ii) the indebtedness owed by Capital Funding to International. International shall, in turn, use the funds so borrowed from FinanceCo to repay a corresponding aggregate principal amount of its Intercompany Indebtedness. International shall transfer to Capital Funding the indebtedness owed by Capital Funding to International, thereby cancelling the remaining Intercompany Indebtedness of International. (e) FinanceCo shall lend to MediaOne Delaware an amount of funds equal to the sum of the Intercompany Indebtedness of Multimedia and MediaOne Delaware (after giving effect to the assumption made pursuant to Section 3.1(c)). MediaOne Delaware shall, in turn, use a portion of the funds so borrowed from FinanceCo to repay its Intercompany Indebtedness and shall distribute as a dividend to Multimedia the balance of the funds so borrowed from FinanceCo. Multimedia shall, in turn, use such balance of funds to repay its Intercompany Indebtedness. (f) Capital Funding shall repay a portion of the indebtedness owed by Capital Funding to U S WEST equal to the aggregate principal amount of the Intercompany Indebtedness of U S WEST Federal Relations, Inc., a Delaware corporation ("FEDERAL RELATIONS"), by distributing to U S WEST the Intercompany Indebtedness of Federal Relations. U S WEST will, in turn, contribute as a capital contribution to Federal Relations such Intercompany Indebtedness and 24 Federal Relations shall transfer such capital contribution to Capital Funding to repay such Intercompany Indebtedness. (g) U S WEST shall contribute as a capital contribution to MGI all of the indebtedness owed by Capital Funding to U S WEST. MGI shall use such indebtedness to repay a corresponding aggregate principal amount of its Intercompany Indebtedness. (h) Capital Funding shall incur an aggregate principal amount of new indebtedness equal to the sum of (i) the total aggregate principal amount of Capital Funding Indebtedness attributed to the Communications Group plus (ii) $3.9 billion plus (iii) an aggregate principal amount of new indebtedness sufficient to fund the costs and expenses payable by the New U S WEST Group in connection with the Separation, as well as any positive Pre-Separation Adjustment (the "NEW U S WEST NEW INDEBTEDNESS"). All of the new indebtedness incurred by Capital Funding shall be guaranteed by New U S WEST. (i) FinanceCo shall loan to U S WEST all of the proceeds of the indebtedness incurred by FinanceCo to fund the costs and expenses payable by the U S WEST Group in connection with the Separation, as well as any negative Pre-Separation Adjustment, and U S WEST shall use such funds to pay or cause to be paid such costs and expenses and/or such negative Pre-Separation Adjustment. Capital Funding shall loan to New U S WEST all of the proceeds of the indebtedness incurred by Capital Funding to fund the costs and expenses payable by the New U S WEST Group in connection with the Separation, as well as any Positive Pre-Separation Adjustment, and New U S WEST shall use such funds to pay or cause to be paid such costs and expenses and/or such positive Pre-Separation Adjustment. (j) U S WEST shall take all actions necessary to cause the Capital Funding Public Indebtedness, the Capital Funding Private Indebtedness, the Trust Securities and the Financial Services Indebtedness to be refinanced (collectively, the "REFINANCING") through one or more of: (i) offers to purchase the Capital Funding Public Indebtedness, the Financial Services Indebtedness and the Trust Securities (the "TENDER OFFERS"); (ii) offers to exchange (the "EXCHANGE OFFERS") (A) the Capital Funding Public Indebtedness for new debt securities of Capital Funding guaranteed by New U S WEST (the "NEW U S WEST EXCHANGE SECURITIES") or new debt securities of FinanceCo 25 guaranteed by U S WEST (the "MEDIAONE EXCHANGE SECURITIES") and (B) the Trust Securities for new trust securities of New Trusts (the "TRUST EXCHANGE SECURITIES"); (iii) repayments of the Capital Funding Private Indebtedness; and (iv) defeasance of the Capital Funding Public Indebtedness, Financial Services Indebtedness and the Capital Funding Trust Indebtedness. (k) Capital Funding shall use a portion of the proceeds of the New U S WEST New Indebtedness, together with the AirTouch Funds, if any, and the funds it receives from PCS Holdings, Interactive Services, Financial Services, Real Estate, International, MediaOne Delaware and Multimedia (collectively, the "BORROWER SUBSIDIARIES") pursuant to Sections 3.2 (d), (e) and (f) to (i) repay all of the Capital Funding Private Indebtedness, (ii) repay all of the Capital Funding Public Indebtedness tendered pursuant to the Tender Offers, (iii) repurchase all of the Trust Securities tendered in the Tender Offers and the Exchange Offers and (iv) defease all of the Capital Funding Public Indebtedness and Capital Funding Trust Indebtedness to be defeased pursuant to the Refinancing. Capital Funding shall use the Trust Securities which it repurchases pursuant to the Tender Offers to satisfy its obligations under a corresponding aggregate principal amount of Capital Funding Trust Indebtedness. Financial Services shall use the funds it receives from FinanceCo pursuant to Section 3.2(b) to repay all of the Financial Services Indebtedness tendered pursuant to the Tender Offers. (l) In the event that holders of Capital Funding Public Indebtedness offer to exchange such indebtedness for New U S WEST Exchange Securities pursuant to the Exchange Offers, the amount of New U S WEST New Indebtedness shall be reduced by an amount equal to the aggregate principal amount of the New U S WEST Exchange Securities issued. In no event shall New U S WEST Exchange Securities be issued in an aggregate principal amount which exceeds the aggregate principal amount of the New U S WEST New Indebtedness. In the event that holders of Capital Funding Public Indebtedness offer to exchange such indebtedness for MediaOne Exchange Securities pursuant to the Exchange Offers, (i) FinanceCo shall distribute to U S WEST such MediaOne Exchange Securities, U S WEST shall contribute such MediaOne Exchange Securities to Capital Funding and Capital Funding shall issue such MediaOne Exchange Securities in exchange for the Capital Funding Public Indebtedness offered for exchange, (ii) the amount of MediaOne New Indebtedness 26 shall be reduced by an amount equal to the aggregate principal amount of the MediaOne Exchange Securities issued and (iii) Capital Funding shall transfer to U S WEST all of its rights under an amount of Intercompany Indebtedness of the Borrower Subsidiaries equal to the aggregate principal amount of such MediaOne Exchange Securities and U S WEST may, in turn, transfer such Intercompany Indebtedness to FinanceCo (in which event the transactions contemplated by Sections 3.2(d), (e) and (f) shall not be effected with respect to an amount equal to the amount of such Intercompany Indebtedness). In the event that holders of Trust Securities offer to exchange such securities for Trust Exchange Securities pursuant to the Exchange Offers, (i) Capital Funding shall repurchase such Trust Securities as described in Section 3.2(l), (ii) the exchange agent for the Exchange Offers (the "EXCHANGE AGENT") shall use the funds which Capital Funding would otherwise pay to such holders to purchase, on behalf of such holders, Trust Exchange Securities from one or more New Trusts with an aggregate liquidation amount corresponding to the aggregate liquidation amount of the Trust Securities repurchased by Capital Funding and shall deliver such Trust Exchange Securities to such holders, (iii) each New Trust shall loan to FinanceCo the funds received upon issuance of such Trust Exchange Securities and FinanceCo shall use such funds to repay a portion of the MediaOne New Indebtedness and (iv) Capital Funding shall use the Trust Securities which it so repurchases to satisfy its obligations under a corresponding aggregate principal amount of Capital Funding Trust Indebtedness. In no event shall MediaOne Exchange Securities and Trust Exchange Securities be issued in an aggregate principal amount which exceeds the aggregate principal amount of the MediaOne New Indebtedness. (m) In the event that less than all of the Capital Funding Public Indebtedness, Trust Securities and Financial Services Indebtedness are tendered or exchanged pursuant to the Refinancing and U S WEST does not elect to defease such indebtedness (or, in the case of the Trust Securities, the related Capital Funding Trust Indebtedness), (i) U S WEST shall assume (A) from Capital Funding all of the Capital Funding Public Indebtedness not tendered or exchanged and an amount of Capital Funding Trust Indebtedness equal to the liquidation amount of the Trust Securities not tendered or exchanged and (B) from Financial Services all of the Financial Services Indebtedness not tendered, (ii) the amount of the MediaOne New Indebtedness shall be reduced by an amount equal to the principal amount 27 of the indebtedness assumed by U S WEST from Capital Funding and Financial Services, (iii) to the extent U S WEST assumes a portion of the Capital Funding Public Indebtedness or Capital Funding Trust Indebtedness, Capital Funding shall transfer to U S WEST all of its rights under an amount of the Intercompany Indebtedness of the Borrower Subsidiaries equal to the aggregate principal amount of the Capital Funding Public Indebtedness and the Capital Funding Trust Indebtedness assumed by U S WEST and U S WEST may, in turn, transfer such Intercompany Indebtedness to FinanceCo (in which event the transactions contemplated by Sections 3.2(d), (e) and (f) shall not be effected with respect to an amount equal to the amount of such Intercompany Indebtedness) and (iv) to the extent that U S WEST assumes a portion of the Financial Services Indebtedness, FinanceCo shall not make the loans contemplated by Section 3.2(b) with respect to an amount equal to such amount of Financial Services Indebtedness. (n) U S WEST shall cause the U S WEST Savings Plan/ESOP to repay all LESOP Notes outstanding immediately prior to the Separation Time. 3.3 CONTRIBUTION. Subject to the terms and conditions of this Agreement, following consummation of the Reorganization and the transactions contemplated by Section 3.2, U S WEST and New U S WEST shall cause the following transactions to occur in the order set forth below (collectively, the "Contribution"): (a) U S WEST shall, as a capital contribution to New U S WEST, convey, transfer, assign and deliver to New U S WEST all of U S WEST's right, title and interest in and to all of the following Assets (together with all of the Assets of New U S WEST and its Subsidiaries prior to such transfer, the "NEW U S WEST ASSETS"): (i) all of the issued and outstanding capital stock, together with all the Assets, of: (A) MGI; (B) Capital Funding; (C) Federal Relations; (D) U S WEST Investment Management Company, a Colorado corporation; (E) U S WEST Educational Foundation, a Washington corporation; (F) U S WEST Foundation, a Colorado corporation; (G) U S WEST SPF Co., a Colorado corporation; and (H) U S WEST IP Holdings, Inc., a Delaware corporation; 28 (ii) except as set forth in Section 3.3(c), all of the Assets included on the combined balance sheet of the Communications Group as of March 31, 1998 and any Assets acquired by U S WEST or any of its Subsidiaries relating primarily to the businesses attributed to the Communications Group from April 1, 1998 to the Separation Time (including, in each case, the proceeds received upon disposition of any such Assets); (iii) all of the Assets included on the consolidated balance sheet of Dex, as of March 31, 1998 and any Assets acquired by U S WEST or any of its Subsidiaries relating primarily to the Directories Business from April 1, 1998 to the Separation Time (including, in each case, the proceeds received upon disposition of any such Assets); (iv) subject to Section 5.6 and except as otherwise agreed to by U S WEST and New U S WEST, all of the New U S WEST Trademarks, New U S WEST Patents and New U S WEST Other Intellectual Property and an equal and undivided interest in the Joint Patents and the Joint Other Intellectual Property; (v) all of the New U S WEST Insurance Arrangements, an equal and undivided interest in the Joint Insurance Arrangements and all of the other rights granted, and Assets contemplated to be transferred, to New U S WEST pursuant to Article VII; (vi) all of the rights granted, and Assets contemplated to be transferred, to New U S WEST and the Communications Employee Benefit Plans and Communications Employee Arrangements pursuant to the Employee Matters Agreement; (vii) all of the rights of U S WEST and its Subsidiaries with respect to the Actions listed in Section 3.3(a)(vii) of the Separation Disclosure Schedule and any other rights of U S WEST and its Subsidiaries against any Person to the extent such rights relate primarily to the New U S WEST Business; (viii) 50% of all Shared Contingent Gains; (ix) all of the leasehold interests listed in Section 3.3(a)(ix) of the Separation Disclosure Schedule; and 29 (x) all of the Assets listed in Section 3.3(a)(x) of the Separation Disclosure Schedule. (b) U S WEST shall retain and shall not contribute to New U S WEST, and the New U S WEST Assets shall not include, all of U S WEST's right, title and interest in all of the Assets of U S WEST other than the New U S WEST Assets (together with any Assets transferred to U S WEST or any member of the U S WEST Group pursuant to Section 3.3(c) or the Employee Matters Agreement, the "MEDIAONE ASSETS"), including, without limitation, the following Assets: (i) all of the issued and outstanding capital stock, together with all of the assets, of (A) Multimedia; (B) MediaOne of Michigan, Inc., a Michigan corporation; (C) Western Range Insurance Co, a Vermont corporation ("Western Range"); and (D) if FinanceCo is a Subsidiary of U S WEST, FinanceCo; (ii) all of the Assets included on the combined balance sheet of the Media Group as of March 31, 1998 (other than the Assets of Dex and its Subsidiaries) and any Assets acquired by U S WEST or any of its Subsidiaries relating primarily to the MediaOne Business from April 1, 1998 to the Separation Time (including, in each case, the proceeds received upon disposition of any such Assets); (iii) all of the shares of Media Stock held as treasury stock by U S WEST; (iv) all of the common securities of the Trusts, any New Trusts and U S WEST Financing III, a Delaware statutory business trust; (v) subject to Section 5.6 and except as otherwise agreed to by U S WEST and New U S WEST, all of the MediaOne Trademarks, MediaOne Patents and MediaOne Other Intellectual Property, and an equal and undivided interest in the Joint Patents and the Joint Other Intellectual Property; (vi) all of the MediaOne Insurance Arrangements, an equal and undivided interest in the Joint Insurance Arrangements and all of the rights granted to, and Assets contemplated to be retained by, U S WEST pursuant to Article VII; 30 (vii) all of the rights of U S WEST and its Subsidiaries with respect to the Actions listed in Section 3.3(b)(vii) of the Separation Disclosure Schedule and any other rights of U S WEST and its Subsidiaries against any Person to the extent such rights relate primarily to the MediaOne Business; (viii) 50% of all Shared Contingent Gains; (ix) all of the leasehold interests listed in Section 3.3(b)(ix) of the Separation Disclosure Schedule; and (x) all of the Assets listed in Section 3.3(b)(x) of the Separation Disclosure Schedule. (c) New U S WEST shall cause the following transfers: (i) U S WEST Advanced Technologies, Inc., a Colorado corporation which will be a Subsidiary of New U S WEST upon consummation of the Reorganization ("AT"), shall convey, transfer, assign and deliver to U S WEST all of AT's right, title and interest in and to the Assets of AT listed in Section 3.3(c) of the Separation Disclosure Schedule. (ii) U S WEST Communications, Inc., a Colorado corporation which will be a Subsidiary of New U S WEST upon consummation of the Reorganization ("COMMUNICATIONS") shall convey, transfer, assign and deliver to U S WEST all of Communications' right, title and interest in and to the Assets of Communications listed in Section 3.3(c) of the Separation Disclosure Schedule. (iii) Federal Relations shall convey, transfer, assign and deliver to U S WEST all of Federal Relation's right, title and interest in and to the Assets of Federal Relations listed in Section 3.3(c) of the Separation Disclosure Schedule. (d) Prior to the Separation Time, the Chief Financial Officer of the Communications Group and the Chief Financial Officer of the Media Group shall agree in writing as to the amount of the Pre-Separation Adjustment (as determined below). If the Pre-Separation Adjustment is positive, New U S WEST shall declare as a dividend to U S 31 WEST an amount in cash equal to the Pre-Separation Adjustment. If the Pre-Separation Adjustment is negative, U S WEST shall contribute as a capital contribution to New U S WEST an amount in cash equal to the Pre-Separation Adjustment. The "Pre-Separation Adjustment" shall be determined in the manner set forth in Section 3.3(d) of the Separation Disclosure Schedule. 3.4 DISCHARGE OF LIABILITIES. (a) From and after the Separation Time, New U S WEST agrees to (or to cause a member of the New U S WEST Group to) discharge or perform when due all of the following Liabilities (the "NEW U S WEST LIABILITIES"): (i) all Liabilities of U S WEST arising out of or relating primarily to the New U S WEST Assets or the operation of the New U S WEST Business, whether arising before or after the Separation Time; (ii) all of the Liabilities included on the combined balance sheet of the Communications Group as of March 31, 1998 and any Liabilities incurred by U S WEST or any of its Subsidiaries relating primarily to the businesses attributed to the Communications Group from April 1, 1998 to the Separation Time; (iii) all of the Liabilities included on the consolidated balance sheet of Dex as of March 31, 1998 and any Liabilities incurred by U S WEST or any of its Subsidiaries relating primarily to the Directories Business from April 1, 1998 to the Separation Time; (iv) all indebtedness incurred by Capital Funding pursuant to Section 3.2 and all of the indebtedness of U S WEST Communications, Inc., a Colorado corporation; (v) all Liabilities identified in Section 2(a) of the Employee Matters Agreement and all other Liabilities identified in the Employee Matters Agreement as Liabilities of the New U S WEST Group; (vi) subject to Section 3.3(d), the Transaction Costs identified in Section 1.1(j) of the Separation Disclosure Schedule as the responsibility of New U S WEST; (vii) for each category of Shared Liabilities listed in Section 1.1(i) of the Separation Disclosure 32 Schedule, the percentage of such category of Shared Liabilities indicated in such section as the responsibility of New U S WEST; (viii) the Actions and Liabilities listed in Section 3.4(a)(viii) of the Separation Disclosure Schedule (ix) the Liabilities listed in Section 3.4(a)(ix) of the Separation Disclosure Schedule; and (x) all Liabilities that are expressly contemplated by any of the Transaction Documents as Liabilities of any member of the New U S WEST Group. (b) U S WEST shall retain and discharge or perform when due, and New U S WEST shall have no liability with respect to, all Liabilities of U S WEST other than the New U S WEST Liabilities (the "MEDIAONE LIABILITIES"), including, without limitation, the following: (i) all Liabilities arising out of or relating primarily to the MediaOne Assets or the operation of the MediaOne Business, whether arising before or after the Separation Time; (ii) all of the Liabilities included on the combined balance sheet of the Media Group as of March 31, 1998 (other than (A) the Liabilities of Dex and its Subsidiaries and (B) $3.9 billion of indebtedness (net of any indebtedness of Dex and its Subsidiaries)) and any Liabilities incurred by U S WEST or any of its Subsidiaries relating primarily to the MediaOne Business from April 1, 1998 to the Separation Time; (iii) all indebtedness incurred by FinanceCo or assumed by U S WEST from Capital Funding or Financial Services pursuant to Section 3.2 and all indebtedness of MediaOne Delaware; (iv) all Liabilities identified in Section 2(b) of the Employee Matters Agreement and all other Liabilities contemplated by the Employee Matters Agreement as Liabilities of the U S WEST Group; (v) subject to Section 3.3(d), the Transaction Costs identified in Section 1.1(j) of the Separation Disclosure Schedule as the responsibility of U S WEST; 33 (vi) for each category of Shared Liabilities listed in Section 1.1(i) of the Separation Disclosure Schedule, the percentage of such category of Shared Liabilities indicated in such section as the responsibility of U S WEST; (vii) the Actions and Liabilities listed in Section 3.4(b)(vii) of the Separation Disclosure Schedule; (viii) the Liabilities listed in Section 3.4(b)(viii) of the Separation Disclosure Schedule; and (ix) all Liabilities that are expressly contemplated by any of the Transaction Documents as Liabilities of any member of the U S WEST Group. 3.5 CLOSING; DELIVERY; METHODS OF TRANSFER AND ASSUMPTION. (a) Unless otherwise provided in this Agreement, or in any other Transaction Document, the closing of the Reorganization, the Refinancing and the Contribution shall occur immediately prior to the Separation Time at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153. (b) In connection with the Reorganization and the Contribution, (i) U S WEST shall execute and deliver and shall cause its Subsidiaries to execute and deliver, such deeds, bills of sale, stock powers, certificates of title, assignments of leases and contracts, assumption agreements and other instruments of contribution, grant, conveyance, assignment, transfer, delivery and assumption necessary to evidence the Reorganization and the Refinancing and (ii) U S WEST and New U S WEST shall (and shall cause their Subsidiaries, as applicable, to) execute and deliver such deeds, bills of sale, stock powers, certificates of title, assignments of leases and contracts, assumption agreements and other instruments of contribution, grant, conveyance, assignment, transfer, delivery and assumption necessary to evidence the Contribution and the transactions contemplated by Section 3.4. All such instruments shall be deemed to have been delivered as of the Separation Time. 34 ARTICLE IV THE SEPARATION 4.1 THE SEPARATION. Subject to the terms and conditions of this Agreement, at the Separation Time, U S WEST shall cause the following transactions to occur (collectively, the "SEPARATION"): (a) U S WEST shall, in accordance with the terms of Section 2.4.3 of Article V of the Restated Certificate (as amended by the Charter Amendments), redeem each share of Communications Stock issued and outstanding immediately prior to the Separation Time for one share of New U S WEST Common Stock (the "COMMUNICATIONS REDEMPTION"). Each share of Communications Stock held as treasury stock by U S WEST shall be cancelled. (b) U S WEST shall distribute as a dividend (the "MEDIA DIVIDEND") on each share of Media Stock outstanding as of the close of trading on the Record Date (other than shares of Media Stock held as treasury stock by U S WEST) a number of shares of New U S WEST Common Stock equal to the Dividend Number (as determined in accordance with Section 4.3(b)). (c) From and after the Separation Time, each outstanding share of Media Stock shall remain outstanding and shall thereafter represent a share of common stock, par value $.01 per share, of U S WEST, with the terms set forth in the Restated Certificate (as amended by the Charter Amendments). As used herein, such common stock is referred to as "MEDIAONE COMMON STOCK". (d) From and after the Separation Time, each outstanding share of Series C Cumulative Redeemable Preferred Stock, par value $1.00 per share, of U S WEST; Series D Convertible Preferred Stock, par value $1.00 per share, of U S WEST; and Series E Convertible Preferred Stock, par value $1.00 per share, of U S WEST, shall remain outstanding. 4.2 SEPARATION TIME. The Board of Directors shall determine the time at which the Separation shall become effective (the "SEPARATION TIME"), which time shall be following the satisfaction or waiver of all of the conditions set forth in Section 4.5 as determined by the Board of Directors of U S WEST. 35 4.3 CERTAIN DETERMINATIONS. (a) Prior to the Separation Time, the Board of Directors of U S WEST shall (i) fix the record date for determining the holders of Media Stock entitled to receive the Media Dividend (the "RECORD DATE"), (ii) declare the Media Dividend, (iii) fix the date on which the Communications Stock shall be redeemed pursuant to the Communications Redemption (the "REDEMPTION DATE") and (iv) give notice to holders of Communications Stock of the Communications Redemption. The Redemption Date and the Record Date shall be the date on which the Separation Time shall occur. (b) The "DIVIDEND NUMBER" shall equal the quotient of (i) $850,000,000 divided by (ii) the product of (x) the number of shares of Media Stock outstanding immediately prior to the Separation Time (other than shares of Media Stock held by U S WEST) multiplied by (y) the average Market Value of the Communications Stock over the period of 20 Trading Days ending on the fifth Trading Day prior to the date of the Separation Time, rounded to the nearest one-hundred thousandth (or if there shall not be a nearest one-hundred thousandth, to the next highest one-hundred thousandth). 4.4 NEW U S WEST SIP ACCOUNTS; CERTIFICATES; DISTRIBUTION PROCEDURES. (a) Prior to the Separation Time, New U S WEST shall establish a Shareowner Investment Plan (the "NEW U S WEST SIP"). As of the Separation Time, New U S WEST shall establish an account (a "NEW U S WEST SIP ACCOUNT") under the New U S WEST SIP for each stockholder of U S WEST (each, a "SIP PARTICIPANT") which, immediately prior to the Separation Time, maintained an account (a "U S WEST SIP ACCOUNT") under the U S WEST Shareowner Investment Plan (the "U S WEST SIP"). As of the Separation Time, the New U S WEST SIP Account of each SIP Participant shall, without any action on the part of the SIP Participants, be credited by New U S WEST with that number of shares of New U S WEST Common Stock that such SIP Participant has the right to receive pursuant to the provisions of Section 4.1 and all shares of Communications Stock held in the U S WEST SIP Account of such SIP Participant shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist. SIP Participants shall be mailed the cash in lieu of fractional shares of New U S WEST Common Stock to which they are entitled pursuant to Section 4.4(h). (b) As of the Separation Time, all shares or fractions of a share of Communications Stock redeemed 36 pursuant to the Communications Redemption shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist. As of the Separation Time, each certificate that immediately prior to the Separation Time evidenced shares of Communication Stock ("COMMUNICATIONS CERTIFICATES") shall be deemed at any time after the Separation Time to represent only the right to receive the shares of New U S WEST Common Stock issuable in respect thereof pursuant to Section 4.1 and the unpaid dividends and distributions payable with respect to such shares pursuant to this Article IV. As of the Separation Time, each certificate that as of the Record Date evidenced shares of Media Stock ("MEDIA CERTIFICATES") shall after the Separation Time represent a corresponding number of shares of MediaOne Common Stock, the right to receive the shares of New U S WEST Common Stock issuable in respect thereof pursuant to Section 4.1 and the unpaid dividends and distributions payable with respect to such shares pursuant to this Article IV. (c) Prior to the Separation Time, New U S WEST shall establish a Direct Registration System which shall enable holders of New U S WEST Common Stock to hold such shares in uncertificated book-entry form (the "NEW U S WEST DRS SYSTEM"). As of the Separation Time, U S WEST shall deposit with Boston Equiserve, as Distribution Agent ("DISTRIBUTION AGENT"), (a) for the benefit of holders of Communications Certificates, the shares of New U S WEST Common Stock to which such holders are entitled pursuant to Section 4.1, (b) for the benefit of holders of Media Certificates, the shares of New U S WEST Common Stock and certificates evidencing the shares of MediaOne Common Stock to which such holders are entitled pursuant to Section 4.1 and (c) for the benefit of SIP Participants, certificates evidencing the shares of MediaOne Common Stock to which such holders are entitled pursuant to Section 4.1. New U S WEST shall provide to the Distribution Agent the funds necessary to pay any cash payable in lieu of fractional shares of New U S WEST Common Stock pursuant to Section 4.4(h) and the funds or other property necessary to pay or make any dividends or distributions with respect to shares of New U S WEST Common Stock pursuant to Section 4.4(g). (d) As soon as reasonably practicable after the Separation Time, the Distribution Agent shall mail to each holder of record of Communications Certificates (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Communications 37 Certificates shall pass, only upon proper delivery of the Communications Certificates to the Distribution Agent and shall be in such form and have such other provisions as U S WEST reasonably may specify), (ii) an affidavit of loss for use by holders whose Communications Certificates are lost, mutilated or destroyed and (iii) instructions for use in effecting the surrender of the Communications Certificates or completing such affidavit of loss. Upon surrender of a Communications Certificate for cancellation to the Distribution Agent or such affidavit of loss together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Communications Certificate shall be entitled to receive in exchange therefor that number of shares of New U S WEST Common Stock that such holder has the right to receive pursuant to Section 4.1 in respect thereof in uncertificated book-entry form through the New U S WEST DRS System and any cash payable in lieu of fractional shares of New U S WEST Common Stock to which such holder is entitled pursuant to Section 4.4(h) and dividends or other distributions to which such holder is entitled pursuant to Section 4.4(g) and the Communications Certificate (if any) so surrendered shall forthwith be canceled. Notwithstanding the foregoing, a holder of a Communications Certificate shall have the right to elect to receive a certificate representing that number of shares of New U S WEST Common Stock that such holder has the right to receive pursuant to Section 4.1 in respect thereof in lieu of receiving such shares in uncertificated book-entry form through the New U S WEST DRS System. (e) As soon as reasonably practicable after the Separation Time, the Distribution Agent shall mail to each holder of record of Media Certificates (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Media Certificates shall pass, only upon proper delivery of the Media Certificates to the Distribution Agent and shall be in such form and have such other provisions as U S WEST reasonably may specify), (ii) an affidavit of loss for use by holders whose Media Certificates are lost, mutilated or destroyed and (iii) instructions for use in effecting the surrender of the Media Certificates or completing such affidavit of loss. Upon surrender of a Media Certificate for cancellation to the Distribution Agent or such affidavit of loss together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such 38 Media Certificate shall be entitled to receive in exchange therefor (x) a new certificate representing that number of shares of MediaOne Common Stock represented by such Media Certificate and (y) that number of shares of New U S WEST Common Stock that such holder has the right to receive pursuant to Section 4.1 in respect thereof in uncertificated book-entry form through the New U S WEST DRS System, and any cash payable in lieu of fractional shares of New U S WEST Common Stock to which such holder is entitled pursuant to Section 4.4(h) and dividends or other distributions to which such holder is entitled pursuant to Section 4.4(g) and the Media Certificate (if any) so surrendered shall forthwith be canceled. Notwithstanding the foregoing, a holder of a Media Certificate shall have the right to elect to receive a certificate representing that number of shares of New U S WEST Common Stock that such holder has the right to receive pursuant to Section 4.1 in respect thereof in lieu of receiving such shares in uncertificated book-entry form through the New U S WEST DRS System. As soon as reasonably practicable after the Separation Time, the Distribution Agent shall mail to each SIP Participant a certificate representing a number of shares of MediaOne Common Stock equal to the number of shares of Media Stock held in such SIP Participant's U S WEST SIP Account. Following such mailing to SIP Participants, the U S WEST SIP shall be terminated. (f) In the event of a transfer of ownership of shares of Communications Stock or Media Stock that is not registered in the transfer records of U S WEST, certificates evidencing the proper number of shares of New U S WEST Common Stock and MediaOne Common Stock may be issued in accordance with this Section 4.4 to a transferee if the Communications Certificate or Media Certificate evidencing such shares of Communications Stock or Media Stock is presented to the Distribution Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. (g) Notwithstanding any other provisions of this Agreement, no dividends or other distributions declared after the Separation Time shall be paid with respect to any shares of New U S WEST Common Stock represented by a Communications Certificate or a Media Certificate until such Communications Certificate or Media Certificate or an affidavit of loss is surrendered for exchange as provided herein. Subject to the effect of Applicable Laws, following 39 surrender of any such Communications Certificate or Media Certificate or affidavit of loss, there shall be paid to the holder of the shares of New U S WEST Common Stock issued in exchange therefor, without interest, (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Separation Time theretofore payable with respect to such shares of New U S WEST Common Stock and not paid, less the amount of any withholding taxes which may be required thereon, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Separation Time but prior to surrender and a payment date subsequent to surrender payable with respect to such shares of New U S WEST Common Stock, less the amount of any withholding taxes which may be required thereon. (h) No certificates or scrip representing fractional shares of New U S WEST Common Stock shall be issued pursuant to the Media Dividend and such fractional share interests will not entitle the holder thereof to vote or to any rights of a stockholder of New U S WEST. Notwithstanding any provision of this Agreement, each Person who immediately prior to the Separation Time was a holder of shares of Media Stock who would otherwise have been entitled to receive a fraction of a share of New U S WEST Common Stock (after taking into account all of the shares of Media Stock owned by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of New U S WEST Common Stock multiplied by the average Market Value of the Communications Stock over the period of 20 Trading Days ending on the fifth Trading Day prior to the date of the Separation Time, rounded to the nearest cent (or if there shall not be a nearest cent, to the next highest cent). (i) None of U S WEST, New U S WEST or the Distribution Agent shall be liable to any holder of shares of Communications Stock or Media Stock for shares of New U S WEST Common Stock, cash in lieu of fractional shares of New U S WEST Common Stock or dividends or distributions with respect to shares of New U S WEST Common Stock that have been delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (j) U S WEST shall be entitled to, or shall be entitled to cause the Distribution Agent to, deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Communication 40 Stock or Media Stock such amounts as are required to be deducted and withheld with respect to the making of such payment under the Code, or any provision of state, local or foreign Tax law. To the extent that amounts are so withheld by U S WEST or the Distribution Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Communications Stock or Media Stock in respect of which such deduction and withholding was made by U S WEST or the Distribution Agent. (k) If any Communications Certificates or Media Certificates shall not have been surrendered prior to seven years after the Separation Time (or immediately prior to such earlier date on which any shares of New U S WEST Common Stock, cash in lieu of fractional shares of New U S WEST Common Stock or unpaid dividends or distributions with respect to shares of New U S WEST Common Stock in respect of such Communications Certificates or Media Certificates would otherwise escheat to or become the property of any Governmental Authority), any undistributed shares of New U S WEST Common Stock in respect of Communications Certificates or unpaid dividends or distributions in respect of such shares shall, to the extent permitted by Applicable Laws, become the property of New U S WEST and any undistributed shares of New U S WEST Common Stock in respect of Media Certificates or cash in lieu of fractional shares or unpaid dividends or distributions in respect of such shares shall, to the extent permitted by Applicable Laws, become the property of U S WEST. (l) Notwithstanding any other provision of this Article IV, stockholders who are entitled to receive shares of New U S WEST Common Stock pursuant to Section 4.1 with an aggregate value greater than or equal to $15 million will not receive such shares until such stockholders make all required filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Shares of New U S WEST Common Stock issuable to stockholders required to make such filings shall be held in escrow by the Distribution Agent until such time as New U S WEST receives evidence from such stockholders that such filings have been made. 4.5 CONDITIONS TO THE SEPARATION. (a) The undertaking of U S WEST to effect the Separation is subject to the satisfaction of each of the following conditions, unless waived by the Board of Directors of U S WEST in its sole and absolute discretion: 41 (i) All of the transactions contemplated by this Agreement to be performed on or prior to the consummation of the Separation shall have been consummated. (ii) The Form S-4, the Form 8-A and the Form 8-B/A shall each have been declared effective by the SEC, and no stop order with respect thereto shall be in effect. (iii) The Charter Amendments shall have been approved and adopted by the stockholders of U S WEST. (iv) The Charter Amendments shall have been executed, acknowledged and filed with the Secretary of State of the State of Delaware in accordance with Section 242 of the Delaware General Corporation Law. (v) The Board of Directors of U S WEST shall have set the Redemption Date and given notice of the Communications Redemption to the holders of Communications Stock. (vi) The Board of Directors of U S WEST shall have fixed the Record Date and declared the Media Dividend. (vii) The New U S WEST Common Stock shall have been approved for listing on the NYSE and the PSE, subject to official notice of issuance. (viii) No order, injunction or decree shall have been issued by any Governmental Authority and remain in effect preventing the consummation of the Separation. (ix) All consents of, approvals of, notices to and filings with any Governmental Authority or any other Person necessary to consummate the Reorganization, the Contribution or the Separation shall have been obtained and be in full force and effect. (x) U S WEST shall have provided the NYSE and the PSE with the prior written notice of the Redemption Date and the Record Date as required by Rule 10b-17 of the Exchange Act and the rules and regulations of the NYSE. 42 (xi) U S WEST shall have obtained an advance letter ruling from the Internal Revenue Service that certain aspects of the Reorganization, the Contribution and the Separation will qualify as tax-free transactions within the meaning of Sections 332, 368(a)(1)(D) and 355 of the Code, and such ruling shall be in full force and effect at the Separation Time. (xii) On or prior to the Separation Time, each of U S WEST and New U S WEST shall have entered into, or caused the appropriate members of the Group of which it is a member to enter into, each of the Transaction Documents. (b) Any determination made by the Board of Directors of U S WEST on behalf of any of the parties hereto prior to the Separation Time concerning the satisfaction or waiver of any or all of the conditions set forth in this Section 4.5 shall be conclusive. ARTICLE V POST-SEPARATION INTERCOMPANY BUSINESS RELATIONSHIPS 5.1 PENDING LITIGATION. Following the Separation Time, subject to the provisions of Section 8.3, (a) New U S WEST shall have exclusive authority and control over the investigation, prosecution, defense and appeal of all pending Actions relating to the New U S WEST Liabilities, including, but not limited to, the pending Actions listed in Section 3.4(a) of the Separation Disclosure Schedule (each, a "NEW U S WEST ACTION"), and may settle or compromise, or consent to the entry of any judgment with respect to, any such New U S WEST Action without the consent of U S WEST and (b) U S WEST shall have exclusive authority and control over the investigation, prosecution, defense and appeal of all pending Actions relating to the MediaOne Liabilities, including, but not limited to, the pending Actions listed in Section 3.4(b) of the Separation Disclosure Schedule (each, a "U S WEST ACTION"), and may settle or compromise, or consent to the entry of any judgment with respect to, any such U S WEST Action without the consent of New U S WEST; PROVIDED, HOWEVER, that if any member of the New U S WEST Group or any of their respective 43 directors, officers or employees is named as a party to a U S WEST Action or any member of the U S WEST Group or any of their respective directors, officers or employees is named as a party to a New U S WEST Action, neither U S WEST nor New U S WEST, as the case may be, may settle or compromise, or consent to the entry of any judgment with respect to, any such Action without the prior written consent of such other named party (which consent may not be unreasonably withheld), unless such settlement (i) includes a complete release of such other named party and such party's directors, officers or employees (to the extent such directors, officers or employees are named in such Action) and (ii) does not require such other named party or such party's directors, officers or employees (to the extent such directors, officers or employees are named in such Action) to make or forego any payment or forego or take any action. Each of U S WEST and New U S WEST shall cooperate fully with the other and its counsel in the investigation, defense and settlement of any U S WEST Action or New U S WEST Action. 5.2 SETTLEMENTS FOR CASH COLLECTIONS AND DISBURSEMENTS AFTER THE SEPARATION TIME. (a) For each calendar month commencing with the month in which the Separation Time occurs and, unless sooner terminated by agreement of the parties, continuing for a period of two years thereafter, (i) within 30 Business Days of the end of the month in question, New U S WEST shall prepare and deliver to U S WEST, and U S WEST shall fully cooperate in preparing, a statement of transactions that shall reflect a complete analysis of any cash collections and cash disbursements by the New U S WEST Group on behalf of the U S WEST Group during the relevant month or for any prior month that should have been (but was not) included in a prior statement and (ii) within 30 Business Days of the end of the month in question, U S WEST shall prepare and deliver to New U S WEST, and New U S WEST shall fully cooperate in preparing, a statement of transactions that shall reflect a complete analysis of any cash collections and cash disbursements by the U S WEST Group on behalf of the New U S WEST Group during the relevant month or for any prior month that should have been (but was not) included in a prior statement; PROVIDED, HOWEVER, in each case that, with respect to the first such monthly period, such statement shall not reflect any cash collections or disbursements occurring prior to the Separation Time. (b) Not later than five Business Days (unless otherwise specifically provided in the relevant Transaction Document) following delivery of each such monthly statement, New U S WEST shall pay to U S WEST or U S WEST shall pay to 44 New U S WEST, as the case may be, in cash an amount necessary to eliminate the account balance as reflected in each such statement (which amounts may be set off against each other as appropriate). Any disputes relating to such amounts payable shall be submitted to the Separation Committee for resolution in accordance with the procedures set forth in Section 12.2. (c) Following the end of the two-year period referred to in Section 5.2(a) (or such earlier period as the parties hereto may agree), U S WEST and New U S WEST shall continue to deliver the statement of transactions referred to in Section 5.2(a) and pay the amounts necessary to eliminate the account balance as reflected in such statement in accordance with Section 5.2(b), at such intervals as the parties may agree. Any disputes relating to such amounts payable shall be submitted to the Separation Committee for resolution in accordance with the procedures set forth in Section 12.2. (d) Each of U S WEST and New U S WEST hereby grants the other a limited irrevocable power-of-attorney to endorse, deposit and negotiate any check, draft or other form of payment made in respect of any invoice representing a receivable payable to one of them but which is sent by the payor to a lock box maintained by the other or is made payable to either of them or any of their subsidiaries but which is the payment of a receivable that is a receivable of the other. 5.3 TRANSITION SERVICES. (a) From and after the Separation Time, each party will provide, or cause one or more of the members of its Group to provide, to the other Group such services on such terms as may be agreed upon between U S WEST and New U S WEST from time to time in writing. The party that is to provide the services (the "PROVIDER") will use its commercially reasonable efforts to provide such services to the other party (the "RECIPIENT") in a satisfactory and timely manner and as further specified in writing by the parties. (b) All employees and representatives of the Provider providing services to the Recipient pursuant to this Section 5.3 shall be deemed for purposes of all compensation and employee benefits matters to be employees or representatives of the Provider and not employees or representatives of the Recipient. In performing such services, such employees and representatives will be under 45 the direction, control and supervision of the Provider (and not the Recipient) and the Provider will have the sole right to exercise all authority with respect to the employment (including, without limitation, termination of employment), assignment and compensation of such employees and representatives. Any disputes relating to the provision of services under this Section 5.3 shall be submitted to the Separation Committee for resolution in accordance with the procedures set forth in Section 12.2. 5.4 U S WEST NAME. (a) U S WEST acknowledges that the name "U S WEST", whether alone or in combination with one or more words, is an asset being transferred to New U S WEST pursuant to the Contribution. Promptly after the Separation Time, U S WEST shall cause each member of the U S WEST Group whose corporate name includes the name "U S WEST" to change its name to delete any reference therein to "U S WEST" (for example, without limiting the generality of the foregoing, the word "U S WEST" shall be removed from the name of "U S WEST International Holdings, Inc."). Promptly after the Separation Time, U S WEST shall, and shall cause each member of the U S WEST Group to, subject to the requirements of Section 7.8 of the AirTouch Merger Agreement, (i) assign, and does hereby assign, to New U S WEST any license to use the name U S WEST (including any appurtenant rights and obligations such as quality control) with all agents, franchisees and licensees of the U S WEST Group and the MediaOne Business (to the extent permitted by the terms of such license), including any license granted pursuant to Section 7.8 of the AirTouch Merger Agreement, (ii) to the extent assignment is not permitted, terminate any license to use the name U S WEST with all agents, franchisees and licensees of the U S WEST Group and the MediaOne Business (to the extent permitted by the terms of such license) and (iii) if neither assignment or termination is permitted, the U S WEST Group shall cooperate with New U S WEST, and if appropriate enter into necessary agreements, to preserve New U S WEST's ownership rights in the U S WEST name. U S WEST further agrees not to use the name "U S WEST" in connection with the operations of the U S WEST Group or the MediaOne Business; PROVIDED, HOWEVER, that for a period of six months after the Separation Time, the U S WEST Group may continue to use the "U S WEST" name for internal purposes on business forms, business cards (with the company name manually corrected) and stationery. Nothing herein shall require U S WEST or any member of the U S WEST Group to retrieve from customers telephones, accessories or other equipment or materials labeled with the 46 "U S WEST" name and remove such name from such telephones, accessories or other equipment or materials. (b) For a period of two years following the Separation Time, New U S WEST shall not, and shall cause each member of the New U S WEST Group not to, use the names "U S WEST Media Group," "U S WEST Media," "U S WEST Interactive Services," "U S WEST International" or "U S WEST NewVector" in the operations of the New U S WEST Business; PROVIDED, HOWEVER, that, notwithstanding the foregoing, the New U S WEST Group shall be permitted to use the words "Media Group," "Media," "Interactive Services," and "International" as long as such words do not immediately follow the name "U S WEST" as referenced above. By way of example, New U S WEST may use as "taglines" references to "the Media Group of U S WEST," the "International Division of U S WEST" or similar references in the operation of the New U S WEST Business. Promptly after the Separation Time, New U S WEST shall cause MGI to change its corporate name to delete any reference therein to the words "Media Group". 5.5 TRANSFER TAXES. New U S WEST and U S WEST agree to cooperate to determine the amount of sales, transfer or other similar taxes or fees (including, without limitation, all real estate, patent, copyright and trademark transfer taxes and recording fees) payable in connection with the transactions contemplated by this Agreement. U S WEST and New U S WEST agree to file promptly and timely returns for such taxes and fees with the appropriate taxing authorities. The amounts payable with respect to such taxes and fees shall be borne equally by U S WEST and New U S WEST. Any disputes relating to such amounts payable shall be submitted to the Separation Committee for resolution in accordance with the procedures set forth in Section 12.2. 5.6 INTELLECTUAL PROPERTY. (a) At the Separation Time, subject to Section 5.6(b), (i) the U S WEST Group shall become the sole and exclusive owner of all right, title and interest in the MediaOne Patents, the MediaOne Trademarks and the MediaOne Other Intellectual Property, (ii) the New U S WEST Group shall become the sole and exclusive owner of all right, title and interest in the New U S WEST Patents, the New U S WEST Trademarks and the New U S WEST Other Intellectual Property and (iii) the U S WEST Group and the New U S WEST Group shall each have, as joint owners, an equal and undivided interest in and to all right, title and interest in both the Joint Patents and the Joint Other Intellectual Property. The parties agree to file 47 appropriate assignment documents with the U.S. Patent and Trademark Office (or other appropriate agencies) in order to effect and record the ownership of the MediaOne Patents, the MediaOne Trademarks, the New U S WEST Patents, the New U S WEST Trademarks and the Joint Patents as provided under this Section 5.6(a). (b) From and after the Separation Time, subject to the protection of Information required by Section 10.5, (i) the New U S WEST Group shall have the non-exclusive right to use all MediaOne Other Intellectual Property and New U S WEST Other Intellectual Property which is in the possession of, and is used by or for which there are good faith plans for use by, the New U S WEST Business as of the Separation Time and (ii) the U S WEST Group shall have the non-exclusive right to use all New U S WEST Other Intellectual Property and MediaOne Intellectual Property which is in the possession of, and is used by or for which there are good faith plans for use by, the MediaOne Business as of the Separation Time. (c) It is understood that the right of each party to use both the MediaOne Other Intellectual Property and the New U S WEST Other Intellectual Property under Section 5.6(b) shall include (but only to the extent necessary for such use) rights under MediaOne Patents and New U S WEST Patents. ARTICLE VI EMPLOYEE MATTERS 6.1 EMPLOYEES. Effective as of the Separation Time, except as otherwise provided in the Employee Matters Agreement, (a) those Media Employees who are employed by U S WEST or any of its Subsidiaries immediately prior to the Separation Time shall remain or become employees of U S WEST or any Subsidiary thereof and (b) those Communications Employees who are employed by U S WEST or any of its Subsidiaries immediately prior to the Separation Time shall become employees of New U S WEST or any Subsidiary thereof. 6.2 EMPLOYEE BENEFIT PLANS AND EMPLOYEE ARRANGEMENTS. U S WEST and New U S WEST shall take all 48 actions necessary to effect the transfer to New U S WEST and the assumption by New U S WEST of the Employee Benefit Plans and Employee Arrangements and the Assets and Liabilities thereunder as described in the Employee Matters Agreement. 6.3 INTERNAL REVENUE SERVICE FORMS. U S WEST and New U S WEST agree that pursuant to the "Alternative Procedure" provided in Section 5 of Revenue Procedure 96-60, 1996-53, I.R.B. 24, with respect to preparing, filing and furnishing the Internal Revenue Service Forms W-2, W-3, 941 and W-5, (i) U S WEST and New U S WEST shall report on a "predecessor-successor" basis as set forth therein, (ii) U S WEST shall be relieved from furnishing Forms W-2 to the New U S WEST Employees and (iii) New U S WEST shall assume the obligations of U S WEST to furnish such forms to the New U S WEST Employees for the full 1998 calendar year. ARTICLE VII INSURANCE MATTERS 7.1 POLICIES AND RIGHTS INCLUDED WITHIN ASSETS. (a) Immediately prior to the Separation Time, U S WEST shall cause Western Range to transfer to an Insurer or to a member of the New U S WEST Group all of the Insurance Arrangements provided by Western Range (as well as the liabilities and corresponding reserves) which relate to members of the New U S WEST Group or the New U S WEST Business or New U S WEST Liabilities (the "WESTERN RANGE TRANSFERRED INSURANCE ARRANGEMENTS"). (b) The MediaOne Assets shall include (i) all MediaOne Insurance Arrangements and (ii) subject to the provisions of this Article VII, an equal and undivided interest in the Joint Insurance Arrangements. The New U S WEST Assets shall include (i) all New U S WEST Insurance Arrangements (including the Western Range Transferred Insurance Arrangements) and (ii) subject to the provisions of this Article VII, an equal and undivided interest in the Joint Insurance Arrangements. (c) As of the Separation Time, all of the Joint Insurance Arrangements shall be discontinued and each of the Groups shall be responsible for arranging separate Insurance 49 Arrangements with respect to injuries, losses, liabilities, damages and expenses arising after the Separation Time with respect to such Group and its businesses. At the Separation Time, all prepaid and unused premiums with respect to each Joint Insurance Arrangement shall be distributed to U S WEST and New U S WEST in the same ratio in which such premiums were allocated by U S WEST to the MediaOne Business and the New U S WEST Business prior to the Separation Time. Following the Separation Time, any refunds received by U S WEST or New U S WEST with respect to a Joint Insurance Arrangement shall be distributed to U S WEST and New U S WEST in the same ratio in which premiums payable with respect to such Joint Insurance Arrangement were allocated by U S WEST to the MediaOne Business and the New U S WEST Business prior to the Separation Time. To the extent U S WEST or New U S WEST receives any such refund, the party receiving such refund shall promptly transfer to the other party the portion of such refund to which such other party is entitled. 7.2 ADMINISTRATION; OTHER MATTERS. (a) From and after the Separation Time, except as set forth in Section 7.2(c), U S WEST shall be responsible for Insurance Administration under the Joint Insurance Arrangements with respect to MediaOne Liabilities and New U S WEST shall be responsible for Insurance Administration under the Joint Insurance Arrangements with respect to New U S WEST Liabilities. The disbursements, out-of-pocket expenses and costs of employees or agents of U S WEST or New U S WEST relating to Insurance Administration contemplated by this Section 7.2(a) shall be borne by the party incurring such expenses or costs. Insurance Proceeds with respect to claims, costs and expenses under the Joint Insurance Arrangements shall be paid by the Insurer to the party making the Insured Claim thereunder. In the event U S WEST or New U S WEST makes an Insured Claim under a Joint Insurance Arrangement, such party shall deliver notice to the other party of such Insured Claim and shall keep the other party periodically updated as to the status of such Insured Claim. (b) From and after the Separation Time, subject to Section 7.2(c), each of U S WEST and New U S WEST shall have the right to claim coverage for Insured Claims under each Joint Insurance Arrangement with respect to any claim covered by such Joint Insurance Arrangement as and to the extent that such insurance is available up to the full extent of the applicable limits of liability, if any, of 50 such Joint Insurance Arrangement (and may receive any Insurance Proceeds with respect thereto); PROVIDED, HOWEVER, that, prior to making any Insured Claim under a Joint Insurance Arrangement, U S WEST or New U S WEST, as the case may be, shall be required to have retained a portion of the Liability underlying such Insured Claim equal to the amount of the self-insured retention or deductible, if any, of such party with respect to such Liability. In the event that the total Insurance Proceeds payable to the U S WEST Group and the New U S WEST Group under a Joint Insurance Arrangement shall have exhausted the limits of liability, if any, under such Joint Insurance Arrangement, payment of any future claims which are not reimbursed under such Joint Insurance Arrangement as a result of such exhaustion of the limits of liability shall be the sole responsibility of the party having liability for such claim under Section 3.4. Each of the parties agrees to use commercially reasonable efforts to maximize available coverage under those Joint Insurance Arrangements applicable to it, and to take all commercially reasonable steps to recover from all other responsible parties in respect of an Insured Claim. (c) With respect to any Insured Claim in respect of a Shared Liability, U S WEST and New U S WEST shall share any Insurance Proceeds received in respect of such Insured Claim in the same proportions in which such Shared Liability is shared by U S WEST and New U S WEST. In the event of any such Insured Claim, U S WEST and New U S WEST shall jointly determine which party shall be responsible for Insurance Administration under the Joint Insurance Arrangements in respect of such Insured Claim. The disbursements, out-of-pocket expenses and costs relating to Insurance Administration contemplated by this Section 7.2(c) shall be borne by the parties in the same proportions in which the Shared Liability underlying such Insured Claim is shared by U S WEST and New U S WEST. 7.3 COOPERATION; DISAGREEMENTS. The parties shall use their commercially reasonable efforts to cooperate with respect to the various insurance matters contemplated 51 by this Agreement. Any disagreements between U S WEST and New U S WEST under this Article VII shall be submitted to the Separation Committee in accordance with the procedures set forth in Section 12.2. ARTICLE VIII INDEMNIFICATION 8.1 NEW U S WEST'S AGREEMENT TO INDEMNIFY. (a) Except as otherwise specifically provided in the other Transaction Documents, subject to the terms and conditions set forth in this Agreement, from and after the Separation Time, New U S WEST shall indemnify, defend and hold harmless U S WEST and its directors, officers, employees, representatives, advisors, agents and Affiliates (collectively, the "U S WEST INDEMNIFIED PARTIES") from, against and in respect of any and all Indemnifiable Losses of the U S WEST Indemnified Parties arising out of, relating to or resulting from, directly or indirectly: (i) any and all New U S WEST Liabilities (including any New U S WEST Liability which could be covered by the terms of the indemnification provisions contained in the Bylaws of U S WEST prior to the Separation Time); (ii) New U S WEST's failure to observe from and after the Separation Time its obligations under this Agreement or any of the other Transaction Documents; and (iii) any untrue statement or alleged untrue statement of a material fact contained in any of the SEC Filings, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (but, in each case, only with respect to information relating to the New U S WEST Business contained in or omitted from the SEC Filings). (b) Notwithstanding New U S WEST's obligations to indemnify U S WEST Indemnified Parties pursuant to Section 8.1(a), U S WEST hereby waives, releases and agrees not to make any claim or bring any contribution, cost recovery or other action against any member of the New U S WEST Group, 52 and, if applicable, their respective directors, officers, employees, representatives, agents and Affiliates and their heirs, successors and assigns, under CERCLA or any similar federal, state or local environmental law or regulation now existing or hereafter enacted that seeks to allocate liabilities between U S WEST and New U S WEST in a different manner than as expressly set forth in this Agreement. 8.2 U S WEST'S AGREEMENT TO INDEMNIFY. (a) Except as otherwise specifically provided in the other Transaction Documents, subject to the terms and conditions set forth in this Agreement, from and after the Separation Time, U S WEST shall indemnify, defend and hold harmless New U S WEST and each of its directors, officers, employees, representatives, advisors, agents and Affiliates (collectively, the "NEW U S WEST INDEMNIFIED PARTIES") from, against and in respect of any and all Indemnifiable Losses of the New U S WEST Indemnified Parties arising out of, relating to or resulting from, directly or indirectly: (i) any and all MediaOne Liabilities; (ii) U S WEST's failure to observe from and after the Separation Time its obligations under this Agreement or any of the other Transaction Documents; and (iii) any untrue statement or alleged untrue statement of a material fact contained in any of the SEC Filings, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (but, in each case, only with respect to information relating to the MediaOne Business contained in or omitted from the SEC Filings). (b) Notwithstanding U S WEST's obligations to indemnify New U S WEST Indemnified Parties pursuant to Section 8.2(a), New U S WEST hereby waives, releases and agrees not to make any claim or bring any contribution, cost recovery or other action against any member of the U S WEST Group, and, if applicable, their respective directors, officers, employees, representatives, agents and Affiliates and their heirs, successors and assigns, under CERCLA or any similar federal, state or local environmental law or regulation now existing or hereafter enacted that seeks to allocate liabilities between New U S WEST and U S WEST in a 53 different manner than as expressly set forth in this Agreement. 8.3 PROCEDURE FOR INDEMNIFICATION. Except as set forth in the Employee Matters Agreement, all claims for indemnification under this Article VIII shall be asserted and resolved as follows: (a) THIRD PARTY CLAIMS (OTHER THAN WITH RESPECT TO SHARED LIABILITIES). In the event that any claim or demand for which an Indemnifying Party may be liable to an Indemnified Party hereunder (other than with respect to Shared Liabilities) is asserted against or sought to be collected by a third party from an Indemnified Party (an "ASSERTED LIABILITY"), the Indemnified Party shall as soon as possible notify the Indemnifying Party in writing of such Asserted Liability, specifying the nature of such Asserted Liability (the "CLAIM NOTICE"); provided that no delay on the part of the Indemnified Party in giving any such Claim Notice shall relieve the Indemnifying Party of any indemnification obligation hereunder except to the extent that the Indemnifying Party is materially prejudiced by such delay. The Indemnifying Party shall have 60 days (or less if the nature of the Asserted Liability requires) from its receipt of the Claim Notice to notify the Indemnified Party whether or not the Indemnifying Party desires, at the Indemnifying Party's sole cost and expense and by counsel of its own choosing, to defend against such Asserted Liability; PROVIDED, HOWEVER, that if, under applicable standards of professional conduct a conflict on any significant issue between the Indemnifying Party and any Indemnified Party exists in respect of such Asserted Liability, then the Indemnifying Party shall reimburse the Indemnified Party for the reasonable fees and expenses of one additional counsel (who shall be reasonably acceptable to the Indemnifying Party). The Indemnified Party shall have the right to control, pay or settle any Asserted Liability which the Indemnifying Party shall have undertaken to defend so long as the Indemnified Party shall also (at the time it exercises such right to control, pay or settle such Asserted Liability) waive any right to indemnification therefor by the Indemnifying Party. If the Indemnifying Party undertakes to defend against such Asserted Liability, the Indemnified Party shall cooperate fully with the Indemnifying Party and its counsel in the investigation, defense and settlement thereof, but the Indemnifying Party 54 shall control the investigation, defense and settlement thereof. If the Indemnified Party desires to participate in any such defense, it may do so at its sole cost and expense. If the Indemnifying Party elects not to defend against such Asserted Liability, then the Indemnifying Party shall have the right to participate in any such defense at its sole cost and expense, but the Indemnified Party shall control the investigation, defense and settlement thereof at the reasonable cost and expense of the Indemnifying Party. The Indemnifying Party shall not, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), consent to any settlement unless such settlement (i) includes a complete release of the Indemnified Party and (ii) does not require the Indemnified Party to make or forego any payment or forego or take any action. The Indemnifying Party shall not be liable for any settlement of any Asserted Liability effected without its prior written consent (which consent shall not be unreasonably withheld). In the event a dispute arises as to which party has responsibility under this Agreement for an Asserted Liability, the Indemnified Party shall have the right to defend such Asserted Liability until such dispute is resolved in accordance with the procedures set forth in Section 12.2; PROVIDED, HOWEVER, that in such circumstances (i) the Indemnified Party shall not have the right to settle such Asserted Liability unless the Indemnified Party shall also (at the time it exercises such right to settle such Asserted Liability) waive any right to indemnification therefor by the Indemnifying Party and (ii) if it is subsequently determined pursuant to Section 12.2 that such Asserted Liability is the responsibility of the Indemnifying Party, the Indemnifying Party shall thereafter have the right to defend against such Asserted Liability in accordance with this Section 8.3(a). Any disputes between the Indemnifying Party and the Indemnified Party under this Section 8.3(a) shall be submitted to the Separation Committee in accordance with the procedures set forth in Section 12.2. (b) THIRD PARTY CLAIMS WITH RESPECT TO SHARED LIABILITIES. In the event that any claim or demand with respect to a Shared Liability is asserted against or sought to be collected by a third party (a "SHARED ASSERTED LIABILITY"), the Indemnifying Party receiving notice of such claim (the "RECEIVING PARTY") shall as soon as practicable notify the other Indemnifying Party (the "NON-RECEIVING PARTY") in writing of such Shared Asserted Liability, specifying the nature of such Shared Asserted Liability (the 55 "SHARED CLAIM NOTICE"); PROVIDED, HOWEVER, that no delay on the part of the Receiving Party in giving any such Shared Claim Notice shall relieve the Non-Receiving Party of any indemnification obligation hereunder except to the extent that the Non-Receiving Party is materially prejudiced by such delay. If one of the Indemnifying Parties has responsibility for greater than 50% of such Shared Asserted Liability as set forth in Section 1.1(i) of the Separation Disclosure Schedule, such Indemnifying Party shall have management and administrative responsibility in respect of such Shared Asserted Liability (the "MANAGING PARTY"), including responsibility for the defense of such Shared Asserted Liability, negotiation with claimants and potential claimants (subject to the limitations in the following paragraph) and other activities related thereto. If one of the Indemnifying Parties does not have responsibility for greater than 50% of such Shared Asserted Liability as set forth in Section 1.1(i) of the Separation Disclosure Schedule, New U S WEST shall be the Managing Party. The Managing Party shall assume the defense of the Shared Asserted Liability with counsel selected by the Managing Party and shall control the defense of such Shared Asserted Liability, although the Indemnifying Party that is not the Managing Party (the "NON-MANAGING PARTY") shall have the right at its own cost to participate in such defense and to employ counsel separate from the counsel employed by the Managing Party. The Non-Managing Party shall cooperate with the Managing Party in the defense or prosecution of such Shared Asserted Liability. In the event a dispute arises as to whether the Non-Receiving Party has any responsibility under this Agreement for the Shared Asserted Liability, the Receiving Party shall have the right to defend such Shared Asserted Liability until such dispute is resolved in accordance with the procedures set forth in Section 12.2; PROVIDED, HOWEVER, that in such circumstances (i) the Receiving Party shall not have the right to settle such Shared Asserted Liability unless the Indemnified Party shall also (at the time it exercises such right to settle such Shared Asserted Liability) waive any right to indemnification therefor by the Non-Receiving Party and (ii) if the Non-Receiving Party becomes the Managing Party, the Managing Party shall thereafter defend against such Shared Asserted Liability in accordance with this Section 8.3(b). In no event will the Managing Party admit any liability with respect to, or settle, compromise or discharge, any such Shared Asserted Liability without the 56 prior written consent of the Non-Managing Party; PROVIDED, HOWEVER, that the Managing Party shall have the right to settle, compromise or discharge, any such Shared Asserted Liability without the consent of the Non-Managing Party if the aggregate amount payable by the Indemnifying Parties in respect of such settlement, compromise or discharge does not exceed $5,000,000 and such settlement, compromise or discharge does not require the Non-Managing Party to take any action other than the payment of damages; PROVIDED, FURTHER, that the Managing Party shall have the right to settle, compromise or discharge such Shared Asserted Liability without the consent of the Non-Managing Party if the Managing Party releases in writing the Non-Managing Party from its indemnification obligation hereunder with respect to such Shared Asserted Liability and such settlement, compromise or discharge would not otherwise adversely affect the Non-Managing Party; and PROVIDED, FURTHER, that if the Managing Party recommends a settlement, compromise or discharge of such Shared Asserted Liability to the Non-Managing Party that does not require the Non-Managing Party to take any action other than the payment of damages and the Non-Managing Party does not consent to such settlement, compromise or discharge, then the Non-Managing Party shall be required to indemnify the Managing Party for any amount that the Managing Party may be required to pay in the future in connection with such Shared Asserted Liability which is in excess of the amount that would have been paid by or on behalf of the Managing Party pursuant to such settlement, compromise or discharge. All amounts payable by the Indemnifying Parties in connection with a Shared Asserted Liability, including all reasonable legal and other expenses incurred in connection with such Shared Asserted Liability (including reasonable legal expenses of the Non-Managing Party), shall be shared by the parties in the same proportions in which the related Shared Liability is shared. Any disputes between the parties under this Section 8.3(b) shall be submitted to the Separation Committee in accordance with the procedures set forth in Section 12.2. (C) NON-THIRD PARTY CLAIMS. In the event that an Indemnified Party should have a claim against the Indemnifying Party hereunder that does not involve a claim or demand being asserted against or sought to be collected from it by a third party, the Indemnified Party shall send a notice with respect to such claim to the Indemnifying Party. The Indemnifying Party shall have 60 days from the date such notice is delivered during which to notify the Indemnified Party in writing of any good faith objections it has to the 57 Indemnified Party's notice or claims for indemnification, setting forth in reasonable detail each of the Indemnifying Party's objections thereto. If the Indemnifying party does not deliver such written notice of objection within such 60-day period, the Indemnifying Party shall be deemed to not have any objections to such claim. If the Indemnifying Party does deliver such written notice of objection within such 60-day period, the Indemnifying Party and the Indemnified Party shall attempt in good faith to resolve any such dispute within 60 days of the delivery by the Indemnifying Party of such written notice of objection. If the Indemnifying Party and the Indemnified Party are unable to resolve any such dispute within such 60-day period, such dispute shall be submitted to the Separation Committee in accordance with the procedures set forth in Section 12.2. 