<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
CONTINENTAL CABLEVISION, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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CONTINENTAL CABLEVISION, INC.
October 15, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting in Lieu of the Annual
Meeting of Stockholders (the "Special Meeting") of Continental Cablevision, Inc.
("Continental") to be held on November 14, 1996 at 10:00 a.m., local time, at
the Hotel Meridien, 250 Franklin Street, Boston, Massachusetts 02110.
At the Special Meeting, stockholders will be asked to approve and adopt an
Agreement and Plan of Merger (the "Merger Agreement"), providing for the merger
(the "Merger") of Continental with and into U S WEST, Inc. ("U S WEST") or a
wholly owned subsidiary of U S WEST. As described in the accompanying Proxy
Statement, at the effective time of the Merger, (a) each share of Continental
Class A Common Stock, par value $.01 per share ("Class A Common Stock"), will be
converted into the right to receive shares of U S WEST Media Group Common Stock,
par value $.01 per share ("Media Stock"), and U S WEST Series D Convertible
Preferred Stock, par value $1.00 per share ("Series D Preferred Stock"), with a
liquidation preference of $50 per share, and (b) each share of Continental Class
B Common Stock, par value $.01 per share ("Class B Common Stock"), will be
converted into the right to receive, at the election of the holder thereof
(subject in certain instances to proration), (i) a combination of cash, Media
Stock and Series D Preferred Stock (the "Standard Election"), (ii) a combination
of shares of Media Stock and Series D Preferred Stock (the "Stock Election") or
(iii) $30 in cash (the "Cash Election"). Except as otherwise described in the
accompanying Proxy Statement, each record holder of Class B Common Stock will be
entitled to make only one election (either a Standard Election, a Stock Election
or a Cash Election) with respect to all of the shares of Class B Common Stock
held by such holder as of the effective time of the Merger. As further described
in the accompanying Proxy Statement, the Merger could not occur if the
continuing tax-free status of the recent transactions involving the merger of
Providence Journal Company with and into Continental were to be jeopardized
thereby. In order to preserve the tax-free status of these transactions, holders
of Class A Common Stock will need to be precluded from receiving cash
consideration in the Merger.
On October 8, 1996, the closing sale price of the Media Stock was $17.625
per share (the "October Media Stock Price"). Based on the October 8 Media Stock
Price, the value of the aggregate consideration to be received by stockholders
of Continental in the Merger would be approximately $4.7 billion, consisting of
$1.0 billion of cash (all of which will be paid to holders of Class B Common
Stock), shares of Series D Preferred Stock with an aggregate liquidation value
of $1.0 billion (which will be allocated between holders of Class A Common Stock
and Class B Common Stock as described in the accompanying Proxy Statement) and
the remainder in shares of Media Stock. U S WEST will have the right to increase
the amount of cash to be paid in the Merger up to a maximum of $1.5 billion, as
described in