8.4 MISCELLANEOUS INDEMNIFICATION PROVISIONS. (a) The Indemnifying Party agrees to indemnify any successors of the Indemnified Party to the same extent and in the same manner and on the same terms and conditions as the Indemnified Party is indemnified by the Indemnifying Party under this Article VIII. (b) The amount that an Indemnifying Party is required to pay to any Indemnified Party pursuant to this Article VIII shall be reduced (retroactively or prospectively) by any Insurance Proceeds or other amounts actually recovered by or on behalf of such Indemnified Party in respect of the related Indemnifiable Loss (including any Insurance Proceeds in respect of a Shared Liability recovered by or on behalf of such Indemnified Party in respect of the related Indemnifiable Loss). If an Indemnified Party shall have received the payment required by this Article VIII in respect of an Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Indemnifiable Loss, then such Indemnified Party shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Article VIII in respect of such Indemnifiable Loss. (c) In determining the amount of any indemnity payable under this Article VIII, such amount shall be reduced by any related Tax benefits if and when actually realized or received (but only after taking into account any 58 Tax benefits (including, without limitation, any net operating losses or other deductions) to which the Indemnified Party would be entitled without regard to such item), except to the extent such Tax benefit has already been taken into account in determining the amount of any indemnity payable under this Article VIII in respect of the related Indemnifiable Loss. Any such Tax benefit shall be promptly repaid by the Indemnified Party to the Indemnifying Party following the time at which such recovery is realized or received pursuant to the previous sentence, minus all reasonably allocable costs, charges and expenses incurred by the Indemnified Party in obtaining such Tax benefit. Notwithstanding the foregoing, if (x) the amount of Indemnifiable Losses for which the Indemnifying Party is obligated to indemnify the Indemnified Party is reduced by any Tax benefit in accordance with the provisions of the previous sentence and (y) the Indemnified Party subsequently is required to repay the amount of any such Tax benefit or such Tax benefit is disallowed, then the obligation of the Indemnifying Party to indemnify with respect to such amounts shall be reinstated immediately and such amounts shall be paid promptly to the Indemnified Party in accordance with the provisions of this Agreement. (d) No Indemnifying Party shall be liable to an Indemnified Party under this Article VIII in respect of consequential, exemplary, special or punitive damages, or lost profits, except to the extent such consequential, exemplary, special or punitive damages, or lost profits are actually paid to a third party. 8.5 CONTRIBUTION. (a) If the indemnification provided for in this Article VIII is not permitted under Applicable Law, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Indemnifiable Losses (i) any amount that such Indemnified Party would be entitled to pursuant to Article VIII of this Agreement or the relevant indemnity provisions of any other Transaction Document or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relevant benefits of the indemnity provisions described in clause (i) above, but also the relative ownership of the Assets or responsibility for the Liabilities associated with such Indemnifiable Losses. 59 (b) The amounts paid or payable by an Indemnified Party as a result of Indemnifiable Losses referred to in Section 8.5(a) above shall be deemed to include, subject to the limitations set forth above, any reasonable legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. 8.6 TAX MATTERS; CONSTRUCTION OF AGREEMENTS. (a) Except as set forth in the Tax Sharing Agreement, all indemnification relating to Taxes shall be governed by the Tax Sharing Agreement. (b) Notwithstanding any other provision in this Agreement to the contrary, except as set forth in Section 8.6(a), in the event and to the extent that there shall be a conflict between the provisions of this Article VIII and the provisions of any other part of this Agreement or any exhibit or schedule hereto, the provisions of this Article VIII shall control, and in the event and to the extent that there shall be a conflict between the provisions of this Agreement (including, without limitation, the provisions of this Article VIII) and the provisions of any other Transaction Document, the provisions of such other Transaction Document shall control. 8.7 REMEDIES CUMULATIVE. The remedies provided in this Article VIII shall be cumulative and, subject to the provisions of Section 12.2, shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party. ARTICLE IX CERTAIN ADDITIONAL COVENANTS 9.1 LICENSES AND PERMITS. Each party hereto shall cause the appropriate members of its Group to prepare and file with the appropriate licensing and permitting authorities applications for the transfer or issuance, as may be necessary or advisable in connection with the Separation, to its Group of all material governmental licenses and permits required for the members of its Group to operate its business after the Separation. The members of the New U S WEST Group and the members of the U S WEST Group shall cooperate and use all reasonable best efforts to 60 secure the transfer or issuance of such licenses and permits. 9.2 INTERCOMPANY AGREEMENTS. All contracts, licenses, agreements, commitments or other arrangements, formal or informal, between any member of the U S WEST Group, on the one hand, and any member of the New U S WEST Group, on the other, in existence as of the Separation Time, pursuant to which any member of either Group provides services to any member of the other Group (including, without limitation, management, administrative, financial, accounting, data processing, insurance or technical support), or the use of any Assets of any member of the other Group, or the secondment of any employee, or pursuant to which rights, privileges or benefits are afforded to members of either Group or Affiliates of the other Group, shall terminate as of the close of business on the day prior to the Separation Time, except (i) as specifically provided herein or in the Transaction Documents or as otherwise agreed to by the parties, (ii) for the agreements listed in Section 9.2 of the Separation Disclosure Schedule, which will remain in effect following the Separation Time and (iii) to the extent required by the terms of the AirTouch Merger Agreement, for any agreements between a member of the New U S WEST Group, on the one hand, and NewVector or any of its Subsidiaries or investments or PCS Holdings, on the other hand. From and after the Separation Time, no member of either Group shall have any rights under any contract, license, agreement, commitment or arrangement so terminated. 9.3 GUARANTEE OBLIGATIONS. (a) U S WEST and New U S WEST shall cooperate, and shall cause their respective Groups to cooperate, to terminate, or to cause a member of the New U S WEST Group to be substituted in all respects for any member of the U S WEST Group in respect of, all obligations of any member of the U S WEST Group under any loan, letter of credit, financing, lease, contract or other obligation in existence as of the Separation Time pertaining to the New U S WEST Business for which such member of the U S WEST Group may be liable, as guarantor, original tenant, primary obligor or otherwise. If such a termination or substitution is not effected by the Separation Time, (i) New U S WEST shall indemnify and hold harmless the U S WEST Indemnified Parties for any Indemnifiable Loss arising from or relating to any such loan, letter of credit, financing, lease, contract or other obligation and (ii) without the prior written consent of U S WEST, from and after the Separation Time, New U S WEST shall not, and shall not 61 permit any member of the New U S WEST Group or any of its Affiliates to, renew or extend the term of, increase its obligations under, transfer to a third party, or amend in any manner adverse to the U S WEST Group, any such loan, letter of credit, financing, lease, contract or other obligation unless all obligations of the U S WEST Group with respect thereto are thereupon terminated by documentation reasonably satisfactory in form and substance to U S WEST. (b) U S WEST and New U S WEST shall cooperate, and shall cause their respective Groups to cooperate, to terminate, or to cause a member of the U S WEST Group to be substituted in all respects for any member of the New U S WEST Group in respect of, all obligations of any member of the New U S WEST Group under any loan, financing, letter of credit, lease, contract, or other obligation in existence as of the Separation Time pertaining to the U S WEST Business for which such member of the New U S WEST Group may be liable, as guarantor, original tenant, primary obligor or otherwise. If such a termination or substitution is not effected by the Separation Time, (i) U S WEST shall indemnify and hold harmless the New U S WEST Indemnified Parties for any Indemnifiable Loss arising from or relating to any such loan, letter of credit, financing, lease, contract or other obligation, and (ii) without the prior written consent of New U S WEST, from and after the Separation Time, U S WEST shall not, and shall not permit any member of the U S WEST Group or any of its Affiliates to, renew or extend the term of, increase its obligations under, transfer to a third party, or amend in any manner adverse to the New U S WEST Group, any such loan, letter of credit, financing, lease, contract or other obligation unless all obligations of the New U S WEST Group with respect thereto are thereupon terminated by documentation reasonably satisfactory in form and substance to New U S WEST. 9.4 FURTHER ASSURANCES. (a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, all things reasonably necessary, proper or advisable under Applicable Laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement. Without limiting the foregoing, each party hereto shall cooperate with the other party, and execute and deliver, or use reasonable best efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment 62 and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any governmental or regulatory authority or any other Person under any permit, license, agreement, indenture or other instrument, and take all such other actions as such party may reasonably be requested to take by the other party hereto from time to time, consistent with the terms of this Agreement and the Transaction Documents, in order to effectuate the provisions and purposes of this Agreement and the transfers of Assets and Liabilities and the other transactions contemplated hereby. (b) If any such transfer of Assets or Liabilities is not consummated prior to or at the Separation Time, then the party hereto retaining such Asset or Liability shall continue to take the actions required by Section 9.4(a) to consummate and make effective such transfer as soon as practicable after the Separation Time and, in the case of Assets, shall use its reasonable best efforts to preserve the value of such Assets until the time of transfer. If and when any such Asset or Liability becomes transferable, such transfer shall be effected forthwith. The parties hereto agree that, as of the Separation Time, each party hereto shall be deemed to have acquired complete and sole beneficial ownership to all of the Assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement and the Transaction Documents all of the Liabilities, and all duties, obligations and responsibilities incident thereto, that such party is entitled to acquire or required to assume pursuant to the terms of this Agreement. (c) Each of the parties hereto agrees to use its respective reasonable best efforts, at such party's expense, to obtain any consents required to transfer and assign to (i) New U S WEST all Contracts, licenses and other rights of any nature whatsoever included in the New U S WEST Assets and (ii) U S WEST all Contracts, licenses and other rights of any nature whatsoever included in the MediaOne Assets. In the event and to the extent that either party hereto is unable to obtain any such required consents, (i) such party shall continue to be bound thereby (such party in such capacity, the "RECORD HOLDER") and (ii) the party to which such Asset would otherwise be transferred pursuant to this Agreement (the "BENEFICIAL HOLDER") shall pay, perform and discharge fully all of the obligations of the Record Holder thereunder from and after the Separation Time and indemnify 63 such Record Holder for all losses arising out of such performance by such Record Holder. The Record Holder shall, without further consideration therefor, pay, assign and remit to the Beneficial Holder promptly all monies, rights and other consideration received in respect of such performance. The Record Holder shall exercise or exploit its rights and options under all such Contracts, licenses and other rights and commitments referred to in this Section 9.5(c) only as reasonably directed by the Beneficial Holder and at the Beneficial Holder's expense. If and when any such consent shall be obtained or any such Contract, license or other right shall otherwise become assignable, the Record Holder shall promptly assign all of its rights and obligations thereunder to the Beneficial Holder without payment of further consideration and the Beneficial Holder shall, without the payment of any further consideration therefor, assume such rights and obligations. (d) In the event that, subsequent to the Separation Time, U S WEST shall either (i) receive written notice from New U S WEST that certain specified Assets which properly constitute New U S WEST Assets were not transferred to it on or prior to the Separation Time or (ii) determine that certain Assets of U S WEST which constitute New U S WEST Assets were not transferred to New U S WEST on or prior to the Separation Time, then, as promptly as practicable thereafter, U S WEST shall use its reasonable best efforts to transfer and deliver any and all of such Assets to New U S WEST without the payment by New U S WEST of any consideration therefor. In the event that, subsequent to the Separation Time, New U S WEST shall either (i) receive written notice from U S WEST that certain specified Assets were transferred to New U S WEST which properly constitute MediaOne Assets, or (ii) determine that certain Assets of New U S WEST which constitute MediaOne Assets were transferred to New U S WEST, then as promptly as practicable thereafter, New U S WEST shall use its reasonable best efforts to transfer and deliver any and all of such Assets to U S WEST without the payment by U S WEST of any consideration therefor. 9.5 NATIONAL CONTRACTS. Each of the parties hereto agrees to use its respective reasonable best efforts to permit the other party hereto to obtain the benefits of certain Contracts with nationally-based vendors and suppliers existing as of the Separation Time and listed on Section 9.5 of the Separation Disclosure Schedule (such Contracts, each individually a "NATIONAL CONTRACT" and 64 collectively the "NATIONAL CONTRACTS"). Each of U S WEST and New U S WEST hereby agrees to cooperate with respect to obtaining favorable prices under such National Contracts by combining or consolidating orders made under such National Contracts. Each of U S WEST and New U S WEST hereby agrees that New U S WEST or a member of the New U S WEST Group shall administer these National Contracts and that U S WEST shall be responsible for the portions attributable to U S WEST of any order or delivery of goods and services received under each National Contract (including costs of administration). The arrangements of U S WEST and New U S WEST with respect to National Contracts relating to employee matters shall be governed by the terms of the Employee Matters Agreement. 9.6 NON-SOLICITATION OF EMPLOYEES. Each of U S WEST and New U S WEST shall not, and shall cause the other members of the Group of which it is a member not to, until the first anniversary of the Separation Time, directly or indirectly, (i) recruit any Covered Employee of the other Group or (ii) solicit any Covered Employee of the other Group to leave the employment of the other Group; PROVIDED, HOWEVER, that nothing contained herein shall (A) prohibit any advertisement or general solicitation (or employment as a result thereof) by any member of the U S WEST Group or the New U S WEST Group that is not specifically targeted at employees of the other Group or (B) prohibit any employee of one Group from initiating employment discussion with the other Group without any recruitment or solicitation from such other Group. In the event U S WEST or New U S WEST breaches the provisions of this Section 9.5, the breaching party shall be required to pay to the non-breaching party as liquidated damages an amount equal to the product of (x) 1.5 multiplied by (y) the total salary and bonus under the non-breaching party's short-term compensation plan received by the Covered Employee recruited or solicited during the most recent 12-month period. 9.7 LOCK BOXES. U S WEST shall take all such actions as may be necessary or required to deliver to New U S WEST full authority as of the Separation Time with respect to all lock boxes or similar deposit arrangements maintained by U S WEST prior to the Separation Time and which are utilized exclusively by the New U S WEST Business. Effective as of the Separation Time, U S WEST shall terminate any arrangement whereby funds directed to such lock boxes or similar arrangements are consolidated with other funds of U S WEST or otherwise made available to U S 65 WEST. U S WEST shall, effective as of the Separation Time, take all necessary steps to remove all Persons who are not New U S WEST Employees but who are signatories or holders of powers-of-attorney with respect to such lock boxes or other arrangements from the list of such signatories and holders and otherwise extinguish their signing authority with respect thereto. 9.8 AGREEMENTS WITH RESPECT TO COMMON STOCK RECEIVED BY SAVINGS PLAN/ESOPS. (a) U S WEST and the U S WEST Savings Plan/ESOP and New U S WEST and the MediaOne Savings Plan/ESOP shall cooperate with each other in supplying such information as may be necessary for any of such parties to complete and file any information reporting forms presently or hereafter required by the SEC or any commissioner or other authority administering the "blue sky" or securities laws of any applicable jurisdiction which would be required to be filed as a condition to the availability of an exemption from registration or qualification of an offer or sale of the shares of the MediaOne Common Stock owned by the U S WEST Savings Plan/ESOP after the Separation (the "New U S WEST Savings Plan Shares") and the shares of the New U S WEST Common Stock received by the MediaOne Savings Plan/ESOP in the Separation (the "MediaOne Savings Plan Shares") under the Securities Act, or any such "blue sky" or securities laws. (b) To the extent required by Applicable Law, (i) until the sale by the New U S WEST Savings Plan of the New U S WEST Savings Plan Shares, U S WEST shall file in a timely manner all reports contemplated by Rule 144(c)(1) under the Securities Act as satisfying the condition that adequate public information with respect to U S WEST is available and (ii) until the sale by the MediaOne Savings Plan of the MediaOne Savings Plan Shares, New U S WEST shall file in a timely manner all reports contemplated by Rule 144(c)(1) under the Securities Act as satisfying the condition that adequate public information with respect to New U S WEST is available. 9.9 AIRTOUCH TRANSACTION. (a) Except as set forth in this Section 9.9 or as otherwise agreed to by the parties, all rights and obligations of U S WEST and its Subsidiaries under the AirTouch Merger Agreement shall be retained by U S WEST in connection with the Separation. (b) At the Separation Time (whether or not the AirTouch Transaction shall have been consummated), U S WEST 66 shall assign to New U S WEST and the New U S WEST Group, pursuant to the instrument of assignment attached as Exhibit K-2 to the AirTouch Merger Agreement, the following rights (and related obligations): (i) all of the rights (and related obligations) of U S WEST and its Subsidiaries under Section 7.8 of the AirTouch Merger Agreement (relating to use of the "U S WEST" name by AirTouch and its Subsidiaries), subject to the limitations set forth therein; and (ii) an equal and undivided interest (together with the U S WEST Group) in all of the rights (and related obligations) of U S WEST and its Subsidiaries under Sections 7.9(b) and 7.9(c) of the AirTouch Merger Agreement (relating to Intellectual Property), subject to the limitations set forth therein; and (iii) an equal and undivided interest (together with the U S WEST Group) in all of the rights (and related obligations) of U S WEST and its Subsidiaries under Section 7.11 of the AirTouch Merger Agreement (relating to Third Party Rights), subject to the limitations set forth therein. (c) New U S WEST acknowledges the right of AirTouch pursuant to Section 7.10 of the AirTouch Merger Agreement to make claims (directly or through U S WEST) under the Joint Insurance Arrangments and agrees that, for purposes of Article VII hereof, any such claim shall be deemed to have been made by the U S WEST Group. (d) New U S WEST acknowledges the right of AirTouch pursuant to Section 7.12(c) of the AirTouch Merger Agreement to terminate any contract, license or other arrangement between NewVector or any of its Subsidiaries or investments or PCS Holdings, on the one hand, and a member of the New U S WEST Group, on the other hand, on 30 Business Days' prior written notice. ARTICLE X ACCESS TO INFORMATION 10.1 PROVISION OF CORPORATE RECORDS. Prior to or as promptly as practicable after the Separation Time, U S WEST shall deliver to New U S WEST all corporate books and 67 records of the New U S WEST Group in its possession and copies of the relevant portions of all corporate books and records of the U S WEST Group relating directly and primarily to the New U S WEST Group, the New U S WEST Assets, the New U S WEST Business, the New U S WEST Liabilities and the New U S WEST Employees, including, without limitation, original corporate minute books, stock ledgers and certificates and the corporate seal of each corporation the capital stock of which is included in the New U S WEST Assets, copies of portions of the minute books of U S WEST and other members of the U S WEST Group that are directly and primarily related to the New U S WEST Business and documentation relating to the New U S WEST Liabilities, including, in each case, all active agreements, active litigation files and government filings. From and after the Separation Time, all such books, records and copies shall be the property of New U S WEST. Prior to or as promptly as practicable after the Separation Time, New U S WEST shall deliver to U S WEST all corporate books and records of the U S WEST Group in its possession and copies of the relevant portions of all corporate books and records of the New U S WEST Group relating directly and primarily to the U S WEST Group, the MediaOne Assets, the Media Business, the U S WEST Liabilities and the MediaOne Employees, including, without limitation, original corporate minute books, stock ledgers and certificates and the corporate seal of each corporation the capital stock of which is included in the MediaOne Assets, copies of portions of the minute books of members of the New U S WEST Group that are directly and primarily related to the MediaOne Business and documentation relating to the U S WEST Liabilities, including, in each case, all active agreements, active litigation files and government filings. From and after the Separation Time, all such books, records and copies shall be the property of U S WEST. 10.2 ACCESS TO INFORMATION. From and after the Separation Time, each of U S WEST and New U S WEST shall afford to the other and to the other's Representatives reasonable access and duplicating rights, during normal business hours and upon reasonable advance notice, to all Information within the possession or control of such party's Group relating to the other party's Group's pre-Separation business, Assets or Liabilities or relating to or arising in connection with the relationship between the Groups on or prior to the Separation Time, insofar as such access is reasonably required for a reasonable purpose, subject to the provisions below regarding Privileged Information. Without limiting the foregoing and except as otherwise provided in 68 the Transaction Documents, Information may be requested under this Section 10.2 for audit, accounting, claims, litigation and Tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations. In furtherance of the foregoing: (a) Each party hereto acknowledges that: (i) Each of U S WEST and New U S WEST (and the members of the U S WEST Group and the New U S WEST Group, respectively) has or may obtain Privileged Information; (ii) there are a number of Litigation Matters affecting each or both of U S WEST and New U S WEST; (iii) both U S WEST and New U S WEST have a common legal interest in Litigation Matters, in the Privileged Information, and in the preservation of the confidential status of the Privileged Information, in each case relating to pre-Separation business of the U S WEST Group or the New U S WEST Group or relating to or arising in connection with the relationship between the Groups on or prior to the Separation Time; and (iv) both U S WEST and New U S WEST intend that the transactions contemplated hereby and by the other Transaction Documents and any transfer of Privileged Information in connection therewith shall not operate as a waiver of any applicable privilege. (b) Each of U S WEST and New U S WEST agrees, on behalf of itself and each member of the Group of which it is a member, not to disclose or otherwise waive any privilege attaching to any Privileged Information relating to pre-Separation business of the New U S WEST Group or the U S WEST Group, respectively, or relating to or arising in connection with the relationship between the Groups on or prior to the Separation Time, without providing prompt written notice to and obtaining the prior written consent of the other, which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that U S WEST and New U S WEST may make such disclosure or waiver with respect to Privileged Information if such Privileged Information relates solely to the pre-Separation business of the U S WEST Group, in the case of U S WEST, or the New U S WEST Group, in the case of New U S WEST. Any disagreement between any member of the U S WEST Group and any member of the New U S WEST Group concerning the reasonableness of withholding such consent shall be submitted to the Separation Committee in accordance with the procedures set forth in Section 12.2 and no disclosure shall be made prior to a resolution of such disagreement. 69 (c) Upon any member of the U S WEST Group or any member of the New U S WEST Group receiving any subpoena or other compulsory disclosure notice from a court, other governmental agency or otherwise that requests disclosure of Privileged Information, in each case relating to pre-Separation business of the New U S WEST Group or the U S WEST Group, respectively, or relating to or arising in connection with the relationship between the Groups on or prior to the Separation Time, in the event the recipient of such the notice intends to disclose such Privileged Information, such recipient shall promptly provide to the other Group (following the notice provisions set forth herein) a copy of such notice, the intended response, and all materials or information relating to the other Group that might be disclosed. In the event of a disagreement as to the intended response or disclosure, unless and until the disagreement is resolved as provided in subsection (b), the parties shall cooperate to assert all defenses to disclosure claimed by either party's Group, and shall not disclose any disputed documents or information until all legal defenses and claims of privilege have been finally determined. 10.3 PRODUCTION OF WITNESSES. Subject to Section 10.2, after the Separation Time, each of U S WEST and New U S WEST shall, and shall cause each member of the U S WEST Group and the New U S WEST Group, respectively, to, make available to U S WEST or New U S WEST or any member of the U S WEST Group or of the New U S WEST Group, as the case may be, upon written request of the other, such Group's directors, officers, employees and agents as witnesses to the extent that any such Person may reasonably be required in connection with any Litigation Matters, administrative or other proceedings in which the requesting party may from time to time be involved and relating to the pre-Separation business of the U S WEST Group or the New U S WEST Group or relating to or in connection with the relationship between the Groups on or prior to the Separation Time; PROVIDED, HOWEVER, that, notwithstanding the foregoing, neither the U S WEST Group nor the New U S WEST Group shall be required to make available such Group's directors, officers, employees or witnesses in response to a subpoena received by any member of the other Group from a third party. 10.4 RETENTION OF RECORDS. Except as otherwise agreed in writing, or as otherwise provided in the Transaction Documents, each of U S WEST and New U S WEST shall, and shall cause the members of the Group of which it is a member to, comply with the current records retention 70 policy of U S WEST included in Section 10.4 of the Separation Disclosure Schedule with respect to all Information in such party's Group's possession or under its control relating directly and primarily to the pre-Separation business, Assets or Liabilities of the other party's Group. 10.5 CONFIDENTIALITY. Subject to Section 10.2, which shall govern Privileged Information, from and after the Separation Time, each of New U S WEST and U S WEST shall, and shall use reasonable best efforts to cause the members of its Group and Representatives to, preserve the confidentiality of all Information concerning the other party's Group obtained by it prior to the Separation Time or furnished to it by such other party's Group pursuant to this Agreement or the other Transaction Documents with the same degree of care as it takes to preserve confidentiality for its own similar Information. 10.6 COOPERATION WITH RESPECT TO GOVERNMENT REPORTS AND FILINGS. U S WEST, on behalf of itself and each member of the U S WEST Group, agrees to provide any member of the New U S WEST Group, and New U S WEST, on behalf of itself and each member of the New U S WEST Group, agrees to provide any member of the U S WEST Group, with such cooperation and Information as may be reasonably requested by the other in connection with the preparation or filing of any government report or other government filing contemplated by this Agreement or the other Transaction Documents or in conducting any other government proceeding relating to pre-Separation business of the U S WEST Group or the New U S WEST Group, Assets or Liabilities of either Group or relating to or in connection with the relationship between the Groups on or prior to the Separation Time. Such cooperation and Information shall include, without limitation, promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any Governmental Authority which relate to the U S WEST Group, in the case of the New U S WEST Group, or the New U S WEST Group, in the case of the U S WEST Group. Each party shall make its employees and facilities available during normal business hours and on reasonable prior notice to provide explanation of any documents or Information provided hereunder. 10.7 CERTAIN LIMITATIONS WITH RESPECT TO INFORMATION. (a) Any Information owned by one Group that is provided to a requesting party pursuant to this Agreement 71 or any other Transaction Document shall be deemed to remain the property of the providing party. Unless specifically set forth herein, nothing contained in this Agreement shall be construed as granting or conferring rights of license or otherwise in any such Information. (b) A party providing Information hereunder or under any other Transaction Document shall be entitled to receive from the requesting party the reasonable costs, if any, of creating, gathering and copying such Information, to the extent that such costs are incurred for the benefit of the requesting party. Except as may be otherwise specifically provided elsewhere in this Agreement or in any of the Transaction Documents, such costs shall be computed solely in accordance with the providing party's standard methodology and procedures. (c) No party shall have any liability to any other party in the event that any Information exchanged or provided pursuant to this Article X hereof which is an estimate or forecast, or which is based on an estimate or forecast, is found to be inaccurate, in the absence of willful misconduct by the party providing such Information. No party shall have any liability to any other party if any Information is destroyed after reasonable best efforts by such party to comply with the provisions of Section 10.4. (d) The rights and obligations granted under this Article X are subject to any specific limitations, qualifications or additional provisions on the sharing, exchange or confidential treatment of Information set forth in any other Transaction Document. 10.8 PROTECTIVE ARRANGEMENTS. In the event that any party or any member of its Group either determines on the advice of its counsel that it is required to disclose any Information pursuant to applicable law or receives any demand under lawful process or from any Governmental Authority to disclose or provide Information concerning any other party (or any member of any other party's Group) that is subject to the confidentiality provisions hereof, such party shall notify the other party prior to disclosing or providing such Information and shall cooperate at the expense of the requesting party in seeking any reasonable protective arrangements requested by such other party. Subject to the foregoing, the Person that received such request may thereafter disclose or provide Information to 72 the extent required by such law (as so advised by counsel) or by lawful process or such Governmental Authority. ARTICLE XI MUTUAL RELEASE; NO REPRESENTATIONS OR WARRANTIES 11.1 MUTUAL RELEASE. (a) Effective as of the Separation Time and except as specifically set forth in this Agreement or any of the other Transaction Documents, each of New U S WEST, on the one hand, and U S WEST, on the other hand, on its own behalf and on behalf of each member of its respective Group, releases and forever discharges the other and the members of its Group, and its and their respective officers, directors, agents, Affiliates, record and beneficial security holders (including, without limitation, trustees and beneficiaries of trusts holding such securities), advisors and Representatives (in their respective capacities as such) and their respective heirs, executors, administrators, successors and assigns, of and from all debts, demands, Actions, causes of action, suits, accounts, covenants, contracts, agreements, damages, claims and Liabilities whatsoever of every name and nature, both in law and in equity, which the releasing party has or ever had, which arise out of or relate to, in whole or in part, events, circumstances or actions, whether known or unknown, taken by such other party occurring or failing to occur or any conditions existing on or prior to the Separation Time; PROVIDED, HOWEVER, that the foregoing general release shall not apply to (i) any Liabilities assumed, transferred, assigned, allocated or arising under this Agreement or any of the other Transaction Documents and shall not affect any party's rights to enforce this Agreement (including the provisions of Article VIII) or any of the other Transaction Documents in accordance with their terms; (ii) any Liability arising under any agreement listed in Section 9.2 of the Separation Disclosure Schedule (each of which shall remain in effect following the Separation Time); and (iii) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 11.1 (provided that the parties agree not to bring suit or permit any members of their Group to bring suit against any Person with respect to any Liability to the extent such Person would be released with respect to such Liabilities by this Section 11.1 but for this clause (iii)). U S WEST and New U S WEST acknowledge that the foregoing 73 general release shall not apply to any Liabilities assigned by members of the U S WEST Group or members of the New U S WEST Group to third parties prior to the Separation Time. (b) The parties acknowledge that members of the U S WEST Law Department and U S WEST's outside counsel currently represent members of both the U S WEST Group and the New U S WEST Group. Effective as of the Separation Time, each of New U S WEST, on the one hand, and U S WEST, on the other hand, on its own behalf and on behalf of each member of its respective Group, waives any conflict with respect to such common representation before, at or after the Separation Time (other than, in the case of such common representation by U S WEST's outside counsel, with respect to any dispute or Action between a member of the U S WEST Group and a member of the New U S WEST Group). 11.2 NO REPRESENTATIONS OR WARRANTIES. New U S WEST understands and agrees that neither U S WEST nor any other member of the U S WEST Group is, and U S WEST understands and agrees that neither New U S WEST nor any other member of the New U S WEST Group is, in this Agreement or in any other agreement or document, representing or warranting to the other in any way as to such Group's Assets, business or Liabilities or as to any consents or approvals required in connection with the consummation of the transactions contemplated by this Agreement, it being agreed and understood that each member of the Group shall take all of the Assets "AS IS, WHERE IS". Except as set forth in this Agreement and the other Transaction Documents, both parties shall bear the economic and legal risk of the Reorganization, Contribution and Separation that (a) any conveyance of such Group's Assets shall prove to be insufficient, (b) the title of any member of the New U S WEST Group or the U S WEST Group to any of their respective Assets shall be other than good and marketable and free from encumbrances, (c) the title of any member of the New U S WEST Group or the U S WEST Group to the shares of any Subsidiary of such Group shall be other than good and marketable and free from encumbrances or (d) any member of the other Group shall fail to obtain any consents or approvals relating to its business required in connection with the consummation of the transactions contemplated by this Agreement. 74 ARTICLE XII GENERAL PROVISIONS 12.1 MERGER OR CONSOLIDATION. Neither New U S WEST nor U S WEST (in either case, the "TRANSACTION PARTY") shall (a) consolidate with or merge into any Person or permit any Person to consolidate with or merge into the Transaction Party (other than a merger or consolidation in which the Transaction Party is the surviving or continuing corporation) or (b) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of the assets of the Transaction Party, unless the resulting, surviving or transferee Person shall expressly assume, by instrument in form and substance reasonably satisfactory to the other party, all of the obligations of the Transaction Party under this Agreement and each of the other Transaction Documents. 12.2 SEPARATION COMMITTEE; DISPUTE RESOLUTION. (a) As of the Separation Time, New U S WEST and U S WEST shall form a committee (the "SEPARATION COMMITTEE") comprised of one representative designated from time to time by the General Counsel of New U S WEST in his sole discretion and one representative designated from time to time by the General Counsel of U S WEST in his sole discretion. Until the tenth anniversary of the Separation Time, the Separation Committee shall be responsible for resolving any and all disputes between any member of the U S WEST Group and any member of the New U S WEST Group arising with respect to any matter, whether based in contract, tort, statute or otherwise (collectively, "DISPUTES"), including any dispute as to (i) whether any Action or other Liability is a New U S WEST Liability, a MediaOne Liability or a Shared Liability, (ii) whether any Asset is a New U S WEST Asset or a MediaOne Asset, (iii) the interpretation of any provision of this Agreement or any other Transaction Document and (iv) such other matters as are contemplated by this Agreement or any other Transaction Document to be resolved by the Separation Committee. In the event of any such Dispute, each of New U S WEST and U S WEST shall have the right to refer in writing such Dispute to the Separation Committee for resolution. The Separation Committee shall be required to render a written decision with respect to any Dispute within 30 days of its receipt of the referral. The decision of the Separation Committee with respect to any Dispute shall be binding on the New U S WEST Group and the U 75 S WEST Group and their respective successors and assigns. In the event that the Separation Committee is unable to reach a unanimous determination as to any Dispute to which it is referred within 30 days of such referral, each of New U S WEST and U S WEST shall have the right to submit such Dispute to arbitration in accordance with the procedures set forth in Section 12.2(b). All out-of-pocket expenses and costs incurred by New U S WEST or U S WEST in connection with the procedures set forth in this Section 12.2(a) shall be borne by the party incurring such expenses and costs. (b) In the event that the Separation Committee is unable to reach a unanimous determination as to any Dispute pursuant to Section 12.2(a), each of New U S WEST and U S WEST shall have the right to submit such Dispute to arbitration in accordance with the procedures set forth in this Section 12.2(b). Until the tenth anniversary of the Separation Time, resolution of any and all such Disputes, including, but not limited to, disputes over arbitrability, shall be exclusively governed by and settled in accordance with the provisions of this Section 12.2(b); PROVIDED, HOWEVER, that nothing contained herein shall preclude either party from seeking or obtaining injunctive relief or equitable or other judicial relief to enforce this Section 12.2(b). U S WEST or New U S WEST (each a "PARTY") may commence proceedings hereunder by delivering a written notice (the "DEMAND") to the other Party providing a reasonable description of the Dispute to the other, and expressly requesting arbitration hereunder. The parties hereby agree to submit all Disputes to arbitration under the terms hereof, which arbitration shall be final, conclusive and binding upon the parties, their successors and assigns. The arbitration shall be conducted in Denver, Colorado by three arbitrators acting by majority vote (the "PANEL"). Of the three arbitrators comprising the Panel, one arbitrator shall be selected by U S WEST, one arbitrator shall be selected by New U S WEST and one arbitrator shall be jointly selected by the arbitrators selected by U S WEST and New U S WEST. If either U S WEST or New U S WEST fail to select an arbitrator within 15 days after delivery of the Demand, the arbitrator which is to be selected by such Party shall be appointed pursuant to the commercial arbitration rules of the American Arbitration Association, as amended from time to time (the "AAA RULES"). If an arbitrator so selected or appointed becomes unable to serve, his or her successors shall be similarly selected or appointed. Notwithstanding 76 the foregoing, at the agreement of the Parties, the Panel shall consist of one arbitrator selected by agreement of the Parties for appropriate Disputes. The arbitration shall be conducted pursuant to the Federal Arbitration Act and such procedures as the Parties may agree, or, in the absence of or failing such agreement, pursuant to the AAA Rules. Notwithstanding the foregoing, the Panel, taking into consideration the desires of the Parties for expedited resolution of the Dispute, shall have discretion to order discovery, including, in appropriate circumstances, depositions. All hearings shall be conducted on an expedited schedule, and all proceedings shall be confidential. Either Party may at its expense make a stenographic record thereof, which shall then be shared with the other Party. Hearings with respect to a Dispute shall commence not later than 60 days after selection or appointment of the Panel, and shall no be more than 30 days in length. The Panel shall be required to make a final award within 30 days of the conclusion of the hearings. The award shall be in writing and shall specify the factual and legal basis for the award. The Panel shall apportion all costs and expenses of arbitration, including the Panel's fees and expenses, fees and expenses of experts and reasonable attorneys fees, between the prevailing and non-prevailing Party as the Panel deems fair and reasonable. The Parties agree that monetary damages may be inadequate and that either Party shall be entitled to seek, and that the Panel shall be empowered to enter, equitable and injunctive relief, including preliminary and temporary injunctive relief, in addition to any other appropriate relief or remedy. The Parties consent to the jurisdiction of the Panel to award such relief and to the binding nature of any such relief awarded by the Panel. In no event may the Panel award consequential, exemplary, special or punitive damages, or lost profits, except to the extent such consequential, exemplary, special or punitive damages, or lost profits are actually paid by a Party or a member of that Party's Group to a third party. Any arbitration award shall be binding and enforceable against the Parties and each member of their respective Groups and judgment may be entered thereon in any court of competent jurisdiction. 12.3 SUBSIDIARIES. Each of the parties hereto shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party 77 or by any entity that is contemplated to be a Subsidiary of such party on or after the Separation Time. 12.4 EXPENSES. Except as set forth in Sections 3.4(a) and 3.4(b) of the Separation Disclosure Schedule, all out-of-pocket costs with respect to the transfer of the New U S WEST Assets and the transactions contemplated hereby and by the other Transaction Documents shall be borne equally by U S WEST and New U S WEST. 12.5 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of Colorado, without reference to choice of law principles, including matters of construction, validity and performance. 12.6 NOTICES. Notices, requests, permissions, waivers, referrals and all other communications hereunder shall be in writing and shall be deemed to have been duly given if signed by the respective persons giving them (in the case of any corporation the signature shall be by an officer thereof) and delivered by hand or by telecopy or on the date of receipt indicated on the return receipt if mailed (registered or certified, return receipt requested, properly addressed and postage prepaid): If to U S WEST, to: U S WEST, INC. (to be renamed "MEDIAONE GROUP, INC.") 188 Inverness Drive West Englewood, Colorado 80112 Attention: General Counsel Telephone: (303) 858-5800 If to New U S WEST, to: USW-C, INC. (to be renamed "U S WEST, INC.") 1801 California Street Englewood, Colorado 80202 Attention: General Counsel Telephone: (303) 896-2020 Such names and addresses may be changed by notice given in accordance with this Section 12.6. Copies of all notices, requests, permissions, waivers, referrals and all other communications hereunder shall be given to: 78 Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Dennis J. Block, Esq. Telephone: (212) 310-8000 Telecopy: (212) 310-8007 12.7 ENTIRE AGREEMENT. This Agreement and the other Transaction Documents, together with all schedules, exhibits, annexes, certificates, instruments and agreements delivered pursuant hereto and thereto, contain the entire understanding of the parties hereto and thereto with respect to the subject matter contained herein and therein, and supersede and cancel all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matter. 12.8 HEADINGS; REFERENCES. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All references herein to "Articles", "Sections" or "Exhibits" shall be deemed to be references to Articles or Sections hereof or Exhibits hereto unless otherwise indicated. All references herein to "Sections" of the Separation Disclosure Schedule shall be deemed to be references to the Separation Disclosure Schedule unless otherwise indicated. 12.9 SCHEDULES. The Separation Disclosure Schedule referenced in this Agreement and attached hereto is incorporated into this Agreement by reference and made a part hereof. 12.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts and each counterpart shall be deemed to be an original, but all of which shall constitute one and the same original. 12.11 PARTIES IN INTEREST; ASSIGNMENT; SUCCESSORS. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon U S WEST and New U S WEST and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement. 79 12.12 SEVERABILITY; ENFORCEMENT. The invalidity of any portion hereof shall not affect the validity, force or effect of the remaining portions hereof. If it is ever held that any restriction hereunder is too broad to permit enforcement of such restriction to its fullest extent, each party agrees that a court of competent jurisdiction may enforce such restriction to the maximum extent permitted by law, and each party hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restriction. 12.13 AMENDMENT. This Agreement may be amended, modified or supplemented only by a written agreement signed by all of the parties hereto. 12.14 TERMINATION. This Agreement may be terminated and the Separation abandoned at any time prior to the Separation Time by and in the sole discretion of the Board of Directors of U S WEST without the approval of any other party hereto or of U S WEST's stockholders. In the event of such termination, no party hereto or to any other Transaction Document shall have any Liability to any Person by reason of this Agreement or any other Transaction Document, except as otherwise expressly provided herein or therein. 80 IN WITNESS WHEREOF, each of the parties has caused this Separation Agreement to be duly executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written. U S WEST, INC. By: --------------------------------------------- Name: Title: USW-C, INC. By: --------------------------------------------- Name: Title: 81 EX-2.B 3 EXHIBIT 2-B EMPLOYEE MATTERS AGREEMENT TRANSFER, ASSUMPTION AND/OR DIVISION OF EMPLOYEE BENEFITS PLANS AND EMPLOYEE ARRANGEMENTS TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. GENERAL PRINCIPLES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (a) New U S WEST Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7 (b) MediaOne Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 8 (c) Shared Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (d) Class Action Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 9 (e) Appeal Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 (f) Funded Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (g) Control of litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 10 (h) Election to Assume Liability . . . . . . . . . . . . . . . . . . . . . . 10 3. SPONSORSHIP AND ADMINISTRATION OF EMPLOYEE BENEFIT PLANS AND EMPLOYEE ARRANGEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4. EMPLOYEE SAVINGS PLANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5. TRANSFER OF U S WEST PENSION PLAN ASSETS AND LIABILITIES. . . . . . . . . . . 17 6. OTHER TAX-QUALIFIED PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7. WELFARE PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (a) Communications Plans . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (b) Media Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (c) Joint Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 (d) Continuing Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (e) Continuance of Elections . . . . . . . . . . . . . . . . . . . . . . . . 28 (f) Co-Payments and Maximum Benefits . . . . . . . . . . . . . . . . . . . . 28 (g) Pre-existing conditions. . . . . . . . . . . . . . . . . . . . . . . . . 29 (h) COBRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (i) Long-Term Disability . . . . . . . . . . . . . . . . . . . . . . . . . . 30 8. VEBA's. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9. INCENTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (a) Stock Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (b) Restricted Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (c) LTIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 (d) ESTIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 (e) Phantom Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 10. OTHER BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (a) Top-hat plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 (b) Employment contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (c) Split-dollar contracts . . . . . . . . . . . . . . . . . . . . . . . . . 41 (d) Ex-Pat Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (e) Vail Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 i (f) Leaves of Absence. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 (g) Non-Employee Director Plans. . . . . . . . . . . . . . . . . . . . . . . 43 (h) Non-Employee State Executive Board Plan. . . . . . . . . . . . . . . . . 43 11. PORTABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 12. FURTHER AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 13. COOPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14. NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES . . . . . . . . . 46 15. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 (a) Payment of 1998 Administrative Costs and Expenses. . . . . . . . . . . . 47 (b) Audit Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 (1) Information Provided. . . . . . . . . . . . . . . . . . . . . . . . 48 (2) Vendor Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . 48 (c) Beneficiary Designations . . . . . . . . . . . . . . . . . . . . . . . . 49 (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Effect If Separation Does Not Occur . . . . . . . . . . . . . . . . . . . . . 49 (e) Provisions of Separation Agreement . . . . . . . . . . . . . . . . . . . 49
ii EMPLOYEE MATTERS AGREEMENT TRANSFER, ASSUMPTION AND/OR DIVISION OF EMPLOYEE BENEFITS PLANS AND EMPLOYEE ARRANGEMENTS 1. DEFINITIONS. (a) All capitalized terms used in this EM Agreement shall have the meanings set forth below or, if not set forth below, the meaning given in the Separation Agreement. "AirTouch Transfers" shall mean Terminated Employees whose employment is transferred to AirTouch Communications, Inc. or any of its affiliates prior to the Separation Time as a result of the merger agreement among Existing U S WEST, certain subsidiaries thereof and AirTouch Communications, Inc. and who either: (i) are eligible for retiree medical coverage or retiree life insurance as of the date of transfer of employment; or (ii) have an account balance in the Media Savings Plan/ESOP immediately after the Separation Time. "Average Value" shall mean the average Market Value of the Communications Stock or Media Stock, as applicable, over the period of 20 Trading Days ending on the fifth Trading Day prior to the date of the Separation Time, rounded to the nearest one-hundred thousandth (or if there shall not be a nearest one-hundred thousandth, to the next highest one-hundred thousandth). "Cable Companies" shall mean MediaOne of Delaware, Inc. (f/k/a Continental Cablevision, Inc.), MediaOne, Inc. and/or MediaOne of Michigan, Inc. (f/k/a Booth Communications), or their predecessors. "COBRA" shall mean the continuation coverage requirements for group health plans under Title X of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, and as codified in Code Section 4980B and ERISA Sections 601 through 608. "Communications Employees" shall mean all persons who are Employees of the New U S WEST Group at the Separation Time, including without limitation (1) Employees who worked for Existing U S WEST prior to the Separation Time that are designated as Communications Employees by Existing U S WEST as of the Separation Time, (2) Employees who, prior to the Separation Time, worked for an entity that is a 1 member of the MediaOne Group that are designated as Communications Employees as of the Separation Time, and (3) Employees who, prior to the Separation Time, worked for Dex that are designated as Communications Employees as of the Separation Time. "Communications Employee Arrangements" shall mean all Employee Arrangements sponsored by members of the New U S WEST Group after the Separation Time. "Communications Employee Benefit Plans" shall mean all Employee Benefit Plans sponsored by members of the New U S WEST Group after the Separation Time. "Deferred Benefits" shall mean the entitlement of a Terminated Employee, based solely on the records of the Existing U S WEST Group at the Separation Time, to future benefits under one or more of the Deferred Plans. Except as provided in the definition of Terminated Media Employee and Terminated Inc. Employee, a Terminated Employee who, according to such records, is not entitled to any benefits under the Deferred Plans or who has already received all of such benefits prior to the Separation Time does not have any Deferred Benefits. "Deferred Plans" shall mean the U S WEST Employee Savings Plan/ESOP (except accounts attributable to AirTouch Transfers); the U S WEST Pension Plan (including the disability pensions provided thereunder); retiree medical benefits under any medical plan maintained by the Existing U S WEST Group (but excluding COBRA); and long-term disability benefits under a long-term disability plan maintained by the Existing U S WEST Group. "EBC" shall mean the Employee Benefits Committee of Existing U S WEST as constituted prior to the Separation Time. "EM Agreement" shall mean this Employee Matters Agreement, which is Exhibit A to the Separation Agreement. "Employee" means a person who is an employee of the Existing U S WEST Group at the Separation Time, including an employee who is not actively performing services because such employee is on an approved leave of absence, short-term disability, illness or other similar reasons. Employee shall include: (i) a person who is a former employee of the Existing U S WEST Group; and/or (ii) a person who has been transferred to Time Warner Communications pursuant to 2 the agreement of Existing U S WEST and Time Warner Communications; and/or (iii) a person who is an employee of Time Warner Communications at the Separation Time, including an employee who is not actively performing services because such employee is on an approved leave of absence, short-term disability, illness or other similar reasons. In addition, an individual who is described in either of the preceding sentences (whether he works for the Existing U S WEST Group or Time Warner Communications) immediately prior to the Separation Time who does not report for work to the New U S WEST Group, MediaOne Group or Time Warner Communications (depending upon his applicable assignment) immediately after the Separation Time shall be considered an Employee (for purposes of this EM Agreement only) unless (1) prior to the Separation Time, he notifies the Existing U S WEST Group or Time Warner Communications, as applicable, that he is terminating, effective on or before the Separation Time or (2) prior to the Separation Time, the Existing U S WEST Group or Time Warner Communications, as applicable, notifies him that he is terminated, effective on or before the Separation Time. All Employees shall be either Communications Employees or Media Employees. A former employee who is on lay-off is a Terminated Employee, not an Employee. "Employment Related Liabilities" shall mean all Liabilities, including litigation costs, which relate to an Employee, a Terminated Employee or their respective dependents and beneficiaries, in each case relating to, arising out of or resulting from employment by the Existing U S WEST Group or predecessor prior to the Separation Time, including Liabilities under Employee Benefit Plans and Employee Arrangements. Notwithstanding the preceding sentence, the following Liabilities are not Employment Related Liabilities: (1) any Liability which is specifically addressed in a provision other than Section 2 of this EM Agreement, (2) Liabilities arising under or relating to the severance agreements between Existing U S WEST and members of the Executive Group (which Liabilities are addressed in Schedules 3.4(a) and 3.4(b) of the Separation Agreement) and (3) any other Liability scheduled in the Separation Agreement. "Executive Group" shall mean Richard D. McMormick, Charles P. Russ III, Michael P. Glinsky, Robert W. Gras, and James T. Anderson. 3 "Existing U S WEST" shall mean U S WEST, Inc., a Delaware corporation, prior to the Separation Time. "Existing U S WEST Group" shall mean, prior to the Separation Time, Existing U S WEST and all of its Subsidiaries. "Media Employees" shall mean all persons who are Employees of the MediaOne Group at the Separation Time, including without limitation (1) Employees who worked for Existing U S WEST prior to the Separation Time that are designated as Media Employees by Existing U S WEST as of the Separation Time (including, without limitation, Employees who are employed by Time Warner Communications), (2) Employees who, prior to the Separation Time, worked for an entity that is a member of the New U S WEST Group that are designated as Media Employees as of the Separation Time and (3) Employees who, prior to the Separation Time, worked for MGI that are designated as Media Employees as of the Separation Time. "Media Employee Arrangements" shall mean the Employee Arrangements sponsored by members of the MediaOne Group after the Separation Time. "Media Employee Benefit Plans" shall mean the Employee Benefit Plans sponsored by members of the MediaOne Group after the Separation Time. "MediaOne" shall mean MediaOne Group, Inc., a Delaware corporation, at and after the Separation Time. MediaOne was known as U S WEST, Inc. prior to the Separation Time. "MediaOne Employee Benefits Committee" shall mean, effective on and after the Separation Time, the committee of MediaOne Group, Inc. designated to administer various Media Employee Benefit Plans and Media Employee Arrangements. "MediaOne Group" shall mean, at and after the Separation Time, MediaOne Group, Inc. and all of its Subsidiaries. "New U S WEST Employee Benefits Committee" shall mean, effective on and after the Separation Time, the committee of New U S WEST designated to administer various Communications Employee Benefit Plans and Communications Employee Arrangements. 4 "Non-Employee Directors" shall mean those members of the Board of Directors of the respective corporation who are or were not employees of that entity during their term of office. "Retired Non-Employee Directors" shall mean those Non-Employee Directors who have completed their term on the respective Board of Directors prior to the Separation Time. "Non-Employee Director Plans" shall mean the U S WEST, Inc. Deferred Compensation Plan for Non-Employee Directors and the U S WEST, Inc. Retirement Plan for Non-Employee Directors. "Separation Agreement" shall mean the Separation Agreement, dated as of __________, 1998, between U S WEST, Inc. and USW-C, Inc. "Terminated Communications Employees" shall mean all persons who are Terminated Employees and who are not Terminated Media Employees or Terminated Inc. Employees. Terminated Communications Employees shall include (1) all Terminated Employees (other than AirTouch Transfers) with Deferred Benefits (unless they were actively employed by one of the Cable Companies on their last day of active employment with the Existing U S WEST Group); (2) all Terminated Employees who were last actively employed before November 1, 1995 (unless they were actively employed by one of the Cable Companies on their last day of active employment with the Existing U S WEST Group) and are not entitled to Deferred Benefits at the Separation Time; and (3) all Terminated Employees who were last actively employed (on or after November 1, 1995 and before the Separation Time) by an entity that is a member of the New U S WEST Group (excluding MGI, but including Dex and its subsidiaries) after the Separation Time and are not entitled to Deferred Benefits at the Separation Time. "Terminated Employee" means a person who formerly was actively employed by the Existing U S WEST Group and who is not an Employee. An individual who is employed by the Existing U S WEST Group immediately prior to the Separation Time who does not report for work to the New U S WEST Group or MediaOne Group (depending upon his applicable assignment) immediately after the Separation Time shall be considered a Terminated Employee if (1) prior to the Separation Time, he notifies Existing U S WEST or its Subsidiaries that he is terminating, effective on or before the Separation Time or (2) prior to the Separation Time, Existing U S WEST or its Subsidiaries notify him that he is terminated, 5 effective on or before the Separation Time. All members of the Executive Group shall be Terminated Employees. Each Terminated Employee shall be either (a) a Terminated Communications Employee, (b) a Terminated Inc. Employee or (c) a Terminated Media Employee, provided that, to the extent set forth in this EM Agreement, a Terminated Employee may be classified differently for different purposes. "Terminated Inc. Employees" shall mean all Terminated Employees who were last actively employed (on or after November 1, 1995 and before the Separation Time) by Existing U S WEST (but not its Subsidiaries) and are not entitled to Deferred Benefits at the Separation Time. If, after the Separation Time, it is determined by a final decision of a court of competent jurisdiction or an agreement of MediaOne and New U S WEST that a Terminated Inc. Employee is entitled to benefits under one or more Deferred Plans (other than as a result of future employment with the MediaOne Group or New U S WEST Group), such Terminated Employee shall be considered to have Deferred Benefits solely with respect to those Deferred Plans that owe him additional benefits (and shall therefore be a Terminated Communications Employee solely with respect to such Deferred Plans, provided that if the Deferred Plan is the U S WEST Pension Plan, the individual shall also be a Terminated Communications Employee with respect to the U S WEST Nonqualified Pension Plan). "Terminated Media Employees" shall mean (1) all Terminated Employees (whether or not they have Deferred Benefits) who were actively employed by one of the Cable Companies on their last day of active employment with the Existing U S WEST Group; (2) all Terminated Employees who were last actively employed (on or after November 1, 1995 and before the Separation Time) by an entity that is a member of the MediaOne Group after the Separation Time (unless such last employer was Existing U S WEST) and are not entitled to Deferred Benefits at the Separation Time; (3) all Terminated Employees who were last actively employed (on or after November 1, 1995 and before the Separation Time) by MGI and are not entitled to Deferred Benefits at the Separation Time; and (4) all AirTouch Transfers, regardless of their last day of employment. Notwithstanding the foregoing, if, after the Separation Time, it is determined by a final decision of a court of competent jurisdiction or an agreement of MediaOne and New U S WEST that a Terminated Media Employee described in clause (2) or (3) above is entitled to benefits under one or more 6 Deferred Plans (other than as a result of future employment with the MediaOne Group or New U S WEST Group), such Terminated Employee shall be considered to have Deferred Benefits solely with respect to those Deferred Plans that owe him additional benefits (and shall therefore be a Terminated Communications Employee solely with respect to such Deferred Plans, provided that if the Deferred Plan is the U S WEST Pension Plan, the individual shall also be a Terminated Communications Employee with respect to the U S WEST Nonqualified Pension Plan). "Welfare Plan" shall mean an Employee Benefit Plan which is a health benefit, life insurance or other employee welfare benefit plan, within the meaning of Section 3(1) of ERISA, which is maintained by Existing U S WEST, New U S WEST, MediaOne or a Subsidiary of any of them. (b) All determinations under this Section 1 with respect to status as an Employee, Terminated Employee, Media Employee, Communications Employee, Terminated Media Employee, Terminated Inc. Employee or Terminated Communications Employee shall be made as of the Separation Time, unless otherwise specifically set forth in this Section 1. (c) Notwithstanding the foregoing definitions, in the event it is unclear as to whether a Terminated Employee is a Terminated Communications Employee, Terminated Inc. Employee or a Terminated Media Employee, or in the event that a Terminated Employee was last actively employed at a time the individual was on a temporary transfer from one member of the Existing U S WEST Group to another for less than 12 months, MediaOne and New U S WEST shall agree on an equitable classification of such employee or employees (and the assumption of any liability attributable thereto). 2. GENERAL PRINCIPLES. (a) New U S WEST Liabilities. Except as otherwise provided in this EM Agreement, New U S WEST and its Subsidiaries hereby assume and agree to pay, perform, fulfill and discharge: (1) All Employment Related Liabilities (regardless of where such Employment Related Liabilities arose or arise or were or are incurred) to or relating to Communications Employees and Terminated Communications Employees; 7 (2) All Liabilities, including litigation costs, relating to, or arising out of or resulting from the performance of services to the New U S WEST Business (other than MGI) prior to the Separation Time by an independent contractor, leased employee or similar individual or by any person who alleges that he was an employee of the New U S WEST Business (other than MGI) prior to the Separation Time or the dependent or beneficiary of any such independent contractor or alleged employee; (3) All Liabilities, including litigation costs, which relate to a Communications Employee or his dependents and beneficiaries, in each case relating to, arising out of or resulting from employment by the New U S WEST Group on or after the Separation Time (including Liabilities under Communications Employee Benefit Plans and Communications Employee Arrangements); and (4) All Liabilities, including litigation costs, relating to, or arising out of or resulting from the performance of services to the New U S WEST Group on or after the Separation Time by an independent contractor, leased employee or similar individual or by any person who alleges that he was an employee of the New U S WEST Group on or after the Separation Time or the dependent or beneficiary of any such independent contractor or alleged employee. (b) MediaOne Liabilities. Except as otherwise provided in this EM Agreement, MediaOne and its Subsidiaries hereby assume and agree to pay, perform, fulfill and discharge: (1) All Employment Related Liabilities (regardless of where such Employment Related Liabilities arose or arise or were or are incurred) to or relating to Media Employees and Terminated Media Employees; (2) All Liabilities, including litigation costs, relating to, or arising out of or resulting from the performance of services to the MediaOne Business (other than Existing U S WEST) or MGI prior to the Separation Time by an independent contractor, leased employee or similar individual or by any person who alleges that he was an employee of the MediaOne Business (other than Existing U S WEST) or MGI prior to the Separation Time or the dependent or beneficiary of any such independent contractor or alleged employee; 8 (3) All Liabilities, including litigation costs, which relate to a Media Employee or his dependents and beneficiaries, in each case relating to, arising out of or resulting from employment by the MediaOne Group on or after the Separation Time (including Liabilities under Media Employee Benefit Plans or Media Employee Arrangements); and (4) All Liabilities, including litigation costs, relating to, or arising out of or resulting from the performance of services to the MediaOne Group on or after the Separation Time by an independent contractor, leased employee or similar individual or by any person who alleges that he was an employee of the MediaOne Group on or after the Separation Time or the dependent or beneficiary of any such independent contractor or alleged employee. (c) Shared Liabilities. New U S WEST and MediaOne hereby agree to share equally: (1) All Employment Related Liabilities (regardless of where such Employment Related Liabilities arose or arise or were or are incurred) to or relating to Terminated Inc. Employees; and (2) All Liabilities, including litigation costs, relating to, or arising out of or resulting from the performance of services to Existing U S WEST (but not its Subsidiaries) prior to the Separation Time by an independent contractor, leased employee or similar individual or by any person who alleges that he was an employee of Existing U S WEST prior to the Separation Time or the dependent or beneficiary of any such independent contractor or alleged employee. (d) Class Action Liabilities. For purposes of determining whether the New U S WEST Group or Media Group is responsible for Liabilities involving or arising out of actions relating to more than one Employee or Terminated Employee, the portion of Employment Related Liabilities relating to any single Employee or Terminated Employee shall be in proportion to the total number of Employees and Terminated Employees to which the action relates, whether or not all such Employees or Terminated Employees submit claims. (e) Appeal Rights. If either New U S WEST or MediaOne believes that the result arising from the application of the foregoing provisions of this Section 2 will result in an inequitable allocation of liability, it may refer the matter to the Separation Committee and 9 the procedures set forth in Section 12.2 of the Separation Agreement shall apply. Any such referral must be made in writing within sixty days after the referring party becomes aware of the Employment Related Liability to which the referral relates. (f) Funded Benefits. Notwithstanding the foregoing provisions of this Section 2, neither the New U S WEST Group nor the MediaOne Group shall be liable to the extent that any Liability is payable from a trust or insurance contract which funds the benefits under an Employee Benefit Plan or Employee Arrangement maintained by the New U S WEST Group or MediaOne Group after the Separation Date. (g) Control of litigation. Except as set forth in sub-section (h) below, if any litigation is brought by an Employee or Terminated Employee over Liabilities addressed in this EM Agreement, the MediaOne Group shall control the litigation if it is responsible for the Liabilities and the New U S WEST Group shall control the litigation if it is responsible for the Liabilities, irrespective of which party is the defendant, provided that if the party (or its Subsidiaries) entitled to control the litigation is not sued, it shall not control the litigation unless it agrees in writing that it will be responsible for any resulting Liability. In the case of a shared liability described in subsection (c) above or an action described in subsection (d) above, the parties agree to cooperate to jointly control the litigation, unless one of the parties agrees to assume all Liabilities arising out of the litigation. (h) Election to Assume Liability. In the event that any Employee or Terminated Employee makes a claim or commences litigation which, if successful, would result in Liability that is allocated under this EM Agreement (other than under this paragraph (h)) exclusively to either MediaOne or New U S WEST (the "Allocated Liability Party"), but which Liability, if any, arises from alleged actions taken by an Employee or Terminated Employee of the business of the other party (the "Other Party"), then the Allocated Liability Party shall give written notice of such claim or litigation (the "Claim Notice") to the Other Party within thirty days of becoming aware that such claim or litigation involves an Employee or Terminated Employee of the business of the Other Party. The Other Party may then elect, by giving written notice (the "Election Notice") to the Allocated Liability Party within thirty days after receiving the Claim Notice, to take control of the 10 defense of the claim and/or litigation and to assume all Liability, including litigation costs, associated with such claim or litigation (other than a Liability described in subsection (f) above). If the Election Notice is given, the Allocated Liability Party shall cease to have any Liability with respect to the claim or litigation which is the subject of the Election Notice and all such Liability (other than a Liability described in subsection (f) above) shall be assumed by the Other Party. (i) The provisions of this Section 2 are designed solely to allocate Liabilities between the New U S WEST Group and the MediaOne Group. Notwithstanding any provision of this EM Agreement, except to the extent required by the preceding sentence, this EM Agreement shall not impose any Liability relating to an Employee or Terminated Employee on any entity or Subsidiary other than the entity or Subsidiary that incurred the Liability. For example, if a Communications Employee worked solely for one Subsidiary of New U S WEST, that Subsidiary (but not New U S WEST or any other Subsidiary) shall be responsible for any unfunded Liabilities owed to that individual. 3. SPONSORSHIP AND ADMINISTRATION OF EMPLOYEE BENEFIT PLANS AND EMPLOYEE ARRANGEMENTS. (a) At or prior to the Separation Time, all Communications Employee Benefit Plans and Communications Employee Arrangements that are not already sponsored by a member of the New U S WEST Group shall be transferred to and assumed by New U S WEST in accordance with the terms of this EM Agreement. Each of such Communications Employee Benefit Plans and Communications Employee Arrangements is hereby amended (such amendments to be self-effectuating), effective as of the Separation Time, to provide transfer of sponsorship to New U S WEST. In addition, each Communications Employee Benefit Plan and Communications Employee Arrangement is hereby amended (such amendments to be self-effectuating), effective as of the Separation Time, to provide that the Liabilities to be assumed by a corresponding Media Employee Benefit Plan or Media Employee Arrangement shall cease to be Liabilities under such Communications Employee Benefit Plan or Communications Employee Arrangement. New U S WEST, MediaOne and their Subsidiaries shall take all action reasonably appropriate prior to the Separation Time (or as soon as practicable thereafter) to effectuate such assumptions, including amendments of the 11 applicable Employee Benefit Plans and Employee Arrangements where desirable. To the extent that any of the Communications Employee Benefit Plans or Communications Employee Arrangements is administered by the EBC prior to the Separation Time, such plan or arrangement shall be administered by the New U S WEST Employee Benefits Committee on and after the earlier of the Separation Time or the date sponsorship of the applicable plan or arrangement is assumed by New U S WEST. In addition, any functions or responsibilities of the Treasurer of Existing U S WEST with respect to such plans or arrangements prior to the Separation Time shall become duties and responsibilities of the Treasurer of New U S WEST (or such other officer as New U S WEST shall designate) on the date set forth in the preceding sentence. (b) To the extent that a Media Employee Benefit Plan or Media Employee Arrangement (or, in the case of any newly adopted Media Employee Benefit Plan or Media Employee Arrangement, the Employee Benefit Plan or Employee Arrangement that is replaced by such newly adopted Media plan or arrangement) is administered by the EBC prior to the Separation Time, such plan or arrangement shall be administered by the MediaOne Employee Benefits Committee on and after the Separation Time. In addition, any functions or responsibilities of the Treasurer of Existing U S WEST with respect to such plans or arrangements prior to the Separation Time shall become duties and responsibilities of the Treasurer of MediaOne (or such other officer as MediaOne shall designate) on and after the Separation Time. 4. EMPLOYEE SAVINGS PLANS. (a) On or before the Separation Time, sponsorship of the U S WEST Savings Plan/ESOP (consisting of the "U S WEST Savings Plan" and the "U S WEST ESOP") shall be transferred from Existing U S WEST to New U S WEST. Prior to the Separation Time, Multimedia shall establish a new defined contribution plan or plans consisting of a profit-sharing plan and a stock bonus plan which shall be an employee stock ownership plan (the "Media Savings Plan/ESOP", consisting of the "Media Savings Plan" and the "Media ESOP"), effective immediately after the Separation Time, for the benefit of Media Employees and Terminated Media Employees (excluding persons described in clauses (2) or (3) of the definition of Terminated Media Employee) covered by the existing U S WEST Savings 12 Plan/ESOP. The Media Savings Plan/ESOP shall initially contain terms and conditions that are similar to those of the existing U S WEST Savings Plan/ESOP, including without limitation (1) provisions required by Section 411(d)(6) of the Code for account balances to be transferred from the U S WEST Savings Plan/ESOP, and (2) provisions granting credit for past service with the Existing U S WEST Group for purposes of eligibility, vesting, distributions and withdrawals. Each Media Employee and Terminated Media Employee who was a participant in the U S WEST Savings Plan/ESOP as of the Separation Time shall become a participant in the Media Savings Plan/ESOP as of the Separation Time. (b) As soon as reasonably practicable after the Separation Time, New U S WEST shall cause to be transferred from the U S WEST Savings Plan to the Media Savings Plan assets having a fair market value equal to the aggregate value of the account balances in the U S WEST Savings Plan (but not the ESOP), as of the date of the transfer, applicable to Media Employees and Terminated Media Employees, and Multimedia shall cause the Media Savings Plan to accept such transfers and to assume all Savings Plan liabilities relating to Media Employees and Terminated Media Employees (excluding persons described in clauses (2) or (3) of the definition of Terminated Media Employee). All such liabilities shall cease to be liabilities of the U S WEST Savings Plan. Such transfer shall be in (i) shares of MediaOne Common Stock and New U S WEST Common Stock to the extent such shares are allocated in the U S WEST Savings Plan to accounts of Media Employees or Terminated Media Employees, (ii) notes evidencing loans to Media Employees or Terminated Media Employees, and (iii) with the balance in cash or, to the extent that the parties mutually agree, other securities held by the U S WEST Savings Plan. (c) As soon as reasonably practicable after the Separation Time, New U S WEST shall cause to be transferred from the U S WEST ESOP to the Media ESOP assets having a fair market value equal to the aggregate value of the account balances in the U S WEST ESOP (but not the Savings Plan), as of the date of the transfer, applicable to Media Employees and Terminated Media Employees, and Multimedia shall cause the Media ESOP to accept such transfers and to assume all ESOP liabilities relating to Media Employees and Terminated Media Employees (excluding persons described in clauses (2) or (3) of the definition of Terminated Media Employee). All such 13 liabilities shall cease to be liabilities of the U S WEST ESOP. Such transfer shall be in shares of MediaOne Common Stock and of New U S WEST Common Stock. To the greatest extent possible and consistent with fiduciary duties under Sections 404 and 406 of ERISA, the shares of Common Stock shall be transferred so that, immediately following the transfer, the U S WEST ESOP will have at least 60% of its assets invested in New U S WEST Common Stock and the Media ESOP will have at least 60% of its assets invested in MediaOne Common Stock. (d) U S WEST Savings Plan/ESOP shall transfer to the Media Savings Plan/ESOP all qualified domestic relations orders (within the meaning of Section 414(p) of the Code) ("QDROs") held by the U S WEST Savings Plan/ESOP with respect to Media Employees and Terminated Media Employees. New U S WEST shall cause to be transferred from the U S WEST Savings Plan/ESOP assets having a fair market value equal to the aggregate account values relating to such QDROs in accordance with paragraphs (b) and (c) above, and the Media Savings Plan ESOP shall assume all liabilities relating to such QDROs. (e) The U S WEST ESOP will repay all "acquisition loans" (as defined in the U S WEST Savings Plan/ESOP) prior to the Separation Time. If, as of the Separation Time, the U S WEST ESOP holds shares of common stock that have not been allocated to participants' accounts, the U S WEST ESOP will transfer to the Media ESOP unallocated shares of stock having a fair market value equal to (x) the total market value of all unallocated shares held by the U S WEST ESOP as of the Separation Time, multiplied by (y) the aggregate dollar value of the Employing Company Contributions made under the U S WEST ESOP during the first calendar quarter of 1998 as matched allotments to Media Employees and Terminated Media Employees, divided by (z) the aggregate dollar value of the Employing Company Contributions made under the U S WEST ESOP during the first calendar quarter of 1998 as matched allotments to all Employees and Terminated Employees. To the greatest extent possible, the unallocated shares transferred to the Media ESOP pursuant to this paragraph shall be shares of MediaOne Common Stock. (f) If required by law, New U S WEST and Multimedia shall cause to be filed with the IRS all applicable Forms 5310A and any other required forms with the appropriate governmental agency in order for the Media Savings Plan/ESOP to receive a transfer of 14 assets from the U S WEST Savings Plan/ESOP on or following the Separation Time in accordance with paragraphs (b), (c), (d) and (e) above. Within nine months after the Separation Time, Multimedia shall cause to be filed with the IRS a request for a determination that the Media Savings Plan/ESOP is qualified under Section 401(a) of the Code. Multimedia agrees to make all reasonable amendments requested by the IRS to obtain such determination letter. (g) Subject to paragraph (h), and in accordance with applicable law and to the extent consistent with fiduciary duties under Sections 404 and 406 of ERISA, the U S WEST Savings Plan and the U S WEST ESOP will maintain a MediaOne Common Stock Fund for participants who retain such investment of their account balances after the Separation Time. No new investments in the MediaOne Common Stock Fund of the U S WEST Savings Plan or in the MediaOne Common Stock Fund of the U S WEST ESOP will be permitted after the Separation Time. Subject to paragraph (h), and in accordance with applicable law and to the extent consistent with fiduciary duties under Sections 404 and 406 of ERISA, the Media Savings Plan and the Media ESOP will maintain a New U S WEST Common Stock Fund for participants who retain such investment of their account balances after the Separation Time. No new investments in the New U S WEST Common Stock Fund of the Media Savings Plan or in the New U S WEST Common Stock Fund of the Media ESOP will be permitted after the Separation Time. The U S WEST Savings Plan (but not the ESOP) will maintain the MediaOne Common Stock Fund, and the Media Savings Plan (but not the ESOP) will maintain the New U S WEST Common Stock Fund, for at least five years after the Separation Time; as soon as practicable after either plan sponsor decides to eliminate such stock fund, it shall inform the issuer of the stock to be sold so that the issuer may arrange a facility to exercise the right of first refusal described below. When the trustee of the U S WEST Savings Plan intends to sell MediaOne Common Stock because the MediaOne Common Stock Fund will no longer be maintained or the trustee of the Media Savings Plan intends to sell New U S WEST Common Stock because the New U S WEST Common Stock Fund will no longer be maintained, such trustee shall first offer such stock to the issuer prior to offering such stock for sale on the open market. After the close of business, the issuer shall then have the right to purchase such stock at the closing price of the stock on that day. If the issuer does not exercise such right to purchase, the trustee 15 shall be free to sell the stock on the open market the next day, provided that,subject to fiduciary duties under Sections 404 and 406 of ERISA, the trustee shall not sell in any one day more than 20% of the average daily trading volume of the relevant stock. (For this purpose, the average daily trading volume is the arithmetic mean of the reported daily trading volumes of the relevant stock on the New York Stock Exchange (or, if not traded on the New York Stock Exchange, the principal exchange on which the stock is traded) in the two calendar months preceding any such sale.) (h) Within two years after the Separation Time, the U S WEST ESOP (but not the Savings Plan) will dispose of all investment in MediaOne Common Stock and the Media ESOP (but not the Savings Plan) will dispose of all investment in New U S WEST Common Stock (each, a "Non-Employer Common Stock"). Subject to fiduciary duties under Sections 404 and 406 of ERISA, the U S WEST ESOP shall exchange shares of MediaOne Common Stock it holds for shares of New U S WEST Common Stock held by the Media ESOP, and VICE VERSA, at the Common Stocks' relative fair market values. To the extent such exchanges are not practicable for some or all of the Non-Employer Common Stock held by either ESOP, the U S WEST ESOP and the Media ESOP will sell shares of Non-Employer Common Stock. As soon as practicable after either plan sponsor decides to sell such Non-Employer Common Stock, it shall inform the issuer of the stock to be sold so that the issuer may arrange a facility to exercise the right of first refusal described below. When the trustee of the U S WEST ESOP intends to sell MediaOne Common Stock or the trustee of the Media ESOP intends to sell New U S WEST Common Stock (other than because of a sale by, or distribution to, plan participants), such trustee shall first offer such stock to the issuer prior to offering such stock for sale on the open market. After the close of business, the issuer shall then have the right to purchase such stock at the closing price of the stock on that day. If the issuer does not exercise such right to purchase, the trustee shall be free to sell the stock on the open market the next day. Subject to fiduciary duties under Sections 404 and 406 of ERISA, from the Separation Time to and including the second anniversary of the Separation Time, neither the U S WEST ESOP nor the Media ESOP will sell in any one day more than 20% of the average daily trading volume of the relevant Non-Employer Common Stock. (For this purpose, the average daily trading volume is the arithmetic mean of the reported daily trading volumes of the relevant 16 stock on the New York Stock Exchange (or, if not traded on the New York Stock Exchange, the principal exchange on which the stock is traded) in the two calendar months preceding any such sale.) (i) MediaOne and New U S WEST shall take such action as necessary to ensure that participants in the U S WEST Savings Plan/ESOP and the Media Savings Plan/ESOP are notified that a quiet period will occur beginning on or about the Separation Time, during which changes in investment direction with respect to participants' accounts generally will not be permitted. (j) The Media Savings Plan/ESOP and the assets and liabilities with respect thereto shall be considered a Media Employee Benefit Plan. The U S WEST Savings Plan/ESOP and the assets and liabilities with respect thereto shall be considered a Communications Employee Benefit Plan. 5. TRANSFER OF U S WEST PENSION PLAN ASSETS AND LIABILITIES. (a) On or prior to the Separation Time, sponsorship of the U S WEST Pension Plan shall be transferred from Existing U S WEST to New U S WEST. Prior to the Separation Time, Multimedia shall establish a defined benefit pension plan (the "Media Pension Plan"), effective immediately after the Separation Time, for the benefit of the Media Employees and Terminated Media Employees (excluding persons described in clauses (2) or (3) of the definition of Terminated Media Employee) covered by the existing U S WEST Pension Plan. The Media Pension Plan shall contain terms and conditions that are substantially similar to those of the existing U S WEST Pension Plan, including credit for past service with the Existing U S WEST Group for eligibility, vesting, early retirement, and, contingent upon the transfer of assets set forth in paragraph (b) below, benefit accrual and compensation earned with the Existing U S WEST Group. Notwithstanding the preceding sentence, the Media Pension Plan shall contain two benefit structures. In general, (1) the benefits for all Media Employees who are employed immediately after the Separation Time and who earned benefits under Articles V-B or V-D of such Pension Plan prior to the Separation Time shall continue in such benefit structure and (2) all other Media Employees, as well as all future employees of the MediaOne Group shall participate in a benefit structure substantially similar to the benefit structure currently contained in the Appendix I of the U S WEST Pension Plan, provided that this EM Agreement does not obligate 17 Multimedia to continue to maintain such benefit formulas for any particular period of time. In addition, the U S WEST Pension Plan currently contains two subsidies relating to service pensions: (i) the early retirement pension under the grandfathered formula in Article V-B (but not the DLS formula in Article V-D) is unreduced (or provides for a lower reduction) for Participants that are service pension eligible and (ii) if a lump sum service pension is elected, a 0% interest rate applies prior to age 65. The Media Pension Plan shall include, for all Media Employees described in clause (2) of the second preceding sentence (but not any future employees of the MediaOne Group or any Terminated Media Employees) whose combined age and service (in each case rounded up to the next integer), as of January 1, 1999, equals or exceeds 55, both of the foregoing subsidies with respect to both the DLS formula set forth in Article 6, and the grandfathered formula in Article 7, of Appendix I of the Pension Plan; such provisions shall be referred to as the "Service Pension Amendments." Immediately after the Separation Time, all Liabilities under the U S WEST Pension Plan to, or relating to, Media Employees or Terminated Media Employees (excluding persons described in clauses (2) or (3) of the definition of Terminated Media Employee) shall be assumed by the Media Pension Plan and shall cease to be Liabilities of the U S WEST Pension Plans. Such Liabilities shall include all accrued benefits, within the meaning of Section 411(d)(6) of the Code, all ancillary benefits (such as the death benefits set forth in Article VII of the U S WEST Pension Plan and disability benefits set forth in Appendix J thereof) and any other benefits. The Media Pension Plan shall comply with Section 411(d)(6) of the Code with respect to such assumed Liabilities. Each Media Employee and Terminated Media Employee who was a participant in the U S WEST Pension Plan as of the Separation Time shall become a participant in the Media Pension Plan as of the Separation Time. Notwithstanding the foregoing, the following rules shall apply to any Terminated Employee who is not vested in the U S WEST Pension Plan at the Separation Time who returns to employment with either the MediaOne Group or the New U S WEST Group after the Separation Time. To the extent required by law, any such Terminated Employee who becomes entitled to credit, for benefit accrual purposes, for his service with the Old U S WEST Group prior to the Separation 18 Time as a result of returning to employment after the Separation Time, then (1) any benefits attributable to such prior service shall be payable from the Media Pension Plan if the individual returns to employment with the MediaOne Group and (2) any benefits attributable to such prior service shall be payable from the U S WEST Pension Plan if the individual returned to employment with the New U S WEST Group. (b) New U S WEST shall cause a "spin-off" transfer within the meaning of Section 414(1) of the Code, from the U S WEST Pension Plan to the Media Pension Plan in the manner and at the times specified in paragraph (e) below. For purposes of this Section 5, the following definitions shall apply: (1) "Actuaries" refer to the enrolled actuaries for the U S WEST Pension Plan at the Separation Time. (2) "Contingent Amount" equals the difference between the amount that the Final Determination provides that should have been transferred from the U S WEST Pension Plan to the Media Pension Plan in connection with the spinoff and the Media Asset Share. If the difference is positive, that is, the Final Determination provides that additional assets should have been transferred to the Media Pension Plan, the difference shall be referred to as a "Positive Contingent Amount." If the difference is negative, that is, the Final Determination provides that the amount that should have been transferred is less than the Media Asset Share, the difference shall be referred to as a "Negative Contingent Amount." (3) "Final Determination" means a final nonappealable determination by a court, or a final settlement of litigation or a dispute among Multimedia, New U S WEST, the U S WEST Pension Plan and the Media Pension Plan and any other parties to the litigation or dispute, that provides that the amount of assets to be transferred from U S WEST Pension Plan to the Media Pension Plan in connection with the spinoff should be more than or less than the Media Asset Share. (4) "Media Asset Share" shall mean the product of: (i) the fair market value of the assets of the U S WEST Pension Plan as of the end of the month coinciding with or immediately preceding 19 the Separation Time, and (ii) the Media Fraction; increased or decreased by an amount to be agreed to by New U S WEST and MediaOne to reflect the rate of return of the U S WEST Pension Plan (or any other mutually agreeable rate) during the period, if any, commencing immediately after the end of the month coinciding with or immediately preceding the Separation Time and ending on the Separation Time. (5) "Media Economic PBO" for the U S WEST Pension Plan shall mean the portion of the Total Economic PBO as of the Separation Time attributable to the Media Employees and Terminated Media Employees, as calculated by the Actuaries. For this purpose, the U S WEST Pension Plan shall be deemed amended to include the Service Pension Amendments. (6) "Media Fraction" for the U S WEST Pension Plan shall mean (i) the Media Economic PBO, divided by (ii) the Total Economic PBO. (7) "Premium Amount" shall equal the estimated PBGC premiums initially paid to the PBGC by the Media Pension Plan for plan year 1998, without regard to any adjustment required as a result of an audit. (8) "Total Economic PBO" shall be the projected benefit obligation, as defined in SFAS No. 87, of the U S WEST Pension Plan, as calculated by the Actuaries as of the Separation Time using actuarial methods and assumptions mutually agreeable to the parties. For this purpose, the U S WEST Pension Plan shall be deemed amended to include the Service Pension Amendments. (9) "Transfer Amount" shall equal the Media Asset Share plus the Premium Amount plus the Positive Contingent Amount and minus the Negative Contingent Amount. (c) In order to determine the Media Asset Share, Multimedia and New U S WEST shall determine in good faith the Media Employees, Terminated Media Employees, Communications Employees, Terminated Communications Employees and Terminated Inc. Employees as of the Separation Time. Such determinations shall be updated six months after the Separation Time to take into account the 20 reclassification of Employees as of the Separation Time as Media Employees or Communications Employees. (d) If required by law, Multimedia and New U S WEST shall cause to be filed all applicable Forms 5310A and any other required IRS or PBGC forms with the appropriate governmental agency in order for the Media Pension Plan to receive a transfer of assets from the U S WEST Pension Plan on or following the Separation Time, in accordance with paragraph (e) below. Within nine months after the Separation Time, Multimedia shall cause to be filed with the IRS a request for a determination that the Media Pension Plan is qualified under Section 401(a) of the Code. Multimedia agrees to make all reasonable amendments requested by the IRS to obtain such determination letter. (e) New U S WEST shall cause the U S WEST Pension Plan to transfer assets in an amount equal to the Transfer Amount (plus interest to the extent set forth below) to the Media Pension Plan and Multimedia shall cause the Media Pension Plan to accept such assets equal to such Transfer Amount (and interest), as follows: (1) Immediately after the Separation Time or as soon as reasonably practicable thereafter, an amount equal to 98% of the Media Asset Share, as estimated by the Actuaries (immediately prior to the Separation Time) and provided to Multimedia and New U S WEST in writing. (2) As soon as practicable after the value of the plan assets as of the Separation Time is determined and the Media Asset Share is determined by the Actuaries and provided in writing to MediaOne and New U S WEST (but not later than 30 days after such writing is provided), the excess of the Media Asset Share over the sum of (i) the interim transfer effected under (1) above, and (ii) any benefit payments paid to Terminated Media Employees or Media Employees by the U S WEST Pension Plan after the Separation Time. (If such amount is a negative number, such amount shall be transferred from the Media Pension Plan to the U S WEST Pension Plan.) (3) In addition, if there is a Final Determination that sets forth a Contingent Amount, New U S WEST, the U S WEST Pension Plan, Multimedia, and the Media Pension Plan agree as follows: 21 (A) If there is a Positive Contingent Amount, as soon as practicable after the Final Determination, the U S WEST Pension Plan shall transfer the assets equal to the Positive Contingent Amount to the Media Pension Plan, and the Media Pension Plan shall accept such transfers; and (B) If there is a Negative Contingent Amount, as soon as practicable after the Final Determination, the Media Pension Plan shall transfer the assets equal to the Negative Contingent Amount to the U S WEST Pension Plan, and the U S WEST Pension Plan shall accept such transfers. (4) As soon as practicable after the Premium Amount is determined and paid by the Media Pension Plan, an amount equal to the Premium Amount. To the extent any of the foregoing amounts set forth in paragraphs (1) through (4) of this subsection (e) are paid after the Separation Time, such amount shall be increased or decreased by interest from the Separation Time to the date of payment (to the extent not paid or previously advanced) at a rate to be agreed to by New U S WEST and MediaOne to reflect the rate of return of the U S WEST Pension Plan or the Media Pension Plan, whichever is applicable (or any other mutually agreeable rate), during the period commencing with the Separation Time and ending with the date of payment; provided that (i) no interest shall be paid with respect to the Contingent Amount if the Final Determination already provides for an adjustment reflecting interest or plan earnings and (ii) no interest shall be paid with respect to the Premium Amount. With respect to all of the foregoing transfers between the U S WEST Pension Plan and the Media Pension Plan, the specific assets to be transferred shall be agreed upon by New U S WEST and Multimedia in good faith so as to not treat the Media Pension Plan and the U S WEST Pension Plan unfairly in any material respect. (f) Notwithstanding subsections (a) through (e) above, the value of assets to be transferred to and liabilities to be assumed by the Media Pension Plan shall be no less than that necessary to satisfy the requirements of Section 414(1) of the Code, as 22 determined by the Actuaries, based on the assumptions used by the PBGC in the case of a termination of a trusteed pension plan. (g) Multimedia, New U S WEST, the U S WEST Pension Plan and the Media Pension Plan (collectively, the "Pension Parties") all agree that, if there is a Final Determination that provides for a Contingent Amount, such Final Determination shall be satisfied to the maximum extent permitted by law by making the transfers among the U S WEST Pension Plan and the Media Pension Plan as set forth above, as opposed to requiring any additional contributions or payments (a "Corporate Liability") from either MediaOne, New U S WEST or any of their Subsidiaries. The Pension Parties agree to cooperate to the maximum extent to ensure that no such Corporate Liability ensues as a result of any Final Determination or claims relating to the allocation of plan assets between the two plans. If any litigation is brought against one of the Pension Parties claiming that the amount of assets transferred from the U S WEST Pension Plan to the Media Pension Plan should have been higher or lower, the other Pension Parties shall, at the request of the Pension Party that was sued, agree to be joined in any such litigation and to use their best efforts to ensure that any potential Contingent Amount be satisfied by plan-to-plan transfers, as opposed to Corporate Liability. In addition, the Pension Parties agree that, to the extent permitted by law, any costs of defending any claims that a Contingent Amount is payable and any Liabilities arising out of such claims shall be borne by the U S WEST Pension Plan and the Media Pension Plan. The following rules shall apply if there is any Corporate Liability for a Contingent Amount or arising out of any claims that a Contingent Amount is payable. Any Corporate Liability that is an out-of-pocket cost of defending any such claims (whether or not the claims result in litigation), such as attorneys or consultant fees (but excluding any fees for Plaintiffs' attorneys) and travel expenses, shall be borne equally by New U S WEST and Multimedia; provided that each party shall bear all expenses for salaries and benefits of its employees. Any other Corporate Liability, such as the payment of a Contingent Amount, any direct payments to claimants in lieu of a Contingent Amount or fees for plaintiffs' attorneys, shall be borne by (1) New U S WEST, if the claimants asserted that the amount of 23 plan assets transferred to the Media Pension Plan should have been greater than the amount actually transferred and (2) Multimedia, if the claimants asserted that the amount of plan assets transferred to the Media Pension Plan should have been less than the amount actually transferred. (h) The U S WEST Pension Plan shall transfer to the Media Pension Plan all qualified domestic relations orders (within the meaning of Section 414(p) of the Code) ("QDROs") held by the U S WEST Pension Plan with respect to Media Employees and Terminated Media Employees. (i) Qualified transfers. This subsection (i) applies if a qualified transfer, within the meaning of Code Section 420 (a "Qualified Transfer"), is made within either the U S WEST Pension Plan or the Media Pension Plan during the calendar year in which the Separation Time occurs. (1) If the Internal Revenue Service, a court of competent jurisdiction or the sponsor of the plan in which the Qualified Transfer is made determines that any Terminated Employees who terminated employment during the period commencing twelve months prior to the Qualified Transfer and ending on the Separation Time are entitled to vested pension benefits solely because of the Qualified Transfer, then, notwithstanding any other provision of this EM Agreement, the plan in which the Qualified Transfer is made shall provide such vested pension benefits to such Terminated Employee. (2) If (i) the Internal Revenue Service declines to issue a favorable determination letter with respect to the provisions of either the U S WEST Pension Plan or the Media Pension Plan setting forth the terms of a Qualified Transfer unless Employees or other employees who terminate employment after the Separation Time from the business of the sponsor of the other pension plan are provided vested pension benefits on account of the Qualified Transfer or (ii) a court of competent jurisdiction determines that such Employees or employees are entitled to such benefits on account of the Qualified Transfer, then such other pension plan shall provide such Employees or employees with the required vested pension benefits. 24 (j) The Media Pension Plan and the assets and liabilities with respect thereto shall be considered a Media Employee Benefit Plan. The U S WEST Pension Plan and the assets and liabilities with respect thereto shall be considered a Communications Employee Benefit Plan. 6. OTHER TAX-QUALIFIED PLANS. Any other plan that is qualified under Section 401 of the Code and is not described in Section 4 or 5 above shall be retained by the entity that sponsors it before the Separation Time. 7. WELFARE PLANS. (a) Communications Plans. As of the Separation Time, any Welfare Plan, including all insurance or amounts held in trust and associated therewith to the extent attributable solely to such plan, which exclusively covers Communications Employees, Terminated Communications Employees and/or Terminated Inc. Employees and their eligible spouses and dependents shall be transferred to and assumed by New U S WEST and shall be deemed to be amended to provide for such transfer and assumption. New U S WEST or its Subsidiaries shall assume and pay the Liability with respect thereto (whether accrued or arising before or after the Separation Time). All such plans shall be considered Communications Employee Benefit Plans. (b) Media Plans. As of the Separation Time, any Welfare Plan, including all insurance or amounts held in trust and associated therewith to the extent attributable solely to such plan, which exclusively covers Media Employees and/or Terminated Media Employees and their eligible spouses and dependents shall be retained by the MediaOne Group and, if necessary, are hereby amended to provide for such retention (without the need for any further action). MediaOne or its Subsidiaries shall assume and pay the Liability with respect thereto (whether accrued or arising before or after the Separation Time). All such plans shall be considered Media Employee Benefit Plans. (c) Joint Plans. This subsection (c) addresses the treatment of any Welfare Plan (including, without limitation, any retiree medical plan or retiree life insurance plan) which, as of the Separation Time, covers both: (1) Communications Employees, Terminated Communications Employees and/or Terminated Inc. Employees; and (2) Media Employees and/or Terminated Media Employees (a "Joint Welfare Plan"). 25 (1) As of the Separation Time, each Joint Welfare Plan shall be transferred to and assumed by New U S WEST or one of its Subsidiaries. Each of such Joint Welfare Plans is hereby amended as set forth in Section 3 of this EM Agreement. At and immediately following the Separation Time, New U S WEST or its Subsidiaries shall maintain as a separate plan and assume and pay the Liabilities and expenses (whether accrued or arising before or after the Separation Time) with respect to that portion of the Joint Welfare Plans as relates to obligations to Communications Employees, Terminated Communications Employees and Terminated Inc. Employees; in addition, any such retiree medical plan shall assume any retiree medical Liabilities or expenses of persons described in clauses (2) or (3) of the definition of Terminated Media Employee. This EM Agreement does not obligate New U S WEST to continue to maintain such plans or their terms for any particular period of time. All such plans shall be considered Communications Employee Benefit Plans. (2) As soon as practicable, Multimedia or its Subsidiaries shall establish and maintain one or more separate plans corresponding to each of the Joint Welfare Plans. Such Plans shall be effective as of the Separation Time and shall contain such benefits as desired by Multimedia. However, such plans shall assume and pay the Liabilities and expenses (whether accrued or arising before or after the Separation Time) under the Joint Welfare Plans with respect to Media Employees and Terminated Media Employees, provided that any new Media retiree medical plan shall not assume any retiree medical Liabilities or expenses of persons described in clauses (2) or (3) of the definition of Terminated Media Employee. All Liabilities and expenses assumed by such Media Employee Benefit Plans shall cease to be Liabilities of the Communications Employee Benefit Plans described in the preceding paragraph. The Liabilities of each such Joint Welfare Plan so assumed by Multimedia or its Subsidiaries together with each such separate plan established by Multimedia, shall be considered a Media Employee Benefit Plan. Unless Multimedia or its Subsidiaries adopts a plan with respect to a Joint Welfare Plan prior to the Separation Time, Multimedia is hereby deemed to have 26 adopted (without the requirement of any additional action), effective as of the Separation Time, a separate Media Welfare Plan that is substantially identical in all respects to the Joint Welfare Plan it replaces, provided that this EM Agreement does not obligate Multimedia to continue to maintain such terms for any particular period of time. (3) MediaOne (and Multimedia) and New U S WEST shall use commercially reasonable efforts to obtain, effective as of the Separation Time, separate coverages or to split the coverages between Multimedia and New U S WEST under the Joint Welfare Plans that provided benefits through Provider Contracts prior to the Separation Time. Such coverage shall be on substantially the same terms and conditions as applied immediately before the Separation Time, or such other terms and conditions as are acceptable to Multimedia and New U S WEST. To the extent practicable, such coverages shall be obtained by entering into a separate contract between Multimedia and the third party. For purposes of this paragraph, the term "Provider Contract" shall mean a contract to provide benefits with an insurance company, health maintenance organization, preferred provider organization or similar provider of benefits, as well as third party administrative services contracts. To the extent such efforts are not successful with respect to any Provider Contract, then New U S WEST shall administer such Provider Contract on an equitable basis for the benefit of both Multimedia and New U S WEST until the expiration of the applicable contract. For any period after the Separation Time when Multimedia is participating in any such Provider Contract administered by New U S WEST, Multimedia shall pay an allocable share of the cost of such contract based upon the actual experience attributable to Media Employees and Terminated Media Employees thereunder, or if actual experience is not readily determinable, based upon the relative headcount of Media Employees and Terminated Media Employees to all individuals covered by such Provider Contract. Such payments shall include interest on any funds advanced by New U S WEST at a rate to be agreed upon in a services agreement to be effective as of the Separation Time. 27 (d) Continuing Treatment. Notwithstanding the foregoing provisions of this Section 7, all treatments which have been precertified or are being provided as of the Separation Time shall be provided without interruption under the appropriate Welfare Plan until such treatment is concluded or discontinued pursuant to applicable plan rules and limitations, but New U S WEST, in the case of a Communications Employee or Terminated Communications Employee, or Multimedia, in the case of a Media Employee or Terminated Media Employee, shall be responsible for all expenses relating to, arising out of or resulting from such on-going treatments after the Separation Time. (e) Continuance of Elections. Multimedia and New U S WEST shall cause the Welfare Plans which they or their Subsidiaries maintain after the Separation Time to recognize and maintain all coverage and contribution elections made by Employees under the Welfare Plans maintained by the Existing U S WEST Group prior to the Separation Time and shall apply such elections under the Welfare Plans maintained by Multimedia and New U S WEST or their Subsidiaries, whichever is applicable, for the remainder of the period or periods for which such elections are by their terms applicable. Neither the transfer or other movement of employment from one member of the Existing U S WEST Group to another member on or before the Separation Time nor the transfer and assignment to the New U S WEST Group or the MediaOne Group in connection with the Reorganization, Contribution and Separation shall constitute or be treated as a "status change" under the Welfare Plans maintained by either Existing U S WEST, New U S WEST, Multimedia or their Subsidiaries. (f) Co-Payments and Maximum Benefits. Multimedia and New U S WEST shall cause the Welfare Plans which they or their Subsidiaries maintain after the Separation Time to recognize and give credit for: (1) All amounts applied to deductibles, out-of-pocket maximums, and other applicable benefit coverage limits with respect to Employees covered by Welfare Plans maintained by the Existing U S WEST Group prior to the Separation Time for the remainder of the year in which the Separation Time occurs; and (2) All benefits paid to Employees under the Welfare Plans maintained by the Existing U S WEST Group prior to the Separation Time for purposes of determining when such persons have 28 reached their lifetime maximum benefits under the Welfare Plans maintained by Multimedia and New U S WEST or their Subsidiaries, whichever is applicable, after the Separation Time. (g) Pre-existing conditions. After the Separation Time, any group health plan maintained by Multimedia and New U S WEST or their Subsidiaries shall be prohibited from making exceptions from the coverage of individuals who were Employees or Terminated Employees prior to the Separation Time and their eligible spouses and dependents for pre-existing conditions except to the extent such exception is applicable under the plan in effect immediately prior to the Separation Time. (h) COBRA. Notwithstanding the foregoing provisions of this Section 7: (1) New U S WEST or its Subsidiaries shall be responsible for providing coverage required under COBRA, including the administration of such coverage, to (A) all Employees and Terminated Employees (and their eligible spouses and dependents) whose entitlement to benefits under COBRA is attributable to a "qualifying event," as defined in COBRA, which occurred before the Separation Time under any group health plan other than a group health plan maintained by the Cable Companies and (B) all Communications Employees, Terminated Communications Employees and Terminated Inc. Employees if such individual's entitlement to benefits under COBRA is attributable to a "qualifying event" which occurs on or after the Separation Time. (2) MediaOne or its Subsidiaries shall be responsible for providing coverage required under COBRA, including the administration of such coverage, to (A) all Employees and Terminated Employees (and their eligible spouses and dependents) whose entitlement to benefits under COBRA is attributable to a "qualifying event," as defined in COBRA, which occurred before the Separation Time under any group health plan maintained by the Cable Companies and (B) all Media Employees and Terminated Media Employees if such individual's entitlement to benefits under COBRA is attributable to a "qualifying event" which occurs on or after the Separation Time. 29 (i) Long-Term Disability. Notwithstanding the foregoing provisions of this Section 7, this subsection (i) applies to long-term disability benefits provided to Terminated Employees other than through the U S WEST Pension Plan ("LTD"). (1) New U S WEST shall be responsible for providing LTD, including the administration of such coverage, to Terminated Communications Employees, Terminated Inc. Employees and Terminated Media Employees who were employed immediately prior to commencing LTD by an employer other than one of the Cable Companies. (2) MediaOne shall be responsible for providing LTD, including the administration of such coverage, to Terminated Media Employees who were employed immediately prior to commencing LTD by one of the Cable Companies. 8. VEBA'S. (a) As of the Separation Time, sponsorship of the U S WEST Benefit Assurance Trust ("BAT"), the U S WEST Management Benefit Assurance Trust ("MBAT") and U S WEST Life Insurance Welfare Trust ("Life Insurance Trust") shall be transferred from Existing U S WEST to New U S WEST. In addition, each of the BAT, MBAT and Life Insurance Trust are hereby amended (such amendments to be self-effectuating), effective as of the Separation Time, to provide that the "Company" (as well as the sponsor, settlor and all other similar terms) under such trusts shall be New U S WEST and that the trust shall be administered by New U S WEST. (b) Sponsorship of the U S WEST VEBA Trust shall be retained by MediaOne or, at its option, transferred to Multimedia. (c) Effective as of the Separation Time, Multimedia shall adopt one or more new voluntary employee benefit associations or modify the U S WEST VEBA Trust (the "Media VEBA") to assume, immediately after the Separation Time, all Liabilities under the MBAT and Life Insurance Trust to, or relating to, Media Employees or Terminated Media Employees (excluding persons described in clauses (2) or (3) of the definition of Terminated Media Employee); all such Liabilities shall cease to be Liabilities of the MBAT and Life Insurance Trust. The Media VEBA shall comply with Code Sections 419, 419A, 501(a) and 501(c)(9). 30 (d) As soon as practicable after the Separation Time, New U S WEST shall cause a transfer of assets from the MBAT and Life Insurance Trust to the Media VEBA in the manner and at the times specified in paragraph (f) below. For purposes of this Section, the following definitions shall apply: (i) "Total Economic APBO" shall be the accumulated postretirement benefit obligation (as defined in SFAS No. 106) of the MBAT and Life Insurance Trust (excluding liabilities for supplemental and dependent life insurance), as calculated by the Actuaries, as of the Separation Time using actuarial methods and assumptions mutually agreeable to the parties. (ii) "Actuaries" refer to the actuaries for the MBAT and Life Insurance Trust at the Separation Time. (iii) "Media Economic APBO" shall mean the portion of the Total Economic APBO attributable to the Media Employees and Terminated Media Employees, as calculated by the Actuaries. (iv) "Media Fraction" shall mean (1) the Media Economic APBO, divided by (2) the Total Economic APBO. (v) "Media Asset Share" shall mean the product of: (1) the fair market value of the assets of the MBAT and Life Insurance Trust as of the end of the month coinciding with or immediately preceding the Separation Time BUT excluding Supplemental and Dependent Life Assets, and (2) the Media Fraction; increased or decreased by an amount to be agreed to by New U S WEST and MediaOne to reflect the rate of return of the MBAT and Life Insurance Trust (or any other mutually agreeable rate) during the period, if any, commencing immediately after the end of the month coinciding with or immediately preceding the Separation Time and ending on the Separation Time. (vi) "Supplemental and Dependent Life Assets" shall mean any assets which are 31 segregated for the purpose of providing supplemental and dependent life insurance. Notwithstanding the above, the Total Economic APBO, the Media Economic APBO and the Media Asset Share shall be determined separately for the MBAT and the Life Insurance Trust. In addition, in order to determine the Media Asset Share, the provisions of Section 5(c) shall apply. (e) Within nine months after the Separation Time, Multimedia shall cause to be filed with the IRS a request for a determination that the Media VEBA is tax-exempt under Section 501(c)(9) of the Code (unless the New VEBA is the existing U S WEST VEBA Trust and New U S WEST agrees no such filing is required). Multimedia agrees to make all reasonable amendments requested by the IRS to obtain such letter. New U S WEST and Multimedia agree to cooperate with each other to fulfill any filing and/or regulatory reporting obligations with respect to such transfers. (f) New U S WEST shall cause the following asset transfers from the MBAT and Life Insurance Trust to the Media VEBA and Multimedia shall cause the Media VEBA to accept such asset transfers: (1) Immediately after the Separation Time or as soon as reasonably practicable thereafter, an amount equal to 98% of the Media Asset Share, as estimated by the Actuaries in writing (immediately prior to the Separation Time) to Multimedia and New U S WEST. (2) Immediately after the Separation Time or as soon as reasonably practicable thereafter, an amount equal to the Supplemental and Dependent Life Assets multiplied by a fraction, the numerator of which is the amount of premiums paid by Media Employees and Terminated Media Employees for supplemental and dependent life insurance during the last full calendar month prior to the Separation Time and the denominator of which is the total premiums for such coverage paid by all Employees and Terminated Employees during that month. (3) As soon as practicable after the value of the assets as of the Separation Time is determined and the Media Asset Share is determined by the 32 Actuaries in writing to Multimedia and New U S WEST (but not later than 30 days after such writing is provided), the excess of the Media Asset Share over the sum of the interim transfer under (1) above and any benefit payments to Terminated Media Employees by the MBAT and Life Insurance Trust after the Separation Time. (If such amount is a negative number, such amount shall be transferred from the Media VEBA to the MBAT and Life Insurance Trust.) (4) In the event there is any litigation or claims that the amount transferred from the MBAT and Life Insurance Trusts to the Media VEBA should be larger or smaller, the amount transferred shall be adjusted in accordance with all of the provisions set forth in Section 5 of this EM Agreement relating to a Contingent Amount and claims over the amount of the transfer. In addition, the parties agree that, to the extent permitted by law, any costs of defending any such claims and any Liabilities arising out of such claims shall be borne by the MBAT, Life Insurance Trust and the Media VEBA. Any such Liability for a transfer or arising out of any claims that a transfer is payable which cannot be borne by the MBAT, Life Insurance Trust or the Media VEBA shall be borne by New U S WEST or Multimedia in accordance with the last paragraph of Section 5(g) of this EM Agreement. To the extent any of the foregoing amounts is paid after the Separation Time, such amount shall be increased or decreased by interest from the Separation Time to the date of payment (to the extent not paid or previously advanced) at a rate to be agreed to by New U S WEST and MediaOne to reflect the rate of return of the MBAT and Life Insurance Trust or the Media VEBA, whichever is applicable (or any other mutually agreeable rate), during the period commencing with the Separation Time and ending with the date of payment; provided that no interest shall be paid with respect to the amounts in clause (4) above if the Final Determination already provides for an adjustment reflecting interest or plan earnings. With respect to all of the foregoing transfers and any transfer required by subsection (g) below, the specific assets to be transferred shall be agreed upon by New U S WEST and Multimedia in good faith so as to not treat the MBAT, Life Insurance Trust and Media VEBA unfairly in any material respect. 33 (g) As soon as practicable after the Separation Time, MediaOne shall cause a transfer of assets from the U S WEST VEBA Trust to the MBAT in an amount equal to the balance in the U S WEST VEBA Trust immediately prior to the Separation Time (and before any transfers described in paragraph (f) above) multiplied by a fraction, the numerator of which is the amount of contributions made to that trust for calendar year 1998 (up through the Separation Time) on behalf of the New U S WEST Group and the denominator of which is the total amount of all contributions made to that trust for 1998 (up through the Separation Time), increased by interest on the unpaid amount due from the Separation Time to the date of payment at the rate of (8%) per annum. In lieu of these transfers, the parties may agree to offset the amount to be transferred against the transfers required in subsection (f) above. 9. INCENTIVE COMPENSATION. (a) Stock Options. Options to purchase shares of Communications Stock ("Communications Options") and shares of Media Stock ("Media Options") which are unexercised as of the Separation Time and which were issued pursuant to the terms of the Amended U S WEST 1994 Stock Plan, the U S WEST Media Group 1996 Stock Option Plan, the U S WEST Media Group 1997 Stock Option Plan and the U S WEST Communications Group 1997 Stock Option Plan (collectively the "Option Plans") shall be treated as follows: (1) New U S WEST shall assume the U S WEST Communications Group 1997 Stock Option Plan and all obligations under such plan. (2) MediaOne shall retain the U S WEST Media Group 1996 Stock Option Plan and the U S WEST Media Group 1997 Stock Option Plan and all obligations under such plans. (3) MediaOne shall retain the Amended U S WEST 1994 Stock Plan and all obligations with respect to Media Options under such plan. (4) New U S West shall establish a new stock plan to be effective as of the Separation Time and shall assume, under such plan, all obligations with respect to Communications Options issued under the Amended U S WEST 1994 Stock Plan. (5) Unexercised options issued under any of the Option Plans shall continue in effect for their 34 original term subject to paragraph (6) below and the following adjustments to reflect the transactions contemplated by the Separation Agreement. (i) No Media Dividend shall be distributed with respect to any Media Options. However, in accordance with the following sentence, the number of Media Options held by any person shall be converted into a higher number of options to purchase shares of MediaOne Common Stock and the exercise price of each such option shall be decreased. The number of options shall be increased and the exercise price of each share under each option shall be decreased to reflect the Media Dividend in a manner consistent with Accounting Rule EITF 90-9 in order to preserve the economic value of the options. (ii) The Communications Options shall be converted to options to purchase shares of New U S WEST Common Stock on a one for one basis; the exercise price shall not change. (6) Vested options under any of the Option Plans shall be exercised on and after the Separation Time by an Employee by contacting the stock plan administrator for his or her employer or former employer. New U S WEST and MediaOne each agrees to act as agent (the "crossover agent") for the other in the case of an exercise of an option by an Employee of the crossover agent under an Option Plan of the non-employing company. The crossover agent for the non-employing company shall, by itself and/or through its own third-party arrangements (i) effect an option exercise of the applicable shares; (ii) report such exercise to the non-employing company on a timely basis, not to exceed 30 days after the exercise; (iii) collect from the Employee, and remit and/or report to the Employee and/or the appropriate tax authorities, as applicable, all taxes incurred by the crossover agent (as the employing company) resulting from the exercise of an option under the non-employing company's Option Plan, and all taxes required to be withheld from the Employee's proceeds as a result of the exercise of an option under the non-employing company's Option Plan; (iv) deliver the stock to the Employee or pay the Employee the excess of the sales proceeds of 35 the applicable shares over the sum of the exercise price and all taxes required to be withheld from the Employee's proceeds as a result of the exercise; and (v) pay the non-employing company an amount equal to the exercise price of such option on a timely basis, not to exceed 30 days after the exercise. In addition, the non-employing company agrees to honor the separation policies adopted by the crossover agent (or its subsidiaries) for purposes of determining if a separated Employee is eligible to exercise an option under the non-employing company's Option Plan. New U S WEST and MediaOne shall agree on the treatment of options exercised by Terminated Employees after the Separation Time. (b) Restricted Stock. Communications Stock and Media Stock issued to Employees or Terminated Employees under the Amended U S WEST 1994 Stock Plan which has not become vested under the terms of that plan as of the Separation Time ("Restricted Communications Stock" and "Restricted Media Stock" respectively) shall be treated as follows: (1) Immediately prior to the Separation Time, Media Employees and Terminated Media Employees shall surrender any Restricted Communications Stock they hold and receive Restricted Media Stock in exchange. The number of shares of Restricted Media Stock received by each such individual shall equal the number of shares of Restricted Communications Stock surrendered by such individual multiplied by 1.0645 and further multiplied by the ratio of the Average Value of the Communications Stock to the Average Value of the Media Stock. (2) Immediately prior to the Separation Time, Communications Employees, Terminated Communications Employees and Terminated Inc. Employees shall surrender any Restricted Media Stock they hold as of the Separation Time and receive Restricted Communications Stock in exchange. The number of shares of Restricted Communications Stock received by each such individual shall equal that number of shares of Restricted Media Stock surrendered by such individual multiplied by 1.0645 and further multiplied by the ratio of the Average Value of the Media Stock to the Average Value of the Communications Stock. 36 (3) Following the adjustments in paragraphs (1) and (2) above, MediaOne shall retain the Amended U S WEST 1994 Stock Plan and all obligations under such plan with respect to Media Restricted Stock and shall amend such plan to provide for restricted stock ("Restricted MediaOne Common Stock") after the Separation Time. In order to reflect the transactions contemplated by the Separation Agreement, the Restricted Media Stock shall be subject to the following adjustments. Following the adjustments in paragraphs (1) and (2) above, (i) the Restricted Media Stock shall be converted to Restricted MediaOne Common Stock on a one for one basis and (ii) each share of Restricted Media Stock, including shares described in paragraph (1) above but not those described in paragraph (2) above, shall receive the Media Dividend, provided that such Media Dividend shall be free of all restrictions under the plan. (4) Following the adjustments in paragraphs (1) and (2) above, New U S WEST shall assume, under the new stock plan adopted pursuant to subsection (a)(4) above, all obligations under the Amended U S WEST 1994 Stock Plan with respect to Restricted Communications Stock and shall amend such plan to provide for restricted stock ("Restricted New U S WEST Common Stock") after the Separation Time. In order to reflect the transactions contemplated by the Separation Agreement, following the adjustments in paragraphs (1) and (2) above, the Restricted Communications Stock shall be converted to Restricted New U S WEST Common Stock on a one for one basis. (5) Except for the Media Dividend set forth in paragraph (3) above, each share of Restricted New U S WEST Common Stock and Restricted MediaOne Common Stock outstanding after the application of the foregoing paragraphs of this subsection (b) ("Post-Separation Restricted Stock") shall vest in accordance with the vesting period applicable to the grant of restricted stock to which each share of Post-Separation Restricted Stock is attributable. (c) LTIP. The U S WEST Communications Long-Term Incentive Plan ("LTIP") shall be terminated as of the Separation Time and a new long-term incentive plan (the "Communications LTIP") shall be established by 37 New U S WEST. Awards under the LTIP to Communications Employees shall be assumed by the Communications LTIP and shall continue under their original terms subject to adjustment to reflect the transactions contemplated by the Separation Agreement; MediaOne shall cease to have any Liability with respect to such awards. The measurement period for awards under the LTIP to Media Employees shall terminate as of the Separation Time and the awards shall be calculated and paid out in Restricted MediaOne Group Common Stock as of that time. (d) ESTIP. The U S WEST, Inc. Executive Short Term Incentive Plan ("ESTIP") shall be retained by MediaOne and a new executive incentive plan (the "Communications ESTIP") shall be established by New U S WEST. Awards under the ESTIP to Communications Employees shall be assumed by the Communications ESTIP and shall continue under their original terms subject to adjustment to reflect the transactions contemplated by the Separation Agreement; MediaOne shall cease to have any Liability with respect to such awards. (e) Phantom Stock. The units issued under the Amended U S WEST 1994 Stock Plan which are valued in accordance with Communications Stock ("Phantom Communications Stock") and the units issued under the Amended U S WEST 1994 Stock Plan which are valued in accordance with Media Stock ("Phantom Media Stock") shall be treated as follows: (1) The Phantom Communications Stock of a Media Employee or a Media Director (as defined in Section 10(g) below) prior to the Separation Time shall be converted into Phantom Media Stock immediately prior to the Separation Time. The number of units of Phantom Media Stock received by each such individual shall equal the number of units of Phantom Communications Stock surrendered by such individual multiplied by the ratio of the Average Value of the Communications Stock to the Average Value of the Media Stock. (2) The Phantom Media Stock of a Communications Employee or Communications Director (as defined in Section 10(g) below) prior to the Separation Time shall be converted into Phantom Communications Stock immediately prior to the Separation Time. The number of units of Phantom Communications Stock received by each such individual shall equal the number of units 38 of Phantom Media Stock surrendered by such individual multiplied by the ratio of the Average Value of the Media Stock to the Average Value of the Communications Stock. (3) Following the adjustments in paragraphs (1) and (2) above, MediaOne shall retain the Amended U S WEST 1994 Stock Plan and all obligations under such plan with respect to Phantom Media Stock and shall amend such plan to provide for units which are valued in accordance with MediaOne Common Stock ("Phantom MediaOne Common Stock") after the Separation Time. In order to reflect the transactions contemplated by the Separation Agreement, following the adjustments in paragraphs (1) and (2) above, the Phantom Media Stock, including units described in paragraph (1) above but not those described in paragraph (2) above, shall be converted to Phantom MediaOne Common Stock on the following basis. The number of units of Phantom MediaOne Common Stock credited shall equal the number of units of Phantom Media Stock surrendered by such individual multiplied by the ratio of the Average Value of the Media Stock to the excess of the Average Value of the Media Stock over the product of the Dividend Number multiplied by the Average Value of the Communications Stock. (4) Following the adjustments in paragraphs (1) and (2) above, New U S WEST shall assume, under the new stock plan adopted pursuant to subsection (a)(4) above, all obligations under the Amended U S WEST 1994 Stock Plan with respect to Phantom Communications Stock and shall amend such plan to provide for units which are valued in accordance with New U S WEST Common Stock ("Phantom New U S WEST Common Stock") after the Separation Time. In order to reflect the transactions contemplated by the Separation Agreement, following the adjustments in paragraphs (1) and (2) above, the Phantom Communications Stock shall be converted to Phantom New U S WEST Common Stock on a one for one basis. (5) MediaOne and New U S WEST shall cause all plans referred to in this subsection (e) to be amended, as appropriate, to effect the changes described herein as of the Separation Time. 39 10. OTHER BENEFITS. (a) Top-hat plans. As of the Separation Time: (1) New U S WEST or a Subsidiary shall assume all plans maintained by the Existing U S WEST Group prior to the Separation Time which are intended to be described in Section 201(2) of ERISA ("Top-hat Plans") and all Liabilities and obligations with respect to Communications Employees, Terminated Communications Employees and Terminated Inc. Employees under such plans. Such Top-hat Plans shall include, without limitation, the U S WEST Nonqualified Pension Plan and the U S WEST Deferred Compensation Plan. All such plans shall be Communications Employee Benefit Plans. The MediaOne Group shall have no Liabilities with respect to such plans. (2) MediaOne or a Subsidiary shall establish new Top-hat Plans corresponding to the Top-hat Plans maintained by the Existing U S WEST Group before the Separation Time and shall assume, under such plans, all Liabilities and obligations with respect to Media Employees and Terminated Media Employees under the Top-hat Plans maintained by the Existing U S WEST Group prior to the Separation Time. All such plans shall be Media Employee Benefit Plans. All such Liabilities and obligations shall cease to be Liabilities or obligations of the Top-hat Plans assumed by New U S WEST pursuant to the preceding paragraph (1). (3) Subject to paragraph (4) below, any trusts maintained by Existing U S WEST or its Subsidiaries for the purpose of providing benefits under a Top-hat Plan (the "Existing U S WEST Rabbi Trusts") shall be transferred to and assumed by New U S WEST. (4) MediaOne or a Subsidiary shall establish prior to the Separation Time one or more trusts (the "MediaOne Rabbi Trusts") for the purpose of providing benefits under its Top-hat Plans which correspond to the Existing U S WEST Rabbi Trusts. As of the Separation Time, Existing U S West shall cause the trustee or trustees of the Existing U S WEST Rabbi Trusts to transfer to the trustee or trustees of the MediaOne Rabbi Trusts any amounts held in the Existing U 40 S WEST Rabbi Trusts attributable to the benefits of Terminated Media Employees. (b) Employment contracts. Except for the severance agreements with members of the Executive Group, all individual employment contracts, including but not limited to severance agreements, retention agreements, change-of-control agreements and letter agreements, entered into by a member of the Existing U S WEST Group and a single Communications Employee or a Terminated Communications Employee shall be retained by, or assigned to and assumed by, as applicable, the New U S WEST Group, provided they do not expire by their own terms as of the Separation Time. The MediaOne Group shall have no Liabilities with respect to such agreements. Any such employment contracts, other than agreements described in paragraph (d) below, entered into by any member of the Existing U S WEST Group and a single Media Employee or a Terminated Media Employee shall be retained by, or assigned to and assumed by, as applicable, the MediaOne Group, provided they do not expire by their own terms as of the Separation Time. The New U S WEST Group shall have no Liabilities with respect to such agreements. Any Liability under such employment contracts, other than the severance agreements with members of the Executive Group, entered into by any member of the Existing U S WEST Group and a single Terminated Inc. Employee shall be borne in accordance with Section 2(c) and (f) of this EM Agreement. (c) Split-dollar contracts. All split-dollar insurance contracts entered into by the Existing U S WEST Group for the benefit of a Communications Employee or a Terminated Communications Employee shall be retained by, or assigned to and assumed by, as applicable, New U S WEST; the MediaOne Group shall have no interest in, or Liabilities with respect to, such contracts. Any such split-dollar insurance contracts entered into by the Existing U S WEST Group for the benefit of a Media Employee or a Terminated Media Employee shall be retained by, or assigned to and assumed by, as applicable, MediaOne; the New U S WEST Group shall have no interest in, or Liabilities with respect to, such contracts. In order to assign and assume any such split dollar life policies, the parties agree to accept any collateral assignments, policy endorsements or such other documentation executed by or on behalf of the applicable employees or terminated employees, or any trustee of any trust to which such policy rights or incidents of ownership under the policies have been assigned, as well as 41 entering into any such agreements as may be necessary to fulfill obligations to any insurance company or insurance agent or broker under the policies to be assigned. (d) Ex-Pat Employees. This sub-section applies to Employees ("Ex-Pat Employees") currently employed by International who have entered into agreements with Existing U S WEST or a Subsidiary which give such Employees re-employment rights with Existing U S WEST or a domestic Subsidiary thereof. If an Ex-Pat Employee notifies Existing U S WEST in writing prior to May 1, 1998 that he wishes to exercise his right to return to domestic employment prior to the Separation Time, the Communications Business will either: (1) re-employ the Ex-Pat Employee in accordance with his re-employment right; or (2) enter into a new agreement with the Ex-Pat Employee terminating his re-employment right. Any costs associated with re-employing the Ex-Pat Employee or terminating his re-employment right in accordance with the prior sentence shall be borne by the Communications Business. If an Ex-Pat Employee does not notify Existing U S WEST in writing prior to May 1, 1998 that he wishes to exercise his right to return to domestic employment prior to the Separation Time, all obligations under the agreement which provides the re-employment right shall be assumed by MediaOne. Any costs associated with assuming the re-employment right of the Ex-Pat Employee in accordance with the prior sentence shall be borne by New U S WEST and/or MediaOne as determined by the parties through good faith negotiations to be completed prior to the Separation Time. (e) Vail Trust. The Theodore N. Vail Memorial Fund shall be transferred to and assumed by New U S WEST as of the Separation Time. (f) Leaves of Absence. Each member of the MediaOne Group and the New U S WEST Group shall honor all terms and conditions of leaves of absence that have been granted to any Employee before the Separation Time, including such leaves that are commenced after the Separation Time, to the extent that such Employees are assigned to that entity. Each such entity shall be solely responsible for administering such leaves of absence and compliance with all applicable laws relating to leaves of absence, including the Family Medical Leave Act. Unless members of the New U S WEST Group or MediaOne Group adopt other policies prior to the Separation Time, each shall be considered to have adopted leave of absence programs, 42 effective as of the Separation Time, which are substantially identical in all material respects to the leave of absence programs in effect at the respective entities at the Separation Time. (g) Non-Employee Director Plans. (1) As of the Separation Time, New U S WEST shall assume the Non-Employee Director Plans and all Liabilities and obligations under such plans with respect to individuals who will be directors of New U S WEST immediately after the Separation Time and Retired Non-Employee Directors (collectively referred to as "Communications Directors"). The MediaOne Group shall have no Liabilities with respect to such agreements. (2) As of the Separation Time, MediaOne shall establish new plans for its non-employee directors ("Media Non-Employee Director Plans") corresponding to the Non-Employee Director Plans maintained by U S WEST before the Separation Time and shall assume, under such plans, all Liabilities and obligations under the Non-Employee Director Plans with respect to individuals who will be directors of MediaOne ("Media Directors") immediately after the Separation Time. All such Liabilities and obligations shall cease to be Liabilities or obligations of the Non-Employee Director Plans assumed by New U S WEST pursuant to paragraph (1) above. The New U S WEST Group shall have no Liabilities with respect to such agreements. (3) MediaOne and New U S WEST shall cause all plans referred to in this sub-section (g) to be amended, as appropriate, to effect the changes described herein as of the Separation Time. (h) Non-Employee State Executive Board Plan. As of the Separation Time, New U S WEST shall assume the U S WEST Communications, Inc. Non-Employee State Executive Board Deferred Compensation Plan (and any predecessor plan) and be solely responsible for all Liabilities thereunder. New U S WEST shall cause such plan to be amended, as appropriate, to effect the changes described herein as of the Separation Time. 43 11. PORTABILITY. Existing U S WEST and, if necessary after the Separation Time, MediaOne and New U S WEST shall use reasonable best efforts to seek an amendment of the Mandatory Portability Agreement established as of January 1, 1985, as referenced in the U S WEST Pension Plan (the "MPA"), to allow New U S WEST to become a "Tier II Signatory Company" under the MPA with the same rights and obligations as have been granted to AirTouch Communications, Inc. as a Tier II Signatory Company. MediaOne and New U S WEST may mutually agree to additional situations where service credit would be granted for employees transferring between one another (or their Subsidiaries) with associated trust asset transfers after the Separation Time. 12. FURTHER AGREEMENTS. (a) From and after the Separation Time, MediaOne shall, and shall cause its Subsidiaries and successors to, provide credit under all Media Employee Arrangements and Media Employee Benefit Plans to Media Employees and Terminated Media Employees for service with the Existing U S WEST Group prior to the Separation Time for purposes of eligibility to participate, vesting and eligibility to retire, and for purposes of calculating any severance benefits, to the same extent such credit was provided under Employee Arrangements and Employee Benefit Plans prior to the Separation Time. (b) From and after the Separation Time, New U S WEST shall, and shall cause its Subsidiaries and successors to, provide credit under all Communications Employee Arrangements and Communications Employee Benefit Plans to Communications Employees, Terminated Communications Employees and Terminated Inc. Employees for service with the Existing U S WEST Group prior to the Separation Time for purposes of eligibility to participate, vesting and eligibility to retire, and for purposes of calculating any severance benefits, to the same extent such credit was provided under Employee Arrangements and Employee Benefit Plans prior to the Separation Time. (c) MediaOne and New U S WEST shall promptly reimburse each other for all valid liability and expenses addressed in this EM Agreement which are paid by the other and that constitutes a liability of MediaOne or New U S WEST, as the case may be, upon presentation of an invoice thereon. In the event that payment in full is not received within 45 days from the date of 44 the invoice, interest shall accrue at the rate of 7% per annum from the date of the invoice. 13. COOPERATION. (a) MediaOne, New U S WEST and their Subsidiaries shall cooperate with each other in carrying out, implementing and defending the terms of this EM Agreement, including cooperating with each other with respect to any claims or litigation challenging the terms of the EM Agreement. (b) Each party shall exchange such information with the other party and their respective agents and vendors (without obtaining releases), as may be reasonably requested by the other party, with respect thereto. MediaOne and New U S WEST and their respective authorized agents shall, subject to applicable laws on confidentiality, be given reasonable and timely access to, and may make copies of, all information relating to the subjects of this EM Agreement in the custody of the other party, to the extent reasonably requested by the other party. If any provision of this Agreement is dependent on the consent of any third party (such as a vendor or a union) and such consent is withheld, MediaOne and New U S WEST shall use their reasonable best efforts to implement the applicable provisions of this Agreement to the full extent practicable. If any provision of this Agreement cannot be implemented due to the failure of such third party to consent, MediaOne and New U S WEST shall negotiate in good faith to implement the provision in a mutually satisfactory manner. The phrase "reasonable best efforts" as used herein shall not be construed to require the incurrence of any non-routine or unreasonable expense or liability or the waiver of any right of MediaOne and New U S WEST (and their respective Subsidiaries). (c) MediaOne and New U S WEST agree to good faith mutual cooperation in any investigation, inquiry or litigation which jointly involves them or in which either party makes a reasonable request for such cooperation. Each party will make its Employees available on a reasonable basis to give testimony and assistance in connection with any lawsuit, dispute, investigation or proceeding involving the other party and arising out of activities for which the Employee had responsibility prior to the Separation Time. The party requesting such availability (the "Requesting Party") shall reimburse the Employee for all reasonable out-of-pocket travel and other expenses incurred in so cooperating, including without 45 limitation airplane fare, hotel accommodations, meal charges and other similar expenses, as well as reasonable fees and disbursements for independent counsel for the Employee, if the matter requires that the Employee have independent representation. Such expenses will be reimbursed promptly after Employee's submission to the Requesting Party of statements and such reasonable detail as the Requesting Party may require. Any request for cooperation, and the degree of cooperation provided, pursuant to this paragraph will take into account (1) the significance of the matters at issue in the lawsuit, dispute, investigation or proceeding, and (ii) the Employee's other personal and business commitments. In any case in which either MediaOne or New U S WEST becomes aware that one of its Employees is called (except by the other party) as a witness to testify in any discovery or court proceeding relating to the other party, the party employing such individual will notify the other party immediately in order to give the other party a reasonable opportunity to appear and/or assert any privilege to which it may be entitled. 14. NON-TERMINATION OF EMPLOYMENT; NO THIRD-PARTY BENEFICIARIES. (a) No provision of this EM Agreement or the Separation Agreement shall be construed to create any right, or accelerate entitlement, to any compensation or benefit whatsoever on the part of any Employee or Terminated Employee or other future, present or former employee of MediaOne, New U S WEST, or their respective Subsidiaries under any Employee Benefit Plan or Employee Arrangement maintained by any of such entities or otherwise. (b) Without limiting the generality of the foregoing provisions of subsection 14(a) above, except for the severance agreements applicable to the Executive Group, neither (1) the transactions described in the Separation Agreement including without limitation the Reorganization, Contribution and Separation, (2) the termination of the Participating Company status of New U S WEST or a New U S WEST Subsidiary, (3) the transfer of sponsorship of any Employee Benefit Plans or Employee Arrangements to New U S WEST, (4) the transfer of an Employee from one member of the Existing U S WEST Group to another member in connection with or in anticipation of the Reorganization, Contribution or Separation at any time on or before the Separation Time nor (5) the assignment and transfer of an Employee to the New U S 46 WEST Group or MediaOne Group, shall cause any Employee to be deemed to have incurred a termination of employment which entitles such individual to the commencement of benefits under any Employee Benefit Plan or Employee Arrangement maintained by MediaOne, New U S WEST, or their respective Subsidiaries; nor shall any of the events set forth in clauses (1) through (5) of this subsection 14(b) be treated as, or result in, a change in control under any such Employee Benefit Plan or Employee Arrangement. (c) To the extent applicable, each Employee Benefit Plan and Employee Arrangement is hereby amended (without the need for further action) to incorporate the provisions stated in subsection 14(b). (d) Except as expressly provided in this Agreement, nothing in this Agreement shall preclude New U S WEST or MediaOne or their respective Subsidiaries, at any time after the Separation Time, from amending, merging, modifying, terminating, eliminating, reducing, or otherwise altering in any respect any Employee Benefit Plan or Employee Arrangement maintained by such party, any benefit under any such plan or arrangement, or any trust, insurance policy or funding vehicle related to any such plan or arrangement. (e) No provision in this EM Agreement or in the Separation Agreement shall confer upon any person other than the signatories hereto any rights or remedies with respect to the employment, compensation, benefits, or other terms and conditions of employment of any persons. 15. MISCELLANEOUS. (a) Payment of 1998 Administrative Costs and Expenses. Each member of the Existing U S WEST Group shall be responsible for their allocable share of the budgeted costs for benefits in 1998 until the Separation Time, as well as their allocable share of unanticipated expenses incurred prior to the Separation Time. In addition, MediaOne shall pay New U S WEST for all expenses and costs relating to benefits incurred after the Separation Time to the extent that the additional expenses are (i) reasonable and necessary and (ii) incurred as a result of, and for the purpose of, the normal administration of the Media Employee Benefit Plans or Employee Arrangements after the Separation Time. If any expenses are incurred at the request of MediaOne, they shall be the sole responsibility of MediaOne. 47 (b) Audit Rights. (1) Information Provided. Each of MediaOne and New U S WEST, and their duly authorized representatives, shall have the right to conduct audits with respect to all information provided to it by the other party. The party conducting the audit (the "Auditing Party") shall have the sole discretion to determine the procedures and guidelines for conducting audits and the selection of audit representatives under this paragraph (1); provided, that no audits shall be permitted with respect to the allocation or transfer of plan assets and liabilities. The Auditing Party shall have the right to make copies of any records at its expense, subject to the confidentiality provisions set forth in the Separation Agreement, which are incorporated by reference herein. The party being audited shall provide the Auditing Party's representatives with reasonable access during normal business hours to its operations, computer systems and paper and electronic files, and provide workspace to its representatives. After any audit is completed, the party being audited shall have the right to review a draft of the audit findings and to comment on those findings in writing within five business days after receiving such draft. The Auditing Party's audit rights under this paragraph (1) shall include the right to audit, or participate in an audit facilitated by the party being audited, of any Subsidiaries and Affiliates of the party being audited and of any benefit providers and third parties with whom the party being audited has a relationship, or agents of such party, to the extent any such persons are affected by or addressed in this Agreement (collectively, the "Non-parties"). The party being audited shall, upon written request from the Auditing Party, provide an individual (at the Auditing Party's expense) to supervise any audit of a Non-party. The Auditing Party shall be responsible for supplying, at the Auditing Party's expense, additional personnel sufficient to complete the audit in a reasonably timely manner. The responsibility of the party being audited shall be limited to providing, at the Auditing Party's expense, a single individual at each audited site for purposes of facilitating the audit. (2) Vendor Contracts. After the Separation Time, MediaOne and New U S WEST and their duly authorized representatives shall have the right to conduct joint audits with respect to any Provider Contracts that relate to both the MediaOne Welfare Plans and the New 48 U S WEST Welfare Plans. The scope of such audits shall encompass the review of all correspondence, account records, claim forms, cancelled drafts (unless retained by the bank), provider bills, medical records submitted with claims, billing corrections, vendor's internal corrections of previous errors and any other documents or instruments relating to the services performed by the vendor under the applicable vendor contracts. MediaOne and New U S WEST shall agree on the performance standards, audit methodology, auditing policy and quality measures and reporting requirements relating to the audits described in this paragraph (2) and the manner in which costs incurred in connection with such audits will be shared. (c) Beneficiary Designations. All beneficiary designations made under the Employee Benefit Plans or Employee Arrangements prior to the Separation Time shall be transferred to and be in full force and effect under the corresponding new Communications or Media Employee Benefit Plans or Employee Arrangements until such beneficiary designations are replaced or revoked by the individual who made the beneficiary designation. (d) Effect If Separation Does Not Occur. If the Separation does not occur, then all actions and events that are, under this EM Agreement, to be taken or occur effective as of the Separation Time, immediately after the Separation Time, or otherwise contingent upon or in connection with the Separation, shall not be taken or occur. In addition, to the extent actions are taken or events occur prior to the Separation Time in connection with the Reorganization or Contribution or in anticipation of the Separation, then such events or actions shall be reversed or deemed null and void. (e) Provisions of Separation Agreement. The provisions of Articles X - XII of the Separation Agreement shall, to the extent applicable and not inconsistent with this EM Agreement, shall also apply to this EM Agreement. 49 IN WITNESS WHEREOF, each of the parties has caused this EM Agreement to be duly executed on its behalf by its officers thereunto duly authorized, all as of the day and year first above written. U S WEST, Inc. By: ------------------------------------- Name: Title: USW-C, Inc. By: ------------------------------------- Name: Title: U S WEST Multimedia Communications, Inc., plan sponsor of the: Media Pension Plan Media Savings Plan Media VEBA Other Media Employee Benefit Plans By: ------------------------------------- Name: Title: USW-C, Inc., plan sponsor of the: U S WEST Pension Plan U S WEST Savings Plan MBAT and Life Insurance Trust Other Communications Employee Benefit Plans By: ------------------------------------- Name: Title: 50 EX-2.C 4 EXHIBIT 2-C - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- TAX SHARING AGREEMENT between U S WEST, INC. (to be renamed MEDIAONE GROUP, INC.) and USW-C, Inc. (to be renamed U S WEST, INC.) Dated as of , 1998 --------- ---- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- ARTICLE I Definitions; Certain Operating Conventions . . . . . . . . . . . . . . 2 ARTICLE II Allocation and Payment . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE III Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE IV Preparation and Filing of Tax Returns, Cooperation and Record Retention . . . . . . . . . . . . . . . . . . . 10 ARTICLE V Refunds, Audits and Adjustments. . . . . . . . . . . . . . . . . . . . 11 ARTICLE VI Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
TAX SHARING AGREEMENT TAX SHARING AGREEMENT, dated as of _____________, by and between U S WEST, Inc., a Delaware corporation ("U S WEST") to be renamed MediaOne Group, Inc. and USW-C, Inc., a Delaware corporation and wholly owned subsidiary of U S WEST ("New U S WEST") to be renamed U S WEST, Inc. W I T N E S S E T H WHEREAS, New U S WEST and its subsidiaries are currently members of the U S WEST Consolidated Group (as defined herein); WHEREAS, pursuant to the Separation Agreement entered into between U S WEST and New U S WEST dated _________ (the "Separation Agreement"), (a) U S WEST shall effect a restructuring of certain of its assets, liabilities and businesses, as a result of which New U S WEST shall own the Directories Business and the businesses currently attributed to the Communications Group (each as defined in the Separation Agreement) (the "Reorganization") and (b) U S WEST shall distribute all of the outstanding capital stock of New U S WEST to its stockholders (the "Separation"); WHEREAS, the parties intend that for United States federal income tax purposes the Reorganization and the Separation shall qualify as tax-free transactions pursuant to Sections 332, 368(a) and 355 of the Code (as defined herein); WHEREAS, the parties wish to (a) provide for the payment of tax liabilities and entitlement to refunds thereof, allocate responsibility for, and cooperation in, the filing of tax returns and provide for certain other matters relating to taxes and (b) set forth certain covenants and indemnities relating to the preservation of the tax-free status of the Reorganization and the Separation. NOW, THEREFORE, in consideration of the mutual promises and undertakings contained herein and in any other document executed in connection with this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS; CERTAIN OPERATING CONVENTIONS 1.1 For the purposes of this Agreement, the following terms shall have the meanings set forth below: ADJUSTMENTS shall mean any proposed or final change in the Tax Liability of a taxpayer. CODE shall mean the Internal Revenue Code of 1986, as amended. COMBINED RETURN shall mean any combined, unitary, or consolidated State Income Tax return that includes one or more members of the MediaOne Group and one or more members of the New U S WEST Group (as hereinafter defined). COMBINED RETURN TAX SAVINGS shall mean, with respect to a Taxable Year in which one or more Combined Returns were filed or required to be filed in the Communications Group Region, the excess of the State Income Tax that would have been payable to all Tax Authorities in the Communications Group Region if the MediaOne Group had not been included in such Combined Returns for such Taxable Year over the actual State Income Tax paid to such Tax Authorities in respect of such Combined Returns. COMMUNICATIONS GROUP REGION shall mean the 14-state region comprised of the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. CONTRIBUTED MEDIA GROUP SUBSIDIARIES shall mean each of U S WEST Media Group, Inc. and U S WEST Capital Funding, Inc., and each of their respective subsidiaries. CONTRIBUTED SUBSIDIARIES shall mean each of U S WEST Foundation, U S WEST Educational Foundation, U S WEST Investment Management Company, U S WEST SPF, Co., U S WEST Federal Relations, Inc., and U S WEST IP Holdings, Inc., and each of their respective subsidiaries. FEDERAL INCOME TAX shall mean federal Taxes determined on the basis of net income or profits (including, but not limited to, any alternative minimum tax, capital gains and any Tax on items of Tax preferences) but excluding non-income Taxes such as federal payroll and excise Taxes. 2 INDEMNIFYING PARTY shall mean any Person from which an Indemnified Party is seeking indemnification pursuant to the provisions of this Agreement. INDEMNIFIED PARTY shall mean any Person which is seeking indemnification from an Indemnifying Party pursuant to the provisions of this Agreement. IRS shall mean the United States Internal Revenue Service. MEDIAONE GROUP shall mean, individually and collectively, as the case may be, each member of the U S WEST Consolidated Group, other than any member of the New U S WEST Group. NEW U S WEST GROUP shall mean, individually and collectively, as the case may be, New U S WEST and its present and future direct and indirect subsidiaries; provided, however, that on or prior to the Separation Date, none of the Contributed Subsidiaries or the Contributed Media Group Subsidiaries shall be included as a member of the New U S WEST Group. PERSON shall mean and includes any individual, corporation, company, association, partnership, joint venture, limited liability company, joint stock company, trust, unincorporated organization, or other entity. POST-SEPARATION TAXABLE PERIOD shall mean a taxable period that begins after the Separation Date. PRE-SEPARATION TAXABLE PERIOD shall mean a taxable period that ends on or before the Separation Date. PRESENT VALUE BENEFIT shall mean the present value (based on a discount rate equal to the short-term applicable federal rate as determined under Section 1274(d) of the Code at the time of determination, and assuming that the Indemnified Party will be liable for Taxes at all relevant times at the maximum marginal rates) of any income tax benefit. PROCEEDING shall mean any audit or other examination, or any judicial or administrative proceeding, relating to liability for or refunds or Adjustments with respect to Taxes. REFUND shall mean any refund of Taxes, including any reduction in liability for such Taxes by means of a credit, offset or otherwise. 3 RULING REQUEST shall mean the request by U S WEST for an advance letter ruling from the IRS with respect to certain Tax aspects of the Reorganization and the Separation. SEPARATE RETURN shall mean any Tax Return, including any consolidated, combined or unitary Tax Return, filed by either the New U S WEST Group or the MediaOne Group but excluding any Tax Return filed which includes one or more members of both groups. SEPARATION DATE shall mean the date the Separation is effected. STATE INCOME TAX shall mean any state or local jurisdiction Taxes imposed on or measured by gross or net income, value added, net worth or capital stock. State Income Taxes do not include business and occupation taxes, gross receipts taxes, excise, sales or use taxes, real property gains, real or personal property, transfer or similar taxes. STRADDLE PERIOD shall mean a taxable period that includes, but does not end on, the Separation Date. TAX OR TAXES shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, gains, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, custom duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and shall include any transferee liability in respect of Taxes. TAX AUTHORITY shall mean the IRS and any other domestic or foreign governmental authority responsible for the administration and collection of Taxes. TAX LIABILITIES shall mean all liabilities for Taxes. TAX RETURNS shall mean all reports, returns, declaration forms and statements filed or required to be filed with respect to Taxes. TAX-TIMING ADJUSTMENT shall mean any Adjustment in one Taxable Year which will result in an offsetting Adjustment or Adjustments (including an Adjustment to the basis of an asset not eligible for depreciation or amortization) in another Taxable Year. 4 TAXABLE YEAR shall mean the year on the basis of which taxable income is computed. TREASURY shall mean the United States Department of the Treasury. U S WEST CONSOLIDATED GROUP shall mean the affiliated group of corporations, within the meaning of Section 1504(a) of the Code, of which U S WEST is the common parent, and any member of such group. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) Capitalized terms not otherwise defined in this Agreement shall have the meaning ascribed to them in the Separation Agreement. (b) The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (c) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. 1.3 TERMINATION OF TAXABLE YEARS. For Federal Income Tax purposes, the Taxable Year of each member of the New U S WEST Group (including the Contributed Subsidiaries and the Contributed Media Group Subsidiaries) shall end as of the close of the Separation Date. New U S WEST and U S WEST shall, unless prohibited by applicable law, take all action necessary or appropriate to close the taxable period of each member of the New U S WEST Group for all Tax purposes as of the close of the Separation Date. ARTICLE II ALLOCATION AND PAYMENT 2.1 ALLOCATION OF TAXES. U S WEST and New U S WEST each agrees, on its own behalf and on behalf of the MediaOne Group and the New U S WEST Group, respectively, to allocate and pay its respective share of Taxes as provided in this Agreement. (a) Except as provided in Section 2.1(e), the Federal Income Tax liability (including Refunds and deficiencies) of the U S WEST Consolidated Group for any Pre-Separation Taxable Period and any Straddle Period shall be allocated between the New U S WEST Group and the MediaOne Group in accordance with Treasury Regulations Sections 5 1.1552-1(a)(3) and 1.1502-33(d)(3). The fixed percentage under Treasury Regulations Section 1.1502-33(d)(3) shall be 100 percent. (b) Except as provided in Section 2.1(e), the State Income Tax liability of the New U S WEST Group and the MediaOne Group for any Pre-Separation Taxable Period and any Straddle Period in any state included in the Communications Group Region in which a Combined Return is or is required to be filed shall be allocated between the New U S WEST Group and the MediaOne Group in proportion to the state taxable income (positive or negative) of each member of each group included in such Combined Return, or, where the basis is other than net income, in proportion to each member's respective Tax base. Each group shall appropriately compensate the other group for any reduction in State Income Tax liability resulting from the other group's having negative state taxable income. (c) Except as provided in Section 2.1(e), the State Income Tax liability of the New U S WEST Group and the MediaOne Group for any Pre-Separation Taxable Period and any Straddle Period in any state not included in the Communications Group Region in which a Combined Return is or is required to be filed shall be allocated between the New U S WEST Group and the MediaOne Group as follows: (i) For the Taxable Years ended December 31, 1996, December 31, 1997 and on the Separation Date, all such State Income Tax liability for each such Taxable Year shall be allocated to the New U S WEST Group to the extent such State Income Tax liability does not exceed the Combined Return Tax Savings actually realized by the New U S WEST Group for each such Taxable Year. Any excess State Income Tax liability shall be allocated 66.6% to the New U S WEST Group and 33.4% to the MediaOne Group. (ii) For Taxable Years ended on or prior to December 31, 1995, all such State Income Tax liability shall be allocated 66.6% to the New U S WEST Group and 33.4% to the MediaOne Group. (iii) Notwithstanding the foregoing, any liability arising solely out of the inclusion of the New U S WEST Group in a Tax Return which was originally filed as a Separate Return by a member of the affiliated group (as defined in Section 1504(a) of the Code) of which Continental Cablevision, Inc. was the common parent corporation for the Taxable Year ended December 31, 1996 shall be allocated 50% to the New U S WEST Group and 50% to the MediaOne Group. 6 (d) Except as provided in Sections 2.1(c)(iii) and 2.1(e), all Tax Liabilities of the New U S WEST Group and the MediaOne Group for any Pre-Separation Taxable Period and any Straddle Period arising out of the filing of a Separate Return shall be allocated to the member to which such Tax Liabilities relate. (e) Any Tax Liability which is a Shared Liability (as defined in the Separation Agreement), shall be allocated in the following manner: (i) Any Tax Liability of U S WEST arising out of operations conducted directly by it and any Tax Liability of the Contributed Subsidiaries for any Pre-Separation Taxable Period or any Straddle Period shall be allocated 58% to the New U S WEST Group and 42% to the MediaOne Group. (ii) Any Tax Liability arising out of Transaction Costs (as defined in the Separation Agreement) shall be allocated as the underlying costs are allocated pursuant to Section 1.1(l) of the Separation Disclosure Schedule. 2.2 TAX ATTRIBUTES. Tax attributes for Pre-Separation Taxable Periods and any Straddle Period shall be allocated to the New U S WEST Group and the MediaOne Group in accordance with the Code and Treasury Regulations (and any applicable state, local and foreign laws or regulations). U S WEST and New U S WEST shall jointly determine the amounts of such attributes as of the Separation Date and hereby agree to compute all Tax Liabilities for Taxable Years ending after the Separation Date consistently with that determination. 2.3 TAX-TIMING ADJUSTMENTS. To the extent that any portion of any Tax Liability (or Tax benefit) allocated under Section 2.1 relates to a Tax-timing Adjustment, that portion of such Tax Liability (or Tax benefit) shall be allocated to the entity that will receive the benefit (or detriment) of that Tax-timing Adjustment. For purposes of this Agreement, the fact that the period or periods in which offsetting Adjustments will arise is unknown or not determinable shall not be taken into account. 2.4 PENALTIES, ADDITIONS TO TAX AND INTEREST. Penalties, additions to Tax and interest on any Tax deficiencies or overpayments will be allocated as the underlying deficiencies or overpayments are allocated under this Agreement. 2.5 PAYMENT OF TAXES. U S WEST and New U S WEST each agrees to pay or cause to be paid their respective shares of Taxes as allocated and provided in this Agreement. 7 (a) For the Taxable Year ended December 31, 1997 and any Straddle Period, New U S WEST shall timely pay to U S WEST an amount equal to the allocable Federal Income Tax liability of the New U S WEST Group determined under Section 2.1(a) and (e), including the New U S WEST Group's share of estimated Federal Income Taxes. U S WEST shall be responsible for the payment to the IRS of the Federal Income Tax liability of the U S WEST Consolidated Group for such Taxable Years. (b) For the Taxable Year ended December 31, 1997 and any Straddle Period, New U S WEST shall timely pay to U S WEST an amount equal to the allocable State Income Tax liability of the New U S WEST Group determined under Sections 2.1(b), (c) and (e), including the New U S WEST Group's share of estimated State Income Taxes. U S WEST shall be responsible for the payment to the applicable Tax Authority of such State Income Tax liabilities. 2.6 CHARACTERIZATION OF PAYMENTS. For all Tax purposes, the New U S WEST Group and the MediaOne Group agree to treat (i) any payment required by this Agreement as either a contribution by U S WEST to New U S WEST or a distribution by New U S WEST to U S WEST, as the case may be, occurring immediately prior to the Separation Date and (ii) any payment of interest or non-federal Taxes by or to a Tax Authority as taxable or deductible, as the case may be, to the party entitled under this Agreement to retain such payment or required under this Agreement to make such payment, in either case except as otherwise mandated by applicable law. ARTICLE III INDEMNIFICATION 3.1 INDEMNIFICATION BY U S WEST. U S WEST shall pay, and shall indemnify and hold the New U S WEST Group and their respective shareholders, directors, officers, employees, affiliates, agents and successors harmless from and against, without duplication, (i) all Tax Liabilities allocable to the MediaOne Group under Article II, (ii) all Tax Liabilities attributable to Tax Returns required to be filed by the MediaOne Group for any Post-Separation Taxable Period, (iii) all Tax Liabilities incurred by the New U S WEST Group by reason of the breach by U S WEST of any of its covenants hereunder, and (iv) any costs and expenses related to the foregoing (including, without limitation, reasonable attorneys' fees and expenses). 3.2 LIABILITY OF MEDIAONE GROUP FOR UNDERTAKING CERTAIN TRANSACTIONS. Notwithstanding any other provision of this Agreement to the contrary, if, as a result of any 8 event, action, or failure to act wholly or partially within the control of the MediaOne Group (including, without limitation, any event, action, or failure to act that results in a breach of any representation or in the inaccuracy of any statement made to the IRS in connection with, the Ruling Request), or any other event related to the acquisition of U S WEST stock, any Taxes are imposed on the New U S WEST Group with respect to any action taken pursuant to the Separation and the Reorganization, including, without limitation, the transactions that were intended to be tax-free under Sections 332, 355 and 368 of the Code, then U S WEST shall indemnify and hold harmless the New U S WEST Group with respect to any such Taxes on an after-tax basis. 3.3 INDEMNIFICATION BY NEW U S WEST. New U S WEST shall pay, and shall indemnify and hold the MediaOne Group and their respective shareholders, directors, officers, employees, affiliates, agents and successors harmless from and against, without duplication, (i) all Tax Liabilities allocable to the New U S WEST Group under Article II, (ii) all Tax Liabilities attributable to Tax Returns required to be filed by the New U S WEST Group for any Post-Separation Taxable Period, (iii) all Tax Liabilities incurred by the MediaOne Group by reason of the breach by New U S WEST of any of its covenants hereunder and (iv) any costs and expenses related to the foregoing (including, without limitation, reasonable attorneys' fees and expenses). 3.4 LIABILITY OF NEW U S WEST GROUP FOR UNDERTAKING CERTAIN TRANSACTIONS. Notwithstanding any other provision of this Agreement to the contrary, if, as a result of any event, action, or failure to act wholly or partially within the control of the New U S WEST Group (including, without limitation, any event, action or failure to act that results in a breach of any representation or in the inaccuracy of any statement made to the IRS in connection with, the Ruling Request), or any other event related to the acquisition of New U S WEST stock, any Taxes are imposed on the MediaOne Group with respect to any action taken pursuant to the Separation and the Reorganization, including, without limitation, the transactions that were intended to be tax-free under Sections 332, 355 and 368 of the Code, then New U S WEST shall indemnify and hold harmless the MediaOne Group with respect to any such Taxes on an after-tax basis. 3.5 PAYMENT. If the Indemnifying Party is required to indemnify the Indemnified Party pursuant to this Article III, the Indemnified Party shall submit its calculations of the amount required to be paid pursuant to this Article IV (which shall be net of the Present Value Benefit realized or realizable by the Indemnified Party), showing such calculations in sufficient detail so as to permit the Indemnifying Party to understand the calculations. Subject to the following sentence, the Indemnifying Party shall pay to the Indemnified Party, no later than ten (10) business days after the Indemnifying Party receives 9 the Indemnified Party's calculations, the amount that the Indemnifying Party is required to pay the Indemnified Party under this Article III. If the Indemnifying Party disagrees with such calculations, it must notify the Indemnified Party of its disagreement in writing within ten (10) business days of receiving such calculations. Any dispute regarding such calculations shall be resolved in accordance with Section 6.13 of this Agreement. 3.6 TIME LIMITS. Any claim under this Article III with respect to a Tax Liability must be made no later than thirty (30) days after the expiration of the applicable statute of limitations for assessment of such Tax Liability. ARTICLE IV PREPARATION AND FILING OF TAX RETURNS, COOPERATION AND RECORD RETENTION 4.1 FEDERAL TAX RETURNS. New U S WEST and U S WEST hereby agree to cooperate fully with each other to meet filing requirements for the U S WEST Consolidated Group Tax Returns for any Pre-Separation Taxable Period and any Straddle Period. New U S WEST, as agent for the U S WEST Consolidated Group, will be responsible for the filing of such Tax Returns for the Taxable Years ended December 31, 1997 and ending December 31, 1998, and, at the request of U S WEST, shall use its best efforts to file the Tax Return for the Taxable Year ending December 31, 1998 by its original due date. For purposes of this Section 4.1, cooperation includes making available all instructions, workpapers, research, data and notes of any kind required for the completion of the Tax Return, as well as making available personnel to assist in the consolidation effort. Personnel requirements, including the use of third party contractors, will be negotiated and agreed upon between U S WEST and New U S WEST. Interviewing and hiring of third-party contractors will be done jointly, and costs of these contractors will be shared equally. Any software license costs specifically related to a separate entity shall be borne by that entity. Where software license costs are not discernible as separate entity costs, such software license costs will be shared equally. Due dates for information required for the U S WEST Consolidated Group Tax Returns will be negotiated between U S WEST and New U S WEST and good faith efforts will be made to meet those dates. 4.2 COMBINED RETURNS. New U S WEST and U S WEST hereby agree to cooperate fully with each other to meet filing requirements for Combined Returns for any Pre-Separation Taxable Period and any Straddle Period. New U S WEST, as agent for U S WEST, will be responsible for the filing of the Combined Returns for the Taxable Years ended December 31, 1997 and ending December 31, 1998 and, at the request of U S WEST, shall 10 use its best efforts to file any Combined Returns for the Taxable Year ending December 31, 1998 by their original due date. For purposes of this Section 4.2, cooperation includes making available all instructions, workpapers, research, data and notes of any kind required for the completion of the Combined Return, as well as making available personnel to assist in the combination effort. Personnel requirements, including the use of third party contractors, will be negotiated and agreed upon between U S WEST and New U S WEST. Interviewing and hiring of third-party contractors will be done jointly, and costs of these contractors will be shared equally. Any software license costs specifically related to a separate entity shall be borne by that entity. Where software license costs are not discernible as separate entity costs, such software license costs will be shared equally. Due dates for information required for Combined Returns will be negotiated between U S WEST and New U S WEST and good faith efforts will be made to meet those dates. 4.3 SEPARATE RETURNS. Any Separate Return shall be prepared and caused to be filed by the entity required by law to file such Separate Return. 4.4 COOPERATION; MAINTENANCE AND RETENTION OF RECORDS. U S WEST and New U S WEST shall, and shall cause the MediaOne Group and the New U S WEST Group respectively to, provide the requesting party with such assistance and documents as may be reasonably requested by such party in connection with (i) the preparation of any Tax Return, (ii) the conduct of any Proceeding, (iii) any matter relating to Taxes of any member of the U S WEST Consolidated Group, the New U S WEST Group or the MediaOne Group and (iv) any other matter that is a subject of this Agreement. New U S WEST and U S WEST shall retain or cause to be retained all Tax Returns, schedules and workpapers, and all material records or other documents relating thereto, until the expiration of the statute of limitations (including any waivers or extensions thereof) of the Taxable Years to which such Tax Returns and other documents relate or until the expiration of any additional period that any party reasonably requests, in writing, with respect to specific material records or documents. A party intending to destroy any material records or documents shall provide the other party with reasonable advance notice and the opportunity to copy or take possession of such records and documents. The parties hereto will notify each other in writing of any waivers or extensions of the applicable statute of limitations that may affect the period for which the foregoing records or other documents must be retained. 11 ARTICLE V REFUNDS, AUDITS AND ADJUSTMENTS 5.1 REFUNDS OF TAXES. Except as provided in Section 5.2 below, New U S WEST shall be entitled to all Refunds relating to Taxes (plus any interest thereon received with respect thereto from the applicable Tax Authority) for which New U S WEST is or may be liable pursuant to Articles II and III of this Agreement, and U S WEST shall be entitled to all Refunds relating to Taxes (plus any interest thereon received with respect thereto from the applicable Tax Authority) for which U S WEST is or may be liable pursuant to the provisions of Articles II and III of this Agreement. A party receiving a Refund to which another party is entitled pursuant to this Agreement shall pay the amount to which such other party is entitled (plus any interest thereon received with respect thereto from the applicable Tax Authority) within ten (10) days after the receipt of the Refund. 5.2 CARRYBACKS. (a) The carryback of any loss, credit or other Tax attribute in any Post-Separation Taxable Period shall be in accordance with the provisions of the Code and Treasury Regulations (and any applicable state, local or foreign laws or regulations). (b) In the event that the New U S WEST Group realizes any loss, credit or other Tax attribute in any Post-Separation Taxable Period, such group may elect to carry back such loss, credit or Tax attribute to a Pre-Separation Taxable Period. U S WEST shall cooperate with New U S WEST in seeking from the appropriate Tax Authority any Refund that reasonably would result from such carryback. New U S WEST shall be entitled to any Refund (or other Tax benefit) realized by the MediaOne Group (including any interest thereon received from such Tax Authority) attributable to such carryback, within ten (10) business days after such Refund (or other Tax benefit) is received; PROVIDED, HOWEVER, that U S WEST shall be entitled to any Refund (or other Tax benefit) that results from the carryback of a loss, credit or other Tax attribute by the MediaOne Group from a Post-Separation Taxable Period to a Pre-Separation Taxable Period. (c) Except as otherwise provided by applicable law, if the MediaOne Group and the New U S WEST Group both may carry back a loss, credit or other Tax attribute to the same Pre-Separation Taxable Period, any Refund (or other Tax benefit) resulting therefrom shall be allocated between U S WEST and New U S WEST proportionately based on the relative amounts of the Refunds (or other Tax benefits) to which the MediaOne Group and the New U S WEST Group, respectively, would have been entitled had its carrybacks been the only carrybacks to such Taxable Year. 12 (d) To the extent that the amount of a Refund to which a party is entitled under this Section 5.2 is reduced by the applicable Tax Authority as a result of the offset of such amount against a Tax Liability of the other party, as allocated under this Agreement, the party which receives the benefit of such offset shall appropriately compensate the other party within ten (10) days of receipt of such benefit. 5.3 FEDERAL AUDITS AND ADJUSTMENTS. (a) NOTIFICATION OF AUDIT. Each of U S WEST and New U S WEST shall give written notice to the other party of any audit of the U S WEST Consolidated Group Tax Return for any Pre-Separation Taxable Period or Straddle Period within ten (10) business days after receipt of written notification of such audit from the IRS. Such notice shall include a copy of the notification received from the IRS. (b) STATUTE OF LIMITATIONS. Any extension of the statute of limitations for any Pre-Separation Taxable Period or Straddle Period shall be with the mutual agreement of U S WEST and New U S WEST. Any dispute regarding the extension of the statute of limitations shall be resolved in accordance with Section 6.13 of this Agreement. (c) AUDIT ACTIVITY. Each of U S WEST and New U S WEST will coordinate its respective efforts with respect to audits of any Pre-Separation Taxable Period and any Straddle Period and will furnish the other with all necessary workpapers and records to respond to audit inquiries. New U S WEST will be responsible as agent for the U S WEST Consolidated Group for day-to-day contact with IRS agents assigned to such audits. U S WEST will be responsible for responding to audit inquiries regarding issues primarily affecting Tax Liabilities of the MediaOne Group, but will act through New U S WEST, rather than directly contacting the IRS with respect to such matters. (d) NOTIFICATION. New U S WEST will provide timely reports to U S WEST detailing significant activities, information requests, issues raised or resolved, and any other relevant information, such reports to be no less frequent than quarterly. (e) PROPOSED ADJUSTMENTS. New U S WEST shall notify U S WEST of any Adjustment to the U S WEST Consolidated Group Tax Returns within ten (10) business days after receipt of notification of such Adjustment from the IRS. New U S WEST shall include in its notice to U S WEST a copy of the notification received from the IRS. (i) AGREED ISSUES. New U S WEST will not enter into any agreement with the IRS as agent for the U S WEST Consolidated Group with respect to any 13 Adjustment without the written consent of U S WEST, in those cases where the MediaOne Group would be liable for more than 50% of the proposed Tax Liability (as allocated under this Agreement) attributable to such Adjustment. For purposes of this paragraph, all determinations shall be made separately for each Adjustment. (ii) UNAGREED ISSUES. In the event U S WEST and New U S WEST, as the case may be, do not agree to all Adjustments for a Taxable Year, decisions regarding the procedures and preferred forum for contesting Adjustments on unagreed issues shall be made by whichever of the MediaOne Group or the New U S WEST Group is responsible for more than 50% of the cumulative Tax Liability attributable to such Adjustments. The party making the decision shall consult in good faith with the other party and shall promptly notify the other party of its decision. (iii) CONSENT NOT REQUIRED. Notwithstanding any other provision of this Agreement, if the IRS notifies U S WEST that the IRS will deal directly with the MediaOne Group with respect to its Tax Liability, U S WEST shall have full authority to act for the MediaOne Group and resolve any issue affecting its Tax Liability without the consent of New U S WEST. U S WEST will provide New U S WEST with a timely report summarizing any such audit activity, such report to be no less frequent than quarterly. (f) FEDERAL REFUND CLAIMS. If the New U S WEST Group desires to file a claim for Refund with respect to a Taxable Year for which it was a member of the U S WEST Consolidated Group, it shall prepare and submit to U S WEST the claim for Refund and a statement specifying the date on which the statute of limitations for filing the Refund claim will expire. U S WEST will file the Refund claim prior to the date specified as the last day to claim the Refund if such a filing is commercially reasonable, and will take any other appropriate action at New U S WEST's request necessary to secure the Refund. (g) LITIGATION. Subject to the balance of this Section 5.3(g), U S WEST and New U S WEST jointly shall conduct all Proceedings relating to Adjustments of the MediaOne Group and the U S WEST Group as allocated under this Agreement. U S WEST shall have the ability to control the conduct of such Proceedings with respect to issues relating to an Adjustment for which the MediaOne Group would be liable for more than 50% of the proposed Tax Liability (as allocated under this Agreement) attributable to such Adjustment. New U S WEST shall have the ability to control the conduct of such Proceedings with respect to issues relating to an Adjustment for which the New U S WEST Group would be liable for more than 50% of the proposed Tax Liability (as allocated under this Agreement) attributable to such Adjustment. The party with the ability to control the conduct of all or a portion of the Proceedings pursuant to this Section 5.3(g) shall consult in good faith with the other party, 14 which other party shall be entitled to participate in all conferences, meetings, and other matters related to the resolution of such Proceedings. 5.4 AUDITS AND ADJUSTMENTS RELATED TO COMBINED RETURNS. (a) NOTIFICATION OF AUDIT. Each of U S WEST and New U S WEST shall give written notice to the other party of any audit of a Combined Return for any Pre-Separation Taxable Period or Straddle Period within ten (10) business days after receipt of written notification of such audit from a Tax Authority. Such notice shall include a copy of the notification received from the relevant Tax Authority. (b) STATUTE OF LIMITATIONS. Any extension of the statute of limitations for any Pre-Separation Taxable Period or Straddle Period shall be with the mutual agreement of U S WEST and New U S WEST. Any dispute regarding the extension of the statute of limitations shall be resolved in accordance with Section 6.13 of this Agreement. (c) AUDIT ACTIVITY. Each of U S WEST and New U S WEST will coordinate its respective efforts with respect to audits of Combined Returns of any Pre-Separation Taxable Period and any Straddle Period and will furnish the other with all necessary workpapers and records to respond to audit inquiries. New U S WEST will be responsible as agent for any Combined Return for day-to-day contact with state Tax Authorities regarding such audits. U S WEST will be responsible for responding to audit inquiries regarding issues primarily affecting Tax Liabilities of the MediaOne Group, but will act through New U S WEST, rather than directly contacting the appropriate Tax Authorities with respect to such matters. (d) NOTIFICATION. With respect to a Combined Return, New U S WEST will provide timely reports to U S WEST detailing significant activities, information requests, issues raised or resolved, and any other relevant information, such reports to be no less frequent than quarterly. (e) PROPOSED ADJUSTMENTS. New U S WEST shall notify U S WEST of any Adjustment to a Combined Return within ten (10) business days after receipt of notification of such Adjustment from the applicable state Tax Authority. New U S WEST shall include in its notice to U S WEST a copy of the notification received from such Tax Authority. (i) AGREED ISSUES. New U S WEST will not enter into any agreement with a state Tax Authority as agent for U S WEST with respect to any Adjustment in connection with a Combined Return without the written consent of U S WEST in such cases 15 where the MediaOne Group would be liable for more than 50% of the proposed Tax Liability (as allocated under this Agreement) at issue. For purposes of this paragraph, all determinations shall be made separately for each Adjustment. (ii) UNAGREED ISSUES. In the event U S WEST and New U S WEST, as the case may be, do not agree to all Adjustments with respect to a Combined Return for a Taxable Year, decisions regarding the procedures and preferred forum for contesting Adjustments on unagreed issues shall be made by whichever of the MediaOne Group or the New U S WEST Group is responsible for more than 50% of the cumulative Tax Liability attributable to such Adjustments. The party making the decision shall consult in good faith with the other party and shall promptly notify the other party of its decision. (f) STATE REFUND CLAIMS. If the New U S WEST Group desires to file a claim for Refund with respect to a Taxable Year for which it filed a Combined Return, it shall prepare and submit to U S WEST the claim for Refund and a statement specifying the date on which the statute of limitations for filing the Refund claim will expire. U S WEST will file the Refund claim prior to the date specified if such filing is commercially reasonable and will take any other appropriate action at New U S WEST's request necessary to secure the Refund. (g) STATE TAX LITIGATION. Subject to the balance of this Section 5.4(g), U S WEST and New U S WEST jointly shall conduct all Proceedings relating to Adjustments of the MediaOne Group and the New U S WEST Group allocated under this Agreement in connection with a Combined Return. U S WEST shall have the ability to control the conduct of such Proceedings with respect to issues relating to an Adjustment for which the MediaOne Group would be liable for more than 50% of the proposed Tax Liability (as allocated under this Agreement) attributable to such Adjustment. New U S WEST shall have the ability to control the conduct of such Proceedings with respect to issues relating to an Adjustment for which the New U S WEST Group would be liable for more than 50% of the proposed Tax Liability (as allocated under this Agreement) attributable to such Adjustment. The party with the ability to control the conduct of all or a portion of the Proceedings pursuant to this Section 5.4(g) shall consult in good faith with the other party, which other party shall be entitled to participate in all conferences, meetings, and other matters related to the resolution of such Proceedings. 5.5 SEPARATE RETURN MATTERS. The New U S WEST Group and the MediaOne Group will be responsible for and manage their respective Separate Return Proceedings. 5.6 PAYMENT OF COSTS. All costs incurred, whether external or internal (such as in-house tax and legal department salaries and other personnel), with respect to a Proceeding 16 shall be borne by the party with respect to which the costs relate. All other costs relating to Tax Returns or Proceedings not otherwise provided for in this Agreement shall be allocated 50% to the New U S WEST Group and 50% to the MediaOne Group. ARTICLE VI MISCELLANEOUS 6.1 COVENANTS RELATING TO RULING REQUEST. (a) U S WEST AND THE MEDIAONE GROUP. (i) U S WEST shall comply and shall cause the MediaOne Group to comply with and otherwise not take any action inconsistent with each representation and statement made to the IRS in connection with the Ruling Request and (ii) until two (2) years after the Separation Date, U S WEST will remain engaged in the active conduct of a trade or business, as defined in Section 355(b) of the Code. (b) NEW U S WEST AND THE NEW U S WEST GROUP. (i) New U S WEST shall comply and shall cause the New U S WEST Group to comply with and otherwise not take any action inconsistent with each representation and statement made to the IRS in connection with the Ruling Request and (ii) until two (2) years after the Separation Date, New U S WEST will remain engaged in the active conduct of a trade or business, as defined in Section 355(b) of the Code. 6.2 TERMINATION OF PRIOR TAX SHARING AGREEMENTS. This Agreement shall take effect on the Separation Date and shall replace all other agreements, whether or not written, in respect of any Taxes between or among the MediaOne Group on the one hand and the New U S WEST Group on the other. All such replaced agreements shall be canceled as of the Separation Date to the extent they relate to the New U S WEST Group, and any rights or obligations of the MediaOne Group or the New U S WEST Group existing thereunder thereby shall be fully and finally settled without any payment by any party thereto. 6.3 MERGER OR CONSOLIDATION. Neither New U S WEST nor U S WEST (in either case, the "Transaction Party") shall (i) consolidate with or merge into any Person or permit any Person to consolidate with or merge into the Transaction Party (other than a merger or consolidation in which the Transaction Party is the surviving or continuing corporation) or (ii) sell, assign, transfer, lease or otherwise dispose of, in one transaction or a series of related transactions, all or substantially all of the assets of the Transaction Party, unless the resulting, surviving or transferee Person shall expressly assume, by instrument in 17 form and substance reasonably satisfactory to the other party, all of the obligations of the Transaction Party under this Agreement. 6.4 SUBSIDIARIES. Each of the parties hereto shall cause to be performed, and hereby guarantees the performance of, all actions, agreements and obligations set forth herein to be performed by any Subsidiary of such party or by any entity that is contemplated to be a Subsidiary (as defined in the Separation Agreement) of such party on or after the Separation Date. 6.5 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of Colorado, without reference to choice of law principles, including matters of construction, validity and performance. 6.6 AMENDMENT. This Agreement may be amended, modified or supplemented only by a written Agreement signed by all of the parties hereto. 6.7 NOTICES. Notices, requests, permissions, waivers, referrals and all other communications hereunder shall be in writing and shall be deemed to have been duly given if signed by the respective persons giving them (in the case of any corporation, the signature shall be by an officer thereof) and delivered by hand or by telecopy or on the date of receipt indicated on the return receipt if mailed (registered or certified, return receipt requested, properly addressed and postage prepaid): If to U S WEST, to: U S WEST, Inc. (to be renamed "MEDIAONE GROUP, INC.") 188 Inverness Drive West Englewood, Colorado 80112 Attention: Director of Taxes Telephone: 303- Telecopy: 303- 18 If to New U S WEST, to: USW-C, Inc. (to be renamed "U S WEST, INC.") 6300 South Syracuse Way Suite 700 North Englewood, Colorado 80111 Attention: Director of Taxes Telephone: 303-850-3900 Telecopy: 303-850-3959 Such names and addresses may be changed by notice given in accordance with this Section 6.7. 6.8 ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein, and supersedes and cancels all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matter. 6.9 HEADINGS; REFERENCES. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All references herein to "Articles" or "Sections" shall be deemed to be references to Articles or Sections hereof unless otherwise indicated. 6.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts and each counterpart shall be deemed to be an original, but all of which shall constitute one and the same original. 6.11 PARTIES IN INTEREST; ASSIGNMENT; SUCCESSOR. Neither this Agreement nor any of the rights, interest or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement shall inure to the benefit of and be binding upon U S WEST and New U S WEST and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement. 6.12 CONFIDENTIALITY. Each of New U S WEST and U S WEST shall hold, and each of the New U S WEST Group and the MediaOne Group shall use its reasonable best 19 efforts to hold, in strict confidence all information concerning the other party obtained by it prior to the Separation Date or furnished to it by such other party pursuant to this Agreement pursuant to and in accordance with the terms of Section 10.5 of the Separation Agreement. 6.13 ARBITRATION. Resolution of any and all disputes arising from or in connection with this Agreement, whether based on contract, tort, statute or otherwise, including, but not limited to, disputes over arbitrability and disputes in connection with claims by third parties shall be exclusively governed by and settled in accordance with the provisions of Section 12.2 of the Separation Agreement, provided, however, that nothing contained in Section 12.2 of the Separation Agreement shall preclude either party from seeking or obtaining injunctive relief or equitable or other judicial relief to enforce such Section 12.2, or, pending resolution of Disputes (as defined in the Separation Agreement) under such Section, to preserve the status quo or to enforce an arbitral award rendered pursuant to such Section. 6.14 SEVERABILITY; ENFORCEMENT. The invalidity of any portion hereof shall not affect the validity, force or effect of the remaining portions hereof. If it is ever held that any restriction hereunder is too broad to permit enforcement of such restriction to its fullest extent, each party agrees that a court of competent jurisdiction may enforce such restriction to the maximum extent permitted by law, and each party hereby consents and agrees that such scope may be judicially modified accordingly in any proceeding brought to enforce such restriction. 6.16 EFFECTIVE DATE. This Agreement shall become effective only upon the occurrence of the Separation. IN WITNESS WHEREOF, each of the Parties has caused this Tax Sharing Agreement to be executed on its behalf by its officers thereunto duly authorized, all as of the day and year first written above. U S WEST, Inc. By: ------------------------------------- Name: Title: USW-C, Inc. 20 By: ------------------------------------- Name: Title: 21 EX-3.B 5 EXHIBIT 3-B EXHIBIT 3-B BYLAWS OF U S WEST, INC. AS ADOPTED ON NOVEMBER 1, 1995 AND AMENDED ON MARCH 13, 1998 BYLAWS OF U S WEST, INC. ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of U S WEST, Inc. (the "Corporation") in the State of Delaware shall be at 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801 and its registered agent at such address shall be The Corporation Trust Company, or such other office or agent as the Board of Directors of the Corporation (the "Board") shall from time to time select. SECTION 2. OTHER OFFICES. The Corporation may also have an office or offices, and keep the books and records of the Corporation, except as may otherwise be required by law, at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETING. All meetings of the stockholders of the Corporation shall be held at the office of the Corporation or at such other places, within or without the State of Delaware, as may from time to time be fixed by the Board. SECTION 2. ANNUAL MEETINGS. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on the first Friday of June in each year, or on such other date that the Board or its authorized designee shall determine, at an hour to be named in the notice of the meeting, unless such day should fall on a legal holiday in the state where such meeting is to be held, in which event the meeting shall be held on the next succeeding business day that is not a legal holiday. Any previously scheduled annual meeting of the stockholders may be postponed by action of the Board or its authorized designee taken prior to the time previously scheduled for such annual meeting of stockholders. SECTION 3. SPECIAL MEETINGS. Except as otherwise required by law or the Certificate of Incorporation of the Corporation (the "Certificate"), special meetings of the 2 stockholders for any purpose or purposes may be called by the Chairman of the Board or a majority of the entire Board. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting. SECTION 4. NOTICE OF MEETINGS. Except as otherwise provided by law, written notice of each meeting of the stockholders, whether annual or special, shall be given, either by personal delivery or by mail, not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to notice of the meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Each such notice shall state the place, date and hour of the meeting, and the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy without protesting, prior to or at the commencement of the meeting, the lack of proper notice to such stockholder, or who shall sign a written waiver of notice thereof, whether before or after such meeting. Notice of adjournment of a meeting of stockholders need not be given if the time and place to which it is adjourned are announced at such meeting, unless the adjournment is for more than 30 days or, after adjournment, a new record date is fixed for the adjourned meeting. SECTION 5. QUORUM. Except as otherwise provided by law or by the Certificate, the holders of a majority of the votes entitled to be cast by the stockholders entitled to vote generally, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders; PROVIDED, HOWEVER, that in the case of any vote to be taken by classes, the holders of a majority of the votes entitled to be cast by the stockholders of a particular class shall constitute a quorum for the transaction of business by such class. SECTION 6. ADJOURNMENTS. The chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders who are present in person or by proxy may adjourn the meeting from time to time whether or not a quorum is present. In the event that a quorum does not exist with respect to any vote to be taken by a particular class, the chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders of such class who are present in person or by proxy may adjourn the meeting with respect to the vote(s) to be taken by such class. At such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 7. ORDER OF BUSINESS. (a) At each meeting of the stockholders, the Chairman of the Board or, in the absence of the Chairman of the Board, such person as shall be selected by the Board shall act as chairman of the meeting. The order of business at each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, 3 restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. (b) At any annual meeting of stockholders, only such business shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting, (ii) pursuant to the notice provided for in this Section 4 of this Article II or (iii) by any stockholder who is a holder of record at the time of the giving of such notice provided for in this Section 7, who is entitled to vote at the meeting and who complies with the procedures set forth in this Section 7. (c) For business properly to be brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation (the "Secretary"). To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 90 days prior to the date of an annual meeting of stockholders. (Amended 8-2-96) To be in proper written form, a stockholder's notice to the Secretary shall set forth in writing as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address of the stockholder proposing such business and all persons or entities acting in concert with the stockholder; (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder and all persons or entities acting in concert with such stockholder; and (iv) any material interest of the stockholder in such business. The foregoing notice requirements shall be deemed satisfied by a stockholder if the stockholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such stockholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; PROVIDED, HOWEVER, that if such stockholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 7. The chairman of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the annual meeting in accordance with the provisions of this Section 7 and, if the chairman should so determine, the chairman shall so declare to the annual meeting and any such business not properly brought before the annual meeting shall not be transacted. SECTION 8. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or other officer who has charge of the stock ledger to prepare and make, at least 10 days before each meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in such stockholder's name. Such list shall be produced and kept available at the times and places required by law. 4 SECTION 9. VOTING. (a) Except as otherwise provided by law or by the Certificate, each stockholder of record of any class or series of capital stock of the Corporation shall be entitled at each meeting of stockholders to such number of votes for each share of such stock as may be fixed in the Certificate or in the resolution or resolutions adopted by the Board providing for the issuance of such stock, registered in such stockholder's name on the books of the Corporation: (1) on the date fixed pursuant to Section 6 of Article VII of these bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting; or (2) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) Each stockholder entitled to vote at any meeting of stockholders may authorize not in excess of three persons to act for such stockholder by proxy. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated for holding such meeting. No such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. (c) At each meeting of the stockholders, all corporate actions to be taken by vote of the stockholders (except as otherwise required by law and except as otherwise provided in the Certificate or these bylaws) shall be authorized by a majority of the votes cast by the stockholders entitled to vote thereon who are present in person or represented by proxy, and where a separate vote by class is required, a majority of the votes cast by the stockholders of such class who are present in person or represented by proxy shall be the act of such class. (d) Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter, including the election of directors, need not be by written ballot. In the case of a vote by written ballot, each ballot shall be signed by the stockholder voting, or by such stockholder's proxy. SECTION 10. INSPECTORS. The chairman of the meeting shall appoint one or more inspectors to act at any meeting of stockholders. Such inspectors shall perform such duties as shall be specified by the chairman of the meeting. Inspectors need not be stockholders. No director or nominee for the office of director shall be appointed such inspector. 5 ARTICLE III BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate directed or required to be exercised or done by the stockholders. SECTION 2. NUMBER, QUALIFICATION AND ELECTION. (a) Except as otherwise fixed by or pursuant to the provisions of Article V of the Certificate relating to the rights of the holders of any class or series of stock having preference over the common stock of the corporation as to dividends or upon liquidation, the number of directors of the Corporation shall be determined from time to time by the Board by the affirmative vote of directors constituting at least a majority of the entire Board; provided that the number thereof may not be less than six nor more than seventeen. (b) The directors, other than those who may be elected by the holders of shares of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation pursuant to the terms of Article V of the Certificate or any resolution or resolutions providing for the issuance of such stock adopted by the Board, shall be classified, with respect to the time for which they severally hold office, into three classes as nearly equal in number as possible, with each class to hold office until its successors are elected and qualified. Subject to the rights of the holders of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation, at each such annual meeting of the stockholders, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. (c) Each director shall be at least 21 years of age. Directors need not be stockholders of the Corporation. (d) In any election of directors held at a meeting of stockholders, the persons receiving a plurality of the votes cast by the stockholders entitled to vote thereon at such meeting who are present or represented by proxy, up to the number of directors to be elected in such election, shall be deemed elected. SECTION 3. NOTIFICATION OF NOMINATION. Subject to the rights of the holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board or by any stockholder who is a stockholder of record at the time of giving of the notice of nomination provided for in this Section 3 of this Article III and who is entitled to vote for the election of directors. Any stockholder of record entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if timely written notice of such stockholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage 6 prepaid, to the Secretary. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation (i) with respect to an election to be held at an annual meeting of stockholders, not less than 60 days prior to the date of such annual meeting and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, not less than 15 days following the public announcement of the date of such special meeting. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination, of all persons or entities acting in concert with the stockholder, and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or entities acting in concert with the stockholder (naming such person or entities) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by the stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; (e) the class and number of shares of the Corporation that are beneficially owned by the stockholder and all persons or entities acting in concert with the stockholder; and (f) the consent of each nominee to being named in a proxy statement as nominee and to serve as a director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made after compliance with the foregoing procedure. Only such persons who are nominated in accordance with the procedures set forth in this Section 3 of this Article III shall be eligible to serve as directors of the Corporation. SECTION 4. QUORUM AND MANNER OF ACTING. Except as otherwise provided by law, the Certificate or these bylaws, a majority of the entire Board shall constitute a quorum for the transaction of business at any meeting of the Board, and, except as so provided, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. The chairman of the meeting or a majority of the directors present may adjourn the meeting to another time and place whether or not a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 5. PLACE OF MEETING. The Board may hold its meetings at such place or places within or without the State of Delaware as the Board may from time to time determine or as shall be specified or fixed in the respective notice or waivers of notice thereof. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board shall be held at such times and places as the Chairman of the Board or the Board shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday under the laws of the place where the meeting is to be held, the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. 7 SECTION 7. SPECIAL MEETINGS. Special meetings of the Board shall be held whenever called by the Chairman of the Board or by a majority of the directors. SECTION 8. NOTICE OF MEETINGS. Notice of regular meetings of the Board or of any adjourned meeting thereof need not be given. Notice of each special meeting of the Board shall be given by overnight delivery service or mailed to each director, in either case addressed to such director at such director's residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such director at such place by telegraph or telecopy or be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any director who shall, either before or after the meeting, submit a signed waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to such director. Every such notice shall state the time and place but need not state the purpose of the meeting. SECTION 9. RULES AND REGULATIONS. The Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these bylaws for the conduct of its meetings and management of the affairs of the Corporation as the Board may deem proper. SECTION 10. PARTICIPATION IN MEETING BY MEANS OF COMMUNICATION EQUIPMENT. Any one or more members of the Board or any committee thereof may participate in any meeting of the Board or of any such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting if all of the members of the Board or of any such committee consent thereto in writing and the writing or writings are filed with the minutes or proceedings of the Board or of such committee. SECTION 12. RESIGNATIONS. Any director of the Corporation may at any time resign by giving written notice to the Board, the Chairman of the Board, the President or the Secretary. Such resignation shall take effect at the time specified therein or, if the time be not specified therein, upon receipt thereof; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 13. REMOVAL OF DIRECTORS. Directors may be removed only as provided in Section 5 of Article VI of the Certificate. 8 SECTION 14. VACANCIES. Subject to the rights of the holders of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation, any vacancies on the Board resulting from death, resignation, removal or other cause shall only be filled by the Board by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors shall be filled by the Board, or if not so filled, by the stockholders at the next annual meeting thereof or at a special meeting called for that purpose in accordance with Section 3 of Article II of these bylaws. Any director elected in accordance with the preceding sentence of this Section 14 of this Article III shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. SECTION 15. COMPENSATION. Each director, in consideration of such person serving as a director, shall be entitled to receive from the Corporation such amount per annum and such fees for attendance at meetings of the Board or of committees of the Board, or both, as the Board shall from time to time determine. In addition, each director shall be entitled to receive from the Corporation reimbursement for the reasonable expenses incurred by such person in connection with the performance of such person's duties as a director. Nothing contained in this Section 15 of this Article III shall preclude any director from serving the Corporation or any of its subsidiaries in any other capacity and receiving proper compensation therefor. ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS SECTION 1. ESTABLISHMENT OF COMMITTEES OF THE BOARD OF DIRECTORS; ELECTION OF MEMBERS OF COMMITTEES OF THE BOARD OF DIRECTORS; FUNCTIONS OF COMMITTEES OF THE BOARD OF DIRECTORS. The Board may, in accordance with and subject to the General Corporation Law of the State of Delaware, from time to time establish committees of the Board to exercise such powers and authorities of the Board, and to perform such other functions, as the Board may from time to time determine. SECTION 2. PROCEDURE; MEETINGS; QUORUM. Regular meetings of committees of the Board, of which no notice shall be necessary, may be held at such times and places as shall be fixed by resolution adopted by a majority of the members thereof. Special meetings of any committee of the Board shall be called at the request of a majority of the members thereof. Notice of each special meeting of any committee of the Board shall be given by overnight delivery service or mailed to each member, in either case addressed to such member at such member's residence or normal place of business, at least two days before the day on which the meeting is to be held or shall be sent to such members at such place by telegraph or telecopy or be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any member who shall, either before or after the meeting, submit a signed waiver of such notice or 9 who shall attend such meeting without protesting, prior to it or at its commencement, the lack of such notice to such member. Any special meeting of any committee of the Board shall be a legal meeting without any notice thereof having been given, if all the members thereof shall be present thereat. Notice of any adjourned meeting of any committee of the Board need not be given. Any committee of the Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these bylaws for the conduct of its meetings as such committee of the Board may deem proper. A majority of the members of any committee of the Board shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the members thereof present at any meeting at which a quorum is present shall be the act of such committee. Each committee of the Board shall keep written minutes of its proceedings and shall report on such proceedings to the Board. ARTICLE V OFFICERS SECTION 1. NUMBER; TERM OF OFFICE. The officers of the Corporation shall be such officers, which may include a Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer, General Counsel and one or more Vice Presidents (including, without limitation, Assistant, Executive and Senior Vice Presidents) and a Treasurer, Secretary and Controller and such other officers or agents with such titles and such duties as the Board may from time to time determine, each to have such authority, functions or duties as provided in these bylaws or as the Board may from time to time determine, and each to hold office for such term as may be prescribed by the Board and until such person's successor shall have been chosen and shall qualify, or until such person's death or resignation, or until such person's removal in the manner hereinafter provided. One person may hold the offices and perform the duties of any two or more of said officers; PROVIDED, HOWEVER, that no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Certificate or these bylaws to be executed, acknowledged or verified by two or more officers. The Board may from time to time authorize any officer to appoint and remove any such other officers and agents and to prescribe their powers and duties. The Board may require any officer or agent to give security for the faithful performance of such person's duties. SECTION 2. REMOVAL. Any officer may be removed, either with or without cause, by the Board at any meeting thereof or, except in the case of any officer elected by the Board, by any superior officer upon whom such power may be conferred by the Board. SECTION 3. RESIGNATION. Any officer may resign at any time by giving notice to the Board, the Chairman of the Board or the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 10 SECTION 4. VACANCIES. A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term in the manner prescribed in these bylaws for election to such office. SECTION 5. CHAIRMAN OF THE BOARD; POWERS AND DUTIES. The Chairman of the Board shall be the chief executive officer of the Corporation. Subject to the control of the Board, the Chairman of the Board shall supervise and direct generally all the business and affairs of the Corporation. The Chairman of the Board shall preside at all meetings of the stockholders and the Board. Any document may be signed by the Chairman of the Board or any other person who may be thereunto authorized by the Board or the Chairman of the Board. The Chairman of the Board may appoint such assistant officers as are deemed necessary. SECTION 6. PRESIDENT, EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND VICE PRESIDENTS; POWERS AND DUTIES. The President shall be the chief operating officer of the Corporation. The President and each Executive Vice President, each Senior Vice President, and each Vice President shall have such powers and perform such duties as may be assigned by the Board of Directors or the Chairman of the Board. In case of the absence or disability of the Chairman of the Board or a vacancy in the office, the President, an Executive Vice President, a Senior Vice President, or a Vice President designated by the Chairman of the Board or the Board shall exercise all the powers and perform all the duties of the Chairman of the Board. SECTION 7. SECRETARY AND ASSISTANT SECRETARIES; POWERS AND DUTIES. The Secretary shall attend all meetings of the stockholders and the Board and shall keep the minutes for such meetings in one or more books provided for that purpose. The Secretary shall be custodian of the corporate records, except those required to be in the custody of the Treasurer or the Controller, shall keep the seal of the Corporation, and shall execute and affix the seal of the Corporation to all documents duly authorized for execution under seal on behalf of the Corporation, and shall perform all of the duties incident to the office of Secretary, as well as such other duties as may be assigned by the Chairman of the Board or the Board. The Assistant Secretaries shall perform such of the Secretary's duties as the Secretary shall from time to time direct. In case of the absence or disability of the Secretary or a vacancy in the office, an Assistant Secretary designated by the Chairman of the Board or by the Secretary, if the office is not vacant, shall perform the duties of the Secretary. SECTION 8. CHIEF FINANCIAL OFFICER; POWERS AND DUTIES. The Chief Financial Officer shall be responsible for maintaining the financial integrity of the Corporation, shall prepare the financial plans for the Corporation, and shall monitor the financial performance of the Corporation and its subsidiaries, as well as performing such other duties as may be assigned by the Chairman of the Board or the Board. 11 SECTION 9. TREASURER AND ASSISTANT TREASURERS; POWERS AND DUTIES. The Treasurer shall have care and custody of the funds and securities of the Corporation, shall deposit such funds in the name and to the credit of the Corporation with such depositories as the Treasurer shall approve, shall disburse the funds of the Corporation for proper expenses and dividends, and as may be ordered by the Board, taking proper vouchers for such disbursements. The Treasurer shall perform all of the duties incident to the office of Treasurer, as well as such other duties as may be assigned by the Chairman of the Board or the Board. The Assistant Treasurers shall perform such of the Treasurer's duties as the Treasurer shall from time to time direct. In case of the absence or disability of the Treasurer or a vacancy in the office, an Assistant Treasurer designated by the Chairman of the Board or by the Treasurer, if the office is not vacant, shall perform the duties of the Treasurer. SECTION 10. GENERAL COUNSEL; POWERS AND DUTIES. The General Counsel shall be a licensed attorney at law and shall be the chief legal officer of the Corporation. The General Counsel shall have such power and exercise such authority and provide such counsel to the Corporation as deemed necessary or desirable to enforce the rights and protect the property and integrity of the Corporation, shall also have the power, authority, and responsibility for securing for the Corporation all legal advice, service, and counseling, and shall perform all of the duties incident to the office of General Counsel, as well as such other duties as may be assigned by the Chairman of the Board or the Board. SECTION 11. CONTROLLER AND ASSISTANT CONTROLLERS; POWERS AND DUTIES. The Controller shall be the chief accounting officer of the Corporation and shall keep and maintain in good and lawful order all accounts required by law and shall have sole control over, and ultimate responsibility for, the accounts and accounting methods of the Corporation and the compliance of the Corporation with all systems of accounts and accounting regulations prescribed by law. The Controller shall audit, to such extent and at such times as may be required by law or as the Controller may think necessary, all accounts and records of corporate funds or property, by whomsoever kept, and for such purposes shall have access to all such accounts and records. The Controller shall make and sign all necessary and proper accounting statements and financial reports of the Corporation, and shall perform all of the duties incident to the office of Controller, as well as such other duties as may be assigned by the Chairman of the Board or the Board. The Assistant Controllers shall perform such of the Controller's duties as the Controller shall from time to time direct. In case of the absence or disability of the Controller or a vacancy in the office, an Assistant Controller designated by the Chairman of the Board or the Controller, if the office is not vacant, shall perform the duties of the Controller. SECTION 12. SALARIES. The salaries of all officers of the Corporation shall be fixed by or in the manner provided by the Board. If authorized by a resolution of the Board, the salary of any officer other than the Chairman of the Board may be fixed by the Chairman of the Board or a 12 Committee of the Board. No officer shall be disqualified from receiving a salary by reason of also being a director of the Corporation. ARTICLE VI INDEMNIFICATION SECTION 1. SCOPE OF INDEMNIFICATION. (a) The Corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise, by reason of the fact that such person is or was serving in an indemnified capacity, except to the extent that any such indemnification against a particular liability is expressly prohibited by applicable law or where a judgment or other final adjudication adverse to the indemnified representative establishes, or where the Corporation determines, that his or her acts or omissions (i) were in breach of such person's duty of loyalty to the Corporation or its stockholders, (ii) were not in good faith or involved intentional misconduct or a knowing violation of law, or (iii) resulted in receipt by such person of an improper personal benefit. The rights granted by this Article shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution, or advancement of expenses may be entitled under any statute, certificate of incorporation, agreement, contract of insurance, vote of stockholders or disinterested directors, or otherwise. The rights of indemnification and advancement of expenses provided by or granted pursuant to this Article shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. (b) If an indemnified representative is not entitled to indemnification with respect to a portion of any liabilities to which such person may be subject, the Corporation shall nonetheless indemnify such indemnified representative to the maximum extent for the remaining portion of the liabilities. (c) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the indemnified representative is not entitled to indemnification. (d) To the extent permitted by law, the payment of indemnification provided for by this Article, including the advancement of expenses pursuant to Section 2 of this Article VI, with respect to proceedings other than those brought by or in the right of the Corporation, shall be subject to the conditions that the indemnified representative shall give the Corporation prompt notice of any proceeding, that the Corporation shall have complete charge of the defense of such proceeding and the right to select counsel for the indemnified representative, and that the indemnified representative shall assist and cooperate fully in all matters respecting the proceeding and its defense or settlement. The Corporation may waive any or all of the conditions set forth in the preceding sentence. Any such waiver shall be applicable only to the specific payment for which the waiver is made and shall not in any way obligate the Corporation to grant such waiver at any 13 future time. In the event of a conflict of interest between the indemnified representative and the Corporation that would disqualify the Corporation's counsel from representing the indemnified representative under the rules of professional conduct applicable to attorneys, it shall be the policy of the Corporation to waive any or all of the foregoing conditions subject to such limitations or conditions as the Corporation shall deem to be reasonable in the circumstances. (e) For purposes of this Article: (1) "indemnified capacity" means any and all past, present, or future services by an indemnified representative in one or more capacities as a director, officer, employee, or agent of the Corporation or, at the request of the Corporation, as a director, officer, employee, agent, fiduciary, or trustee of another corporation, partnership, joint venture, trust, employee benefit plan, or other entity or enterprise; any indemnified representative serving an affiliate of the Corporation in any capacity shall be deemed to be doing so at the request of the Corporation; (2) an "affiliate of the Corporation" means an entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the Corporation; (3) "indemnified representative" means any and all directors, officers, and employees of the Corporation and any other person designated as an indemnified representative by the Board; (4) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damage, excise tax assessed with respect to an employee benefit plan, or cost or expense of any nature (including, without limitation, expert witness fees, costs of investigation, litigation and appeal costs, attorneys' fees, and disbursements); and (5) "proceeding" means any threatened, pending, or completed action, suit, appeal, or other proceeding of any nature, whether civil, criminal, administrative, or investigative, whether formal or informal, whether external or internal to the Corporation, and whether brought by or in the right of the Corporation, a class of its security holders or otherwise. SECTION 2. ADVANCING EXPENSES. All reasonable expenses incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 1 of this Article VI shall be advanced to the indemnified representative by the Corporation. Before making any such advance payment of expenses, the Corporation shall receive an undertaking by or on behalf of the indemnified representative to repay such amount if it shall ultimately be determined that such indemnified representative is not entitled to be indemnified by the Corporation pursuant to this Article VI. No advance shall be made by the Corporation if a determination is reasonably and promptly made by a majority vote of disinterested directors, even if the disinterested directors constitute less than a quorum, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs) by independent legal counsel in a written opinion, that, based upon the facts known to the Board or counsel at the time such 14 determination is made, the indemnified representative has acted in such a manner as to permit or require the denial of indemnification pursuant to the provisions of Section 1 of this Article VI. ARTICLE VII CAPITAL STOCK SECTION 1. SHARE OWNERSHIP. (a) Holders of shares of stock of each class of the Corporation shall be recorded on the books of the Corporation and ownership of such stock shall be evidenced by a certificate or other form as shall be approved by the Board. Certificates representing shares of stock of each class shall be signed by, or in the name of, the Corporation by the Chairman of the Board or the President, any Vice President and by the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the Corporation, and sealed with the seal of the Corporation, which may be a facsimile thereof. Any or all such signatures may be facsimiles if countersigned by a transfer agent or registrar. Although any officer, transfer agent or registrar whose manual or facsimile signature is affixed to such a certificate ceases to be such officer, transfer agent or registrar before such certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still such at the date of its issue. (b) The stock ledger and blank share certificates shall be kept by the Secretary or by a transfer agent or by a registrar or by any other officer or agent designated by the Board. SECTION 2. TRANSFER OF SHARES. Transfers of shares of stock of each class of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by such holder's attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary or a transfer agent for such stock, if any, and on surrender of the certificate or certificates, if any, for such shares properly endorsed or accompanied by a duly executed stock transfer power (or by proper evidence of succession, assignment or authority to transfer) and the payment of any taxes thereon; PROVIDED, HOWEVER, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. The person in whose name shares are registered on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; PROVIDED, HOWEVER, that whenever any transfer of shares shall be made for collateral security and not absolutely, and written notice thereof shall be given to the Secretary or to such transfer agent, such fact shall be stated in the entry of the transfer. No transfer of shares shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. 15 SECTION 3. REGISTERED STOCKHOLDERS AND ADDRESSES OF STOCKHOLDERS. (a) The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. (b) Each stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notices of meetings and all other corporate notices may be delivered or mailed to such person, and, if any stockholder shall fail to designate such address, corporate notices may be delivered to such person by mail directed to such person at such person's post office address, if any, as the same appears on the stock record books of the Corporation or at such person's last known post office address. SECTION 4. LOST, DESTROYED AND MUTILATED CERTIFICATES. The Corporation may issue to any holder of shares of stock the certificate for which has been lost, stolen, destroyed or mutilated a new certificate or certificates for shares, upon the surrender of the mutilated certificate or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction. The Board, or a committee designated thereby, or the transfer agents and registrars for the stock, may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or such person's legal representative, to give the Corporation a bond in such sum and with such surety or sureties as they may direct to indemnify the Corporation and said transfer agents and registrars against any claim that may be made on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 5. REGULATIONS. The Board may make such additional rules and regulations as it may deem expedient concerning the issue and transfer of certificates representing shares of stock of each class of the Corporation and may make such rules and take such action as it may deem expedient concerning the issue of certificates in lieu of certificates claimed to have been lost, destroyed, stolen or mutilated. SECTION 6. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment or any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER, that the Board may fix a new record date for the adjourned meeting. 16 SECTION 7. TRANSFER AGENTS AND REGISTRARS. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. ARTICLE VIII SEAL The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and the words and figures of "Corporate Seal Delaware", or such other words or figures as the Board may approve and adopt. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE IX FISCAL YEAR The fiscal year of the Corporation shall end on the 31st day of December in each year. ARTICLE X AMENDMENTS Any bylaw may be adopted, repealed, altered or amended by two-thirds of the entire Board at any meeting thereof. The stockholders of the Corporation shall have the power to amend, alter or repeal any provision of these bylaws only to the extent and in the manner provided in the Certificate. 17 EX-10.X 6 EXHIBIT 10.X ================================================================================ AGREEMENT AND PLAN OF MERGER among U S WEST, INC., U S WEST MEDIA GROUP, INC., U S WEST NEWVECTOR GROUP, INC., U S WEST PCS HOLDINGS, INC. and AIRTOUCH COMMUNICATIONS, INC. Dated as of January 29, 1998 ================================================================================ TABLE OF CONTENTS
PAGE(S) ------- ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . 1 1.1 General. . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Terms Defined Elsewhere in the Agreement . . . . . . . . 17 1.3 Other Definitional Provisions. . . . . . . . . . . . . . 19 ARTICLE II THE MERGER . . . . . . . . . . . . . . . . . . . . . . . 19 2.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . 19 2.3 Effective Time . . . . . . . . . . . . . . . . . . . . . 19 2.4 Effects of the Merger. . . . . . . . . . . . . . . . . . 19 2.5 Certificate of Incorporation and Bylaws. . . . . . . . . 20 2.6 Directors. . . . . . . . . . . . . . . . . . . . . . . . 20 2.7 Officers . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE III EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; CERTIFICATES . . . . . . . . . 20 3.1 Effect on Capital Stock. . . . . . . . . . . . . . . . . 20 3.2 Determination of Common Consideration. . . . . . . . . . 21 3.3 Post-Closing Adjustments to Merger Consideration . . . . 24 3.4 Surrender and Exchange . . . . . . . . . . . . . . . . . 26 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF U S WEST . . . . . . . 27 4.1 Organization and Qualification . . . . . . . . . . . . . 27 4.2 Capitalization; Subsidiaries . . . . . . . . . . . . . . 27 4.3 Corporate Authority. . . . . . . . . . . . . . . . . . . 29 4.4 Consents and Approvals . . . . . . . . . . . . . . . . . 30 4.5 Non-Contravention. . . . . . . . . . . . . . . . . . . . 30 4.6 Financial Statements; Undisclosed Liabilities. . . . . . 31 4.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . 32 4.8 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 33 4.9 ERISA Compliance . . . . . . . . . . . . . . . . . . . . 35 4.10 Compliance with Laws . . . . . . . . . . . . . . . . . . 35 4.11 Employment and Non-Competition Agreements. . . . . . . . 35 4.12 Domestic Wireless Assets . . . . . . . . . . . . . . . . 36 4.13 Intellectual Property. . . . . . . . . . . . . . . . . . 36 4.14 Labor Matters. . . . . . . . . . . . . . . . . . . . . . 37 4.15 Environmental Compliance and Liabilities . . . . . . . . 37 4.16 Licenses . . . . . . . . . . . . . . . . . . . . . . . . 38 4.17 Material Contracts . . . . . . . . . . . . . . . . . . . 38 4.18 Insurance. . . . . . . . . . . . . . . . . . . . . . . . 39 4.19 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 39 4.20 Nature of Acquisition. . . . . . . . . . . . . . . . . . 39 4.21 Ownership of AirTouch Capital Stock. . . . . . . . . . . 40 ARTICLE V REPRESENTATIONS AND WARRANTIES OF AIRTOUCH . . . . . . . 40 5.1 Organization and Qualification . . . . . . . . . . . . . 40 5.2 Capitalization . . . . . . . . . . . . . . . . . . . . . 40 5.3 Corporate Power and Authorization. . . . . . . . . . . . 41 -i- 5.4 Consents . . . . . . . . . . . . . . . . . . . . . . . . 42 5.5 Non-Contravention. . . . . . . . . . . . . . . . . . . . 42 5.6 AirTouch SEC Documents; Undisclosed Liabilities. . . . . 42 5.7 Litigation . . . . . . . . . . . . . . . . . . . . . . . 43 5.8 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 44 5.9 Compliance with Laws . . . . . . . . . . . . . . . . . . 44 5.10 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . 44 ARTICLE VI COVENANTS RELATING TO CONDUCT OF BUSINESS. . . . . . . . 45 6.1 Conduct of Business of NV and PCS Holdings. . . . . . . 45 6.2 Conduct of Business of AirTouch. . . . . . . . . . . . . 46 6.3 Access to Information. . . . . . . . . . . . . . . . . . 50 ARTICLE VII ADDITIONAL AGREEMENTS. . . . . . . . . . . . . . . . . . 51 7.1 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . 51 7.2 Reasonable Best Efforts. . . . . . . . . . . . . . . . . 51 7.3 Antitrust Notification; FCC and State Regulatory Approvals. . . . . . . . . . . . . . . . . . . . . . . . 52 7.4 Supplemental Disclosure. . . . . . . . . . . . . . . . . 52 7.5 Announcements. . . . . . . . . . . . . . . . . . . . . . 52 7.6 NYSE Listing . . . . . . . . . . . . . . . . . . . . . . 53 7.7 Settlements for Cash Collections and Disbursements After the Effective Time . . . . . . . . . . . . . . . . 53 7.8 Use of U S WEST Name . . . . . . . . . . . . . . . . . . 54 7.9 Intellectual Property. . . . . . . . . . . . . . . . . . 54 7.10 Insurance. . . . . . . . . . . . . . . . . . . . . . . . 56 7.11 Third Party Rights . . . . . . . . . . . . . . . . . . . 57 7.12 Intercompany Agreements. . . . . . . . . . . . . . . . . 57 7.13 Joint Agreements; Joint Assets . . . . . . . . . . . . . 58 7.14 Transaction Agreements . . . . . . . . . . . . . . . . . 60 7.15 Undertakings with respect to Scheduled Properties. . . . 60 7.16 Pre-Closing Capital Contributions to PCS Nucleus by AirTouch . . . . . . . . . . . . . . . . . . . . . . . . 61 7.17 Assumption of Guarantee Obligations with respect to Leveraged Leases . . . . . . . . . . . . . . . . . . . . 61 7.18 Repayment of Assumed NV Debt and Assumed PCS Debt. . . . 61 7.19 AirTouch Class D and Class E Preferred Stock . . . . . . 61 ARTICLE VIII EMPLOYEE MATTERS . . . . . . . . . . . . . . . . . . . . 61 8.1 Employees. . . . . . . . . . . . . . . . . . . . . . . . 61 8.2 Employee Benefit Plans and Arrangements. . . . . . . . . 62 8.3 Other Employee Matters . . . . . . . . . . . . . . . . . 62 8.4 Cooperation. . . . . . . . . . . . . . . . . . . . . . . 67 ARTICLE IX CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . 67 9.1 Conditions to Each Party's Obligations to Effect the Merger . . . . . . . . . . . . . . . . . . . . . . . . . 67 9.2 Conditions to Obligation of AirTouch . . . . . . . . . . 68 9.3 Conditions to Obligations of U S WEST, Media, NV and PCS Holdings . . . . . . . . . . . . . . . . . . . . . . 69 -ii- ARTICLE X TERMINATION AND AMENDMENT. . . . . . . . . . . . . . . . 70 10.1 Termination. . . . . . . . . . . . . . . . . . . . . . . 70 10.2 Effect of Termination. . . . . . . . . . . . . . . . . . 70 10.3 Amendment. . . . . . . . . . . . . . . . . . . . . . . . 70 10.4 Extension; Waiver. . . . . . . . . . . . . . . . . . . . 70 ARTICLE XI INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . 71 11.1 Indemnification by U S WEST. . . . . . . . . . . . . . . 71 11.2 Indemnification by AirTouch. . . . . . . . . . . . . . . 73 11.3 Procedures Relating to Indemnification . . . . . . . . . 75 11.4 Miscellaneous Indemnification Provisions . . . . . . . . 77 11.5 Contribution . . . . . . . . . . . . . . . . . . . . . . 78 11.6 Tax Indemnification. . . . . . . . . . . . . . . . . . . 78 11.7 Payments Adjustments to Merger Consideration . . . . . . 79 ARTICLE XII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . 79 12.1 Survival of Representations. . . . . . . . . . . . . . . 79 12.2 Legends. . . . . . . . . . . . . . . . . . . . . . . . . 79 12.3 Removal of Legends . . . . . . . . . . . . . . . . . . . 80 12.4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . 80 12.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . 80 12.6 Notices. . . . . . . . . . . . . . . . . . . . . . . . . 80 12.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . 81 12.8 Disclosure Schedules . . . . . . . . . . . . . . . . . . 82 12.9 Headings; References . . . . . . . . . . . . . . . . . . 82 12.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . 82 12.11 Parties in Interest; Assignment; Successors. . . . . . . 82 12.12 Severability . . . . . . . . . . . . . . . . . . . . . . 83 12.13 Enforcement. . . . . . . . . . . . . . . . . . . . . . . 84 12.14 Dispute Resolution . . . . . . . . . . . . . . . . . . . 84
Exhibit A-1 - Certificate of Designation, Preferences and Rights of AirTouch Class D Preferred Stock Exhibit A-2 - Certificate of Designation, Preferences and Rights of AirTouch Class E Preferred Stock Exhibit B - New Investment Agreement Exhibit C - Patent License Agreement Exhibit D - Software License Agreement Exhibit E - Tax Sharing Agreement Exhibit F - Calculation of Value Adjustment Exhibit G-1 - Form of AirTouch Representations Letter - NV Merger Exhibit G-2 - Form of AirTouch Representations Letter - PCS Merger Exhibit H-1 - Form of U S WEST Representations Letter - NV Merger Exhibit H-2 - Form of U S WEST Representations Letter - PCS Merger Exhibit I - Resources Agreement Exhibit J - Exceptions to Restrictions on Non-Solicitation Exhibit K-1 - Form of MediaCo Assignment and Assumption Agreement -iii- Exhibit K-2 - Form of CommunicationsCo Assignment and Assumption Agreement Exhibit K-3 - Form of NV/PCS Transferee Assignment and Assumption Agreement
-iv- AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of January 29, 1998, among U S WEST, INC., a Delaware corporation ("U S WEST"), U S WEST MEDIA GROUP, INC., a Delaware corporation and wholly owned direct subsidiary of U S WEST ("Media"), U S WEST NEWVECTOR GROUP, INC., a Colorado corporation and wholly owned direct subsidiary of Media ("NV"), U S WEST PCS HOLDINGS, INC., a Delaware corporation and wholly owned direct subsidiary of Media ("PCS Holdings"), and AIRTOUCH COMMUNICATIONS, INC., a Delaware corporation ("AirTouch"). W I T N E S S E T H: WHEREAS, the Boards of Directors of U S WEST, Media, NV and AirTouch each have determined that it is in the best interests of their respective stockholders for NV to merge with and into AirTouch (the "NV Merger"); WHEREAS, the Boards of Directors of U S WEST, Media, PCS Holdings and AirTouch each have determined that it is in the best interests of their respective stockholders for PCS Holdings to merge with and into AirTouch (the "PCS Holdings Merger," and collectively with the NV Merger, the "Merger"); WHEREAS, Media, as sole shareholder of NV and PCS Holdings, has approved the Merger; WHEREAS, for United States Federal income tax purposes, it is intended that the NV Merger and the PCS Merger each shall qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended, together with the rules and regulations promulgated thereunder (the "Code"); and WHEREAS, U S WEST, Media, NV, PCS Holdings and AirTouch desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger. NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 GENERAL. For purposes of this Agreement, the following terms shall have the meanings set forth below: "ACTION" shall mean any action, claim, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or any arbitration tribunal. -1- "AFFECTED EMPLOYEES" shall mean the employees of NV and the Domestic Wireless Subsidiaries and PCS Employees, including those employees among them who are absent from employment due to illness, injury, military service or other authorized absence and those employees who are disabled within the meaning of the short-term disability plans currently applicable to NV and the Domestic Wireless Subsidiaries; PROVIDED, HOWEVER, that "Affected Employees" shall not include (i) employees who are disabled within the meaning of the long-term disability plans currently applicable to the NV and the Domestic Wireless Subsidiaries, (ii) former employees and (iii) retired employees. "AFFILIATE" shall mean, with respect to any specified Person, any other Person directly or indirectly controlling, controlled by or under common control with such specified Person. "AGREED VALUE" shall mean, for a class or series of capital stock, on any applicable date, the average of the daily Volume-Weighted Average Trading Prices per share of such class or series of capital stock for the ten consecutive Trading Days beginning on the 40th Trading Day following the issuance of such class or series of capital stock; PROVIDED, HOWEVER, that if the Closing Date were to occur prior to the end of such ten consecutive Trading Day period, such period shall commence on the 15th Trading Day immediately preceding the Closing Date. "AGREEMENT" shall mean this Agreement and Plan of Merger, together with all exhibits and schedules hereto, as the same may be amended from time to time in accordance with the terms hereof. "AIRTOUCH" shall have the meaning set forth in the preamble to this Agreement. "AIRTOUCH CLASS D PREFERRED STOCK" shall mean the AirTouch Class D Preferred Stock, par value $.01 per share, to be issued pursuant to the Certificate of Designation, Preferences and Rights attached hereto as Exhibit A-1. "AIRTOUCH CLASS E PREFERRED STOCK" shall mean the AirTouch Class E Preferred Stock, par value $.01 per share, to be issued pursuant to the Certificate of Designation, Preferences and Rights attached hereto as Exhibit A-2. "AIRTOUCH DETERMINATION PRICE" shall mean the average of the Volume-Weighted Average Trading Prices of AirTouch Common Stock for the 30 consecutive Trading Days (the "Averaging Period") ending on the fifth Trading Day immediately prior to the Closing Date, rounded to the nearest one-hundred thousandth (or if there shall not be a nearest one-hundred thousandth, to the next higher one-hundred thousandth); PROVIDED THAT if the Board of Directors of AirTouch declares a dividend (other than dividends for which adjustments have been provided pursuant to Section 3.2) on the outstanding shares of AirTouch Common Stock having a record date before the Effective Time and an ex-dividend date (based on -2- "regular way" trading on the NYSE of shares of AirTouch Common Stock) (the "Ex-Date") that occurs during the Averaging Period, then for purposes of computing the AirTouch Determination Price, the Volume-Weighted Average Trading Price on any Trading Day before the Ex-Date will be adjusted by subtracting therefrom the amount of such dividend. "AIRTOUCH GROUP" shall mean, at and after the Effective Time, AirTouch, the Domestic Wireless Subsidiaries and the Domestic Wireless Investments and their respective Affiliates. "AIRTOUCH MERGER DISCLOSURE SCHEDULE" shall mean the Disclosure Schedule, dated as of the date hereof, delivered by AirTouch to U S WEST. "AIRTOUCH RIGHTS AGREEMENT" shall mean the Rights Agreement between AirTouch and Bank of New York, as Right's Agent, dated as of September 19, 1994, as amended. "AIRTOUCH STOCK" shall mean the AirTouch Common Stock, the AirTouch Class D Preferred Stock and the AirTouch Class E Preferred Stock. "APPLICABLE LAWS" shall mean, with respect to any Person, all statutes, laws, ordinances, rules, orders and regulations of any Governmental Authority applicable to such Person and its business, properties and assets. "ARBITRATION AGREEMENT" shall mean the Arbitration Agreement, dated as of September 30, 1995, by and between AirTouch and U S WEST Colorado. "ASSUMED NV DEBT" shall mean indebtedness (including accrued but unpaid interest) of NV to a Subsidiary of U S WEST outstanding as of the Closing Date; PROVIDED, HOWEVER, that the sum of the Assumed NV Debt and the Assumed PCS Debt shall not be less than $1.3 billion nor more than $1.5 billion as of the Closing Date. "ASSUMED PCS DEBT" shall mean indebtedness (including accrued but unpaid interest) of PCS Holdings to a Subsidiary of U S WEST outstanding as of the Closing Date; PROVIDED, HOWEVER, that the sum of the Assumed NV Debt and the Assumed PCS Debt shall not be less than $1.3 billion nor more than $1.5 billion as of the Closing Date. "BUSINESS DAY" shall mean a day other than a Saturday, Sunday or other day on which banks located in New York City or San Francisco are authorized or required by law to close. "CBCA" shall mean the Colorado Business Corporation Act. "CELLULAR SERVICE" shall mean any commercial mobile radio service, and the resale of such service, provided by a radio -3- communications system authorized under the rules for the domestic public cellular radio telecommunications service designated as Subpart H of Part 22 of the FCC's rules in effect on July 25, 1994, or any revision thereto or successor thereof, which may be in effect from time to time, including the network, marketing, distribution, sales, customer interfaces, and operations function relating thereto. "CODE" shall have the meaning set forth in the recitals to this Agreement. "COMMON VALUE" shall mean the result of (i) the Transaction Value, MINUS (ii) the Preferred Value, MINUS (iii) the amount of the Assumed NV Debt and the Assumed PCS Debt. "COMMUNICATIONSCO" shall mean an independent company to which the businesses of the U S WEST Communications Group and the directory businesses of the U S WEST Media Group may be transferred by U S WEST in connection with the U S WEST Separation. "COMMUNICATIONS WIRELESS BUSINESS" shall mean the businesses of USWCG and its Subsidiaries engaged in the provision of any wireless services. "CONFIDENTIAL INFORMATION" shall mean all confidential information, including all knowhow, discoveries, inventions (excluding subject matter covered by patents or patent applications), improvements, processes, formulae, specifications, trade secrets (whether patentable or not but excluding subject matter covered by patents or patent applications), business plans, marketing data, software, tools and documentation (other than the software, tools and documentation identified in item 1 of Section 1.1 of the U S WEST Merger Disclosure Schedule) and all drawings, records, books or indicia, however evidenced, of the foregoing. "CONSENT" shall mean any approval, consent or waiver required to be obtained from any Third Party for the consummation of a specified transaction, including (without limitation) any option, right of first refusal, right of first offer or other similar right of a Third Party triggered by a specified transaction. "CONTRACT" shall mean any contract, agreement, lease, license, sales order, purchase order, instrument or other commitment that is binding on any Person or any part of its property under Applicable Law. "CURRENT MARKET PRICE", for a class or series of capital stock, on any applicable date, shall mean the average of the daily Volume-Weighted Average Trading Prices per share of such class or series of capital stock for the ten consecutive Trading -4- Days ending on the third Trading Day immediately preceding such date. "DGCL" shall mean the Delaware General Corporation Law. "DISPOSED ASSET" shall mean each Scheduled Property as to which, as of or at any time following the Closing Date, either of the following conditions shall apply: (a) AirTouch or any Subsidiary thereof shall have sold, assigned, exchanged, transferred or otherwise disposed of such Scheduled Property in connection with any court order with respect to, or any Settlement (in whole or in part) of, any Scheduled Property Claim (for purposes of this definition, the dissolution, liquidation and winding up of any partnership underlying a Scheduled Property (including, without limitation, occurring as a result of a withdrawal by AirTouch or any Subsidiary thereof as a partner of such partnership) shall be considered a disposition of such Scheduled Property); or (b) In the case of any Scheduled Property of which, as of the date hereof, NV or any Subsidiary thereof is a general partner or which is otherwise managed by NV or any Subsidiary thereof, AirTouch shall not obtain or shall lose the right to manage such Scheduled Property prior to or on the first anniversary of the Closing Date (or if, as of such first anniversary, a Scheduled Property Claim shall be pending which relates to AirTouch's right to manage such Scheduled Property, the date that such Scheduled Property Claim is finally resolved) pursuant to any court order with respect to, or any Settlement (in whole or in part) of, any Scheduled Property Claim; PROVIDED that such Scheduled Property shall cease to be a Disposed Asset if AirTouch shall regain the right to manage such Scheduled Property prior to or on the second anniversary of the Closing Date (or if, as of such second anniversary, a Scheduled Property Claim shall be pending which relates to AirTouch's right to manage such Scheduled Property, the date that such Scheduled Property Claim is finally resolved). "DISPOSED ASSET VALUE" shall mean: (a) In the case of any Disposed Asset by operation of clause (a) of the definition thereof, the result of: (i) the excess, if any, of (x) the Allocated Value (as set forth in item 2 of Section 1.1 of the U S WEST Merger Disclosure Schedule) of such Disposed Asset (accreted at a rate of 12% per annum from the Closing Date), over (y) the after-Tax net proceeds received by AirTouch or any Subsidiary thereof from the sale, assignment, -5- exchange, transfer or other disposition of such Disposed Asset; PLUS (ii) the aggregate amount of expenditures made by AirTouch or any Subsidiary thereof with respect to such Disposed Asset following the Closing Date (accreted at a rate of 12% per annum from the time such expenditures are made); MINUS (iii) the aggregate amount of distributions received by AirTouch or any Subsidiary thereof with respect to such Disposed Asset following the Closing Date (accreted at a rate of 12% per annum from the time such distributions are received); and (b) In the case of any Disposed Asset solely by operation of clause (b) of the definition thereof, 20% of the Allocated Value of such Disposed Asset (accreted at the rate of 12% per annum from the Closing Date). "DISPUTE" shall mean all disputes, controversies or claims arising from or in connection with this Agreement or any other Transaction Agreement, whether based on contract, tort, statute or otherwise, including but not limited to, interpretation or enforcement of such agreements, or any breach, termination or claim of invalidity of such agreements. "DOJ" shall mean the United States Department of Justice. "DOMESTIC WIRELESS BUSINESS" shall mean, collectively, the businesses of NV, the Domestic Wireless Subsidiaries, the Domestic Wireless Investments and PCS Holdings. "DOMESTIC WIRELESS INTELLECTUAL PROPERTY" shall mean the items set forth in item 3 of Section 1.1 of the U S WEST Merger Disclosure Schedule. "DOMESTIC WIRELESS INVESTMENTS" shall mean the Investments held by NV or its Subsidiaries other than, as of the Closing Date, Investments that are Excluded Assets. "DOMESTIC WIRELESS SUBSIDIARIES" shall mean the Subsidiaries of NV other than, as of the Closing Date, Subsidiaries that are Excluded Assets. "EMPLOYEE ARRANGEMENTS" shall mean all employment and consulting agreements, and all bonus and other incentive compensation, deferred compensation, disability, severance, change in control, stock award, stock option, stock purchase, collective bargaining agreements, plans, programs, policies and arrangements with respect to the employment or termination of employment of any employee, officer, director or other individual -6- who is or was employed at any time by U S WEST or any of its Subsidiaries. "EMPLOYEE BENEFIT PLAN" shall mean all "employee benefit plans," as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, which U S WEST or any of its Subsidiaries maintains or to which U S WEST or any of its Subsidiaries has an obligation to make contributions. "ENCUMBRANCES" shall mean any and all mortgages, security interests, liens, claims, pledges, restrictions, charges or other encumbrances. "ENVIRONMENTAL LAWS" shall mean all Applicable Laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, wetlands, land surface, subsurface strata, and indoor and outdoor workplace), including, without limitation, (a) laws and regulations relating to emissions, discharges, releases or threatened releases of any Substance of Concern or otherwise relating to the importation, manufacture, processing, formulation, testing, distribution, use, treatment, storage, disposal, transport or handing of any Substance of Concern, and (b) common law principles of tort liability related to the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA AFFILIATE" shall mean each member of a controlled group of corporations within the meaning of section 414(b) of the Code and each member of a group of trades or businesses under common control within the meaning of section 414(c) of the Code. "ESMR SERVICE" shall mean any commercial mobile radio service, and the resale of such service, provided by radio communications system authorized under the rules for Enhanced Specialized Mobile Radio services designated under Subpart S of Part 90 of the FCC's rules in effect on July 25, 1994, or any revision thereto or successor thereof, which may be in effect from time to time, including the network, marketing, distribution, sales, customer interfaces, and operations function relating thereto. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "EXCHANGE AGREEMENT" shall mean the Amended and Restated Agreement of Exchange, dated as of September 30, 1995, by and between U S WEST Colorado and AirTouch. "EXCLUDED ASSET" shall mean each Scheduled Property as to which any of the following shall apply as of the Closing Date: -7- (a) NV or any Subsidiary thereof shall have sold, assigned, exchanged, transferred or otherwise disposed of such Scheduled Property either (i) pursuant to a right of first refusal made in accordance with Section 7.15(a), (ii) in fulfillment of U S WEST's obligations under Section 7.15(b) or (iii) pursuant to other written agreement of the parties hereto; or (b) NV or any Subsidiary thereof shall have withdrawn (voluntarily or pursuant to a court order) as a partner of the partnership underlying such Scheduled Property and such partnership shall have been dissolved. "EXCLUDED ASSETS VALUE" shall equal the sum (for all Excluded Assets) of the Allocated Value (as set forth in item 2 of Section 1.1 of the U S WEST Merger Disclosure Schedule) of each such Excluded Asset. "EXCLUDED CLAIM" shall mean any claim or demand made by any Person or any Action (in each case, which is made, instituted or commenced before the Effective Time) to the extent such claim, demand or Action (a) arises out of, relates to or results from, directly or indirectly, (i) any actual or alleged violation of, or seeks to enforce compliance with, any law, rule or regulation of any Governmental Authority in respect of antitrust, consumer disclosure or unfair competition or (ii) any actual or alleged wrongful termination, or other actual or alleged breach or violation, of any distribution or agent relationship (excluding any claim or demand made by any Person or any Action which arises out of, relates to or results from solely a claim of breach of contract) and (b) arises out of, relates to or results from, directly or indirectly, the conduct of the Domestic Wireless Business or any part thereof before or at the Effective Time; PROVIDED, HOWEVER, that any claim or demand made by any Person or any Action shall not be an "Excluded Claim" to the extent such claim, demand or Action arises out of, relates to or results from, directly or indirectly, the conduct of WMC in respect of any of the businesses of AirTouch or its Subsidiaries or any part thereof before or at the Effective Time. For purposes of this definition, the term "Subsidiary" shall not include WMC. "EXCLUDED EMPLOYEES" shall mean all employees, former employees and retired employees of U S WEST and its Subsidiaries and Affiliates other than the Affected Employees. "EXCLUDED SETTLEMENTS" shall mean all Settlements made or entered into prior to the Effective Time to the extent such Settlements arise out of, relate to or result from, directly or indirectly, the conduct of the Domestic Wireless Business or any part thereof (to the extent not satisfied in full by U S WEST, NV, a Domestic Wireless Subsidiary or a Domestic Wireless Investment prior to the Effective Time). -8- "EXTRAORDINARY CASH DISTRIBUTIONS" shall mean with respect to any consecutive 12-month period, all cash dividends and cash distributions on the outstanding shares of AirTouch Common Stock during such period (other than cash dividends or cash distributions for which a prior adjustment to the Merger Consideration was previously made) to the extent such cash dividends and cash distributions exceed, on a per share of AirTouch Common Stock basis, 5% of the average Volume-Weighted Average Trading Price of the AirTouch Common Stock over such period. "FAIR VALUE" shall mean (i) with respect to shares of capital stock which is traded on an exchange or in the over-the-counter market, the average of the Volume-Weighted Average Trading Prices per share of such class or series of capital stock for the 30 consecutive Trading Days ending on the fifth Trading Day immediately prior to the Closing Date, (ii) with respect to cash, the amount of cash distributed and (iii) with respect to evidences of indebtedness or assets or capital stock which is not traded on an exchange or in the over-the-counter market, the value of such evidences of indebtedness or assets or such capital stock as determined by an investment banking firm jointly selected by AirTouch and U S WEST. "FCC" shall mean the United States Federal Communications Commission. "FTC" shall mean the United States Federal Trade Commission. "GAAP" shall mean generally accepted accounting principles in effect in the United States of America. "GOVERNMENTAL AUTHORITY" shall mean any foreign, federal, state or local government, court, agency or commission or other governmental or regulatory body or authority. "HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations issued pursuant thereto. "INDEMNIFIABLE LOSSES" shall mean, with respect to any claim by an Indemnified Party for indemnification under this Agreement, any and all damages, losses, deficiencies, Liabilities, obligations, penalties, judgments, settlements, claims, payments, fines, interest, costs and expenses (including, without limitation, the costs and expenses of any and all Actions, demands, assessments, judgments, settlements and compromises relating thereto and the costs and expenses of attorneys', accountants', consultants' and other professionals' fees and expenses incurred in the investigation or defense thereof or the enforcement of rights thereunder). -9- "INDEMNIFIED PARTY" shall mean any Person that is seeking indemnification from an Indemnifying Party pursuant to the provisions of this Agreement. "INDEMNIFYING PARTY" shall mean any party hereto from which any Indemnified Party is seeking indemnification pursuant to the provisions of this Agreement. "INFORMATION" shall mean all records, books, Contracts, instruments, computer data and other data and information. "INSURANCE ARRANGEMENT" shall mean insurance policies and insurance Contracts of any kind, including, without limitation, primary and excess policies, commercial general liability policies, automobile policies, product liability policies, directors' and officers' liability policies, fiduciary liability policies, workmens' compensation policies, and self-insurance programs and captive insurance company arrangements, together with the rights, benefits and privileges thereunder. "INTELLECTUAL PROPERTY" shall mean all Trademarks, Trade Names, copyrights or copyright registrations, and patents or patents pending, including any Contracts, licenses or other legal arrangements granting rights or privileges to use any Trademark, Trade Name, copyright or patent. "INTER-EXCHANGE CARRIER AGREEMENT" shall mean an agreement between NV or any Domestic Wireless Subsidiary and any inter-exchange carrier relating to the conduct of the operations of the Domestic Wireless Business. "INVESTMENT AGREEMENT" shall mean the Amended and Restated Investment Agreement dated as of September 30, 1995, by and between U S WEST Colorado and AirTouch. "INVESTMENT" shall mean, with respect to any Person, any equity interest held by such Person or its Subsidiaries in another Person (other than a Subsidiary); PROVIDED, HOWEVER, that Time Warner Entertainment Company, L.P. shall not be deemed to be an Investment of U S WEST or of any of its Subsidiaries. "IRS" shall mean the United States Internal Revenue Service. "JOINT VENTURE ORGANIZATION AGREEMENT" shall mean the Amended and Restated Joint Venture Organization Agreement dated as of September 30, 1995 by and between U S WEST Colorado and AirTouch, as amended. "LEGAL PROCEEDINGS" shall mean any judicial, administrative or arbitral actions, suits, investigations, proceedings (public or private) or governmental proceedings. "LEVERAGED LEASES" shall mean all of the Japanese leveraged leases entered into by PrimeCo as of the Closing Date. -10- "LIABILITY" shall mean, with respect to any Person, except as expressly provided herein, any direct or indirect liability (whether absolute, accrued or unaccrued, contingent, liquidated or unliquidated, matured or unmatured, reflected on a balance sheet (or in the notes thereto) or otherwise, and whether known or unknown, fixed or contingent), indebtedness, obligation, expense, claim, deficiency, guarantee or endorsement of or by such Person (including, without limitation, those arising under any Applicable Law or Action or under any award of any court, tribunal or arbitrator of any kind, and those arising under any Contract). "LICENSE" shall mean any permit, license, waiver or authorization from any Governmental Authority having jurisdiction over a Person required or advisable for the conduct of an activity, including, without limitation, any license or authorization or certificate of public convenience and necessity from the FCC. "MATERIAL ADVERSE EFFECT" shall mean, with respect to any Person or business, any change or effect that is materially adverse to the business, assets, financial condition or results of operations of such Person and its Subsidiaries taken as a whole or to such business taken as a whole; PROVIDED that a failure to include the business of any Excluded Asset in the Domestic Wireless Business shall not be deemed to constitute a Material Adverse Effect with respect to the Domestic Wireless Business. "MATERIAL CONTRACT" shall mean any Contract made in conjunction with or related to the operations of the Domestic Wireless Business (including, without limitation, Contracts with customers or suppliers, Resale Agreements, Roaming Agreements, Inter-Exchange Carrier Agreements, and similar agreements) that (a) is reasonably anticipated by the party making a representation with respect thereto to involve, in any given year, an aggregate payment by any party thereto in excess of $5,000,000; (b) in the case of any Resale Agreement, Roaming Agreement, Inter-Exchange Carrier Agreement or network or subscriber equipment purchase Contract, is reasonably anticipated by the party making a representation with respect thereto to involve aggregate payments by all parties thereto in excess of $15,000,000 in any five-year period; (c) has a term of five years or more and involves, in any given year, an aggregate payment by any party thereto in excess of $1,000,000; or (d) that any party thereto would be required to file as an exhibit to its Annual Report on Form 10-K if such Person were a registrant under Section 12 of the Exchange Act. "MEDIA" shall have the meaning set forth in the preamble to this Agreement. "MEDIACO" shall mean an independent company to which the cable and international businesses of the U S WEST Media Group -11- may be transferred by U S WEST in connection with the U S WEST Separation. "MERGER" shall have the meaning set forth in the recitals to the Agreement. "NEW INVESTMENT AGREEMENT" shall mean the Amended and Restated Investment Agreement attached hereto as Exhibit B. "NV" shall have the meaning set forth in the preamble to this Agreement. "NV/PCS TRANSFEREE" shall mean (i) if the U S WEST Separation is consummated prior to the Effective Time, the Subsidiary of U S WEST (or MediaCo, as applicable) to which the NV Stock and the PCS Holdings Stock will be transferred in connection with the U S WEST Separation and (ii) if the U S WEST Separation is consummated following the Effective Time, the Subsidiary of U S WEST (or MediaCo, as applicable) to which the AirTouch Stock received by Media in connection with the Merger will be transferred in connection with the U S WEST Separation; PROVIDED that, in either such case, the NV/PCS Transferee shall remain an Affiliate of the domestic cable businesses of the U S WEST Media Group following the consummation of the U S WEST Separation. "NYSE" shall mean the New York Stock Exchange, Inc. "ORDER" shall mean action by the FCC or a state regulatory authority, as applicable, granting the FCC's or such state regulatory authority's Consent to the transactions contemplated hereby without any conditions which either U S WEST or AirTouch reasonably deems to be materially adverse to it and as to which no stay by the FCC or such state regulatory authority, as applicable, or other Governmental Authority, is in effect. "PATENT LICENSE AGREEMENT" shall mean the Patent License Agreement between U S WEST and AirTouch in the form attached hereto as Exhibit C, as the same may be amended from time to time. "PCS EMPLOYEES" shall mean the employees identified in item 4 of Section 1.1 of the U S WEST Merger Disclosure Schedule who are employed in the Domestic Wireless Business at the Effective Time. "PCS HOLDINGS" shall have the meaning set forth in the preamble to this Agreement. "PCS NUCLEUS" shall mean PCS Nucleus, L.P., a Delaware limited partnership. "PCS NUCLEUS AGREEMENT" shall mean the Amended and Restated Agreement of Limited Partnership of PCS Nucleus, dated as of -12- September 30, 1995, between AirTouch PCS Holdings, Inc. and PCS Holdings. "PCS PARTNERSHIP INTERESTS" shall mean a 10.1% general partner's interest and a 39.9% limited partner's interest in PCS Nucleus. "PCS SERVICE" shall mean any broadband radio communications service authorized under the rules for personal communications services designated as Subpart E of Part 24 of the FCC's rules in effect on July 25, 1994, or any revision thereto or successor thereof which may be in effect from time to time, including the network, marketing, distribution, sales, customer interface and operations functions relating thereto. "PERMITTED ENCUMBRANCE" shall mean (a) a statutory Encumbrance not yet due and payable or (b) any other Encumbrance that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business. "PERSON" or "PERSON" shall mean and includes any individual, partnership, limited liability company, joint venture, corporation, association, joint stock company, trust, unincorporated organization or similar entity. "PREFERRED SHARE NUMBER" shall mean the quotient of (a) the Preferred Value, DIVIDED BY (b) $1,000 (rounded to the nearest whole even number). "PREFERRED VALUE" shall mean (a) $1,600,000,000, PLUS (b) the excess, if any, of (i) $1,400,000,000, over (ii) the sum of the amounts of the Assumed NV Debt and the Assumed PCS Debt. "PRIMECO" shall mean PrimeCo Personal Communications, L.P., a Delaware limited partnership. "PRIMECO AGREEMENT" shall mean the Agreement of Limited Partnership of PrimeCo, dated as of October 20, 1994, as amended. "RELATED PARTY AGREEMENT" shall mean any Contract between or among NV or any Domestic Wireless Subsidiary, on the one hand, and U S WEST, Media or any of their respective Affiliates (other than NV or any Domestic Wireless Subsidiary), on the other hand; PROVIDED, HOWEVER, that (i) all Employee Arrangements and Employee Benefit Plans and (ii) all administrative services agreements (including accounting, legal, insurance and tax services and other similar agreements) shall not be deemed to be Related Party Agreements. "RESALE AGREEMENT" shall mean any agreement entered into by NV or a Domestic Wireless Subsidiary with any Third Party with respect to the resale of any Cellular Service. -13- "ROAMING AGREEMENT" shall mean any agreement entered into by NV or a Domestic Wireless Subsidiary with any Third Party relating to a roaming arrangement with respect to customers of any Cellular Service, PCS Service, ESMR Service or satellite service. "SCHEDULED PROPERTIES" shall mean the Domestic Wireless Subsidiaries and Domestic Wireless Investments listed in item 5 of Section 1.1 of the U S WEST Merger Disclosure Schedule. "SCHEDULED PROPERTY CLAIM" means any claim or demand made by any Person or any Action (in either case, whether or not pending at the Effective Time and whether or not the basis for which is known to AirTouch at the Effective Time) that the execution, delivery or performance by AirTouch, U S WEST, NV or any Domestic Wireless Subsidiary or any Domestic Wireless Investment managed by NV or any Domestic Wireless Subsidiary of (A) the Joint Venture Organization Agreement and the related agreements referred to therein or the consummation of the transactions contemplated thereby or (B) any Transaction Agreement to which it is or will be a party or the consummation of the transactions contemplated thereby, has resulted or results in a violation or breach of, or has constituted or constitutes a default, withdrawal or impermissible transfer under, or has given or gives rise to any right of purchase, conversion of interest, dissolution, termination, first refusal, notice or consent under or has given or gives rise to any right of amendment, cancellation or acceleration of material benefit under, any partnership agreement or other formative agreement or management or similar agreement relating to a Scheduled Property. "SEC" shall mean the United States Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "SETTLEMENTS" shall mean any and all agreements or commitments to settle, compromise or otherwise resolve in whole or in part any claim or demand of any Person or any Action. "SOFTWARE LICENSE AGREEMENT" shall mean the Software License Agreement between U S WEST and AirTouch in the form attached hereto as Exhibit D, as the same may be amended from time to time. "SUBSTANCE OF CONCERN" shall mean any chemical, pollutant, contaminant, waste, toxic substance, industrial substance, noxious substance, hazardous substance, radioactive material, asbestos, genetically modified organism, petroleum or petroleum product. -14- "SPECIFIED ACTION" shall mean any action, claim, suit, arbitration or proceeding which has been brought before or filed by any Governmental Authority or arbitration tribunal which (a) arises out of, relates to or results from, directly or indirectly, (i) any actual or alleged violation of, or seeks to enforce compliance with, any law, rule or regulation of any Governmental Authority in respect of antitrust, consumer disclosure or unfair competition or (ii) any actual or alleged wrongful termination, or other actual or alleged breach or violation, of any distribution or agent relationship (excluding any Action which arises out of, relates to or results from solely a claim of breach of contract) and (b) arises out of, relates to or results from, directly or indirectly, the conduct of the Domestic Wireless Business or any part thereof before or at the Effective Time, but specifically excluding any such action, claim, suit, arbitration or proceeding to the extent that it (x) constitutes an Excluded Claim or (y) arises out of, relates to or results from, directly or indirectly, the conduct of WMC in respect of the business of AirTouch or its Subsidiaries or any part thereof before or at the Effective Time. For purposes of this definition, the term "Subsidiary" shall not include WMC. "SUBSIDIARY" shall mean, with respect to any Person, (a) each corporation, partnership, joint venture or other legal entity of which such Person owns, either directly or indirectly, 50% or more of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or similar governing body of such corporation, partnership, joint venture or other legal entity and (b) each partnership in which such Person or another Subsidiary of such Person is the general partner or otherwise controls such partnership; PROVIDED, HOWEVER, that PCS Nucleus shall not be deemed to be a Subsidiary of AirTouch or U S WEST. "TAX" or "TAXES" shall mean all taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, gains ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, whether computed on a separate, consolidated, unitary, combined or any other basis, together with any interest (including interest that would have accrued absent a netting of Taxes) and any penalties, fines, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign) and shall include any transferee liability in respect of Taxes. "TAX SHARING AGREEMENT" shall mean the Tax Sharing Agreement between U S WEST, Media, NV, PCS Holdings and AirTouch in the form attached hereto as Exhibit E, as the same may be amended from time to time. -15- "THIRD PARTY" shall mean, with respect to U S WEST, Media or AirTouch, a party or parties which is or are not an Affiliate of either U S WEST, Media or AirTouch, respectively. "TOMCOM AGREEMENT" shall mean the Agreement of Limited Partnership of Tomcom, L.P., a Delaware limited partnership, dated as of October 20, 1994, as amended. "TRADEMARK" shall mean any federal or state service mark, trademark, trade name, trademark registration or application, and all common law rights therein. "TRADE NAME" shall mean any trade name, corporate name, business name, commercial name, and any registration or application therefor or any other name used to identify a business. "TRADING DAY" shall mean a day on which the NYSE is open for the transaction of business. "TRANSACTION AGREEMENTS" shall mean this Agreement, the Tax Sharing Agreement, the Software License Agreement, the Patent License Agreement, the Resources Agreement and the New Investment Agreement, and all agreements, instruments, schedules, exhibits and annexes attached hereto or thereto or delivered pursuant hereto or thereto. "TRANSACTION VALUE" shall equal (a) $5,685,000,000, PLUS (b) the amount, if any, of the Base Adjustment (as defined below), MINUS (c) the amount, if any, of the Excluded Assets Value, PLUS (d) the amount of any positive Value Adjustment (or, MINUS, the amount of any negative Value Adjustment) calculated as of the Closing Date. The "Base Adjustment" shall equal: AirTouch $50,000,000, multiplied by ( Determination Price - $40 ) ------------- ------------------------- $5 ; provided that, for purposes of the foregoing calculation, (i) if the AirTouch Determination Price is less than $40 per share, the Base Adjustment shall equal zero and (ii) if the AirTouch Determination Price is greater than $45 per share, the Base Adjustment shall equal $50,000,000. "TRUST EXCHANGE AGREEMENT" shall mean the Amended and Restated Trust Agreement of Exchange dated as of September 30, 1995 by and between U S WEST Colorado and AirTouch. "U S WEST" shall have the meaning ascribed to such term in the preamble to this Agreement. "U S WEST COLORADO" shall mean U S WEST, Inc., a Colorado corporation and the predecessor of U S WEST. "U S WEST GROUP" shall mean, after the Effective Time, U S WEST, Media and their respective Affiliates. -16- "U S WEST INSURANCE ARRANGEMENTS" shall mean the Insurance Arrangements of U S WEST existing at the Effective Time or prior thereto which are owned or maintained by or on behalf of U S WEST or any of its predecessors. "U S WEST INTELLECTUAL PROPERTY" shall mean all Intellectual Property of the U S WEST Group and its Affiliates (which Affiliates exist as of the date hereof) other than the Domestic Wireless Intellectual Property. "U S WEST MERGER DISCLOSURE SCHEDULE" shall mean the Disclosure Schedule, dated as of the date hereof, delivered by U S WEST to AirTouch. "U S WEST SEPARATION" shall mean a transaction in which the businesses of the U S WEST Communications Group and the businesses of the U S WEST Media Group are separated into two independent companies. "VALUE ADJUSTMENT" shall mean the result calculated in accordance with Exhibit F hereto. "VOLUME-WEIGHTED AVERAGE TRADING PRICE" shall mean, for any Trading Day, an amount equal to (a) the cumulative sum, for each trade of AirTouch Common Stock (or other class or series of capital stock) during such Trading Day on the NYSE (or, if such security is not listed on the NYSE, such other principal exchange or over-the-counter market on which such security is listed), of the product of: (i) the sale price times (ii) the number of shares of AirTouch Common Stock (or such other class or series of capital stock) sold at such price, divided by (b) the total number of shares of AirTouch Common Stock (or such other class or series of capital stock) so traded during the Trading Day. "WMC" shall mean WMC Partners, L.P., a Delaware limited partnership. "WMC AGREEMENT" shall mean the Amended and Restated Agreement of Limited Partnership of WMC, dated as of September 30, 1995. 1.2 TERMS DEFINED ELSEWHERE IN THE AGREEMENT. For purposes of this Agreement, the following terms have the meanings set forth in the Sections indicated:
TERM SECTION ---- -------- AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.14(a) Accounting Referee. . . . . . . . . . . . . . . . . . . . . . . . 3.3(c) Acquiring Person. . . . . . . . . . . . . . . . . . . . . . . . . 6.2(d) Adjusted Cap Price. . . . . . . . . . . . . . . . . . . . . . . . 3.2(e) Adjusted Floor Price. . . . . . . . . . . . . . . . . . . . . . . 3.2(e) AirTouch Affiliated Group . . . . . . . . . . . . . . . . . . . . 5.8(a) AirTouch Common Stock . . . . . . . . . . . . . . . . . . . . . . 3.1(b) -17- AirTouch Consents . . . . . . . . . . . . . . . . . . . . . . . . 5.4 AirTouch Indemnified Parties. . . . . . . . . . . . . . . . . . . 11.1 AirTouch Pension Plan . . . . . . . . . . . . . . . . . . . . . . 8.3(b) AirTouch Retirement Plan. . . . . . . . . . . . . . . . . . . . . 8.3(h) AirTouch Rights Agreement . . . . . . . . . . . . . . . . . . . . 5.2(a) AirTouch SEC Documents. . . . . . . . . . . . . . . . . . . . . . 5.6(a) Articles of Merger. . . . . . . . . . . . . . . . . . . . . . . . 2.3 Cap Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(e) Cap Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(a) Certificate of Merger . . . . . . . . . . . . . . . . . . . . . . 2.3 Claim Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3(a) Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Closing Date. . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Common Consideration. . . . . . . . . . . . . . . . . . . . . . . 3.1(b) Confidentiality Agreements. . . . . . . . . . . . . . . . . . . . 6.3(c) Core Intellectual Property. . . . . . . . . . . . . . . . . . . . 7.9(d) Decision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.14(a) Domestic Wireless Financial Statements. . . . . . . . . . . . . . 4.6(a) Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Employee Communication Materials. . . . . . . . . . . . . . . . . 8.3(m) Extraordinary Dividend. . . . . . . . . . . . . . . . . . . . . . 6.2(a) FCC/State Orders. . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Floor Number. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(e) Floor Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2(a) Gains Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Indemnitees . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(n) Joint Agreement . . . . . . . . . . . . . . . . . . . . . . . . . 7.13(a) Joint Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.13(b) Joint Venture Agreements. . . . . . . . . . . . . . . . . . . . . 12.7(b) Merger Consideration. . . . . . . . . . . . . . . . . . . . . . . 3.1(b) Merger Consideration Value. . . . . . . . . . . . . . . . . . . . 6.2(d) Modified Accrual Participant. . . . . . . . . . . . . . . . . . . 8.3(c) Non-Qualified Plans . . . . . . . . . . . . . . . . . . . . . . . 8.3(n) Non-solicitation Period . . . . . . . . . . . . . . . . . . . . . 8.3(l) Notice Period . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3(b) NV/PCS Affiliated Group . . . . . . . . . . . . . . . . . . . . . 4.8(a) NV Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1(b) Operating Subsidiary. . . . . . . . . . . . . . . . . . . . . . . 6.2(a) Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(o) Parent Transaction. . . . . . . . . . . . . . . . . . . . . . . . 6.2(a) PCS Holdings Stock. . . . . . . . . . . . . . . . . . . . . . . . 3.1(b) Planned Capital Expenditures. . . . . . . . . . . . . . . . . . . 6.1(a) Preferred Consideration . . . . . . . . . . . . . . . . . . . . . 3.1(b) Recalculation Differential. . . . . . . . . . . . . . . . . . . . 3.3(b) Recourse Right. . . . . . . . . . . . . . . . . . . . . . . . . . 7.11 Restricted Action . . . . . . . . . . . . . . . . . . . . . . . . 6.2(a) Services Agreement. . . . . . . . . . . . . . . . . . . . . . . . 11.1(b) Solicit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3(l) Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . 2.1 Termination Date. . . . . . . . . . . . . . . . . . . . . . . . . 10.1(d) Third Party Claim . . . . . . . . . . . . . . . . . . . . . . . . 11.3 Transferred Benefit Assets. . . . . . . . . . . . . . . . . . . . 8.3(b) Transferred Benefit Liabilities . . . . . . . . . . . . . . . . . 8.3(b) USWCG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9(c) -18- U S WEST Consents . . . . . . . . . . . . . . . . . . . . . . . . 4.4 U S WEST Indemnified Parties. . . . . . . . . . . . . . . . . . . 11.2 U S WEST Pension Plan . . . . . . . . . . . . . . . . . . . . . . 8.3(b) U S WEST Savings Plan . . . . . . . . . . . . . . . . . . . . . . 8.3(i)
1.3 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein", and "hereunder" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this Agreement. (b) The terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (c) The terms "dollars" and "$" shall mean United States dollars. ARTICLE II THE MERGER 2.1 MERGER. Upon the terms and subject to the conditions set forth in this Agreement and in accordance with the CBCA and DGCL, NV and PCS Holdings shall be merged with and into AirTouch at the Effective Time. At the Effective Time, the separate corporate existences of NV and PCS Holdings shall cease and AirTouch shall continue as the surviving corporation (the "Surviving Corporation"). 2.2 CLOSING. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 10.1, the closing of the Merger (the "Closing") will take place at 10:00 a.m. (San Francisco time), on the second Business Day following the date on which the last of the conditions set forth in Article IX is fulfilled or waived (the "Closing Date"), at the offices of Pillsbury Madison & Sutro LLP, 235 Montgomery Street, San Francisco, California, unless another date, time or place is agreed to by the parties hereto. 2.3 EFFECTIVE TIME. The parties hereto shall cause the Merger to be consummated by filing a certificate of merger with the Secretary of State of the State of Delaware (the "Certificate of Merger"), as provided in the DGCL, and articles of merger with the Secretary of State of the State of Colorado (the "Articles of Merger"), as provided in the CBCA, in each case, as soon as practicable on or after the Closing Date. The Merger shall become effective at such time as is provided in the Certificate of Merger and the Articles of Merger (the "Effective Time"). 2.4 EFFECTS OF THE MERGER. The Merger shall have the effects prescribed by Applicable Laws. -19- 2.5 CERTIFICATE OF INCORPORATION AND BYLAWS. (a) At the Effective Time, in accordance with the DGCL, the Certificate of Incorporation of AirTouch, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation after the Effective Time, until duly amended in accordance with its terms and the DGCL. (b) The Bylaws of AirTouch, as in effect immediately prior to the Effective Time, shall be the Bylaws of the Surviving Corporation, until duly amended in accordance with their terms, the DGCL and the Certificate of Incorporation of the Surviving Corporation. 2.6 DIRECTORS. The directors of AirTouch immediately prior to the Effective Time shall be the directors of the Surviving Corporation, until the earlier of their resignations or removal or until their respective successors are duly elected and qualified, as the case may be. 2.7 OFFICERS. The officers of AirTouch immediately prior to the Effective Time shall be the officers of the Surviving Corporation, until the earlier of their resignations or removal or until their respective successors are duly elected and qualified, as the case may be. ARTICLE III EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; CERTIFICATES 3.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock: (a) CAPITAL STOCK OF AIRTOUCH. Each share of each class of capital stock of AirTouch issued and outstanding immediately prior to the Effective Time shall remain an issued and outstanding share of the same class of capital stock of the Surviving Corporation. (b) CAPITAL STOCK OF NV AND PCS HOLDINGS. The common stock, no par value, of NV (the "NV Stock") and the common stock, no par value, of PCS Holdings (the "PCS Holdings Stock") issued and outstanding immediately prior to the Effective Time shall be canceled and extinguished and converted automatically into the right to receive (i) a number of shares of common stock, par value $.01 per share, of AirTouch (the "AirTouch Common Stock"), together with the corresponding rights to purchase AirTouch Series A Preferred Stock pursuant to the AirTouch Rights Agreement, determined in accordance with Section 3.2 (the "Common Consideration"), (ii) a number of shares of AirTouch Class D Preferred Stock equal to 50% of the Preferred Share Number and (iii) a number of shares of AirTouch Class E Preferred Stock -20- equal to 50% of the Preferred Share Number (such shares of AirTouch Class D Preferred Stock and AirTouch Class E Preferred Stock are referred to herein as the "Preferred Consideration", and collectively with the Common Consideration, as the "Merger Consideration"). 3.2 DETERMINATION OF COMMON CONSIDERATION. (a) Subject to the provisions of Section 6.2, if the AirTouch Determination Price is greater than or equal to $40.00 (the "Floor Price") and less than or equal to $45.00 (the "Cap Price"), the number of shares of AirTouch Common Stock that constitute the Common Consideration shall equal the quotient of the Common Value, divided by the AirTouch Determination Price (rounded to the nearest whole number). (b) Subject to the provisions of Section 6.2, if the AirTouch Determination Price is less than the Floor Price, the number of shares of AirTouch Common Stock that constitute the Common Consideration shall equal the quotient of the Common Value, divided by the Floor Price (rounded to the nearest whole number). (c) Subject to the provisions of Section 6.2, if the AirTouch Determination Price is greater than the Cap Price, the number of shares of AirTouch Common Stock that constitute the Common Consideration shall equal the quotient of Common Value, divided by the Cap Price (rounded to the nearest whole number). (d) Subject to the provisions of Section 6.2, the Cap Price and Floor Price shall be adjusted from time to time as follows for events occurring prior to the Effective Time: (i) If AirTouch shall (A) pay a dividend, or make a distribution, in shares of AirTouch Common Stock, (B) subdivide or split its outstanding AirTouch Common Stock into a greater number of shares, or (C) combine the outstanding shares of AirTouch Common Stock into a smaller number of shares, then, in any such event, the Cap Price and Floor Price shall each be adjusted by multiplying each of the Cap Price and the Floor Price in effect immediately prior to such date of issuance by a fraction, the numerator of which shall be one and the denominator of which shall be the number of shares or fractions of a share of AirTouch Common Stock that a holder of one share of AirTouch Common Stock immediately prior to any such event would hold immediately after such event (assuming the issuance of fractional shares). (ii) If AirTouch shall issue rights, warrants or options for, or securities convertible or exchangeable into or exercisable for, shares of AirTouch Common Stock entitling the holders to subscribe for or purchase shares of AirTouch Common Stock at a price per share that, together with the consideration paid to AirTouch upon the issuance of such securities, is lower than the Current Market Price both as of the date on which a -21- definitive agreement is entered into with respect to such issuance or (if there is no such agreement) the date on which such issuance is announced and at the record date for or (if there is no record date) the date of such issuance (other than pursuant to any existing employee benefit plan or employee arrangement or pursuant to the AirTouch Rights Agreement), then, in any such event, the Cap Price and the Floor Price shall each be adjusted by multiplying each of the Cap Price and the Floor Price in effect immediately prior to such record date or date of issuance by a fraction, the numerator of which shall be the number of shares of AirTouch Common Stock outstanding on such record date or date of issuance plus the maximum number of additional shares of AirTouch Common Stock which the aggregate offering price of the maximum number of shares of AirTouch Common Stock so offered for subscription or purchase pursuant to such rights, warrants, options or securities would purchase at the Current Market Price on such record date or date of issuance (determined by multiplying such maximum number of shares by the exercise price of such rights, warrants or options or the conversion price of such securities (plus any other consideration received by AirTouch upon the issuance, exercise or conversion of such rights, warrants, options or securities) and dividing the product so obtained by the Current Market Price on such record date or date of issuance) and the denominator of which shall be the number of shares of AirTouch Common Stock outstanding on such date of issuance plus the maximum number of additional shares of AirTouch Common Stock offered for subscription pursuant to such rights, warrants, options or securities. (iii) If AirTouch shall issue or sell shares of AirTouch Common Stock at a price per share that is lower both at the date on which a definitive agreement is entered into with respect to such issuance or sale and at the date of such issuance or sale than the Current Market Price as of the Trading Day immediately preceding such dates (other than pursuant to any bona fide underwritten public offering or offering pursuant to Rule 144A under the Securities Act, pursuant to the terms of existing options or benefit plans or upon conversion of shares of preferred stock), then, in any such event, the Cap Price and the Floor Price shall each be adjusted by multiplying each of the Cap Price and the Floor Price in effect immediately prior to such date of issuance by a fraction, the numerator of which shall be the number of shares of AirTouch Common Stock outstanding on such date of issuance plus the number of additional shares of AirTouch Common Stock which the aggregate price of the number of shares of AirTouch Common Stock so issued or sold would purchase at the Current Market Price on such date of issuance (determined by multiplying such number of shares by the purchase price of such shares and dividing the product so obtained by the Current Market Price on such date of issuance) and the denominator of which shall be the number of shares of AirTouch Common Stock outstanding on such date of issuance plus the number of additional shares of AirTouch Common Stock issued. -22- (iv) If AirTouch shall pay a dividend or make a distribution to all holders of outstanding shares of AirTouch Common Stock, of capital stock, cash, evidence of its indebtedness or other assets of AirTouch (but excluding (x) any cash dividends or distributions (other than Extraordinary Cash Distributions) and (y) dividends or distributions referred to in Section 3.2(d)(i) or 3.2(e)), then the Cap Price and the Floor Price shall each be adjusted by multiplying each of the Cap Price and the Floor Price in effect immediately prior to the opening of business on the record date for the determination of stockholders entitled to receive such dividend or distribution by a fraction, the numerator of which shall be the Current Market Price (determined as of such record date) less either (A) the Fair Value of the portion of the capital stock, assets or evidences of indebtedness to be so distributed applicable to one share of AirTouch Common Stock or (B), if applicable, the amount of the Extraordinary Cash Distribution to be distributed per share of AirTouch Common Stock, and the denominator of which shall be such Current Market Price. In addition, to the extent that any of the events set forth in this Section 3.2(d) occurs during the period in which the AirTouch Determination Price is determined, then the Volume-Weighted Average Trading Prices for Trading Days prior to the occurrence of such event used in determining the AirTouch Determination Price shall be adjusted in a manner consistent with the adjustments set forth in Section 3.2(d). (e) Subject to the provisions of Section 6.2, if prior to the Effective Time AirTouch shall pay a dividend or make a distribution to all holders of outstanding shares of AirTouch Common Stock of shares of a class or series of capital stock of AirTouch other than AirTouch Common Stock, then (i) Media (or the NV/PCS Transferee) shall be entitled to receive pursuant to Section 3.1(b), in addition to the number of shares of AirTouch Common Stock which it is entitled to receive pursuant to Section 3.1(b), a number of shares of such class or series of capital stock equal to the number of shares of such class or series of capital stock which it would have been entitled to receive upon or by reason of such event if the shares of AirTouch Common Stock issuable pursuant to Section 3.1(b) had been received immediately before the record date (or, if no record date, the effective date) for such event and (ii) the Cap Price and the Floor Price shall each be adjusted by multiplying each of the Cap Price and the Floor Price in effect immediately prior to the opening of business on such record date or effective date by a fraction, the numerator of which shall be the Current Market Price (determined as of such record date or effective date) less the Agreed Value of the shares of capital stock so paid or distributed, and the denominator of which shall be such Current Market Price (such adjusted Cap Price and adjusted Floor Price being the "Adjusted Cap Price" and "Adjusted Floor Price"). In addition, to the extent such event occurs during the period in which the AirTouch Determination Price is determined, then the Volume-Weighted -23- Average Trading Prices for Trading Days prior to the occurrence of such event used in determining the AirTouch Determination Price shall be adjusted in a manner consistent with the foregoing adjustment. In the event of such a dividend or distribution, the number of shares of AirTouch Common Stock that constitute the Common Consideration shall be determined in the following manner: (A) If the AirTouch Determination Price is less than the Adjusted Floor Price, the number of shares of AirTouch Common Stock that constitute the Common Consideration shall equal the quotient of (1) the Common Value, divided by (2) the Floor Price (the "Floor Number"). (B) If the AirTouch Determination Price is greater than the Adjusted Cap Price, the number of shares of AirTouch Common Stock that constitute the Common Consideration shall equal the quotient of (1) the Common Value, divided by (2) the Cap Price (the "Cap Number"). (C) If the AirTouch Determination Price is greater than or equal to the Adjusted Floor Price and less than or equal to the Adjusted Cap Price, the number of shares of AirTouch Common Stock that constitute the Common Consideration shall equal the difference between (x) the Floor Number and (y) the product of (i) the difference between the Floor Number and the Cap Number multiplied by (ii) a fraction, the numerator of which shall be the difference between the AirTouch Determination Price and the Adjusted Floor Price and the denominator of which shall be the difference between the Adjusted Cap Price and the Adjusted Floor Price. (f) Any adjustments under Section 3.2(d) and (e) shall be made successively whenever an event requiring such an adjustment occurs. 3.3 POST-CLOSING ADJUSTMENTS TO MERGER CONSIDERATION. (a) At any time following the date that any Scheduled Property shall become a Disposed Asset, AirTouch shall deliver to U S WEST a statement setting forth its calculation of the Disposed Asset Value with respect thereto. U S WEST shall, within 15 Business Days following the delivery of such statement, notify AirTouch in writing of any dispute regarding AirTouch's calculation of such Disposed Asset Value. Any such dispute shall be resolved in the manner set forth in Section 3.3(c). Within five Business Days following the later to occur of (i) the 15th Business Day following delivery of AirTouch's calculation of such Disposed Asset Value (if such calculation shall not have been disputed by U S WEST) and (ii) the resolution of any dispute regarding the calculation of such Disposed Asset Value pursuant -24- to Section 3.3(c), Media (or the NV/PCS Transferee) shall return a portion of the Merger Consideration to AirTouch by delivering to AirTouch a number of shares of AirTouch Common Stock equal to the quotient of (i) the amount of the Disposed Asset Value, divided by (ii) the Current Market Price of the AirTouch Common Stock as of the date of such delivery. If following the date of any adjustment to the Merger Consideration made pursuant to the preceding sentence, any Scheduled Property (which was a Disposed Asset solely by operation of clause (b) of the definition thereof) shall cease to be a Disposed Asset, then no later than 20 Business Days following the date on which such Scheduled Property shall so cease to be a Disposed Asset, AirTouch shall deliver to Media (or the NV/PCS Transferee) a number of shares of AirTouch Common Stock equal to the quotient of (i) the amount of the Disposed Asset Value with respect thereto, divided by (ii) the Current Market Price of the AirTouch Common Stock as of the date of such delivery. (b) No later than 15 Business Days following the occurrence of any event that would result in the recalculation of the Value Adjustment in accordance with Exhibit G, AirTouch shall deliver to U S WEST a statement setting forth its recalculation of the Value Adjustment and its calculation of the amount equal to the difference of the Value Adjustment as so recalculated, minus the Value Adjustment calculated as of the Closing Date (or as of the most recent date on which the Value Adjustment shall have been recalculated pursuant to this Section 3.3(b)) (such difference referred to herein as the "Recalculation Differential"). U S WEST shall, within 15 Business Days following the delivery of such statement, notify AirTouch in writing of any dispute regarding AirTouch's calculation of the Recalculation Differential. Any such dispute shall be resolved in the manner set forth in Section 3.3(c). Within five Business Days following the later to occur of (i) the 15th Business Day following delivery of AirTouch's calculation of such Recalculation Differential (if such calculation shall not have been disputed by U S WEST) and (ii) the resolution of any dispute regarding the calculation of such Recalculation Differential pursuant to Section 3.3(c), either (A) if the Recalculation Differential shall be positive, AirTouch shall deliver to Media (or the NV/PCS Transferee) a number of shares of AirTouch Common Stock equal to the quotient of the positive amount of the Recalculation Differential, divided by the Current Market Price of the AirTouch Common Stock as of the date of such delivery or (B) if the Recalculation Differential shall be negative, Media (or the NV/PCS Transferee) shall return a portion of the Merger Consideration to AirTouch by delivering to AirTouch a number of shares of AirTouch Common Stock equal to the quotient of the negative amount of the Recalculation Differential, divided by the Current Market Price of the AirTouch Common Stock as of the date of such delivery. (c) AirTouch and U S WEST shall meet following the delivery by U S WEST of any notice of dispute (with respect to the -25- calculation of a Disposed Asset Value or a Recalculation Differential) to discuss in good faith, and to use best efforts to resolve, all disputed matters. If ten Business Days following the delivery by U S WEST of any such notice of dispute, a dispute remains as to the calculation of such Disposed Asset Value or Recalculation Differential, as the case may be, such dispute shall be determined by a firm of independent nationally recognized accountants chosen and mutually accepted by AirTouch and U S WEST (the "Accounting Referee"), which determination shall be final and conclusive. The Accounting Referee shall resolve the dispute as promptly as practicable (but in no event later than 20 Business Days) after having the item referred to it. The costs, fees and expenses of the Accounting Referee shall be borne equally by AirTouch and U S WEST. 3.4 SURRENDER AND EXCHANGE. (a) From and after the Effective Time, Media (or the NV/PCS Transferee), as sole holder of all of the issued and outstanding shares of NV Stock and PCS Holdings Stock, shall be entitled to receive, upon surrender of all the certificates representing such shares, the Merger Consideration payable in respect of such shares as provided for in Section 3.1(b). After the Effective Time, such certificates shall, until so surrendered, represent for all purposes only the right to receive such Merger Consideration. From and after the Effective Time, there shall be no further registration of the transfer on the stock transfer books of the Surviving Corporation of shares of NV Stock or PCS Holdings Stock which were outstanding immediately prior to the Effective Time. (b) No dividends, interest or other distributions with respect to the Merger Consideration shall be paid to Media (or the NV/PCS Transferee) as the holder of any unsurrendered certificates representing the NV Stock or the PCS Holdings Stock outstanding prior to the Effective Time, until all such certificates are surrendered as provided in this Section 3.4. Upon surrender of all such certificates (or, if later, the appropriate payment date), there shall be paid, without interest, to Media (or the NV/PCS Transferee) as the Person in whose name the certificates representing the Merger Consideration into which such shares were converted are registered, all dividends, interest and other distributions payable in respect of such securities on a date subsequent to, and in respect of a record date after, the Effective Time. (c) AirTouch shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to Media (or the NV/PCS Transferee) as the holder of the shares of NV Stock and PCS Holdings Stock such amounts, if any, as are required to be deducted and withheld with respect to the making of such payment under the Code, or any provision of state, local or foreign Tax law. To the extent that amounts are so withheld by AirTouch such withheld amounts shall be treated -26- for all purposes of this Agreement as having been paid to Media (or the NV/PCS Transferee) as the holder of the shares of NV Stock and PCS Holdings Stock. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF U S WEST U S WEST hereby represents and warrants to AirTouch as follows: 4.1 ORGANIZATION AND QUALIFICATION. Each of U S WEST, Media, NV, PCS Holdings and the Domestic Wireless Subsidiaries is, and the NV/PCS Transferee will be, a corporation, partnership or other entity duly organized or formed, validly existing and in good standing under the laws of its jurisdiction of organization or formation and has all requisite power and authority to own, lease and operate its assets and properties and to carry on its business as currently conducted. Each of U S WEST, Media, NV, PCS Holdings and the Domestic Wireless Subsidiaries is, and the NV/PCS Transferee will be, duly qualified to do business and is in good standing in each jurisdiction where the ownership or operation of its assets and properties or the conduct of its business requires such qualification, except where the failure to be so qualified or in good standing, as the case may be, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business. Complete and correct copies of the Articles of Incorporation and Bylaws of NV and the Certificate of Incorporation and Bylaws of PCS Holdings, each as amended to date, have been delivered to AirTouch. Such Articles and Certificate of Incorporation and Bylaws are in full force and effect. 4.2 CAPITALIZATION; SUBSIDIARIES. (a) The authorized capital stock of NV consists of 43,000,000 shares of NV Stock, of which 42,150,273 shares are issued and outstanding, and all of which are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights. The authorized capital stock of PCS Holdings consists of one share of PCS Holdings Stock, which share is issued and outstanding and is duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights. Media is the owner of all of the issued and outstanding shares of NV Stock and PCS Holdings Stock, free and clear of all Encumbrances; PROVIDED, that if the U S WEST Separation is consummated prior to the Closing Date, the NV/PCS Transferee will be the owner of all of the issued and outstanding shares of NV Stock and PCS Holdings Stock as of the Closing Date, free and clear of all Encumbrances. (b) Section 4.2(b) of the U S WEST Merger Disclosure Schedule sets forth, as of the date hereof, a true and complete list of all of the Domestic Wireless Subsidiaries and Domestic Wireless Investments, including the jurisdiction of incorporation -27- or organization of each Domestic Wireless Subsidiary and Domestic Wireless Investment, the authorized capital stock or other ownership interests of each Domestic Wireless Subsidiary and Domestic Wireless Investment, the percentage of each Domestic Wireless Subsidiary's outstanding capital stock or other ownership interests owned by NV or a Subsidiary of NV or by any other Person and the percentage of each Domestic Wireless Investment's capital stock or other ownership interests owned by NV or, to the knowledge of U S WEST, by any other Person. All of the outstanding shares of capital stock of, or other ownership interests in, each Domestic Wireless Subsidiary and Domestic Wireless Investment directly or indirectly owned by NV are duly authorized, validly issued, fully paid and non-assessable and, except as set forth in Section 4.2(b) of the U S WEST Merger Disclosure Schedule, are owned by NV or a Subsidiary of NV, free and clear of all Encumbrances. NV does not, directly or indirectly, own any capital stock of or other ownership interests in any corporation, partnership or other Person, other than the Domestic Wireless Subsidiaries and Domestic Wireless Investments or, except as set forth in Section 4.2(b) of the U S WEST Merger Disclosure Schedule, have any Contract relating to the issuance, sale or purchase of any ownership interest in any such Person. Except as set forth in Section 4.2(b) of the U S WEST Merger Disclosure Schedule, none of NV, any Domestic Wireless Subsidiary or, to the knowledge of U S WEST, any Domestic Wireless Investment has engaged or currently engages, directly or indirectly, in the conduct or ownership of any business or activity other than the provision in the United States of Cellular Services. Neither U S WEST nor any Affiliate thereof (other than the Communications Wireless Business and the business of any Excluded Assets) directly or indirectly engages in the provision in the United States of Cellular Services, ESMR services or PCS Services other than through the Domestic Wireless Business. (c) PCS Holdings does not, directly or indirectly, own any capital stock or other ownership interests in any corporation, partnership or other Person, other than PCS Nucleus and PrimeCo. PCS Holdings is the sole owner of the PCS Partnership Interests, free and clear of all Encumbrances, other than as expressly provided under the PCS Nucleus Agreement. Immediately following the Effective Time, AirTouch will be the sole owner of all right, title and interest to and in the PCS Partnership Interests. The PCS Partnership Interests owned by PCS Holdings constitute the entirety of any interest in PCS Nucleus held directly or indirectly by U S WEST or any Affiliate thereof. (d) Other than as set forth in Sections 4.2(a) and 4.2(b) or in Section 4.2(d) of the U S WEST Merger Disclosure Schedule, (i) no shares of the capital stock or other ownership interests of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries are authorized, issued or outstanding, or reserved for any other purpose, and there are no options, warrants, convertible or exchangeable securities or other rights (including registration -28- rights), agreements, arrangements or commitments of any character to which NV, PCS Holdings or any of the Domestic Wireless Subsidiaries is a party relating to or based upon the issued or unissued capital stock or other ownership interests of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries or any obligation of NV or PCS Holdings or any of the Domestic Wireless Subsidiaries to grant, issue or sell any shares of capital or other ownership interests, of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries by sale, lease, license or otherwise and (ii) none of NV, PCS Holdings and any of the Domestic Wireless Subsidiaries has any outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote or which are convertible into or exercisable for securities having the right to vote with the stockholders of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries on any matter. Except as set forth in Section 4.2(d) of the U S WEST Merger Disclosure Schedule, there are no voting trusts or other agreements or understandings with respect to the voting of the capital stock or other ownership interests of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries. 4.3 CORPORATE AUTHORITY. Each of U S WEST, Media, NV and PCS Holdings has, and, in the event that the NV/PCS Transferee shall become a party hereto, the NV/PCS Transferee will have, the requisite corporate power and authority to execute and deliver this Agreement and each other Transaction Agreement to which it is a party and to perform its respective obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by each of U S WEST, Media, NV and PCS Holdings of this Agreement and each other Transaction Agreement to which it is a party and the consummation by each of U S WEST, Media, NV and PCS Holdings of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of each of U S WEST, Media, NV and PCS Holdings. In the event that the NV/PCS Transferee shall become a party hereto, the execution, delivery and performance by the NV/PCS Transferee of this Agreement and each other Transaction Agreement to which it becomes a party and the consummation by the NV/PCS Transferee of the transactions contemplated hereby and thereby will be duly authorized by all necessary corporate action on the part of the NV/PCS Transferee. This Agreement and each other Transaction Agreement to which it is a party has been duly executed and delivered by each of U S WEST, Media, NV and PCS Holdings and constitutes the legal, valid and binding obligation of each of U S WEST, Media, NV and PCS Holdings (and will be duly executed and delivered by the NV/PCS Transferee and constitute the legal, valid and binding obligation of the NV/PCS Transferee) enforceable against each of them in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. -29- 4.4 CONSENTS AND APPROVALS. Except (a) as set forth in Section 4.4(a) of the U S WEST Merger Disclosure Schedule, (b) for compliance with and filings under the HSR Act, (c) for the receipt of the Orders of the FCC and state regulatory authorities set forth in Section 4.4(b) of the U S WEST Merger Disclosure Schedule (the "FCC/State Orders"), (d) for the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, the Articles of Merger with the Secretary of State of the State of Colorado and appropriate documents with the relevant authorities of other states in which either NV or PCS Holdings is qualified to do business, and (e) for such filings in connection with any state or local Tax which is attributable to the beneficial ownership of the owned or leased property used in the operation of the Domestic Wireless Business, if any (collectively, "Gains Taxes") (the items in clauses (a) through (e) being collectively referred to herein as "U S WEST Consents"), no Consents, approvals, licenses, permits, orders or authorizations of, or registrations, declarations, notices or filings with, any Governmental Authority or any Third Party are required to be obtained or made by or with respect to U S WEST, Media, NV, PCS Holdings or any of the Domestic Wireless Subsidiaries (or will be required to be obtained or made by or with respect to the NV/PCS Transferee) on or prior to the Closing Date in connection with (A) the execution, delivery and performance of this Agreement or any of the other Transaction Agreements, the consummation of the transactions contemplated hereby and thereby or the taking by U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) of any other action contemplated hereby or thereby, (B) the continuing validity and effectiveness of, the prevention of any material default or event of withdrawal or dissolution under or the violation of the terms of (i) any material License or Material Contract relating to the operation of NV, PCS Holdings, any Domestic Wireless Subsidiary or, to the knowledge of U S WEST, any Domestic Wireless Investment or (ii) any partnership, joint venture or similar agreement of NV, PCS Holdings or any Domestic Wireless Subsidiary or Domestic Wireless Investment or (C) the operation of the Domestic Wireless Business following the Closing as conducted on the date hereof, other than, in the case of clauses (A) and (C), Consents that, if not obtained or made, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform their respective obligations under this Agreement and the other Transaction Agreements or consummate the transactions contemplated hereby and thereby. 4.5 NON-CONTRAVENTION. Except as set forth in Section 4.5 of the U S WEST Merger Disclosure Schedule, the execution, delivery and performance by each of U S WEST, Media, NV and PCS Holdings (and the NV/PCS Transferee) of this Agreement and each other Transaction Agreement to which it is a party, and the consummation by U S WEST, Media, NV and PCS Holdings (and the NV/PCS Transferee) of the transactions contemplated hereby and -30- thereby, do not and will not (a) violate any provision of the Certificates of Incorporation or Bylaws of U S WEST, Media (or the NV/PCS Transferee) or PCS Holdings, the Articles of Incorporation or Bylaws of NV or, subject to obtaining the U S WEST Consents, the certificate of incorporation or bylaws or comparable organizational document of any of the Domestic Wireless Subsidiaries or Domestic Wireless Investments; (b) subject to obtaining the U S WEST Consents, conflict with, or result in the breach of, or constitute a default or an event of withdrawal or dissolution under, or result in the termination, modification, cancellation or acceleration (whether after the filing of notice or the lapse of time or both) of any right or obligation of U S WEST, Media, NV, PCS Holdings or any of the Domestic Wireless Subsidiaries (or the NV/PCS Transferee) under, any note, mortgage, indenture, lease, Material Contract, agreement or other obligation or instrument of U S WEST, Media, PCS Holdings or any of the Domestic Wireless Subsidiaries (or the NV/PCS Transferee); (c) subject to obtaining the U S WEST Consents, give rise to any option, right of first refusal or similar right of any Third Party with respect to any interest in any Domestic Wireless Subsidiary or Domestic Wireless Investment; or (d) subject to obtaining the U S WEST Consents, violate, or result in a breach of or constitute a default under any Applicable Law in relation to the operation of the Domestic Wireless Business, other than, in the case of clauses (b) and (d), any conflict, breach, termination, modification, default, cancellation, acceleration, loss or violation that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform its obligations under this Agreement and the other Transaction Agreements or consummate the transactions contemplated hereby and thereby. 4.6 FINANCIAL STATEMENTS; UNDISCLOSED LIABILITIES. (a) Section 4.6(a) of the U S WEST Merger Disclosure Schedule contains the audited consolidated balance sheet of NV and its Subsidiaries as of December 31, 1996; the audited consolidated statements of operations and cash flows of NV and its Subsidiaries for the year ended December 31, 1996; the unaudited consolidated balance sheet of NV and its Subsidiaries as of September 30, 1997; and the unaudited consolidated statements of operations and cash flows of NV and its Subsidiaries for the nine months ended September 30, 1997 (collectively, the "Domestic Wireless Financial Statements"). Except as set forth in the Domestic Wireless Financial Statements or in the notes thereto, or otherwise in this Section 4.6(a) or in Section 4.6(a) of the U S WEST Merger Disclosure Schedule, the Domestic Wireless Financial Statements have been prepared in accordance with GAAP, applied on a consistent basis for all periods presented and fairly present, in all material respects (subject, in the case of unaudited financial statements, to -31- normal recurring audit adjustments), the consolidated financial position of NV and its Subsidiaries as of the dates set forth therein and the consolidated results of operations and cash flows of NV and its Subsidiaries for the periods then ended. (b) Except (i) as set forth in the Domestic Wireless Financial Statements or in the notes thereto, (ii) as set forth in Section 4.6(b) of the U S WEST Merger Disclosure Schedule, (iii) for liabilities and obligations in respect of Excluded Claims and Excluded Settlements and (iv) for liabilities and obligations incurred since September 30, 1997 in the ordinary course of business of the Domestic Wireless Business, neither NV nor any of the Domestic Wireless Subsidiaries has any outstanding claims, indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise) that relate to the operations of the Domestic Wireless Business that would be required by GAAP to be reflected in the consolidated balance sheet of NV and its Subsidiaries or in the notes or schedules thereto. (c) PCS Holdings has as its only assets the PCS Partnership Interests and the contract rights under this Agreement and the PCS Nucleus Agreement. PCS Holdings has no Liabilities of any nature, other than the principal amount outstanding under the (i) Assumed PCS Debt, (ii) guarantees executed in respect of the Leveraged Leases, (iii) Tax liabilities under Treasury Regulation section 1.1502-6 resulting from PCS Holdings being a member of the NV/PCS Affiliated Group and ERISA, environmental and other liabilities resulting from PCS Holdings being a Subsidiary of U S WEST (all of which shall be the sole responsibility of the U S WEST Group) and (iv) those Liabilities expressly contemplated by or arising solely out of actions pursuant to and not inconsistent with this Agreement or the PCS Nucleus Agreement. Since the date of PCS Holdings' organization, neither PCS Holdings nor any Person to which it is the successor in interest, by operation of law or otherwise, has engaged in any business or operations other than the ownership of the PCS Partnership Interests. (d) Except as set forth in Section 4.6(d) of the U S WEST Merger Disclosure Schedule or as contemplated by this Agreement, since December 31, 1996, the Domestic Wireless Business has been conducted only in the ordinary course consistent with past practice and in the manner required by Sections 3.1(b) and 3.1(d) of the Joint Venture Organization Agreement, and there has not been any event, change or development, other than an event, change or development resulting from general economic or industry-wide conditions, that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST to perform its obligations under this Agreement or the other Transaction Agreements or consummate the transactions contemplated hereby or thereby. -32- 4.7 LITIGATION. Except as set forth in Section 4.7 of the U S WEST Merger Disclosure Schedule and for investigations by Governmental Authorities as to which U S WEST has received no notice and otherwise has no knowledge, there are no Legal Proceedings relating to the operation of the Domestic Wireless Business pending or, to the knowledge of U S WEST, threatened against NV, PCS Holdings or any of the Domestic Wireless Subsidiaries, except Legal Proceedings which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform its obligations under this Agreement or consummate the transactions contemplated hereby. Except as set forth in Section 4.7 of the U S WEST Merger Disclosure Schedule, there is no order, judgment, injunction or decree of any Governmental Authority outstanding against U S WEST, Media (or the NV/PCS Transferee), NV, PCS Holdings or any of the Domestic Wireless Subsidiaries or, to the knowledge of U S WEST, any Domestic Wireless Investments that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform its obligations under this Agreement and the other Transaction Agreements or consummate the transactions contemplated hereby and thereby. None of NV, the Domestic Wireless Subsidiaries and, to the knowledge of U S WEST, the Domestic Wireless Investments is a party to or otherwise bound by the terms of any Settlement the terms of which, or obligations under which, AirTouch, any Domestic Wireless Subsidiary or any Domestic Wireless Investment would be bound by or obligated to perform following the Effective Time. 4.8 TAXES. (a) NV, PCS Holdings, each of the Domestic Wireless Subsidiaries, and each consolidated, combined, affiliated or unitary group of which NV, PCS Holdings, any of the Domestic Wireless Subsidiaries, is or has ever been a member (together, the "NV/PCS Affiliated Group") has timely filed all federal income tax returns and all other material Tax returns and reports required to be filed by it. All such returns are complete and correct in all material respects. NV, PCS Holdings and each of the Domestic Wireless Subsidiaries has paid (or U S WEST or Media or, if applicable, the NV/PCS Transferee has paid on NV's or the Domestic Wireless Subsidiaries' or PCS Holdings' behalf) all Taxes shown due on such returns, the Domestic Wireless Financial Statements reflect an adequate reserve for all Taxes payable by NV and the Domestic Wireless Subsidiaries and the financial statements of PCS Holdings reflect an adequate reserve for all Taxes payable by PCS Holdings, in each case, for all taxable periods and portions thereof through the date of such financial statements. No liens for Taxes exist with respect to any of the assets or properties of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries, except for -33- statutory liens for Taxes not yet due. All federal income Tax returns filed by or on behalf of the NV/PCS Affiliated Group have been examined by and settled with the IRS or the statute of limitations with respect to the relevant Tax liability has expired, for all taxable periods through and including the period ended December 31, 1987. All Taxes due with respect to any completed and settled audit, examination or deficiency litigation with any taxing authority have been paid in full. Except as set forth in Section 4.8(a) of the U S WEST Merger Disclosure Schedule, there is no audit, examination, deficiency or refund litigation pending, with respect to any Taxes for which NV, PCS Holdings or the Domestic Wireless Subsidiaries is or might be liable and no taxing authority has given written notice of the commencement of any audit, examination or deficiency litigation with respect to any such Taxes. Except as set forth in Section 4.8(a) of the U S WEST Merger Disclosure Schedule, none of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries is a party to a Tax allocation or sharing agreement or any agreement pursuant to which NV, PCS Holdings or any of the Domestic Wireless Subsidiaries has indemnified another party with respect to Taxes. Except as set forth in Section 4.8(a) of the U S WEST Merger Disclosure Schedule, none of NV, PCS Holdings or any of the Domestic Wireless Subsidiaries shall be required to include in a taxable period ending after the date on which the Effective Time occurs taxable income attributable to income that economically accrued in a prior taxable year with respect to Section 481 of the Code or any comparable provision of state or local Tax law. No Person has made with respect to NV, PCS Holdings or any of the Domestic Wireless Subsidiaries, or with respect to any property held by NV, PCS Holdings or any of the Domestic Wireless Subsidiaries, any consent under Section 341 of the Code. Except as set forth in Section 4.8(a) of the U S WEST Merger Disclosure Schedule, there is no agreement or other document extending, or having the effect of extending, the period of assessment or collection of any Taxes for which NV, PCS Holdings or any of the Domestic Wireless Subsidiaries is or might be liable. The NV/PCS Affiliated Group is the only affiliated group of corporations, within the meaning of Section 1504(a) of the Code, of which the NV/PCS Transferee has ever been a member. (b) (i) There is no excess loss account in the stock of any Domestic Wireless Subsidiary, (ii) there is no deferred income or gain arising from deferred intercompany transactions allocable to NV, PCS Holdings or any Domestic Wireless Subsidiary and (iii) no overall foreign loss is allocable to NV, PCS Holdings or any Domestic Wireless Subsidiary. (c) None of U S WEST, Media, the NV/PCS Transferee, NV, PCS Holdings or any of their Subsidiaries has taken or agreed to take any action that would prevent the NV Merger or the PCS Holdings Merger from, in each case, constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. None of U S WEST, Media or the NV/PCS Transferee has any plan, intention, or arrangement to dispose of any of the AirTouch Stock -34- received in the NV Merger or the PCS Holdings Merger in a manner that would cause the NV Merger or the PCS Holdings Merger, respectively, to violate the continuity of shareholder interest requirements set forth in Treas. Regs. Section 1.368-1. 4.9 ERISA COMPLIANCE. Except as described in the Domestic Wireless Financial Statements, as set forth in Section 4.9 of the U S WEST Merger Disclosure Schedule or as would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business, (i) all Employee Benefit Plans and Employee Arrangements are in compliance with all applicable requirements of law, including ERISA and the Code, and (ii) neither NV nor any of its Subsidiaries nor PCS Holdings has any Liabilities or obligations with respect to any such employee benefit plans or arrangements, whether accrued, contingent or otherwise, nor to the knowledge of U S WEST are any such Liabilities or obligations expected to be incurred. Except as set forth in Section 4.9 of the U S WEST Merger Disclosure Schedule, all Employee Benefit Plans in which Affected Employees participate are sponsored by U S WEST or Media, and AirTouch shall not assume sponsorship of any such Employee Benefit Plans as a consequence of the transactions contemplated by this Agreement. Section 4.9 of the U S WEST Merger Disclosure Schedule identifies all Employee Arrangements in which Affected Employees participate. 4.10 COMPLIANCE WITH LAWS. Except as set forth in Section 4.10 of the U S WEST Merger Disclosure Schedule, U S WEST, Media, NV, PCS Holdings and each of the Domestic Wireless Subsidiaries is (and the NV/PCS Transferee will be) in compliance with all Applicable Laws that relate to the operation of the Domestic Wireless Business, except where the failure so to comply, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform its obligations under this Agreement and the other Transaction Agreements or consummate the transactions contemplated hereby and thereby. 4.11 EMPLOYMENT AND NON-COMPETITION AGREEMENTS. (a) Except as set forth in Section 4.11 of the U S WEST Merger Disclosure Schedule, neither NV nor any Domestic Wireless Subsidiary is a party to, or otherwise bound by, any executive employment agreement, secondment agreement or other similar employment agreement involving annual payments exceeding $250,000 or any non-competition, non-solicitation or other similar agreement that would similarly restrict or impair the operations or businesses of AirTouch or its Subsidiaries following the Effective Time. (b) PCS Holdings has, and at the Effective Time will have, no employees. PCS Holdings is not, and at the Effective Time -35- will not be, a party to or otherwise bound by, any employment, secondment or other similar employment agreement or any non-competition, non-solicitation or other similar agreement that would similarly restrict or impair the operations or businesses of AirTouch or its Subsidiaries following the Effective Time. 4.12 DOMESTIC WIRELESS ASSETS. (a) Each of NV and the Domestic Wireless Subsidiaries has, and immediately after the Merger each of the Surviving Corporation (with respect to the property and assets of NV immediately prior to the Effective Time) and the Domestic Wireless Subsidiaries will have, good and valid title to its properties and assets (other than properties or assets as to which it is lessee or licensee), and valid and subsisting leasehold interests in all properties or assets of which it is lessee or licensee, except for such defects which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business, in each case free and clear of Encumbrances other than Permitted Encumbrances. (b) Subject to the rights of Third Parties existing as of the date hereof which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business, NV and the Domestic Wireless Subsidiaries have, and immediately after the Merger the Surviving Corporation and the Domestic Wireless Subsidiaries will have, all right, title and interest (including minority interests) in and to (i) all of their assets that are used or held for use in, or that are otherwise necessary for, the operation, as currently conducted, of the Domestic Wireless Business, (ii) whether or not included within the assets referred to in clause (i) above, all assets (including, without limitation, capital stock and partnership interests) reflected in the Domestic Wireless Financial Statements, in each case, as such assets may have been added to, sold or otherwise changed in the ordinary course of business since September 30, 1997 or in accordance with this Agreement, and (iii) all assets of U S WEST or Media and their respective Subsidiaries primarily used by, or held for use primarily by, the Domestic Wireless Business (other than Intellectual Property, the U S WEST Insurance Arrangements and cash and cash equivalents). 4.13 INTELLECTUAL PROPERTY. Except as provided in Section 4.13 of the U S WEST Merger Disclosure Schedule, NV owns the entire right, title and interest in and to or has the right to use (pursuant to valid and defensible license arrangements), all material Intellectual Property used or held for use in, or otherwise necessary for, the operation of the Domestic Wireless Business. Except as provided in Section 4.13 of the U S WEST Merger Disclosure Schedule, there are no pending or, to the knowledge of U S WEST, threatened proceedings or litigation or other adverse claims affecting or relating to such Intellectual Property, nor, to the knowledge of U S WEST any reasonable basis upon which a claim may be asserted by or against NV or any of the -36- Domestic Wireless Subsidiaries for infringement of any such Intellectual Property, in each case, that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business. The Patent License Agreement and the material Intellectual Property owned by NV or which NV has the right to use will permit the Domestic Wireless Business to use or hold for use all such Intellectual Property to the same extent that it is used or held for use, as of the Effective Time, in the operation of the Domestic Wireless Business. 4.14 LABOR MATTERS. To the knowledge of U S WEST, there are no threatened labor controversies, strikes or work stoppages with any of the employees performing work in connection with the operation of NV and the Domestic Wireless Subsidiaries that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business. None of NV or the Domestic Wireless Subsidiaries is a party to bargaining agreements (whether existing or currently being negotiated) with respect to the employees of the Domestic Wireless Business. 4.15 ENVIRONMENTAL COMPLIANCE AND LIABILITIES. (a) Except as set forth in Section 4.15(a) of the U S WEST Merger Disclosure Schedule, to the knowledge of U S WEST, there exists no fact or condition (i) that would be reasonably likely to subject NV or any of the Domestic Wireless Subsidiaries to any liability or damages (including, without limitation, actual, consequential, exemplary or punitive damages), penalties, injunctive relief or cleanup costs under any Environmental Law or (ii) that would require or would be reasonably likely to require cleanup, removal, remedial action or other response by NV or any of the Domestic Wireless Subsidiaries or any other Person pursuant to any Environmental Law that (with respect to clauses (i) and (ii)), individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business. (b) Except as set forth in Section 4.15(b) of the U S WEST Merger Disclosure Schedule, NV and the Domestic Wireless Subsidiaries are each in compliance with all applicable Environmental Laws, which compliance includes, without limitation, the possession by NV and the Domestic Wireless Subsidiaries of all material Licenses required for the operation of the Domestic Wireless Business under applicable Environmental Laws and compliance with the terms and conditions thereof, except where the failure to be in compliance, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business. (c) Except as set forth in Section 4.15(c) of the U S WEST Merger Disclosure Schedule, all rights to contractual indemnification (other than insurance policies or arrangements) for the benefit of NV or any Domestic Wireless Subsidiary -37- relating to any Liability resulting from any claim under Environmental Laws are freely transferable and enforceable in connection with the Merger. (d) Except as set forth in Section 4.15(d) of the U S WEST Merger Disclosure Schedule, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Substance of Concern or any violation of any Environmental Laws, that could form the basis of any claim arising under Environmental Laws against NV or any of the Domestic Wireless Subsidiaries or against any Person whose liability for any claim arising under Environmental Laws NV or any of the Domestic Wireless Subsidiaries has retained or assumed either contractually or by operation of law, in each case that would reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) to perform its obligations under this Agreement and the other Transaction Agreements or consummate the transactions contemplated hereby and thereby. 4.16 LICENSES. Each of NV and the Domestic Wireless Subsidiaries has all material Licenses which are necessary to conduct the Domestic Wireless Business as presently conducted. Without limiting the generality of the foregoing, NV and the Domestic Wireless Subsidiaries hold the material Licenses identified in Section 4.16 of the U S WEST Merger Disclosure Schedule, and all such material Licenses are valid and in full force and effect. None of U S WEST, Media, NV or the Domestic Wireless Subsidiaries (or the NV/PCS Transferee) has made any untrue statement of any material fact, or omitted to disclose any material fact, to any Governmental Authority or taken or failed to take any action, which misstatements or omissions, actions or failures to act, individually or in the aggregate, would subject or could reasonably be expected to subject any of the material Licenses held by NV and the Domestic Wireless Subsidiaries to revocation or failure to renew. No event has occurred with respect to any of the material Licenses which permits, or after notice or lapse of time or both would permit, revocation or termination thereof or would result in any other material impairment of the rights of the holder of any of the material Licenses. U S WEST has no reason to believe that any of the Licenses identified in Section 4.16 of the U S WEST Merger Disclosure Schedule is not likely to be renewed in the ordinary course nor that the holder of any such License would not be entitled to a renewal expectancy as such term is defined in 47 C.F.R. Section 22.941 or any successor provisions and associated FCC policies. 4.17 MATERIAL CONTRACTS. (a) Section 4.17(a) of the U S WEST Merger Disclosure Schedule contains a true and complete list of all Material Contracts (including all Related Party Agreements which are Material Contracts) to which NV, PCS -38- Holdings or any of the Domestic Wireless Subsidiaries is a party as of the date of this Agreement. (b) Except as set forth in Section 4.17(b) of the U S WEST Merger Disclosure Schedule and except (as of the Closing Date) for Material Contracts relating to the Excluded Assets, each Material Contract listed in Section 4.17(a) of the U S WEST Merger Disclosure Schedule is valid, binding, in full force and effect and enforceable by NV, PCS Holdings or one of the Domestic Wireless Subsidiaries in accordance with its terms (and, at the Effective Time, will be enforceable by the Surviving Corporation or one of the Domestic Wireless Subsidiaries, except to the extent terminated in accordance with its terms (other than by reason of the transactions contemplated hereby) or in the ordinary course of business consistent with past practices). There exists no default or event, occurrence, condition or act (including the consummation of the transactions contemplated hereby) which, with the giving of notice, the lapse of time or the happening of any other event or condition, would become a default under any such Material Contract by NV, PCS Holdings or the Domestic Wireless Subsidiary that is a party thereto or, to the knowledge of U S WEST, by any other party thereto, that would reasonably be expected to have a Material Adverse Effect with respect to the Domestic Wireless Business or materially impair or delay the ability of U S WEST, Media, NV or PCS Holdings to perform its obligations under this Agreement and the other Transaction Agreement or consummate the transactions contemplated hereby and thereby. 4.18 INSURANCE. The conduct of the Domestic Wireless Business and the assets thereof are adequately self-insured by U S WEST or an Affiliate thereof or adequately insured (in the manner and to the extent customary for businesses engaged in the same or similar business). 4.19 BROKERS. Except for Lehman Brothers Inc., whose fees will be paid by U S WEST, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of U S WEST, Media, NV or PCS Holdings (or the NV/PCS Transferee) who might be entitled to any fee or commission from NV or PCS Holdings in connection with the transactions contemplated by this Agreement. 4.20 NATURE OF ACQUISITION. Media (or the NV/PCS Transferee, as applicable) is acquiring the AirTouch Common Stock, the AirTouch Class D Preferred Stock and AirTouch Class E Preferred Stock which constitute the Merger Consideration for its own account, for investment. Media (or the NV PCS Transferee, as applicable) understands that the shares of AirTouch Common Stock, AirTouch Class D Preferred Stock and AirTouch Class E Preferred Stock which constitute the Merger Consideration are characterized as "restricted securities" under federal securities laws since such shares are being acquired in a transaction not involving a public offering and that under such laws and applicable -39- regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances. 4.21 OWNERSHIP OF AIRTOUCH CAPITAL STOCK. Neither U S WEST nor any of its Subsidiaries owns, or has at any time during the past three years owned, any shares of capital stock of AirTouch, other than as permitted by agreement of the parties. ARTICLE V REPRESENTATIONS AND WARRANTIES OF AIRTOUCH AirTouch hereby represents and warrants to U S WEST and Media as follows: 5.1 ORGANIZATION AND QUALIFICATION. Each of AirTouch and AirTouch's Subsidiaries is a corporation, partnership or other entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization or formation and has all requisite power and authority to own, lease and operate its assets and properties and to carry on its business as currently conducted. AirTouch is duly qualified to do business and is in good standing in each jurisdiction where the ownership or operation of its assets and properties or the conduct of its business requires such qualification, except where the failure to be so qualified or in good standing, as the case may be, has or would be reasonably expected to have a Material Adverse Effect with respect to AirTouch. Complete and correct copies of the Certificate of Incorporation and Bylaws of AirTouch, as amended to date, have been delivered to U S WEST. Such Certificate of Incorporation and Bylaws are in full force and effect. 5.2 CAPITALIZATION. (a) The authorized capital stock of AirTouch consists of (i) 1,100,000,000 shares of AirTouch Common Stock of which 504,771,115 shares were issued and outstanding as of September 30, 1997, all of which are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, AirTouch's Certificate of Incorporation or Bylaws or any agreement to which AirTouch is a party or by which AirTouch is bound and (ii) 50,000,000 shares of Preferred Stock, par value $0.01 per share, of which (A) 6,000,000 shares have been designated as Series A Preferred Stock, none of which are issued and outstanding and all of which are reserved for issuance upon exercise of rights issued pursuant to the Rights Agreement, dated as of September 19, 1994, between AirTouch and The Bank of New York, as Rights Agent (the "AirTouch Rights Agreement"), (B) 24,000,000 shares have been designated as 6.00% Class B Mandatorily Convertible Preferred Stock, Series 1996 of which 17,238,921 shares were issued and outstanding as of September 30, 1997, all of which are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, AirTouch's Certificate of Incorporation or Bylaws or any agreement to which -40- AirTouch is a party or by which AirTouch is bound and (C) 19,000,000 shares have been designated as 4.25% Class C Convertible Preferred Stock, Series 1996 of which 11,070,901 shares were issued and outstanding as of September 30, 1997, all of which are duly authorized, validly issued, fully paid and non-assessable and not subject to preemptive rights created by statute, AirTouch's Certificate of Incorporation or Bylaws or any agreement to which AirTouch is a party or by which AirTouch is bound. The shares of AirTouch Stock to be issued to Media (or the NV/PCS Transferee) pursuant to Section 3.1(b) shall be duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights created by statute, AirTouch's Certificate of Incorporation or Bylaws or any agreement to which AirTouch is a party or by which AirTouch is bound. Upon delivery by AirTouch to Media or the NV/PCS Transferee of the certificates representing such shares of AirTouch Stock pursuant to Section 3.4, AirTouch will have transferred to Media or the NV/PCS Transferee good and valid title to such shares, free and clear of any and all Encumbrances, other than Encumbrances created or suffered to exist by Media or the NV/PCS Transferee. (b) Other than as set forth in Section 5.2(a), or as described in the AirTouch SEC Documents or in Section 5.2(b) of the AirTouch Merger Disclosure Schedule, (i) no shares of the capital stock of AirTouch are authorized, issued or outstanding, or reserved for any other purpose, and there are no options, warrants or other rights (including registration rights), agreements, arrangements or commitments of any character to which AirTouch or any of its Subsidiaries is a party relating to the issued or unissued capital stock of AirTouch or any obligation of AirTouch to grant, issue or sell any shares of capital stock of AirTouch by sale, lease, license or otherwise and (ii) AirTouch has no outstanding bonds, debentures, notes or other obligations the holders of which have the right to vote or which are convertible into or exercisable for securities having the right to vote with the stockholders of AirTouch on any matter. Except as set forth in Section 5.2(b) of the AirTouch Merger Disclosure Schedule, there are no voting trusts or other agreements or understandings with respect to the voting of the capital stock of AirTouch. 5.3 CORPORATE POWER AND AUTHORIZATION. AirTouch has the requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by AirTouch and the consummation by AirTouch of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of AirTouch. This Agreement constitutes the legal, valid and binding obligation of AirTouch, enforceable against AirTouch in accordance with its terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. -41- 5.4 CONSENTS. Except (a) as set forth in Section 5.4 of the AirTouch Merger Disclosure Schedule, (b) for compliance with and filings under the HSR Act, (c) for receipt of the FCC/State Orders, (d) for the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, the Articles of Merger with the Secretary of State of the State of Colorado and appropriate documents with the relevant authorities of other states in which AirTouch is qualified to do business, (e) for the filing of the Certificates of Designation, Preferences and Rights of the AirTouch Class D Preferred Stock and the AirTouch Class E Preferred Stock with the Secretary of State of the State of Delaware, and (f) for such filings in connection with Gains Taxes (the items in clauses (a) through (f) being collectively referred to herein as "AirTouch Consents"), no Consents, approvals, licenses, permits, orders or authorizations of, or registrations, declarations, notices or filings with, any Governmental Authority or any Third Party are required to be obtained or made by or with respect to AirTouch in connection with the execution, delivery and performance of this Agreement and the other Transaction Agreements or the consummation of the transactions contemplated hereby and thereby or the taking by AirTouch of any other action contemplated hereby and thereby. 5.5 NON-CONTRAVENTION. The execution, delivery and performance by AirTouch of this Agreement, and the consummation by AirTouch of the transactions contemplated hereby, do not and will not (a) violate any provision of the Certificates of Incorporation or Bylaws of AirTouch; (b) subject to obtaining the AirTouch Consents, conflict with, or result in the breach of, or constitute a default under, or result in the termination, cancellation or acceleration (whether after the filing of notice or the lapse of time or both) of any material right or obligation of AirTouch or any of its Subsidiaries under, any material agreement, lease, Contract, note, mortgage, indenture or other obligation of AirTouch or its Subsidiaries; or (c) subject to obtaining the AirTouch Consents, violate, or result in a breach of or constitute a default under any Applicable Law to which AirTouch or any of its Subsidiaries is subject, other than, in the case of clause (b), any conflict, breach, termination, default, cancellation, acceleration, loss or violation that, individually or in the aggregate, would not have a Material Adverse Effect with respect to AirTouch or materially impair or delay the ability of AirTouch to perform its obligations under this Agreement and the other Transaction Agreements or consummate the transactions contemplated hereby and thereby. 5.6 AIRTOUCH SEC DOCUMENTS; UNDISCLOSED LIABILITIES. (a) AirTouch has filed all required reports, registration statements, proxy statements, forms and other documents with the SEC since January 1, 1997 (as such documents have since the time of their filing been amended or supplemented, the "AirTouch SEC Documents"). As of their respective dates, (i) the AirTouch SEC Documents (including any financial statements filed as a part thereof or incorporated by reference therein) complied in all -42- material respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the SEC promulgated thereunder applicable to such AirTouch SEC Documents, and (ii) at the time they were filed (and at the time they became effective in the case of registration statements), none of the AirTouch SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. At their respective dates, the financial statements of AirTouch included in the AirTouch SEC Documents complied as to form in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP (except, in the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and fairly presented in all material respects (subject, in the case of unaudited financial statements, to normal, recurring audit adjustments) the consolidated financial position of AirTouch and its consolidated Subsidiaries as at the dates thereof and the consolidated results of their operations and cash flows for the periods then ended. (b) Except (i) as disclosed in the AirTouch SEC Documents filed and publicly available prior to the date of this Agreement, and (ii) for liabilities and obligations incurred in the ordinary course, neither AirTouch nor its Subsidiaries have any outstanding claims, indebtedness, obligations or liabilities of any kind (whether accrued, absolute, contingent or otherwise) required by GAAP to be reflected on a consolidated balance sheet of AirTouch and its consolidated Subsidiaries or in the notes or schedules thereto. (c) Except as set forth in Section 5.6(c) of the AirTouch Merger Disclosure Schedule, since December 31, 1996, AirTouch and its Subsidiaries have conducted their respective businesses only in the ordinary course, and there has not been any event, change or development, other than an event, change or development resulting from general economic or industry-wide conditions, that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to AirTouch or materially impair or delay the ability of AirTouch to perform its obligations under this Agreement or the other Transaction Agreements or consummate the transactions contemplated hereby or thereby. 5.7 LITIGATION. Except as disclosed in the AirTouch SEC Documents filed and publicly available prior to the date of this Agreement and for investigations by Governmental Authorities as to which AirTouch has received no notice and otherwise has no knowledge, there are no Legal Proceedings pending or, to the knowledge of AirTouch, threatened against AirTouch or any of its Subsidiaries that, individually or in the aggregate, would -43- reasonably be expected to have a Material Adverse Effect with respect to AirTouch or materially impair or delay the ability of AirTouch to perform its obligations under this Agreement or consummate the transactions contemplated hereby. Except as disclosed in the AirTouch SEC Documents filed and publicly available prior to the date of this Agreement, there is no order, judgment, injunction or decree of any Governmental Authority outstanding against AirTouch or any of its Subsidiaries that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect with respect to AirTouch or materially impair or delay the ability of AirTouch to perform its obligations under this Agreement and the other Transaction Agreements or consummate the transactions contemplated hereby or thereby. 5.8 TAXES. (a) AirTouch and each consolidated, combined, affiliated or unitary group of which AirTouch is a member (together, the "AirTouch Affiliated Group") has timely filed all material Tax returns or reports required to be filed by it or requests for extensions have been timely filed and any such extensions have been granted and have not expired. All such Tax returns were complete and correct in all material respects. All Taxes shown due on such returns have been paid and the most recent financial statements contained in the AirTouch SEC Documents filed and publicly available prior to the date of this Agreement reflect an adequate reserve for all Taxes payable by AirTouch for all taxable periods through the date of such financial statements. (b) Neither AirTouch nor any of its Subsidiaries has taken or agreed to take any action that would prevent the NV Merger or the PCS Holdings Merger from, in each case, constituting a reorganization qualifying under the provisions of Section 368(a) of the Code. AirTouch does not have any plan, intention or arrangement to dispose of any assets of NV, the Domestic Wireless Subsidiaries or the Domestic Wireless Investments (in each case, other than any Disposed Asset) or any of the assets of PCS Holdings in a manner that would cause the NV Merger or the PCS Holdings Merger, respectively, to violate the continuity of business enterprise requirements set forth in Treas. Reg. Section 1.368-1 of the Code. 5.9 COMPLIANCE WITH LAWS. AirTouch and each of its Subsidiaries is in compliance with all Applicable Laws, except where the failure so to comply, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect with respect to AirTouch. 5.10 BROKERS. Except for Morgan Stanley & Co. Incorporated, whose fees will be paid by AirTouch, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of AirTouch who might be entitled to any fee or commission from AirTouch in -44- connection with the transactions contemplated by this Agreement and the other Transaction Agreements. ARTICLE VI COVENANTS RELATING TO CONDUCT OF BUSINESS 6.1 CONDUCT OF BUSINESS OF NV AND PCS HOLDINGS. (a) Except as set forth in item 1 of Section 6.1(a) of the U S WEST Merger Disclosure Schedule or as otherwise contemplated by this Agreement, during the period from the date hereof to the Effective Time, NV and PCS Holdings shall, and NV shall cause the Domestic Wireless Subsidiaries to, except as otherwise expressly contemplated by this Agreement, (i) conduct the Domestic Wireless Business only in the ordinary course consistent with past practice (including, without limitation, not taking any actions out of the ordinary course to generate cash, such as delaying payables or accelerating receivables) and in the manner required by Section 3.1(b) of the Joint Venture Organization Agreement, (ii) make capital expenditures with respect to the Domestic Wireless Business at the times and in amounts not less than 80% of the amounts set forth in item 2 of Section 6.1(a) of the U S WEST Merger Disclosure Schedule ("Planned Capital Expenditures") and (iii) make capital contributions to PCS Nucleus at the times and in the amounts contemplated by the business plans and budgets of PCS Nucleus and PrimeCo. (b) During the period from the date hereof to the Effective Time, except as set forth in Section 6.1(b) of the U S WEST Merger Disclosure Schedule or as otherwise expressly contemplated by this Agreement, neither NV nor PCS Holdings shall (and NV shall cause the Domestic Wireless Subsidiaries not to), without the written consent of AirTouch, which consent may not be unreasonably withheld or delayed: (i) issue, sell, pledge, dispose of or encumber, or authorize or propose the issuance, sale, pledge, disposition or encumbrance of, any shares of, or securities convertible or exchangeable for, or options, puts, warrants, calls, commitments or rights of any kind to acquire, any shares of capital stock or voting securities of NV or PCS Holdings or capital stock or other ownership interests of any Domestic Wireless Subsidiary; (ii) take any action which would be prohibited under Section 3.1(d) of the Joint Venture Organization Agreement (treating PCS Holdings for this purpose as a subsidiary of NV); (iii) implement any change in its accounting principles, practices or methods, other than as may be -45- required by GAAP and other than transfers of reserves with respect to Excluded Claims and Excluded Settlements; (iv) take or agree to take any action that would prevent the NV Merger, or the PCS Holdings Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code; (v) terminate, establish, adopt, enter into, amend or otherwise modify (A) any Employee Arrangement or any employment, independent contractor, secondment, or similar employment agreement or Employee Arrangement to the extent any such actions would increase annual payments or contributions (or both) to be made by NV and the Domestic Wireless Subsidiaries by an amount in excess of $250,000 or (B) any non-competition, non-solicitation or similar agreement affecting the Domestic Wireless Business or that would be binding upon AirTouch or any Subsidiary of AirTouch after the Effective Time, except for (x) budgeted, scheduled, broad-based compensation increases implemented in the ordinary course of business consistent with past practices, (y) amendments or modifications of Employee Arrangements that are required by Applicable Law and (z) the termination of any non- competition or non-solicitation agreement that would restrict the business of AirTouch and its Subsidiaries following the Effective Time; (vi) terminate, establish, adopt, enter into, make any new grants or awards under, amend or otherwise modify any Employee Benefit Plans that would be binding upon AirTouch or any Subsidiary of AirTouch after the Effective Time, or grant any increase or potential increase in direct or indirect compensation of any nature affecting any Affected Employee, except for (A) budgeted, scheduled, broad-based compensation increases implemented in the ordinary course of business consistent with past practices, and (B) amendments or modifications of Employee Benefit Plans that are required by Applicable Law or do not have an aggregate financial impact on Affected Employees under all such Employee Benefit Plans exceeding $100,000; (vii) enter into, amend or otherwise modify any Settlement the terms of which, or obligations under which, AirTouch, any Domestic Wireless Subsidiary or any Domestic Wireless Investment would be bound by or obligated to perform following the Effective Time; or (viii) authorize any of, or commit or agree to take any of, the actions referred to in clauses (i) through (vii) above. 6.2 CONDUCT OF BUSINESS OF AIRTOUCH. (a) From and after the date hereof to the Effective Time, except as specifically permitted by the terms of this Agreement, AirTouch shall not -46- (and, as applicable, shall cause its Subsidiaries not to), without the written consent of U S WEST, which consent may not be unreasonably withheld or delayed: (i) issue any shares of AirTouch Common Stock or any option, warrant or right relating thereto or any securities convertible into or exchangeable for any shares of AirTouch Common Stock (other than pursuant to existing agreements or existing options or benefit plans or upon conversion of outstanding securities) in one or more transactions to the extent that the number of shares of AirTouch Common Stock issued (and/or issuable upon exercise of any such option, warrant or right or upon conversion or exchange of any such security) would in the aggregate represent more than 20% of the number of shares of AirTouch Common Stock outstanding immediately prior to such issuance; (ii) during the period in which the AirTouch Determination Price is being calculated, purchase or trade any shares of AirTouch Common Stock (other than pursuant to the terms of options or benefit plans or upon conversion, exchange or exercise of outstanding securities); (iii) amend the Certificate of Incorporation of AirTouch to alter or change the powers, preferences or special rights of the shares of AirTouch Common Stock so as to affect them materially adversely, or amend the Bylaws of AirTouch in a manner materially adverse to the holders of AirTouch Common Stock; (iv) effect a reclassification of the shares of AirTouch Common Stock, or pay any single dividend or other distribution (whether in cash, capital stock or other assets) to holders of AirTouch Common Stock where the value of such dividend or distribution (in excess of the fair market value of any consideration received therefor) together with the value of all dividends and distributions (in excess of the fair market value of any consideration received therefor) made to the holders of AirTouch Common Stock during the period from the date hereof and prior to such dividend or distribution exceeds 20% of the product of (A) the Volume-Weighted Average Trading Price on the record date for determining the stockholders entitled to receive such dividend or distribution and (B) the number of shares of AirTouch Common Stock outstanding on such record date (an "Extraordinary Dividend"), or declare an Extraordinary Dividend having a record date prior to the Effective Time; (v) sell or exchange in a single transaction or series of related transactions shares of capital stock -47- of (A) AirTouch International, a California corporation, (B) AirTouch Cellular of Nevada, a Nevada corporation, (C) AirTouch Cellular, a California corporation, or (D) AirTouch Cellular, Inc., a Delaware corporation, (each, an "Operating Subsidiary"), or permit any Operating Subsidiary to enter into any agreement providing for a single transaction or series of related transactions that results in the transfer, sale or other disposition of its assets to the extent that the shares of capital stock sold or the assets subject to such transfer, sale or other disposition, as the case may be, in the aggregate would represent more than 20% of the total fair market value of AirTouch and its Subsidiaries, taken as a whole, measured on a proportionate basis immediately prior to such transaction or series of related transactions; PROVIDED, HOWEVER, that the foregoing shall not apply to (x) any primary sale of shares of capital stock of any Operating Subsidiary issued after the date hereof, and (y) any transaction or series of related transactions in which a majority of the value of the consideration received in exchange for the assets transferred, sold or otherwise disposed of consists of assets (or interests in the owner of assets) of a like kind or nature; (vi) take or agree to take any action that would prevent the NV Merger or the PCS Holdings Merger from constituting a reorganization qualifying under the provisions of Section 368(a) of the Code; or (vii) publicly announce any intention, commitment or agreement (A) to effect any of the actions prohibited by clauses (i) through (vi) above (each, a "Restricted Action") or (B) to merge, amalgamate or consolidate AirTouch in any transaction in which (x) AirTouch is not the surviving corporation and (y) the outstanding shares of AirTouch Common Stock are converted or exchanged into other securities or property (a "Parent Transaction"), if, in either case, such announcement would reasonably be expected to materially impair or delay the consummation of the transactions contemplated hereby or the ability of AirTouch to perform its obligations under this Agreement. (b) If prior to the Closing Date, (i) AirTouch shall publicly announce any intention, commitment or agreement to effect any Restricted Action or a Parent Transaction and (ii) the Volume-Weighted Average Trading Price of the AirTouch Common Stock for the ten consecutive Trading Days ending on the 30th day preceding the date of such public announcement is the Floor Price or less, then the AirTouch Determination Price shall be deemed for all purposes of this Agreement to equal the Floor Price. -48- (c) (i) If prior to the Closing Date, AirTouch shall publicly announce any intention, commitment or agreement to effect any Parent Transaction with any Person who does not have a class of equity securities registered with the SEC pursuant to Section 12(b) or 12(g) of the Exchange Act having substantially the same powers, preferences and special rights as AirTouch Common Stock, this Agreement may be terminated and the Merger abandoned by U S WEST upon consummation of such Parent Transaction. (ii) If prior to the Closing Date, AirTouch shall consummate a Parent Transaction, then this Agreement shall be deemed to be modified to provide that Media (or the NV/PCS Transferee) shall be entitled to receive: (A) in lieu of the Common Consideration, the consideration that Media (or the NV/PCS Transferee) would have been entitled to receive upon consummation of such Parent Transaction if the Closing had occurred immediately prior to the consummation of such Parent Transaction and (B) in lieu of the Preferred Consideration, shares of preferred stock of the surviving corporation in such Parent Transaction (or the parent of such surviving corporation if the stockholders of AirTouch receive shares of capital stock of such parent in connection with such Parent Transaction) having substantially the same powers, preferences and special rights as the AirTouch Class D Preferred Stock and AirTouch Class E Preferred Stock. (d)(i) If prior to the Closing Date, AirTouch shall publicly announce any intention, commitment or agreement to effect any Parent Transaction with any Person (an "Acquiring Person") and the Merger Consideration Value (as defined in (ii) below) to be received by holders of AirTouch Common Stock in such Parent Transaction is less than the Floor Price, then the number of shares of AirTouch Common Stock that constitute the Merger Consideration shall equal the quotient of (A) the Common Value, divided by (B) the Merger Consideration Value. (ii) The "Merger Consideration Value," for any Parent Transaction, shall equal the sum of (A) the amount of cash, if any, to be received per share of AirTouch Common Stock in such Parent Transaction, PLUS (B) the number of shares of Acquiring Person common stock, if any, to be received per share of AirTouch Common Stock in such Parent Transaction, multiplied by the Volume-Weighted Average Trading Price of Acquiring Person common stock for the five consecutive Trading Days commencing on the eleventh Trading Day following such announcement, plus (C) the fair market value of Acquiring Person preferred stock or other property or securities, if any, to be received per share of AirTouch Common Stock in such Parent Transaction as determined by an investment banking firm jointly selected by AirTouch and U S WEST; PROVIDED that if any such Acquiring Person preferred stock is convertible into Acquiring Person common stock, such investment banking firm will use the Volume-Weighted Average Trading Price of Acquiring Person common stock for the five -49- consecutive Trading Days commencing on the eleventh Trading Day following such announcement in determining the value of such preferred stock. 6.3 ACCESS TO INFORMATION. (a) From the date hereof until the Closing Date, U S WEST shall permit AirTouch and its representatives to have full access to the management, facilities, suppliers, accounts, books, records (including, without limitation, budgets and forecasts), contracts and other materials of the Domestic Wireless Business reasonably requested by AirTouch or such representatives and shall make available to AirTouch and its representatives the directors, officers, employees and independent accountants (and shall use reasonable best efforts to so make available its former accountants) of the Domestic Wireless Business for interviews for the purpose of verifying the information furnished to AirTouch. Such access and availability shall be subject to existing confidentiality agreements and shall be conducted by AirTouch and its representatives during normal business hours, upon reasonable advance notice and in such a manner as not to interfere unreasonably with the business or operations of the Domestic Wireless Business or U S WEST. (b) From the date hereof until the Closing Date, AirTouch shall permit U S WEST and its representatives to have reasonable access to the management, accounts, books, records and Material Contracts of AirTouch and its Subsidiaries reasonably requested by U S WEST or such representatives in view of the issuance of shares of AirTouch Stock to Media (or the NV/PCS Transferee) in the Merger and shall make available to U S WEST and its representatives, as reasonably requested by U S WEST, the officers, employees and independent accountants of AirTouch and its Subsidiaries for interviews for the purpose of verifying the information furnished to U S WEST. Such access and availability shall be consistent generally with the approach taken by U S WEST and AirTouch (with respect to AirTouch information) prior to the date of this Agreement, shall be subject to existing confidentiality agreements and shall be conducted by U S WEST and its representatives during normal business hours, upon reasonable advance notice and in such a manner as not to interfere unreasonably with the business or operations of AirTouch and its Subsidiaries. To the extent that any information requested by U S WEST pursuant to this Section 6.3(b) relates to any business plans, forecasts, budgets or other forward-looking information, or to any business of AirTouch or its Subsidiaries which actually or potentially competes with any businesses of U S WEST or its Subsidiaries, AirTouch shall only be required to permit U S WEST'S investment bankers and outside legal advisors to have access to such information, and such investment bankers and outside legal advisors shall not distribute, disseminate or disclose such information to U S WEST or any of its Subsidiaries. (c) Each of U S WEST and AirTouch agrees that it will not, and will cause each of its respective Affiliates and representatives not to, use any information obtained pursuant to this -50- Section 6.3 for any purpose unrelated to the consummation of the transactions contemplated by this Agreement and the other Transaction Agreements. The agreements, dated as of January 10, 1997 and April 4, 1997, between U S WEST and AirTouch (collectively, the "Confidentiality Agreements"), as well as the confidentiality obligations set forth in the Joint Venture Organization Agreement and the WMC Agreement, shall apply with respect to information furnished thereunder or hereunder and any other activities contemplated thereby. ARTICLE VII ADDITIONAL AGREEMENTS 7.1 TAX MATTERS. For purposes of the tax opinions to be delivered pursuant to Sections 9.2(d) and 9.3(d), respectively, (i) AirTouch will deliver representation letters substantially in the form of Exhibits G-1 and G-2 attached hereto dated as of the Closing Date, and (ii) U S WEST and Media and the NV/PCS Transferee shall deliver representation letters substantially in the form of Exhibits H-1 and H-2 attached hereto, dated as of the Closing Date, in each case, to Weil, Gotshal & Manges LLP, counsel to U S WEST, Media and the NV/PCS Transferee, and Pillsbury Madison & Sutro LLP, counsel to AirTouch. 7.2 REASONABLE BEST EFFORTS. Upon the terms and subject to the conditions set forth in this Agreement, including, without limitation, Section 7.3 and except as otherwise agreed to by the parties, each of the parties agrees to use all reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement and the other Transaction Agreements, including (a) the obtaining of all necessary actions or nonactions, waivers, Consents and approvals from Governmental Authorities and the making of all necessary registrations and filings with, and the taking of all reasonable steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by, any Governmental Authority, (b) the obtaining of all necessary Consents, approvals or waivers from Third Parties, (c) the defending of any lawsuits or other Legal Proceedings, whether judicial or administrative, challenging this Agreement or any other Transaction Agreement or the consummation of any of the transactions contemplated by this Agreement or any other Transaction Agreement, including seeking to have any stay, temporary restraining order, decree, injunction or other order entered by any court or other Governmental Authority vacated or reversed or otherwise modified to allow the transactions contemplated by this Agreement and the other Transaction Agreements to proceed and (d) the execution and delivery of any additional instruments necessary to consummate the transactions -51- contemplated by, and to fully carry out the purposes of, this Agreement and the other Transaction Agreements. 7.3 ANTITRUST NOTIFICATION; FCC AND STATE REGULATORY APPROVALS. (a) U S WEST and AirTouch shall promptly, and in any event within ten Business Days following the date hereof, file with the FTC and the DOJ, the notification and report form required for the transactions contemplated by this Agreement and any supplemental information requested in connection therewith pursuant to the HSR Act. Each of U S WEST and AirTouch shall furnish to each other's counsel such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission that is necessary under the HSR Act. Each of U S WEST and AirTouch shall use its reasonable best efforts to obtain any clearance required under the HSR Act for the consummation of the Merger and shall keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, the FTC and the DOJ and other Governmental Authorities and shall comply promptly with any such inquiry or request. (b) U S WEST and AirTouch shall promptly, and in any event within ten Business Days following the date hereof, file any required application, report or other filing or request for approval or notifications with the FCC and any state regulatory authority from whom Consent or clearance is required to be obtained in connection with the transactions contemplated hereby. Each of U S WEST and AirTouch shall furnish to each other's counsel such necessary information and reasonable assistance as the other may request in connection with its preparation of any such filing or other submission. Each of U S WEST and AirTouch shall use its reasonable best efforts to obtain any such Consent or clearance required for the consummation of the Merger and shall keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, the FCC or any state regulatory authority and shall comply promptly with any such inquiry or request. 7.4 SUPPLEMENTAL DISCLOSURE. U S WEST, Media, NV, PCS Holdings (and the NV/PCS Transferee) shall confer on a regular and frequent basis with AirTouch, and promptly notify AirTouch of, and furnish AirTouch with, any information it may reasonably request with respect to any event or condition or the existence of any fact that would cause any of the conditions to the obligation of AirTouch to consummate the Merger not to be satisfied, and AirTouch shall promptly notify U S WEST of, and furnish U S WEST with, any information it may reasonably request with respect to any event or condition or the existence of any fact that would cause any of the conditions to the obligations of U S WEST, Media, NV and PCS Holdings (and the NV/PCS Transferee) to consummate the Merger not to be satisfied. 7.5 ANNOUNCEMENTS. Prior to the Closing, none of U S WEST, Media (or the NV/PCS Transferee), NV, PCS Holdings or AirTouch -52- will issue any press release or otherwise make any public statement with respect to this Agreement and the transactions contemplated hereby without the prior consent of the other parties (which consent shall not be unreasonably withheld), except as expressly permitted by and in accordance with terms of the Confidentiality Agreements or as may be required by Applicable Law or stock exchange regulations (including, without limitation, pursuant to the United States federal securities laws in connection with any registration statement or report filed thereunder), in which event the party required to make the release or announcement shall, if possible, allow the other parties reasonable time to comment on such release or announcement in advance of such issuance. The parties agree that the initial press release to be issued with respect to the transactions contemplated by this Agreement shall be in the form heretofore agreed to by the parties. 7.6 NYSE LISTING. AirTouch shall use its best efforts to cause the shares of AirTouch Common Stock to be issued in the Merger to be approved for listing on the NYSE, subject to official notice of issuance, prior to the Effective Time. 7.7 SETTLEMENTS FOR CASH COLLECTIONS AND DISBURSEMENTS AFTER THE EFFECTIVE TIME. (a) For each calendar month commencing with the month in which the Effective Time occurs and, unless sooner terminated by agreement of the parties, continuing for a period of two years thereafter, (i) within 15 Business Days following the end of the month in question, U S WEST shall prepare and deliver to AirTouch, and AirTouch shall fully cooperate in preparing, a statement of transactions which shall reflect a complete analysis of any cash collections and cash disbursements by the U S WEST Group on behalf of the AirTouch Group during the relevant month or for any prior month that should have been (but was not) included in a prior statement and (ii) within 15 Business Days following the end of the month in question, AirTouch shall prepare and deliver to U S WEST, and U S WEST shall fully cooperate in preparing, a statement of transactions which shall reflect a complete analysis of any cash collections and cash disbursements by the AirTouch Group on behalf of the U S WEST Group during the relevant month or for any prior month that should have been (but was not) included in a prior statement; PROVIDED, HOWEVER, in each case that, with respect to the first such monthly period, such statement shall not reflect any cash collections or disbursements occurring prior to the Effective Time taken into account in determining the adjustments to the Merger Consideration. (b) Not later than five Business Days following delivery of each such monthly statement, U S WEST shall pay to AirTouch or AirTouch shall pay to U S WEST, as the case may be, in cash, an amount necessary to eliminate the account balance as reflected in each such statement (which amounts may be set off against each other as appropriate). Any Disputes relating to such amounts payable shall be exclusively governed by and settled in -53- accordance with the provisions of Section 12.14. Payments made pursuant to Section 7.7 shall not, for any purposes of this Agreement, constitute Indemnifiable Losses under Article XI or be set off against any other payments to be made (other than as provided in this Section 7.7(b)), Liabilities asserted or claims made pursuant to this Agreement, unless AirTouch and U S WEST otherwise agree in writing. (c) Following the end of the two-year period referred to in Section 7.7(a) (or such earlier period as the parties hereto may agree), AirTouch and U S WEST shall continue to deliver the statement of transactions referred to in Section 7.7(a) and pay the amounts necessary to eliminate the account balance as reflected in such statement in accordance with Section 7.7(b), not less than once every calendar quarter (or at such other intervals as the parties may agree). (d) Each of AirTouch and U S WEST hereby grants the other a limited irrevocable power-of-attorney to endorse, deposit and negotiate all checks, drafts or other forms of payment made in respect of any invoice representing a receivable payable to either of them or any of their Subsidiaries, but which are sent by the payor to a lock box maintained by the other or is made payable to either of them or any of their Subsidiaries but which is the payment of a receivable which is a receivable of the other. 7.8 USE OF U S WEST NAME. Promptly after the Effective Time, AirTouch shall cause each Domestic Wireless Subsidiary whose name includes the name "U S WEST" to change its name to delete any reference therein to "U S WEST." Promptly after the Effective Time, the Surviving Corporation shall, and shall cause the Domestic Wireless Subsidiaries to, (i) terminate any license to use the name "U S WEST" with all agents, franchisees and licensees of U S WEST and the Domestic Wireless Business (to the extent permitted by the terms of such license) and (ii) not to use the name "U S WEST" in connection with the operations of the Domestic Wireless Business; PROVIDED, HOWEVER, that for a period of 90 days after the Effective Time, the Surviving Corporation and the Domestic Wireless Subsidiaries may continue to use the "U S WEST" name on signage, business forms, business cards and stationery. Nothing herein shall require the Surviving Corporation or the Domestic Wireless Subsidiaries to recall from customers telephones, accessories or other equipment or materials labeled with the "U S WEST" name and remove such name from such telephones, accessories or other equipment or materials. 7.9 INTELLECTUAL PROPERTY. (a) At the Effective Time, the U S WEST Group or a designee of U S WEST shall retain all right, title and interest in the U S WEST Intellectual Property and the AirTouch Group shall have all right, title and interest in the Domestic Wireless Intellectual Property. -54- (b) Subject to the Patent License Agreement and the Software License Agreement, within 180 days following the Effective Time, except as set forth in Sections 7.9(c) and 7.9(d), the U S WEST Group shall cease using and shall return to AirTouch all of the Domestic Wireless Intellectual Property, and the AirTouch Group shall cease using and return to U S WEST any of the U S WEST Intellectual Property. Each of AirTouch and U S WEST recognize that certain employees of the Domestic Wireless Business have been and may in the future be employed at other Subsidiaries of U S WEST, and that certain employees of the U S WEST and its Subsidiaries have been and may in the future be employed in the Domestic Wireless Business, and that such employees may have Information, confidential or otherwise, of their former employers. The parties agree that neither will bring any Action against the other for use or disclosure of such Information to the extent that such Information is based solely on the recollection and knowledge of such employee and is not contained in any document or software, or otherwise memorialized. (c) From and after the Effective Time, (i) the U S WEST Group shall have the right to use all Confidential Information included in the Domestic Wireless Intellectual Property which is used by Subsidiaries of U S WEST (other than NV, the Domestic Wireless Subsidiaries and the Domestic Wireless Investments) as of the date hereof or used by Subsidiaries of U S WEST (other than NV, the Domestic Wireless Subsidiaries and the Domestic Wireless Investments) during the period from the date hereof until the Effective Time in the ordinary course of business consistent with past practice and (ii) the Domestic Wireless Business shall have the right to use all Confidential Information included in the U S WEST Intellectual Property which is used by the Domestic Wireless Business as of the date hereof or used by the Domestic Wireless Business during the period from the date hereof until the Effective Time in the ordinary course of business consistent with past practice; PROVIDED, HOWEVER, that, notwithstanding the foregoing, (A) the U S WEST Group shall not have the right to use any customer lists or other customer data, marketing plans or other marketing data, business plans or other financial data or operating metrics or data relating to marketing, sales and network performance included in the Domestic Wireless Intellectual Property and (B) for a period ending 18 months following the Effective Time, U S WEST Communications Group, Inc. ("USWCG") and its Subsidiaries shall not have the right to use any Confidential Information included in the Domestic Wireless Intellectual Property other than (x) Confidential Information used by USWCG or its Subsidiaries as of the date hereof and (y) Confidential Information used by USWCG or its Subsidiaries to perform administrative functions (including employee benefits, payroll, financial, clerical and accounting functions). (d) In the event there are any Excluded Assets on the Closing Date, from and after the Closing Date, the business of the Excluded Assets shall have the right to use the Domestic -55- Wireless Intellectual Property to the extent it is being used by the business of Excluded Assets as of the Closing Date; PROVIDED, HOWEVER, that, subject to Section 7.9(c), the business of Excluded Assets shall not have the right to use any Domestic Wireless Intellectual Property (including customer lists or other customer data, marketing plans or other marketing data, business plans or other financial data and operating metrics or data relating to marketing, sales and network performance) to the extent that such Domestic Wireless Intellectual Property relates to markets not constituting Excluded Assets. Notwithstanding the foregoing, and subject to any rights granted under the Resources Agreement, upon the transfer, sale or other disposition of an Excluded Asset to a Third Party or a change of control with respect to an Excluded Asset, any right granted pursuant to this Section 7.9(d) to use any Core Intellectual Property (as defined below) in the business of such Excluded Asset shall terminate. The occurrence of any event described in Section 12.11(b) of this Agreement shall not be deemed to be a change of control of any Excluded Asset for purposes of this Section 7.9(d). As used herein, "Core Intellectual Property" shall mean all software, tools and documentation included in the Domestic Wireless Intellectual Property which is used or held for use in connection with the performance of any of the following functions to the extent such software, tools and documentation is proprietary and not commercially available in the form utilized by the Domestic Wireless Business: customer billing systems, customer management systems, customer service systems, enhanced network operations which are not essential to the basic operation of the network (e.g., RF fingerprinting), marketing database systems and sales information systems. (e) For purposes of this Section 7.9 only, "Intellectual Property" shall mean all registered and unregistered trademarks, service marks, service names, trade styles and trade names (including, without limitation, trade dress and other names, marks and slogans) and all associated goodwill, all statutory, common law and registered copyrights, all patents, all applications for any of the foregoing together with all rights to use all of the foregoing, all know-how, inventions, discoveries, improvements, processes, formulae (secret or otherwise), specifications, trade secrets, whether patentable or not, licenses and other similar agreements, confidential information, and all drawings, records, books or other indicia, however evidenced, of the foregoing. 7.10 INSURANCE. (a) U S WEST shall, and shall cause each of its Subsidiaries to, make available to AirTouch, the benefit of any and all U S WEST Insurance Arrangements with respect to insured events or occurrences prior to the Effective Time which relate to the Domestic Wireless Business (whether or not claims relating to such events or occurrences are made prior to or after the Effective Time). -56- (b) AirTouch shall be entitled to assert without notice to U S WEST any claim under the U S WEST Insurance Arrangements by or against the AirTouch Group as to which the aggregate losses, Liabilities, damages or expenses to be incurred in connection therewith are not reasonably expected by AirTouch to exceed $100,000 by notice to the administrator of the applicable Insurance Arrangement. In respect of any claim under the U S WEST Insurance Arrangements by or against the AirTouch Group as to which the aggregate losses, Liabilities, damages or expenses are reasonably expected by AirTouch to exceed $100,000, AirTouch shall provide U S WEST with prompt notice of events or occurrences giving rise to such a claim. U S WEST shall be responsible for asserting, on behalf of the AirTouch Group, and shall use its reasonable best efforts to assert (or at the option of U S WEST) to assist AirTouch in asserting, any such claim so reported to U S WEST; PROVIDED that U S WEST shall not effect a Settlement of any claim by or against the AirTouch Group without the consent of AirTouch unless the Settlement includes as an unconditional term thereof the giving by each claimant or plaintiff to the applicable member of the AirTouch Group of a release from all liability with respect to such claim. (c) Nothing in this Section 7.10 shall be construed to limit or otherwise alter in any way the indemnification obligations of U S WEST, including those created by Article XI of this Agreement. 7.11 THIRD PARTY RIGHTS. (a) In the event that, after the Effective Time, U S WEST or its Affiliates holds any right to indemnification or any other contractual or other right (collectively, a "Recourse Right") with respect to NV, the Domestic Wireless Subsidiaries or the Domestic Wireless Investments then U S WEST shall, or shall cause a Subsidiary to, assert or otherwise make available to the applicable member of the AirTouch Group the full benefit of such Recourse Right by making a claim on behalf of the applicable member of the AirTouch Group or taking other steps reasonably requested by AirTouch. (b) In the event that, after the Effective Time, AirTouch or the Domestic Wireless Subsidiaries holds any Recourse Right with respect to businesses of U S WEST other than the Domestic Wireless Business, then AirTouch shall, or shall cause a Subsidiary to, assert or otherwise make available to the applicable member of the U S WEST Group, the full benefit of such Recourse Right by making a claim on behalf of the applicable member of the U S WEST Group or taking other steps reasonably requested by U S WEST. 7.12 INTERCOMPANY AGREEMENTS. (a) Prior to the Effective Time, U S WEST shall cause each member of the U S WEST Group to discharge in full or otherwise satisfy or terminate any intercompany indebtedness owed by NV, any Domestic Wireless Subsidiary or any Domestic Wireless Investment or PCS Holdings to -57- such member of the U S WEST Group, other than the Assumed NV Debt and the Assumed PCS Debt. (b) Prior to the Effective Time, U S WEST and NV shall discharge in full or otherwise satisfy or terminate (i) all intercompany receivables relating to corporate administrative services of any member of the U S WEST Group from NV, any Domestic Wireless Subsidiary or Domestic Wireless Investment and (ii) all intercompany receivables relating to corporate administrative services of NV, any Domestic Wireless Subsidiary or any Domestic Wireless Investment from any member of the U S WEST Group. (c) Following the Effective Time, all Contracts, Licenses or other arrangements, formal or informal, between NV, the Domestic Wireless Subsidiaries and the Domestic Wireless Investments, on the one hand, and any member of the U S WEST Group, on the other hand, in existence as of the Effective Time (other than this Agreement and the other Transaction Agreements) shall be terminable at the option of AirTouch at any time on 30 Business Days' prior written notice. 7.13 JOINT AGREEMENTS; JOINT ASSETS. (a)(i)Except as otherwise specifically provided in this Agreement and subject to Sections 7.13(a)(ii) and 7.13(a)(iii), any Contract to which NV or a Domestic Wireless Subsidiary is a party that inures to the benefit of both the Domestic Wireless Business and the business of the Excluded Assets (including, without limitation, interconnection agreements, purchasing agreements (including rights under purchasing agreements entered into pursuant to the TOMCOM Agreement), national retailing contracts, bulk contracts, corporate contracts, roaming agreements, marketing contracts and other Contracts) ("Joint Agreements") shall be assigned as of the Closing Date, in part, so that NV or the applicable Domestic Wireless Subsidiary, on the one hand, and the owner of the Excluded Assets, on the other hand, each shall be entitled to the rights and benefits inuring to its business under such agreement. (ii) If any Joint Agreement can be assigned as a whole, but not in part, and such Joint Agreement is primarily used by the Domestic Wireless Business, such Joint Agreement shall be retained by NV or the applicable Domestic Wireless Subsidiary. In such event, subject to Applicable Laws and the terms of such Joint Agreement, NV shall (and shall cause the Domestic Wireless Subsidiaries to) take all reasonable actions to make available to the business of the Excluded Assets the benefit of such Joint Agreement to the same extent of the benefit received by the business of the Excluded Assets as of the Closing Date. To the extent that NV makes the benefits of any Joint Agreement available to the business of the Excluded Assets, the owner of the Excluded Assets shall be responsible for fulfilling its proportionate interest in the obligations under such Joint Agreement. The obligation of NV to make the benefit of any such Joint Agreement available to the business of any Excluded Asset -58- shall terminate upon the earlier to occur of (1) the expiration of the Joint Agreement and (2) six months following the transfer, sale or other disposition of such Excluded Asset to a Third Party or a change of control with respect to such Excluded Asset (or such earlier date as determined by the purchaser of such Excluded Asset). (iii) If any Joint Agreement can be assigned as a whole, but not in part, and such Joint Agreement is primarily used by the business of the Excluded Assets, such Joint Agreement shall be assigned by NV or the applicable Domestic Wireless Subsidiary to the owner of the Excluded Assets and the Liabilities relating to such Joint Agreement shall be assumed by the owner of the Excluded Assets. In such event, subject to Applicable Laws and the terms of such Joint Agreement, the owner of the Excluded Assets shall take all reasonable actions to make available to the Domestic Wireless Business the benefit of such Joint Agreement to the same extent of the benefit received by the Domestic Wireless Business as of the Closing Date. To the extent that the owner of the Excluded Assets makes the benefits of any Joint Agreement available to the Domestic Wireless Business, NV (or a Domestic Wireless Subsidiary) shall be responsible for fulfilling its proportionate interest in the obligations under such Joint Agreement. The obligation of the owner of the Excluded Assets to make the benefit of any such Joint Agreement available to the Domestic Wireless Business shall terminate upon the earlier to occur of (1) the expiration of the Joint Agreement and (2) six months following the transfer, sale or other disposition of the Excluded Asset which is the primary user of such Joint Agreement to a Third Party or a change of control with respect to such Excluded Asset (or such earlier date as determined by AirTouch). (b) (i) Except as otherwise specifically provided in this Agreement, any asset of NV used in or held for use in both the Domestic Wireless Business and the business of Excluded Assets (including, without limitation, inventory) ("Joint Assets") shall, to the extent practicable, be divided as of the Closing Date between the Domestic Wireless Business and the business of the Excluded Assets so that each shall receive its proportionate interest in such Joint Asset based upon relative proportionate subscribers included in each business. Notwithstanding the foregoing, (A) all assets located at the current headquarters of the Domestic Wireless Business located in Bellevue, Washington (other than books and records of the Excluded Assets) shall be part of the Domestic Wireless Business and shall not be Joint Assets and (B) all assets owned by partnerships, the interests in which constitute Excluded Assets shall be part of the Excluded Assets. (ii) Any Joint Asset which can be assigned or otherwise transferred as a whole, but not in part, and is primarily related to the Domestic Wireless Business shall be part of the Domestic Wireless Business. Subject to Applicable Law, NV shall (and shall cause the Domestic Wireless Subsidiaries to), except as may -59- otherwise be agreed by AirTouch and U S WEST, take such reasonable actions as the owner of the Excluded Assets may request in order to make available, at fully loaded cost, to the business of Excluded Assets, the use of any such Joint Asset to the same extent such Joint Asset was used by the business of Excluded Assets as of the Closing Date. The obligation of NV to make such Joint Asset available to the business of any Excluded Asset shall terminate six months following the transfer, sale or other disposition of such Excluded Asset to a Third Party or a change of control with respect to such Excluded Asset (or such earlier date as determined by the purchaser of such Excluded Asset). (iii) Any Joint Asset which can be assigned or otherwise transferred as a whole, but not in part, and is primarily related to the business of Excluded Assets and any Joint Asset owned by a partnership, an interest in which constitutes an Excluded Asset, shall be part of the business of Excluded Assets. Subject to Applicable Law, the owner of the Excluded Assets shall, except as may otherwise be agreed by AirTouch and U S WEST, take such reasonable actions as NV may request in order to make available, at fully loaded cost, to the Domestic Wireless Business, the use of any such Joint Asset to the same extent such Joint Asset was used by the Domestic Wireless Business as of the Closing Date. The obligation of the owner of the Excluded Assets to make such Joint Asset available to the Domestic Wireless Business shall terminate six months following the transfer, sale or other disposition of the Excluded Asset in which such asset is included to a Third Party or a change of control with respect to such Excluded Asset (or such earlier date as determined by AirTouch). (c) The occurrence of any event described in Section 12.11(b) of this Agreement shall not be deemed to be a change of control of any Excluded Asset for purposes of this Section 7.13. 7.14 TRANSACTION AGREEMENTS. On or prior to the Closing Date, AirTouch and U S WEST shall enter into the Tax Sharing Agreement, the Patent License Agreement, the Software License Agreement and the New Investment Agreement. If, as of the Closing Date, Media (or the NV/PCS Transferee) shall be the general partner or otherwise manage any Excluded Asset, the owner of the Excluded Assets and AirTouch Cellular shall enter into a Resources Agreement in the form of Exhibit I hereto. 7.15 UNDERTAKINGS WITH RESPECT TO SCHEDULED PROPERTIES. (a) In connection with the transactions contemplated hereby, NV shall fulfill any and all obligations it may have under the partnership agreements, other formative agreements and management agreements for each Scheduled Property, in respect of the Consent requirements, rights of first refusal and written notification requirements described therein. -60- (b) Promptly (and in any event within ten Business Days) following the satisfaction of the conditions set forth in Sections 9.1(a) and 9.1(e), U S WEST shall take all actions necessary to effect the separation from the Domestic Wireless Business of each Scheduled Property as to which a decree, preliminary or permanent injunction, temporary restraining order or other order of any nature shall be in effect that restrains, prevents or materially changes the transactions contemplated hereby. 7.16 PRE-CLOSING CAPITAL CONTRIBUTIONS TO PCS NUCLEUS BY AIRTOUCH. At such time prior to the Closing as the parties shall agree, AirTouch PCS Holding, Inc. shall contribute to the capital of PCS Nucleus approximately $1,600,000. 7.17 ASSUMPTION OF GUARANTEE OBLIGATIONS WITH RESPECT TO LEVERAGED LEASES. Effective at the time of the Closing, AirTouch will assume all Liabilities of U S WEST under all guarantees executed by U S WEST in respect of the Leveraged Leases pursuant to the instrument of assumption attached as an exhibit to such guarantees. 7.18 REPAYMENT OF ASSUMED NV DEBT AND ASSUMED PCS DEBT. At the time of the Closing, AirTouch shall repay in full the Assumed NV Debt and the Assumed PCS Debt. Media (or the NV/PCS Transferee, as applicable) shall not declare an event of default under the Assumed NV Debt or the Assumed PCS Debt prior to such repayment. 7.19 AIRTOUCH CLASS D AND CLASS E PREFERRED STOCK. Prior to the Effective Time, AirTouch shall file with the Secretary of State of the State of Delaware Certificates of Designation, Preferences and Rights with respect to the shares of AirTouch Class D and Class E Preferred Stock issuable pursuant to Section 3.1 in the forms of Exhibits A-1 and A-2, respectively. ARTICLE VIII EMPLOYEE MATTERS 8.1 EMPLOYEES. Effective as of the Effective Time, those Affected Employees who are PCS Employees or who are employed by NV or any Domestic Wireless Subsidiary immediately prior to the Effective Time shall remain in the same capacities as then held by such employees (or in such other capacities as AirTouch shall determine in its sole discretion). The Excluded Employees shall not become employees of AirTouch or its Subsidiaries or Affiliates as of the Effective Time, and AirTouch and its Subsidiaries and Affiliates shall assume no employment-related Liabilities with respect to the Excluded Employees as a result of the transactions contemplated by this Agreement. All such Liabilities shall be retained by the U S WEST Group. -61- 8.2 EMPLOYEE BENEFIT PLANS AND ARRANGEMENTS. (a) Except as set forth under paragraph (b) below with respect to incurred but unreimbursed claims relating to Affected Employees and subject to Section 8.3(p) of this Agreement, all Affected Employees shall cease to actively participate as of the Effective Time in any Employee Benefit Plan or Employee Arrangement maintained at the Effective Time by U S WEST, Media or their respective Affiliates. (b) AirTouch shall reimburse U S WEST for all incurred but unpaid claims and obligations as of the Effective Time with respect to Affected Employees under the Employee Benefit Plans and Employee Arrangements maintained at the Effective Time by U S WEST, Media and their respective Affiliates. 8.3 OTHER EMPLOYEE MATTERS. (a) Except as specifically provided in this Section 8.3, as of the Effective Time, the Affected Employees shall become eligible to participate in the employee benefit plans of AirTouch then existing on the same terms as applicable to similarly situated employees of AirTouch. For purposes of determining eligibility to participate, vesting, benefit eligibility, and benefit accrual, AirTouch shall recognize service of each Affected Employee with U S WEST and its pre-Merger ERISA Affiliates before the Effective Time as though such service were service with AirTouch and its ERISA Affiliates. (b) Subject to compliance with Sections 8.3(c), 8.3(d) and 8.3(e), as soon as reasonably practicable after the Effective Time, (i) U S WEST shall amend the U S WEST Pension Plan (the "U S WEST Pension Plan") to provide for the transfer of all liability for the accrued benefits of Affected Employees (other than PCS Employees) as of the Effective Time (the "Transferred Benefit Liabilities") and cash equal to the present value of such liabilities ("Transferred Benefit Assets"), and (ii) AirTouch shall amend the AirTouch Employees Pension Plan (the "AirTouch Pension Plan") to accept the Transferred Benefit Liabilities and Transferred Benefit Assets. In addition, U S WEST shall cause the U S WEST Pension Plan to transfer additional assets to the AirTouch Pension Plan sufficient to fund a lump sum payment option with respect to the Transferred Benefit Liabilities. AirTouch shall cause the AirTouch Pension Plan to provide a lump sum payment option with respect to the transferred benefits. The Transferred Benefit Assets shall be calculated on the basis of the actuarial assumptions specified in Section 8.3(b) of the U S WEST Merger Disclosure Schedule. The Transferred Benefit Assets shall be adjusted from the Effective Time to the actual date of transfer for (i) interest at the rate specified in Section 8.3(b) of the U S WEST Merger Disclosure Schedule and (ii) benefit payments made during such interim period. (c) In connection with the transfer described in Section 8.3(b), AirTouch shall amend the AirTouch Pension Plan to -62- preserve the protected benefits (as defined in regulations under Section 411(d)(6) of the Code) with respect to the transferred accrued benefits and to ensure that, subject to vesting, benefits paid to an affected participant from the AirTouch Pension Plan are at least equal to the benefit that would have been payable from the U S WEST Pension Plan as of the Effective Time, treating the participant as a "Modified Accrual Participant" under the AirTouch Pension Plan (with respect to the U S WEST Pension Plan formula applicable to the participant as of the Effective Time). Participants referred to in this Section 8.3(c) shall be treated similarly to all other Modified Accrual Participants under the AirTouch Pension Plan, including with respect to any amendment to reduce or eliminate the compensation uplift attributable to Modified Accrual Participant status. (d) U S WEST's obligation to effectuate the transfer described in Section 8.3(b) shall be conditioned upon its receipt of a recent IRS favorable determination letter with respect to the AirTouch Pension Plan. AirTouch's obligation to receive such transfer shall be conditioned upon its receipt of a recent IRS favorable determination letter with respect to the U S WEST Pension Plan. U S WEST represents and warrants that, and covenants to take all necessary action to ensure that, the U S WEST Pension Plan shall be qualified under Section 401(a) and related sections of the Code as of the date of such transfer, and AirTouch represents and warrants that, and covenants to take all necessary actions to ensure that, the AirTouch Pension Plan shall be qualified under Section 401(a) and related sections of the Code as of the date of such transfer. In the event that it is necessary to increase the Transferred Benefit Liabilities retroactively to the date of transfer in order to maintain the qualified status of the U S WEST Pension Plan or the AirTouch Pension Plan, U S WEST shall cause the U S WEST Pension Plan to transfer cash equal to the present value of such liabilities to the AirTouch Pension Plan, calculated on the basis of the actuarial assumptions specified in Section 8.3(b) of the U S WEST Merger Disclosure Schedule. (e) At least 30 days before the transfer described in Section 8.3(b) above, U S WEST and AirTouch shall each file Form 5310-A with the IRS with respect to the transfer unless, in the case of a de minimis transfer, such filing is not required. (f) Subject to Section 8.3(p), AirTouch shall provide for participation of the Affected Employees and their dependents as of the Effective Time in the AirTouch health and welfare plan(s) applicable to similarly situated AirTouch employees. AirTouch shall waive any pre-existing condition exclusion in the AirTouch medical/dental plans for Affected Employees and their dependents. For purposes of deductible requirements and out-of-pocket maximums under the applicable AirTouch medical or dental plan, if any, Affected Employees and their dependents shall receive credit for any medical or dental deductible payments incurred under the medical and dental plan(s) of U S WEST during the calendar year -63- that includes the date such employees' coverage begins under the AirTouch medical and dental plan(s). U S WEST shall determine the extent to which COBRA elections under the medical, dental and vision coverage of the U S WEST health care plan are required as a result of the Merger and shall be responsible for any required notification and administration of such elections and any subsequently elected coverage. From and after the date of this Agreement and through the period ending 120 days after the Effective Time, AirTouch shall take no actions, and shall cause its Subsidiaries to take no actions, that would alter the AirTouch medical or dental plans from the provisions in effect as of the date of this Agreement in a manner that would provide incentive for Affected Employees to elect COBRA coverage under the U S WEST health care plan in lieu of coverage under the AirTouch medical or dental plans, unless such modifications will apply equally to both Affected Employees and other AirTouch employees covered by the AirTouch medical and dental plans. (g) Affected Employees who have attained the right to four or more weeks of vacation per year under U S WEST'S vacation policy as of the Effective Time shall remain eligible to accrue the same amount of vacation under the applicable AirTouch vacation policy, except to the extent the applicable AirTouch vacation policy is revised to require additional service for all employees who have attained the right to four or more weeks of vacation per year under the vacation policies of either U S WEST or AirTouch as of the Effective Time. (h) As soon as reasonably practicable after the Effective Time, U S WEST shall cause the U S WEST Savings Plan/ESOP (the "U S WEST Savings Plan") to transfer to the AirTouch Retirement Plan (the "AirTouch Retirement Plan") the account balances of the Affected Employees who do not elect, under procedures established by U S WEST that are reasonably acceptable to AirTouch, to have their account balances retained in the U S WEST Savings Plan. Any such transfer shall be made in the form of cash to the extent account balances are not credited with unpaid participant loans, and by a transfer of loans (in the form of promissory notes and/or transaction authorization cards) to the extent account balances are credited with unpaid participant loans. AirTouch shall amend the AirTouch Retirement Plan to fully vest the transferred account balances. (i) U S WEST's obligation to effectuate the transfer described in Section 8.3(h) shall be conditioned upon its receipt of a recent IRS favorable determination letter with respect to the AirTouch Retirement Plan. AirTouch's obligation to receive such transfer shall be conditioned upon its receipt of a recent IRS favorable determination letter with respect to the U S WEST Savings Plan. U S WEST represents and warrants that the U S WEST Savings Plan shall be qualified under Section 401(a) and related sections of the Code as of the date of such transfer, and AirTouch represents and warrants that the AirTouch Retirement -64- Plan shall be qualified under Section 401(a) and related sections of the Code as of the date of such transfer. (j) Subject to Section 8.3(p), for any Affected Employee who is receiving short-term disability benefits under the U S WEST disability plan immediately prior to the Effective Time, AirTouch shall continue to cover such employee under the AirTouch disability plan (and any other AirTouch plans or policies applicable to similarly situated AirTouch employees receiving benefits under the AirTouch disability plan) without requiring an intervening return to work; PROVIDED, HOWEVER, that AirTouch shall determine the extent to which periods of short-term disability under the U S WEST disability plan will be considered for purposes of determining the length of coverage under the AirTouch disability plan. U S WEST agrees to cause the U S WEST disability plan to be amended prior to the Effective Time to provide that coverage under the U S WEST disability plan for any Affected Employee shall cease at the Effective Time whether or not the employee is then receiving short-term disability benefits. U S WEST and AirTouch agree to cooperate in resolving any claims from Affected Employees related to the actions taken pursuant to this Section 8.3(j). (k) Subject to Section 8.3(p), for any Affected Employee who is on an approved leave of absence immediately prior to the Effective Time, AirTouch shall continue to cover such employee under the applicable AirTouch leave of absence policy (and any other AirTouch plans or policies applicable to similarly situated AirTouch employees on such leave of absence) without requiring an intervening return to work; PROVIDED, HOWEVER, that AirTouch shall determine the extent to which the period of leave prior to the Effective Time will be considered for purposes of determining the length of leave under the AirTouch policy. U S WEST agrees to cause the leave of absence policies applicable to Affected Employees prior to the Effective Time to be amended to provide that a leave of absence for any Affected Employee shall cease at the Effective Time whether or not the employee is then on leave. U S WEST, Media and AirTouch agree to cooperate in resolving any claims from Affected Employees related to the actions taken pursuant to this Section 8.3(k). (l) Except as provided in Exhibit J, from the date of this Agreement until the end of the Non-solicitation Period, neither U S WEST nor any of its Affiliates will Solicit any person employed by NV or the Domestic Wireless Subsidiaries to leave his or her employment. For purposes of this Section 8.3(l), the "Non-solicitation Period" ends on the earlier of the first anniversary of the Effective Time or June 1, 1999, and "Solicit" means any affirmative recruitment specifically aimed at one or more individuals identified by name, title or NV affiliation (i.e., beyond advertising job openings), but "Solicit" shall not include any activities that constitute follow-up to individuals who respond to job opening advertisements or who voluntarily initiate employment inquiries. -65- (m) U S WEST will provide AirTouch the opportunity to review and approve, prior to distribution, all "Employee Communication Materials," as defined herein, developed by U S WEST. For this purpose, "Employee Communication Materials" means information, published in written or other tangible form useful for repetitious or mass communication, to the extent that it: (i) will be distributed at any time after the date of this Agreement and prior to the Effective Time, and (ii) will explain to Affected Employees any actions that will be taken to implement the commitments set forth in this Agreement, provided that such information refers to Employee Benefit Plans or Employee Arrangements that will be assumed by AirTouch in whole or in part under Section 8.2, or employee benefit plans or employee arrangements sponsored by AirTouch or its Subsidiaries that may cover Affected Employees after the Effective Time. (n) Prior to the Effective Time, U S WEST will amend the U S WEST Non-Qualified Pension Plan, the U S WEST Mid-Career Pension Plan and the Amended U S WEST Deferred Compensation Plan (the "Non-Qualified Plans") to permit Affected Employees to elect to exclude their employment with AirTouch or its Subsidiaries resulting from the Merger from being treated as a termination of employment or separation from service for purposes of the timing of distributions under the Non-Qualified Plans and to provide for the transfer of their accrued benefits under the Non-Qualified Plans to the AirTouch Deferred Compensation Plan. AirTouch shall amend the AirTouch Deferred Compensation Plan as of the Effective Time to accept the accrued benefit of any Affected Employee who makes an election as described in the preceding sentence as a liability under the AirTouch Deferred Compensation Plan for each such Affected Employee and to treat such accrued benefit as any other account balance under the AirTouch Deferred Compensation Plan. The accrued benefit for each employee under the Non-Qualified Plans shall be determined as of the Effective Time in accordance with the assumptions and procedures set forth in Section 8.3(n) of the U S WEST Merger Disclosure Schedule. Notwithstanding any other provisions of any Transaction Agreement, and without limitation under any provisions of any Transaction Agreement, AirTouch shall indemnify, defend and hold harmless U S WEST and its Affiliates (the "Indemnitees") from and against, and in respect of, and pay or reimburse each Indemnitee for, all Indemnifiable Losses, as incurred, arising out of, relating to or resulting from, directly or indirectly, the election or transfer of accrued benefits described in this Section 8.3(n). (o) Prior to the Effective Time, U S WEST shall provide notice to AirTouch of its intended treatment of outstanding options to purchase shares of capital stock of U S WEST ("Options") issued pursuant to the terms of the Amended U S WEST 1994 Stock Plan and the outstanding Media Options and Communications Options issued pursuant to the terms of the U S WEST Media Group 1996 Stock Option Plan, the U S WEST Media Group 1997 Stock Option Plan and the U S WEST Communications -66- Group 1997 Stock Option Plan, in each case, held by Affected Employees as a class. Following the Effective Time, U S WEST shall provide notice to AirTouch of any decision to terminate or otherwise materially change the terms of the Options held by Affected Employees as a class, such notice to be given at or before the time general notice of such matters is given to Affected Employees. (p) As soon as reasonably practicable within 30 Business Days following the date of this Agreement, U S WEST and AirTouch shall use reasonable best efforts to agree upon (i) specific methods of transitioning Affected Employees into employee benefit plans and employee arrangements sponsored by AirTouch or its Subsidiaries on or after the Effective Time and (ii) a timeline for sharing data and documents pursuant to Section 8.4. 8.4 COOPERATION. AirTouch and U S WEST shall cooperate with each other in carrying out the terms of this Article VIII, and each party shall exchange such information with the other party as may be reasonably required by the other party, with respect thereto. As soon as reasonably practicable after the Effective Time, U S WEST shall provide AirTouch a schedule showing the name, Social Security number, hire date and any other information reasonably requested by AirTouch with respect to each Affected Employee. ARTICLE IX CONDITIONS PRECEDENT 9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger is subject to the satisfaction or waiver (to the extent permitted under Applicable Laws) on or prior to the Closing of the following conditions: (a) HSR ACT. (i) The waiting periods (and any extension thereof) applicable to the Merger under the HSR Act shall have expired or been terminated; (ii) neither the FTC nor DOJ shall have authorized the institution of enforcement proceedings (that have not been dismissed or otherwise disposed of) to delay, prohibit or otherwise restrain the transactions contemplated by the Agreement; (iii) no such proceeding shall be pending as of the Closing Date; and (iv) no injunction or order shall have been issued by a court of competent jurisdiction and remain in effect as of the Closing Date. (b) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation, decree, preliminary or permanent injunction, temporary restraining order or other order of any nature of any Governmental Authority shall be in effect that restrains, prevents or materially changes the transactions contemplated hereby. -67- (c) EXECUTION OF TRANSACTION AGREEMENTS. Each of AirTouch and U S WEST shall have executed and delivered the Tax Sharing Agreement, the Patent License Agreement, the Software License Agreement and the New Investment Agreement. (d) NYSE LISTING. The shares of AirTouch Common Stock issuable to Media (or the NV/PCS Transferee) in connection with the Merger shall have been approved for listing on the NYSE, subject to official notice of issuance. (e) FCC/STATE ORDERS. The FCC/State Orders shall have been obtained; PROVIDED that the foregoing condition shall be deemed to have been satisfied with respect to any Orders of the FCC which constitute FCC/State Orders if either U S WEST or AirTouch shall have provided to the other an opinion of a nationally recognized communications law counsel (addressed to U S WEST and AirTouch) to the effect that the Merger and the other transactions contemplated hereby may be consummated in compliance with the Communications Act of 1934, as amended, without obtaining such Orders of the FCC. 9.2 CONDITIONS TO OBLIGATION OF AIRTOUCH. The obligation of AirTouch to effect the Merger is further subject to the satisfaction of the following conditions, any or all of which may be waived in whole or in part by AirTouch: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of U S WEST made hereunder (i) that are qualified as to materiality shall be true and correct and (ii) that are not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and (unless made as of a specified date) as of the Closing Date as though made on and as of the Closing Date, and AirTouch shall have received a certificate of U S WEST to that effect, dated the Closing Date, and signed on behalf of each by an authorized officer thereof. (b) AGREEMENTS. Each of U S WEST, Media, NV and PCS Holdings (and the NV/PCS Transferee) shall have performed in all material respects all of its obligations required to be performed by it under this Agreement at or prior to the Closing Date, and AirTouch shall have received certificates of U S WEST, Media (or the NV/PCS Transferee), NV and PCS Holdings to that effect, dated the Closing Date, and signed on behalf of each by an authorized officer thereof. (c) TAX OPINION. AirTouch shall have received an opinion of Pillsbury Madison & Sutro LLP, counsel to AirTouch, reasonably satisfactory in form and substance to AirTouch and dated as of the Closing Date, to the effect that for federal income tax purposes (i) each of the NV Merger and the PCS Holdings Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; (ii) each of AirTouch and NV, in respect of the NV Merger, and AirTouch and PCS Holdings, in respect of the PCS Holdings Merger, will be a party to the reorganization within -68- the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be recognized by NV, PCS Holdings or AirTouch as a result of the Merger. In rendering such opinion, Pillsbury Madison & Sutro LLP shall receive and may rely upon representations contained in certificates of AirTouch substantially in the form of Exhibits G-1 and G-2 and of U S WEST, Media, the NV/PCS Transferee, NV and PCS Holdings substantially in the form of Exhibits H-1 and H-2. 9.3 CONDITIONS TO OBLIGATIONS OF U S WEST, MEDIA, NV AND PCS HOLDINGS. The obligations of U S WEST, Media (or the NV/PCS Transferee), NV and PCS Holdings to effect the Merger are further subject to the satisfaction of the following conditions, any or all of which may be waived on or prior to the Closing Date in whole or in part by U S WEST: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of AirTouch made hereunder (i) that are qualified as to materiality shall be true and correct and (ii) that are not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and (unless made as of a specified date) as of the Closing Date as though made on and as of the Closing Date, and U S WEST shall have received a certificate of AirTouch to that effect, dated the Closing Date, and signed on behalf of AirTouch by an authorized officer of AirTouch. (b) AGREEMENTS. AirTouch shall have performed in all material respects all of its obligations required to be performed by it under this Agreement at or prior to the Closing Date, and U S WEST shall have received a certificate of AirTouch to that effect dated the Closing Date and signed on behalf of AirTouch by an authorized officer of AirTouch. (c) TAX OPINION. U S WEST shall have received an opinion of Weil, Gotshal & Manges LLP, counsel to U S WEST, reasonably satisfactory in form and substance to U S WEST and dated as of the Closing Date, to the effect that for federal income tax purposes (i) each of the NV Merger and the PCS Holdings Merger will constitute a reorganization within the meaning of Section 368(a) of the Code and (ii) each of AirTouch and NV, in respect of the NV Merger, and AirTouch and PCS Holdings, in respect of the PCS Holdings Merger, will be a party to the reorganization within the meaning of Section 368(b) of the Code. In rendering such opinion, Weil, Gotshal & Manges LLP shall receive and may rely upon representations contained in certificates of AirTouch substantially in the form of Exhibits G-1 and G-2 and of U S WEST, Media, the NV/PCS Transferee, NV and PCS Holdings substantially in the form of Exhibits H-1 and H-2. -69- ARTICLE X TERMINATION AND AMENDMENT 10.1 TERMINATION. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time: (a) by mutual written consent of U S WEST, on the one hand, and AirTouch, on the other hand, or by mutual action of their respective Boards of Directors; (b) by AirTouch, if any of the conditions set forth in Section 9.2 shall have become incapable of fulfillment (other than as a result of any breach by AirTouch of the terms of this Agreement) and shall not have been waived by AirTouch; (c) by U S WEST, in accordance with Section 6.2(c)(i) or if any of the conditions set forth in Section 9.3 shall have become incapable of fulfillment (other than as a result of any breach by U S WEST, Media, NV or PCS Holdings of the terms of this Agreement) and shall not have been waived by U S WEST; (d) by either AirTouch, on the one hand, or U S WEST, on the other hand, by giving written notice of such termination to the other, if the Merger shall not have been consummated on or before June 30, 1998 (the "Termination Date"); PROVIDED, HOWEVER, that the terminating party is not in breach of its obligations under this Agreement; or (e) by either U S WEST or AirTouch, if any of the conditions set forth in Section 9.1 shall have become incapable of fulfillment (other than as a result of any breach by the party seeking to terminate the Agreement) and shall not have been waived in accordance with the terms of this Agreement. 10.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by U S WEST or AirTouch pursuant to Section 10.1, written notice thereof shall promptly be given to the other parties and, except as otherwise provided herein, this Agreement shall be terminated and become void and have no effect, without further action by any party, other than the provisions of Section 6.3(c) and Article XII. Nothing in this Section 10.2 shall be deemed to release any party from any liability for any breach by such party of the terms and provisions of this Agreement. 10.3 AMENDMENT. Subject to Applicable Laws, this Agreement may be amended, modified or supplemented only by written agreement of U S WEST, Media (or the NV/PCS Transferee), NV, PCS Holdings and AirTouch at any time prior to the Effective Time with respect to any of the terms contained herein. 10.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally -70- allowed: (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto; (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto; and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights. ARTICLE XI INDEMNIFICATION 11.1 INDEMNIFICATION BY U S WEST. (a) Subject to the terms and conditions of this Agreement, from and after the Effective Time, U S WEST shall indemnify, defend and hold harmless AirTouch and its Affiliates, including any of its direct or indirect Subsidiaries, and their respective directors, officers, employees, representatives, advisors and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "AirTouch Indemnified Parties") from, against, and in respect of, and pay or reimburse any such AirTouch Indemnified Party for, all Indemnifiable Losses, as incurred, arising out of, relating to or resulting from, directly or indirectly: (i) any and all Excluded Claims and Excluded Settlements (including the failure by U S WEST or any member of the U S WEST Group to pay, perform or otherwise discharge such Excluded Claims and Excluded Settlements in accordance with their terms); (ii) any and all Specified Actions made, instituted or commenced during the period from and after the Effective Time through and including the date that is 18 months following the Effective Time; PROVIDED, HOWEVER, that if a Specified Action arises out of, relates to or results from, directly or indirectly, the conduct of the Domestic Wireless Business or any part thereof both before and after the Effective Time, then U S WEST's obligation under this Section 11.1(a)(ii) shall only be for the portion of such Specified Action that arises out of, relates to, or results from, directly or indirectly, the conduct of the Domestic Wireless Business, or any part thereof, before or at the Effective Time; (iii) the breach by U S WEST, Media (or the NV/PCS Transferee) or their respective Affiliates, following the Effective Time, of any agreement or covenant contained in any Transaction Agreement which -71- by its express terms is to be performed or complied with after the Effective Time; (iv) any breach of or inaccuracy in any representation or warranty of U S WEST contained in this Agreement (other than the last sentence of Section 4.7); (v) any breach of or inaccuracy in the representation and warranty of U S WEST set forth in the last sentence of Section 4.7 or the covenant of U S WEST set forth in Section 6.1(b)(vii). (vi) the ownership of the Excluded Assets or the conduct of the business of the Excluded Assets, or any part thereof, before, at or after the Effective Time; (vii) any Scheduled Property Claim; (viii) the enforcement by the AirTouch Indemnified Parties of their rights to be indemnified, defended and held harmless under this Agreement; or (ix) the conduct of the businesses of the U S WEST Group or the ownership of the assets of the U S WEST Group or any part thereof (other than the Domestic Wireless Business) in each case before, at or following the Effective Time. (b) (i) U S WEST shall not be liable to the AirTouch Indemnified Parties under Section 11.1(a)(ii) or 11.1(a)(iv), except to the extent (and then only to the extent) that the aggregate amount of all Indemnifiable Losses for which U S WEST would, but for this Section 11.1(b), be liable under Sections 11.1(a)(ii) and 11.1(a)(iv), in the aggregate, exceeds $40,000,000, and then only for all such Indemnifiable Losses in excess thereof up to an aggregate amount equal to $750,000,000. (ii) A notice of any claim for indemnification under Section 11.1(a)(ii) must be given by an Indemnified Party within 30 days following the 18-month period set forth therein. A notice of any claim for indemnification under Section 11.1(a)(iv) must be given by an Indemnified Party within 30 days following the expiration of the period for which the applicable representation and warranty survives the Effective Time pursuant to Section 12.1 of this Agreement. In the event notice of any claim for indemnification under Section 11.1(a)(iv) is given within such period, the representation and warranty that is the subject of such indemnification claim shall survive with respect to such claim until such time as such claim is finally resolved. (iii) U S WEST shall not be liable to the AirTouch Indemnified Parties in respect of consequential, exemplary, -72- special or punitive damages, or lost profits, except under Section 11.1(a)(v) or to the extent actually paid by an AirTouch Indemnified Party in respect of a Third Party Claim or an Action brought by a Governmental Authority in connection with the Indemnifiable Losses covered by Section 11.1(a). (iv) If any tribunal of competent jurisdiction shall have finally determined in any Excluded Claim or any Specified Action which is subject to indemnification under Section 11.1(a)(i) or (ii) that any portion of the damages or judgment awarded in such Excluded Claim or Specified Action is attributable to the gross negligence or willful misconduct of WMC in providing services to the Domestic Wireless Business under the Services Agreement, dated November 1, 1995, among AirTouch Cellular, AirTouch Cellular of Nevada, NV and WMC (the "Services Agreement"), but specifically excluding the actions of any employee of AirTouch seconded to NV, then to the extent the actions which gave rise to such gross negligence or willful misconduct were not authorized by, approved by or actually known to U S WEST or any Subsidiary thereof (other than WMC) or to any Person who at the time of such actions was an officer, executive employee or market manager of U S WEST or any Subsidiary thereof (including any of the foregoing seconded to NV from AirTouch) or was an employee of U S WEST or any Subsidiary thereof seconded to, or otherwise functioning or serving in any capacity with, WMC, U S WEST shall not be liable to the AirTouch Indemnified Parties for the amount of Indemnifiable Losses attributable to such gross negligence or willful misconduct. (c) Except for the Disposed Asset Value adjustment under Section 3.3, U S WEST shall have no liability to the AirTouch Indemnified Parties under Section 11.1(a)(vii) in respect of any diminution of value of any Scheduled Property or Taxes incurred in connection with a sale assignment, exchange or other disposition of a Scheduled Property; PROVIDED that the foregoing shall in no way limit or restrict the liability of U S WEST to the AirTouch Indemnified Parties under Section 11.1(a)(vii) for any other Indemnifiable Losses with respect to any Scheduled Property Claim, including (without limitation) the costs and expenses of the investigation and defense thereof. 11.2 INDEMNIFICATION BY AIRTOUCH. (a) Subject to the terms and conditions of this Agreement, from and after the Effective Time, AirTouch shall indemnify, defend and hold harmless U S WEST and its respective Affiliates and their respective directors, officers, employees, representatives, advisors and agents, and each of the heirs, executors, successors and assigns of any of the foregoing (collectively, the "U S WEST Indemnified Parties") from, against, and in respect of, and pay or reimburse any such U S WEST Indemnified Party for, all Indemnifiable Losses, as incurred, arising out of, relating to or resulting from, directly or indirectly: -73- (i) the breach by AirTouch, following the Effective Time, of any agreement or covenant contained in any Transaction Agreement which by its express terms is to be performed or complied with after the Effective Time; (ii) any breach of or inaccuracy in any representation or warranty of AirTouch contained in this Agreement; (iii) any Excluded Claim or any Specified Action which is subject to indemnification under Section 11.1(a)(i) or (ii) to the extent of the portion, if any, of the damages or judgment awarded in such Excluded Claim or Specified Action that any tribunal of competent jurisdiction shall have finally determined is attributable to the gross negligence or willful misconduct of WMC in providing services to the Domestic Wireless Business under the Services Agreement, but specifically excluding the actions of any employee of AirTouch seconded to NV, if the actions which gave rise to such gross negligence or willful misconduct were not authorized by, approved by or actually known to U S WEST or any Subsidiary thereof (other than WMC) or to any Person who at the time of such actions was an officer, executive employee or market manager of U S WEST or any Subsidiary thereof (other than WMC) (including any of the foregoing seconded to NV from AirTouch) or was an employee of U S WEST or any Subsidiary thereof (other than WMC) seconded to, or otherwise functioning or serving in any capacity with, WMC; (iv) the enforcement by the U S WEST Indemnified Parties of their rights to be indemnified, defended and held harmless under this Agreement; or (v) except as to matters which are subject to indemnification by U S WEST pursuant to Section 11.1, (A) the conduct of the Domestic Wireless Business or the businesses of AirTouch and its Subsidiaries or (B) the ownership of the assets of NV, PCS Holdings or the Domestic Wireless Subsidiaries or AirTouch or its Subsidiaries or any part thereof, in each case before, at or following the Effective Time. (b) (i) AirTouch shall not be liable to the U S WEST Indemnified Parties under Section 11.2(a)(ii), except to the extent (and then only to the extent) that the aggregate amount of all Indemnifiable Losses for which AirTouch would, but for this Section 11.2(b), be liable under Section 11.2(a)(ii), in the aggregate, exceeds $40,000,000, and then only for all such Indemnifiable Losses in excess thereof up to an aggregate amount equal to $750,000,000. (ii) A notice of any claim for indemnification under Section 11.2(a)(ii) must be given by an Indemnified Party within 30 days -74- following the expiration of the period for which the applicable representation and warranty survives the Effective Time pursuant to Section 12.1 of this Agreement. In the event notice of any claim for indemnification under Section 11.2(a)(ii) is given within such period, the representation and warranty that is the subject of such indemnification claim shall survive with respect to such claim until such time as such claim is finally resolved. (iii) AirTouch shall not be liable to the U S WEST Indemnified Parties in respect of consequential, exemplary, special or punitive damages, or lost profits, except to the extent actually paid by any U S WEST Indemnified Party in respect of a Third Party Claim or Action brought by a Governmental Authority in connection with the Indemnifiable Losses covered by Section 11.2(a). 11.3 PROCEDURES RELATING TO INDEMNIFICATION. (a) In order for an Indemnified Party to be entitled to any indemnification provided for under this Agreement in respect of, arising out of or involving a claim or demand made by any Person who is not an Indemnifying Party against an Indemnified Party (a "Third Party Claim"), such Indemnified Party must notify the Indemnifying Party in writing of the Third Party Claim reasonably promptly after receipt by such Indemnified Party of written notice of the Third Party Claim, specifying in reasonable detail the nature of such Third Party Claim (the "Claim Notice"); PROVIDED, HOWEVER, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the Indemnifying Party shall have been actually prejudiced as a result of such failure and that with respect to any matter for which U S WEST is the Indemnifying Party, U S WEST shall be deemed to have received notice with respect to all matters by or against the Domestic Wireless Business as to which any claim or demand to U S WEST or any of its Subsidiaries shall have been made before or at the Effective Time. (b) If a Third Party Claim is made against an Indemnified Party, the Indemnifying Party shall have 30 days (or less if the nature of the Third Party Claim requires) from its receipt of the Claim Notice (the "Notice Period") to notify the Indemnified Party whether or not the Indemnifying Party desires, at the Indemnifying Party's sole cost and expense and by counsel of its own choosing (and reasonably acceptable to the Indemnified Party), to defend against such Third Party Claim; PROVIDED, HOWEVER, that if, under applicable standards of professional conduct a conflict on any significant issue between the Indemnifying Party and any Indemnified Party exists in respect of such Third Party Claim, then the Indemnifying Party shall reimburse the Indemnified Party for the reasonable fees and expenses of one outside counsel, plus any local counsel, who shall be reasonably acceptable to the Indemnifying Party. The Indemnifying Party shall be liable for the fees and expenses of counsel employed by the Indemnified Party for any period during -75- which the Indemnifying Party has not assumed the defense thereof (other than during any period in which the Indemnified Party shall have failed to give notice of the Third Party Claim as provided above). Notwithstanding the foregoing, the Indemnifying Party shall not be entitled to assume the defense of any Third Party Claim (and shall be liable for the fees and expenses of counsel, who shall be reasonably acceptable to the Indemnifying Party, and related expenses incurred by the Indemnified Party in defending such Third Party Claim) if the Third Party Claim either (i) is a Specified Action and the Indemnified Party or Indemnifying Party reasonably determines that the Indemnified Party's residual liability with respect to such Specified Action (after giving effect to any potential indemnification under Section 11.1(a)(ii)) may exceed 50% of the aggregate liability in respect of such Specified Action or (ii) seeks an order, injunction or other equitable relief or relief for other than money damages against the Indemnified Party which the Indemnified Party reasonably determines cannot be separated from any related claim for money damages. If such equitable relief or other relief portion of the Third Party Claim can be so separated from that for money damages, the Indemnifying Party shall be entitled to assume the defense of the portion relating to money damages. The indemnification required by Section 11.1 or 11.2, as the case may be, shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or the Indemnifiable Loss is incurred. If the Indemnifying Party chooses to defend or prosecute any Third Party Claim (and is permitted hereunder to do so), the Indemnified Party will agree to any settlement, compromise or discharge of such Third Party Claim which the Indemnifying Party may recommend and which by its terms obligates the Indemnifying Party to pay the full amount of liability in connection with such Third Party Claim; PROVIDED, HOWEVER, that, without the Indemnified Party's consent, the Indemnifying Party shall not consent to entry of any judgment or enter into any settlement (x) that provides for injunctive or other nonmonetary relief affecting the Indemnified Party or (y) that does not include as an unconditional term thereof the giving by each claimant or plaintiff to such Indemnified Party of a release from all liability with respect to such claim. If the Indemnifying Party elects not to defend against such Third Party Claim or is not permitted to defend against such claim in the circumstances described above, then the Indemnifying Party shall have the right to participate in any such defense at its sole cost and expense, but the Indemnified Party shall control the investigation, defense and settlement thereof at the reasonable cost and expense of the Indemnifying Party. Whether or not the Indemnifying Party shall have assumed or is permitted to assume the defense of a Third Party Claim, the Indemnified Party shall not admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the Indemnifying Party's prior written consent (which consent shall not be unreasonably withheld). The parties hereto shall cooperate in the defense or prosecution of any Third Party Claim, which cooperation shall include the retention and (upon -76- the Indemnifying Party's request) the provision to the Indemnifying Party of records and information which are reasonably relevant to such Third Party Claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Any Disputes between the Indemnifying Party and the Indemnified Party under this Section 11.3(b) shall be resolved in the manner provided in Section 12.14. (c) In the event that an Indemnified Party should have a claim against the Indemnifying Party hereunder which does not involve a Third Party Claim, the Indemnified Party shall send a Claim Notice with respect to such claim to the Indemnifying Party with reasonable promptness. The failure by any Indemnified Party so to notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which it may have to such Indemnified Party under this Agreement, except to the extent that the Indemnifying Party shall have been actually prejudiced by such failure. The Indemnifying Party shall have 30 days from the date such Claim Notice is delivered during which to notify the Indemnified Party in writing of any good faith objections it has to the Indemnified Party's Claim Notice or claims for indemnification, specifying in reasonable detail each of the Indemnifying Party's objections thereto. If the Indemnifying Party delivers such written notice of objection within such 30-day period, the Indemnifying Party and the Indemnified Party shall attempt in good faith to negotiate a resolution of such Dispute. If the Indemnifying Party and the Indemnified Party are unable to negotiate a resolution of such Dispute within 30 days after the delivery by the Indemnifying Party of such written notice of objection, such Dispute shall be resolved in the manner provided in Section 12.14. If the Indemnifying Party does not notify the Indemnified Party within 30 days following its receipt of such notice that the Indemnified Party disputes its liability with respect to such claim under Section 11.1 or 11.2, as the case may be, the claim shall be conclusively deemed a liability of the Indemnifying Party under Section 11.1 or 11.2, as the case may be, and the Indemnifying Party shall pay the amount of such liability to the Indemnified Party on demand or, in the case of any notice in which the amount of the claim (or any portion thereof) is estimated, on such later date when the amount of such claim (or any such portion thereof) becomes finally determined. 11.4 MISCELLANEOUS INDEMNIFICATION PROVISIONS. (a) The Indemnifying Party agrees to indemnify any successors of the Indemnified Party to the same extent and in the same manner and on the same terms and conditions as the Indemnified Party is indemnified by the Indemnifying Party under this Article XI, provided that such Indemnified Party and such successor have complied with the provisions of Section 12.11, if applicable. -77- (b) In determining the amount of any indemnity payable under this Article XI or the number of shares of AirTouch Common Stock deliverable by U S WEST to AirTouch pursuant to Section 3.3, such amount shall be (i) increased to take account of any net Tax cost incurred by the recipient thereof as a result of the receipt or accrual of payments hereunder (grossed-up for such increase) and (ii) reduced to take account of any net Tax benefit realized by the recipient arising from the incurrence or payment of any such payment, other than any such net Tax benefit to which the Indemnified Party would be entitled without regard to such item. In computing the amount of any such Tax cost or Tax benefit, the recipient shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt or accrual of any payment hereunder. (c) In determining the amount of any indemnity payable under this Article XI, such amount shall be reduced by any insurance recovery if and when actually realized or received in each case in respect of such Indemnifiable Loss. Any such recovery shall be promptly repaid by the Indemnified Party to the Indemnifying Party following the time at which such recovery is realized or received pursuant to the previous sentence, minus all reasonably allocable costs, charges and expenses incurred by the Indemnified Party in obtaining such recovery. (d) Notwithstanding the foregoing, if (x) the amount of Indemnifiable Losses for which the Indemnifying Party is obligated to indemnify the Indemnified Party is reduced by any Tax benefit or insurance recovery in accordance with the provisions of this Section 11.4, and (y) the Indemnified Party subsequently is required to repay the amount of any such Tax benefit or insurance recovery or such Tax benefit or insurance recovery is disallowed, then the obligation of the Indemnifying Party to indemnification with respect to such amounts shall be reinstated immediately and such amounts shall be paid promptly to the Indemnified Party in accordance with the provisions of this Agreement. 11.5 CONTRIBUTION. To the extent that any indemnity provided for in this Article XI is unavailable to an Indemnified Party in respect of any of the Indemnifiable Losses of such Indemnified Party, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Indemnifiable Losses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other hand in connection with the action, inaction, statements or omissions that resulted in such Indemnifiable Losses as well as any other relevant equitable considerations. 11.6 TAX INDEMNIFICATION. Notwithstanding anything to the contrary in this Article XI, all indemnification relating to -78- Taxes shall be governed by the Tax Sharing Agreement (except to the extent that the amount of any Indemnifiable Loss under this Agreement is to be determined as provided in Section 11.4 hereof). In the event and to the extent that there shall be a conflict between the provisions of this Agreement (including, without limitation, the provisions of this Article XI) and the provisions of the Tax Sharing Agreement, the provisions of the Tax Sharing Agreement shall control. 11.7 PAYMENTS ADJUSTMENTS TO MERGER CONSIDERATION. It is the intention of the parties hereto that payments made by the parties to each other after the Effective Time pursuant to this Article XI or Section 3.3 or otherwise under the Transaction Agreements are to be treated as relating back to the Effective Time as an adjustment to the Merger Consideration, and the parties shall take positions consistent with such intention with any Governmental Authority, unless with respect to any payment any party receives an opinion of counsel to the effect that there is no reasonable basis for such position. ARTICLE XII GENERAL PROVISIONS 12.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The representations and warranties in this Agreement shall not survive the Effective Time; PROVIDED, HOWEVER, that (a) all of the representations and warranties of U S WEST (other than the last sentence of Section 4.7) and the representations and warranties of AirTouch contained in the last sentence of Section 5.2(a) and Sections 5.4 and 5.5 shall survive until the date that is 18 months following the Effective Time and (b) the representation and warranty of U S WEST set forth in the last sentence of Section 4.7, which shall survive indefinitely. The covenants contained in this Agreement shall not survive the Effective Time except to the extent that they provide for or contemplate performance following the Effective Time and except for the covenant set forth in Section 6.1(b)(vii), which shall survive indefinitely. 12.2 LEGENDS. All certificates evidencing shares of AirTouch Common Stock, AirTouch Class D Preferred Stock or AirTouch Class E Preferred Stock acquired by Media (or the NV/PCS Transferee) directly or indirectly pursuant to this Agreement shall be endorsed with the legends set forth below: THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE, SATISFACTORY TO -79- THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED. 12.3 REMOVAL OF LEGENDS. Any legend endorsed on a certificate pursuant to Section 12.2 shall be removed (a) if the securities represented by such certificate shall have been effectively registered under the Securities Act or otherwise lawfully sold in compliance with Rule 144 under the Securities Act, or (b) if the holder of such securities shall have provided AirTouch with an opinion of counsel, in form and substance reasonably acceptable to AirTouch and its counsel stating that a sale, transfer or assignment of the securities may be made without registration under the Securities Act. 12.4 EXPENSES. Except as otherwise provided herein or in any of the other Transaction Agreements, each of the parties hereto (except for NV and PCS Holdings, the fees, expenses and costs of which shall be paid by U S WEST) shall pay the fees and expenses of its respective counsel, accountants and other experts and shall pay all other costs and expenses incurred by it in connection with the negotiation, preparation and execution of this Agreement and the consummation of the transactions contemplated hereby, including, without limitation, all costs and expenses incurred by it to obtain required Consents to the consummation of the transactions contemplated hereby. 12.5 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to choice of law principles, except to the extent that the laws of the State of Colorado are mandatorily applicable to the Merger. 12.6 NOTICES. Notices, requests, permissions, waivers, and other communications hereunder shall be in writing and shall be deemed to have been duly given if signed by the respective parties giving them (in the case of any corporation the signature shall be by an officer thereof) and delivered by hand or by telecopy or on the date of receipt indicated on the return receipt if mailed (registered or certified, return receipt requested, properly addressed and postage prepaid): If to U S WEST, Media (or the NV/PCS Transferee), or NV or PCS Holdings (prior to the Merger), to: U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 Attention: General Counsel Telephone: (303) 793-6500 Telecopy: (303) 793-6707 -80- with a copy (which shall not constitute notice) to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Dennis J. Block, Esq. Telephone: (212) 310-8000 Telecopy: (212) 310-8007 If to AirTouch or NV or PCS Holdings (after the Merger), to: AirTouch Communications, Inc. One California Street San Francisco, California 94111 Attention: Margaret G. Gill, Esq. Senior Vice President - Legal, External Affairs and Secretary Telephone: (415) 658-2000 Telecopy: (415) 658-2551 with a copy (which shall not constitute notice) to: Pillsbury Madison & Sutro LLP 235 Montgomery Street San Francisco, California 94101 Attention: Nathaniel M. Cartmell III, Esq. Telephone: (415) 983-1000 Telecopy: (415) 983-1200 Such names and addresses may be changed by notice given in accordance with this Section 12.6. 12.7 ENTIRE AGREEMENT. (a) This Agreement, the Tax Sharing Agreement, the Confidentiality Agreements, the Patent License Agreement, the Resources Agreement, the Software License Agreement and the New Investment Agreement, together with all schedules, exhibits, annexes, certificates, instruments and agreements delivered pursuant hereto and thereto, contain the entire understanding of the parties hereto and thereto with respect to the subject matter contained herein and therein and, except to the extent specifically provided herein or therein, supersede and cancel all prior agreements, negotiations, correspondence, undertakings and communications of the parties, oral or written, respecting such subject matters. There are no restrictions, promises, representations, warranties, agreements or undertakings of any party hereto or thereto with respect to the transactions contemplated by this Agreement or the other agreements referred to above other than those set forth herein or therein or made hereunder or thereunder. -81- (b) The Joint Venture Organization Agreement, the WMC Agreement, the Investment Agreement, the Exchange Agreement, the Arbitration Agreement, the PCS Nucleus Agreement, the PrimeCo Agreement, the TOMCOM Agreement and all letter and other agreements entered into by U S WEST, U S WEST Colorado and AirTouch and their respective Subsidiaries pursuant thereto or in connection therewith (the "Joint Venture Agreements") shall remain in full force and effect, without modification, as a result of the execution of this Agreement; PROVIDED that the obligation of the parties to proceed with any of the transactions contemplated under the Joint Venture Agreements shall be suspended during the period in which this Agreement remains in effect. At the Effective Time, each of AirTouch and U S WEST (and their respective successors and assigns and Subsidiaries) shall be released and forever discharged from any and all obligations and liabilities of any kind at any time arising under or in relation to the Joint Venture Agreements, and each of the Joint Venture Agreements (other than the WMC Agreement, the PCS Nucleus Agreement, the PrimeCo Agreement and the TOMCOM Agreement) shall terminate. 12.8 DISCLOSURE SCHEDULES. The U S WEST Merger Disclosure Schedule delivered by U S WEST and Media to AirTouch and the AirTouch Merger Disclosure Schedule delivered by AirTouch to U S WEST and Media are incorporated into this Agreement by reference and made a part hereof. 12.9 HEADINGS; REFERENCES. The article, section and paragraph headings contained herein are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. All references herein to "Articles", "Sections" or "Exhibits" shall be deemed to be references to Articles or Sections hereof or Exhibits hereto unless otherwise indicated. 12.10 COUNTERPARTS. This Agreement may be executed in counterparts and each counterpart shall be deemed to be an original, but all of which shall constitute one and the same original. 12.11 PARTIES IN INTEREST; ASSIGNMENT; SUCCESSORS. (a) Subject to Section 12.11(b) and (c), neither this Agreement nor any of the rights, interest or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other parties. Subject to Section 12.11(b), this Agreement shall inure to the benefit of and be binding upon U S WEST, Media, NV, PCS Holdings and AirTouch and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies under or by reason of this Agreement. -82- (b) (i) If the U S WEST Separation is consummated (whether prior to or following the Effective Time) and, in connection therewith, U S WEST distributes to its stockholders (by dividend, redemption, exchange, merger or otherwise) all of the outstanding capital stock of MediaCo, U S WEST shall assign to MediaCo all of its rights and obligations under this Agreement, including but not limited to, its obligations to the AirTouch Indemnified Parties under Article XI of this Agreement; PROVIDED, HOWEVER, that U S WEST shall not be required to assign to MediaCo its rights and obligations under Sections 7.8, 7.9, 7.10, 7.11, 7.12 and Article VIII. Upon such assumption by MediaCo of the obligations so assigned (by the instrument attached hereto as Exhibit K-1), U S WEST shall be released from its obligations to AirTouch to the extent of such assumption by MediaCo. MediaCo's Affiliates shall be entitled to the benefit of any such rights assigned to MediaCo to the same extent as such Affiliates are entitled to the benefits of such rights hereunder as Affiliates of U S WEST. (ii) If the U S WEST Separation is consummated (whether prior to or following the Effective Time) and, in connection therewith, U S WEST distributes to its stockholders (by dividend, redemption, exchange, merger or otherwise) all of the outstanding capital stock of CommunicationsCo, U S WEST shall assign to CommunicationsCo (fully or on a shared basis) such of its rights and obligations under Sections 7.8, 7.9, 7.10, 7.11, 7.12 and Article VIII as it may determine. Upon such assumption by CommunicationsCo of the obligations so assigned by the instrument attached hereto as Exhibit K-2), U S WEST shall be released from its obligations to AirTouch to the extent of such assumption by CommunicationsCo. CommunicationsCo's Affiliates shall be entitled to the benefit of any such rights assigned to CommunicationsCo to the same extent as such Affiliates are entitled to the benefit of such rights hereunder as Affiliates of U S WEST. (c) If the U S WEST Separation is consummated prior to the Effective Time, Media shall assign to the NV/PCS Transferee all of its rights and obligations under this Agreement. Upon assumption by the NV/PCS Transferee of the obligations so assigned (by the instrument attached hereto as Exhibit K-3), Media shall be released from its obligations to AirTouch to the extent of such assumption. 12.12 SEVERABILITY. If any provision of this Agreement or the application thereof to any Person or circumstance is determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provision to Persons or circumstances other than those as to which it has been held invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon -83- any such determination, the parties shall negotiate in good faith in an effort to agree upon a suitable and equitable substitute provision to effect the original intent of the parties. 12.13 ENFORCEMENT. The parties agree that irreparable damage would occur and that the parties would not have any adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any United States federal court located in the State of Delaware or in Delaware state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any United States federal court located in the State of Delaware or any Delaware state court in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (b) agrees that only such courts shall have jurisdiction and venue over any such dispute, (c) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court and (d) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a United States federal court sitting in the State of Delaware or a Delaware state court. The provisions of this Section 12.13 shall not apply to any of the other Transaction Agreements. 12.14 DISPUTE RESOLUTION. (a) GENERAL ARBITRATION PROVISIONS. (i) The parties hereto agree that all Disputes shall be resolved by binding arbitration, which shall be administered by the American Arbitration Association ("AAA") in Phoenix, Arizona, and, except as expressly provided in this Agreement, shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, as such Rules may be amended from time to time, with the hearing locale to be Phoenix, Arizona. (ii) A single neutral arbitrator shall preside over the arbitration and decide the Dispute (the "Decision"). (iii) The Decision shall be binding, and the prevailing party may enforce such decision in any court of competent jurisdiction. (iv) The parties shall cooperate with each other in causing the arbitration to be held in as efficient and expeditious a manner as practicable. -84- (v) The parties have selected arbitration in order to expedite the resolution of Disputes and to reduce the costs and burdens associated with litigation. The parties agree that the arbitrator should take these concerns into account when determining the scope of permissible discovery and other hearing and pre-hearing procedures. (vi) Without limiting any other remedies which may be available under Applicable Law, the arbitrator shall have no authority to award punitive damages. (vii) The arbitrator shall render a decision within 120 days after accepting an appointment to serve as arbitrator unless the parties otherwise agree or the arbitrator makes a finding that a party has carried the burden of showing good cause for a longer period. (viii) Notwithstanding anything herein to the contrary, any party may seek a temporary restraining order or a preliminary injunction from any court of competent jurisdiction in order to prevent immediate and irreparable injury, loss or damage pending the selection of an arbitrator to render a Decision on the ultimate merits of any Dispute. (b) SELECTION OF THE ARBITRATOR. (i) The parties hereto shall cooperate in good faith to select a mutually agreeable arbitrator. If the parties have not agreed upon an arbitrator within 30 days of the initiation of the arbitration, then an arbitrator shall be selected pursuant to the provisions of Section 12.14(b)(ii) of this Agreement. (ii) If the parties are unable to agree upon an arbitrator pursuant to the procedures of Section 12.14(b)(i) of this Agreement, then the American Arbitration Association shall designate an arbitrator pursuant to its Commercial Arbitration Rules, except that the list of potential arbitrators from the National Panel of Commercial Arbitrators submitted to the parties shall be drawn from throughout the United States other than from the State of Arizona, and shall have expertise in the subject matter or nature of the Dispute. (c) CONFIDENTIALITY. All proceedings and decisions of the arbitrator shall be maintained in confidence, to the extent legally permissible, and shall not be made public by any party or any arbitrator without the prior written consent of all parties to the arbitration, except as may be required by law. (d) FEES AND COSTS. Each party shall bear its own costs and attorneys' fees in connection with any arbitration, and the parties shall equally bear the fees, costs and expenses of the -85- arbitrator and the arbitration proceedings; provided, however, that the arbitrator may exercise discretion to award costs, but not attorneys' fees, to the prevailing party. (e) AWARD. Any arbitration award shall be binding and enforceable against the parties hereto, their successors and assigns, and judgment may be entered thereon in any court of competent jurisdiction. -86- IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf by its officers hereunto duly authorized, all as of the day and year first above written. U S WEST, INC. By: ------------------------------------ Name: Title: U S WEST MEDIA GROUP, INC. By: ------------------------------------ Name: Title: U S WEST NEWVECTOR GROUP, INC. By: ------------------------------------ Name: Title: U S WEST PCS HOLDINGS, INC. By: ------------------------------------ Name: Title: AIRTOUCH COMMUNICATIONS, INC. By: ------------------------------------ Name: Title: EX-12 7 EXHIBIT 12 EXHIBIT 12 U S WEST, INC. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993(1) --------- --------- --------- --------- --------- Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles...................... $ 1,222 $ 1,840 $ 2,154 $ 2,283 $ 745 Interest expense (net of amounts capitalized).................... 1,083 612 527 442 439 Interest factor on rentals (1/3)................................. 104 91 95 96 102 Equity losses in unconsolidated ventures (less than 50% owned)... 690 168 66 -- -- Guaranteed minority interest expense............................. 87 55 14 -- -- --------- --------- --------- --------- --------- Earnings......................................................... $ 3,186 $ 2,766 $ 2,856 $ 2,821 $ 1,286 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Interest expense................................................. $ 1,139 $ 680 $ 599 $ 486 $ 439 Interest factor on rentals (1/3)................................. 104 91 95 96 102 Guaranteed minority interest expense............................. 87 55 14 -- -- Preferred stock dividends (pretax equivalent).................... 91 15 -- -- -- --------- --------- --------- --------- --------- Fixed charges.................................................... $ 1,421 $ 841 $ 708 $ 582 $ 541 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to combined fixed charges and preferred stock dividends....................................................... 2.24 3.29 4.03 4.85 2.38
(1) The 1993 ratio is based on earnings from continuing operations and includes a restructuring charge of $1 billion. Excluding the restructuring charge, the 1993 ratio of earnings to combined fixed charges and preferred stock dividends would have been 4.22. EXHIBIT 12 U S WEST, INC. RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993(1) --------- --------- --------- --------- --------- Income before income taxes, extraordinary items and cumulative effect of changes in accounting principles...................... $ 1,222 $ 1,840 $ 2,154 $ 2,283 $ 745 Interest expense (net of amounts capitalized).................... 1,083 612 527 442 439 Interest factor on rentals (1/3)................................. 104 91 95 96 102 Equity losses in unconsolidated ventures (less than 50% owned)... 690 168 66 -- -- Guaranteed minority interest expense............................. 87 55 14 -- -- --------- --------- --------- --------- --------- Earnings......................................................... $ 3,186 $ 2,766 $ 2,856 $ 2,821 $ 1,286 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Interest expense................................................. $ 1,139 $ 680 $ 599 $ 486 $ 439 Interest factor on rentals (1/3)................................. 104 91 95 96 102 Guaranteed minority interest expense............................. 87 55 14 -- -- --------- --------- --------- --------- --------- Fixed charges.................................................... $ 1,330 $ 826 $ 708 $ 582 $ 541 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of earnings to fixed charges............................... 2.40 3.35 4.03 4.85 2.38
(1) The 1993 ratio is based on earnings from continuing operations and includes a restructuring charge of $1 billion. Excluding the restructuring charge, the 1993 ratio of earnings to fixed charges would have been 4.22. EXHIBIT 12 U S WEST FINANCIAL SERVICES, INC. RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1997 1996 1995 1994 1993 --------- --------- --------- --------- ---------- Income before income taxes................................ $ 19,874 $ 16,150 $ 9,125 $ 12,217 $ 123,596 Interest expense.......................................... 24,758 21,523 29,091 40,816 144,980 Interest factor on rentals (1/3).......................... 27 56 56 123 789 --------- --------- --------- --------- ---------- Earnings.................................................. $ 44,659 $ 37,729 $ 38,272 $ 53,156 $ 269,365 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Interest expense.......................................... $ 24,758 $ 21,523 $ 29,091 $ 40,816 $ 144,980 Interest factor on rentals (1/3).......................... 27 56 56 123 789 --------- --------- --------- --------- ---------- Fixed charges............................................. $ 24,785 $ 21,579 $ 29,147 $ 40,939 $ 145,769 --------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- Ratio of earnings to fixed charges........................ 1.80 1.75 1.31 1.30 1.85
A Termination Agreement and Guarantee (the "Agreement") was entered into on June 24, 1994 between U S WEST, Inc. ("U S WEST") and U S WEST Capital Corporation and U S WEST Financial Services ("USWFS"). The Agreement terminates the Support Agreement dated January 5, 1990 whereby U S WEST agreed to provide financial support to USWFS. The Agreement provides replacement financial support in the form of a direct guarantee by U S WEST of all outstanding indebtedness of USWFS. EX-21 8 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF U S WEST, INC. (A DELAWARE CORPORATION) AS OF JANUARY 30, 1998 I. U S WEST Capital Funding, Inc., a Colorado corporation II. U S WEST Communications Group, Inc., a Colorado corporation A. U S WEST Advanced Technologies, Inc., a Colorado corporation B. U S WEST Business Resources, Inc., a Colorado corporation 1. U S WEST Business Resources, Inc., a Delaware corporation 2. U S WEST Corporate Transportation, Inc., a Colorado corporation C. USW-C, Inc., a Delaware corporation D. U S WEST Communications, Inc., a Colorado corporation 1. Block 142 Parking Garage Association, a Colorado non profit 2. El Paso County Telephone Company, a Colorado corporation 3. Malheur Home Telephone Company, an Oregon corporation 4. Mubeta Development Co., a Colorado corporation 5. Training Partnerships, Inc., a Colorado non profit 6. 1200 Landmark Center Condominium Association, Inc., a Nebraska non profit 7. U S WEST Wireless, L.L.C., a Delaware limited liability corporation E. U S WEST Communications Federal Services, Inc., a Colorado corporation F. U S WEST Communications Services, Inc., a Colorado corporation G. U S WEST Enhanced Services, Inc., a Washington corporation H. U S WEST Interprise America, Inc., a Colorado corporation I. U S WEST Information Technologies, Inc., a Colorado corporation J. U S WEST Long Distance, Inc., a Colorado corporation III. U S WEST Education Foundation, a Washington non profit IV. U S WEST Federal Relations, Inc., a Delaware corporation V. U S WEST Financing I, a Delaware business trust VI. U S WEST Financing II, a Delaware business trust VII. U S WEST Financing III, a Delaware business trust VIII. U S WEST Foundation, a Colorado non profit IX. U S WEST Investment Management Company, a Colorado corporation X. U S WEST IP Holdings, Inc., a Delaware corporation XI. U S WEST Media Group, Inc., a Delaware corporation A. U S WEST Capital Corporation, a Colorado corporation 1. U S WEST Capital (America) Inc., a Colorado corporation 2. U S WEST Capital, Ltd. (U K) 3. Commercial Reinsurance Company, an Oklahoma corporation a) CLFG Corporation, a Delaware corporation b) Financial Security Assurance, Inc., a New York corporation (1) Financial Security Assurance International, Inc., an Indiana corporation (a) Financial Security Assurance of Oklahoma, Inc., an Oklahoma corporation (i) Financial Security Assurance (U.K.) Ltd. c) FSA Portfolio Management Inc., a New York corporation 4. U S WEST Financial Services, Inc., a Colorado corporation a) Commercial Funding, Inc., a New York corporation b) U S WEST Delta, Inc., a Colorado corporation c) USW Finance Corporation, a Colorado corporation d) U S WEST Financial Services Foreign Sales, Inc.(Virgin Islands) e) USWFS Leasing 1995, Inc., a Colorado corporation f) New York Cogenco, Inc., a Delaware corporation g) USW Shacres, Inc., a California corporation h) SIFD ONE, LTD., a Delaware corporation (1) USW FSC ONE, LTD.(Bermuda) i) SIFD TWO, LTD., a Delaware limited partnership (1) USW FSC TWO, LTD.(Bermuda) j) SIFD THREE, LTD., a Delaware business trust (1) USW FSC THREE, LTD. (Bermuda) k) USWSPE, Inc., a Delaware corporation l) Valertex, Inc., a Texas corporation 5. U S WEST Services (America) Inc., a Colorado corporation 6. U S WEST Services, Ltd.(U K) B. U S WEST Cellular Holdings, Inc., a Delaware corporation C. U S WEST Dex, Inc., a Colorado corporation 1. Interactive Video Enterprises, Inc., a Colorado corporation 2. LOCALTouch Holdings, Inc., a Colorado corporation a) LOCALTouch Directory Services, Inc, a Colorado corporation 3. Please Hold Promotions, Inc., an Arizona corporation D. Domestic Cable, Inc., a Colorado corporation E. Far East Investment Company, a Colorado corporation F. U S WEST Interactive Services, Inc., a Colorado corporation G. U S WEST International Holdings, Inc., a Delaware corporation 1. U S WEST Cable Partnership Holdings, Inc., a Colorado corporation 2. U S WEST Cable Programming Corporation, a Colorado corporation 3. U S WEST Czech Cable Company, a Delaware corporation 4. U S WEST Espana Telecommunications, Inc., a Delaware corporation 5. U S WEST Europe, Inc., a Colorado corporation 6. U S WEST Far East Telecommunications, Inc., a Delaware corporation 7. U S WEST Foreign Investments, Inc., a Colorado corporation 8. U S WEST International, Inc., a Colorado corporation 9. U S WEST International Systems Group, Inc., a Colorado corporation a) U S WEST ISG Technologies, Inc., a Colorado corporation 10. Overseas Operations, Inc., a Colorado corporation 11. Overseas Operations II, Inc., a Delaware corporation 12. USW PCN, Inc., a Colorado corporation 13. RTDC Holdings, Inc., a Delaware corporation a) Russian Telecommunications Development Corporation, a Delaware corporation (1) Russian Telecommunications Asset Management Corporation, a Delaware corporation (2) Russian Telecommunications Development Finance Corporation, a Delaware corporation (3) Russian Telecommunications Development Holding Corporation, a Delawarecorporation (4) Russian Telecommunications Development Holding Corporation II, a Delaware corporation (5) Russian Telecommunications Development Management Corporation, a Delaware corporation (6) U S WEST Services (Russia) 14. U S WEST U.K. Cable, Inc., a Colorado corporation ( 15. U S WEST India B.V. (Netherlands) 16. U S WEST International B.V. (Netherlands) a) U S WEST Deutschland GmbH (Germany) b) U S WEST Polska Sp.z.o.o (Poland) 17. U S WEST U.K. Limited (U.K.) a) U S WEST Cable Partnership Limited (U.K.) b) U S WEST International Systems Group Limited (U.K.) c) U S WEST ISG Installation Services Limited (U.K.) d) U S WEST Marketing Resources (U.K.) Limited 18. U S WEST Westelcom B.V. (Netherlands) H. U S WEST Investments, Inc., a Colorado corporation 1. U S WEST Real Estate, Inc., a Colorado corporation a) USW Cardinal I, Inc., an Ohio corporation b) USW Cardinal II, Inc., an Ohio corporation c) USW Fresno, Inc., a Colorado corporation d) USW Lodging, Inc., a Delaware corporation e) NP, Inc., a Colorado corporation f) Taurus Laurel, Inc., a Colorado corporation g) Taurus Properties, Inc., a Colorado corporation h) Verend, Inc., a Texas corporation (1) Riverbend West Association, Inc., a Texas non profit i) Dulles Corner Association, Inc., a Virginia non profit I. MediaOne of Delaware, Inc., a Delaware corporation 1. Continental Cablevision Asia Pacific, Inc., a Massachusetts corporation a) Continental Cablevision Singapore Pte Ltd. (Singapore) 2. Continental Cablevision of Minnesota, Inc., a Minnesota corporation a) Minnesota Cable Communications Holding Company, Inc., a Delaware corporation b) North Central Cable Communications Corporation, a Delaware corporation (1) Group W Cable of Burnsville/Eagan, Inc., a Minnesota corporation (2) Group W Cable of Columbia Heights/Hilltop, Inc., a Minnesota corporation (3) Group W Cable of the North Suburbs, Inc., a Minnesota corporation (4) Group W Cable of the North Central Suburbs, Inc., a Minnesota corporation (5) Group W Cable of Quad Cities, Inc., a Minnesota corporation (6) Group W Cable of Ramsey/Washington, Inc., a Minnesota corporation 3. Continental Cablevision of St. Paul, Inc., a Minnesota corporation 4. Continental Cablevision Satellite Company of Northern California, Inc., a California corporation a) MediaOne Satellite II, Inc., a Delaware corporation (1) MediaOne Satellite I, Inc., a Delaware corporation 5. Continental Satellite Company, Inc., a Massachusetts corporation 6. Continental Satellite Company of Chicago, Inc., an Illinois corporation 7. Continental Satellite Company of Minnesota, Inc., a Minnesota corporation 8. Continental Satellite Company of New England, Inc., a New Hampshire corporation 9. Continental Satellite Company of Ohio, Inc., an Ohio corporation 10. Continental Satellite Company of Virginia, Inc., a Virginia corporation 11. MediaOne Acquisitions of Northern Illinois, Inc., an Illinois corporation 12. MediaOne Digital Radio, Inc., a Massachusetts corporation 13. MediaOne Enterprises, Inc., a Rhode Island corporation a) CCF Management Services, Inc., a Florida corporation b) CCI Management Services, Inc., a California corporation c) MediaOne of Lakewood, Inc., a California corporation d) Copley/Colony, Inc., a Delaware corporation (1) MediaOne of Costa Mesa, Inc, a California corporation (2) MediaOne of Cypress, Inc., a California corporation (3) MediaOne of Harbor, Inc., a California corporation (4) MediaOne of Lomita, Inc., a California corporation (5) MediaOne of Los Angeles County, Inc., a California corporation (6) MediaOne of Orange County, Inc., a California corporation e) King Videocable Company, a Washington corporation (1) King Videocable Company-Minnesota, a Washington corporation (2) King Videocable Company-Twin Falls, an Idaho corporation (a) King Videocable Company-Idaho, a Colorado corporation MediaOne of Newhall, Inc., a California corporation (3) MediaOne of North Valley, Inc., a California corporation f) MediaOne Interconnects, Inc., a Delaware corporation g) MediaOne of Greater New York, Inc., a Rhode Island corporation h) MediaOne of South Florida, Inc., a Florida corporation i) MediaOne of Southern New England, Inc., a Massachusetts corporation 14. MediaOne Holdings 1, Inc., a Delaware corporation a) MediaOne of Los Angeles, Inc., a California corporation (1) American Cablesystems of South Central Los Angeles, Inc., a Delaware corporation b) MediaOne of Milton, Inc., a Massachusetts corporation c) MediaOne of New York, Inc., a New York corporation 15. MediaOne Investments, Inc., a Delaware corporation a) MediaOne Cable Investments, Inc., a Delaware corporation b) Fostoria Communications, Inc., a Massachusetts corporation c) MediaOne Cable News, Inc., a Massachusetts corporation d) MediaOne of Southeast Michigan, Inc., a Michigan corporation e) MediaOne Programming Partners 1, Inc., a Massachusetts corporation 16. MediaOne of Australia, Inc., a Massachusetts corporation 17. MediaOne of Brockton, Inc., a Delaware corporation 18. MediaOne of California, Inc., a California corporation 19. MediaOne of Greater Florida, Inc., a Florida corporation a) Alrif Co., Inc., a Massachusetts corporation b) Continental Satellite Company of Florida, Inc., a Florida corporation (1) MediaOne Satellite II, Inc., a Delaware corporation (a) MediaOne Satellite I, Inc., a Delaware corporation 20. MediaOne of Illinois, Inc., a Delaware corporation 21. MediaOne of Massachusetts, Inc., a Massachusetts corporation 22. MediaOne of Metropolitan Detroit, Inc., a Michigan corporation a) Continental Satellite Company of Michigan, Inc.. a Michigan corporation b) MediaOne of Eastern Michigan, Inc., a Delaware corporation 23. MediaOne of Needham, Inc., a Delaware corporation 24. MediaOne of New England, Inc, a New Hampshire corporation a) MediaOne of New Hampshire, Inc., a Maryland corporation 25. MediaOne of Northern Illinois, Inc., a Delaware corporation 26. MediaOne of Ohio, Inc., an Ohio corporation 27. MediaOne of Sierra Valleys, Inc., a California corporation a) MediaOne of Fresno, Inc., a California corporation b) MediaOne of Nevada, Inc., a Nevada corporation c) MediaOne of Northern California, Inc., a California corporation 28. MediaOne of Virginia, Inc., a Virginia corporation a) MediaOne of Pioneer Valley, Inc., a Massachusetts corporation b) Continental Cablevision of Richmond, Inc., a Virginia corporation 29. MediaOne of Western New England, Inc., a Delaware corporation 30. MediaOne Telecommunications Corp., a Massachusetts corporation a) Continental Australia Programming, Inc., a Massachusetts corporation b) Continental Telecommunications Corp. of Minnesota, a Minnesota corporation c) Continental Telecommunications Corp. of Virginia, a Virginia corporation d) Continental Teleport Partners, Inc., a Massachusetts corporation e) MediaOne Connect, Inc., a Delaware corporation) f) MediaOne Express Midwest, Inc., an Ohio corporation g) MediaOne Express of California, Inc., a California corporation h) MediaOne Express of Florida, Inc., a Florida corporation i) MediaOne Express of Illinois, Inc., an Illinois corporation j) MediaOne Express of New England, Inc., a Massachusetts corporation k) MediaOne Express of Virginia, Inc., a Virginia corporation l) MediaOne Fiber Technologies, Inc., a Florida corporation m) MediaOne Florida Telecommunications, Inc., a Florida corporation n) MediaOne Information Technology Systems, Inc., a Massachusetts corporation o) MediaOne International Programming, Inc., a Massachusetts corporation p) MediaOne Telecommunications Corp. of New England, a Massachusetts corporation q) MediaOne Telecommunications Corp. of Ohio, an Ohio corporation r) MediaOne Telecommunications of California, Inc., a California corporation s) MediaOne Telecommunications of Illinois, Inc., an Illinois corporation t) MediaOne Telecommunications of Massachusetts, Inc., a Massachusetts corporation u) MediaOne Telecommunications of Michigan, Inc., a Michigan corporation v) MediaOne Telecommunications of New Hampshire, Inc., a New Hampshire corporation w) MediaOne Telecommunications of Ohio, Inc., an Ohio corporation x) MediaOne Telecommunications of Virginia, Inc., a Virginia corporation 31. S.A. Ventures, Inc., a Massachusetts corporation a) S.A. Ventures (Delaware), Inc., a Delaware corporation 32. S.A. Ventures II, Inc., a Massachusetts corporation J. U S WEST Multimedia Communications, Inc., a Colorado corporation 1. MediaOne, Inc., a Georgia corporation a) Atlanta Home Network, Inc., a Georgia corporation b) MediaOne Business Services, Inc., a Colorado corporation c) MediaOne of Clayton County, Inc., a Georgia corporation d) MediaOne of Cobb County, Inc., a Georgia corporation e) MediaOne of Conyers-Rockdale, Inc., a Georgia corporation f) MediaOne of Fayette County, Inc., a Georgia corporation g) MediaOne of Fulton County, Inc., a Georgia corporation h) MediaOne of Georgia, Inc., a Georgia corporation i) MediaOne of Henry County, Inc., a Georgia corporation j) Peachtree SMATV Corp., a Georgia corporation K. U S WEST PCS Holdings, Inc., a Delaware corporation L. U S WEST PCS Services, Inc., a Colorado corporation M. U S WEST NewVector Group, Inc., a Colorado corporation 1. Ardael, Inc., a Washington corporation 2. NewVector Communications, Inc., a Delaware corporation 3. U S WEST NewVector Materials, Inc., a Colorado corporation 4. Pacific Cellular, Inc., a Washington corporation 5. Pacific Telecom Cellular of Colorado, Inc., a Colorado corporation XII. MediaOne of Michigan, Inc., a Delaware corporation XIII. U S WEST SPF Co., a Colorado corporation XIV. USW, Inc., a Delaware corporation XV. Western Range Insurance Co., a Vermont corporation EX-23 9 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of U S WEST, Inc. on Form S-3 (File Nos. 33-50047, 33-50047-01, 33-63451 and 33-63087) and Form S-8 (File Nos. 333-01931, 33-63089, 33-63093, 33-63085, 33-63901, 33-24285 and 333-24283) and Form S-4 (File No. 333-45765) of our reports dated February 12, 1996, on our audit of the consolidated financial statements and consolidated financial statement schedule of U S WEST, Inc. for the year ended December 31, 1995, which reports are included in this Annual Report on Form 10-K/A. /s/ COOPERS & LYBRAND L.L.P. Denver, Colorado April 13, 1998 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated February 12, 1998 (except with respect to the matter discussed in Note 21 as to which the date is April 6, 1998) on the consolidated financial statements, the consolidated financial statement schedule and Supplementary Selected Proportionate Results of Operations of U S WEST, Inc., as of December 31, 1997 and 1996 and for the years then ended included in this amended Annual Report on Form 10-K/A, into U S WEST, Inc.'s previously filed Registration Statements on Forms S-3 (Nos. 33-50047, 33-50047-01, 33-63451 and 33-63087), Forms S-8 (Nos. 333-01931, 33-63089, 33-63093, 33-63085, 33-63091, 333-24285 and 333-24283) and Form S-4 (No. 333-45765). /s/ Arthur Andersen LLP Denver, Colorado, April 13, 1998. EX-24 10 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, U S WEST, Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the fiscal year ended December 31, 1997; and WHEREAS, each of the undersigned is a Director of the Company; NOW THEREFORE, each of the undersigned constitutes and appoints MICHAEL P. GLINSKY, JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys for him or her and in his or her name, place, and stead, and in his or her capacity as a Director of the Company, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto on Form 10-K, hereby giving and granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he or she might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney this 13th day of March 1998. /s/ ROBERT S. CRANDALL /s/ ALLEN F. JACOBSON - - ---------------------------- ---------------------------- Robert L. Crandall Allen F. Jacobson /s/ GRANT A. DOVE /s/ CHARLES M. LILLIS - - ---------------------------- ---------------------------- Grant A. Dove Charles M. Lillis /s/ ALLAN D. GILMOUR /s/ RICHARD D. MCCORMICK - - --------------------------- --------------------------- Allan D. Gilmour Richard D. McCormick /s/ PIERSON M. GRIEVE /s/ MARILYN CARLSON NELSON - - --------------------------- --------------------------- Pierson M. Grieve Marilyn Carlson Nelson /s/ GEORGE J. HARAD /s/ FRANK POPOFF - - --------------------------- --------------------------- George J. Harad Frank Popoff /s/ CHARLES P. RUSS III /s/ SOLOMON D. TRUJILLO - - --------------------------- --------------------------- Charles P. Russ III Solomon D. Trujillo /s/ LOUIS A. SIMPSON /s/ JERRY O. WILLIAMS - - --------------------------- --------------------------- Louis A. Simpson Jerry O. Williams /s/ JOHN "JACK" SLEVIN - - --------------------------- John Jack Slevin POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, U S WEST, Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the fiscal year ended December 31, 1997 and WHEREAS, the undersigned is an officer or Director, or both, of the Company and holds the office, or offices, in the Company as indicated below his name; NOW THEREFORE, the undersigned hereby constitutes and appoints MICHAEL P. GLINSKY, JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys for him and in his name, place, and stead, and in each of his offices and capacities in the Company, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto on Form 10-K, hereby giving and granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 13th day of March, 1998. /s/ RICHARD D. MCCORMICK --------------------------- Richard D. McCormick Chairman of the Board, Chief Executive Officer and President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, U S WEST, Inc., a Delaware corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the fiscal year ended December 31, 1997 and WHEREAS, the undersigned is an officer or Director, or both, of the Company and holds the office, or offices, in the Company as indicated below his name; NOW THEREFORE, the undersigned hereby constitutes and appoints JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys for him and in his name, place, and stead, and in each of his offices and capacities in the Company, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto on Form 10-K, hereby giving and granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this 13th day of March, 1998. /s/ MICHAEL P. GLINSKY --------------------------- Michael P. Glinsky Executive Vice President and Chief Financial Officer EX-27.1 11 EXHIBIT 27.1
5 0000732718 U S WEST, INC. 1,000,000 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 192 70 127 160 0 0 0 0 1,974 1,794 1,872 1,973 88 0 0 0 227 237 220 198 2,909 2,753 2,835 2,936 32,884 33,453 33,622 34,265 18,207 18,489 18,633 19,038 25,071 25,145 25,289 25,583 5,052 4,900 4,679 4,866 6,954 7,024 7,360 7,402 651 651 651 651 0 0 0 0 8,228 8,320 8,373 8,396 (280) (209) (156) (114) 25,071 24,145 25,289 25,583 11,746 3,050 6,174 9,353 11,746 3,050 6,174 9,353 0 0 0 0 9,101 2,325 4,731 7,184 0 0 0 0 0 0 0 0 527 135 271 411 2,154 489 1,008 1,502 825 192 398 588 1,329 297 610 914 0 0 0 0 (12) 0 0 0 0 34 34 34 1,317 331 644 948 2.50 .69 1.37 1.97 2.46 .68 1.35 1.94 REPRESENTS BASIC EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128. REPRESENTS DILUTED EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
EX-27.2 12 EXHIBIT 27.2
5 0000732718 U S WEST, INC. 1,000,000 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1996 JAN-01-1997 JAN-01-1997 JAN-01-1997 DEC-31-1996 MAR-31-1997 JUN-30-1997 SEP-30-1997 201 164 244 259 0 0 0 0 2,113 2,059 2,104 2,107 125 0 0 0 159 171 218 216 3,112 2,979 3,159 3,133 37,756 38,152 38,547 39,149 19,475 19,944 20,261 20,600 40,855 40,333 40,366 40,554 6,074 5,813 5,661 6,565 14,300 14,260 14,135 13,422 1,131 1,131 1,180 1,180 920 921 921 921 10,741 10,739 10,776 10,800 (112) (175) (131) (199) 40,855 40,333 40,366 40,554 12,911 3,766 7,553 11,471 12,911 3,766 7,553 11,471 0 0 0 0 10,056 2,944 5,924 9,058 0 0 0 0 0 0 0 0 612 278 544 823 1,840 400 815 1,148 696 170 350 485 1,144 230 465 663 0 0 0 0 0 0 3 (3) 34 0 0 0 1,178 230 468 660 2.62 .70 1.39 2.08 2.58 .70 1.38 2.06 REPRESENTS BASIC EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128. REPRESENTS DILUTED EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
EX-27.3 13 EXHIBIT 27.3
5 0000732718 U S WEST, INC 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 211 0 2,249 136 179 3,399 39,223 20,643 39,740 6,315 13,248 1,180 923 10,876 (475) 39,740 15,235 15,235 0 12,429 0 0 1,083 1,222 522 700 0 (3) 0 697 2.43 2.41 REPRESENTS BASIC EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128. REPRESENTS DILUTED EPS AND HAS BEEN PREPARED IN ACCORDANCE WITH SFAS NO.128.
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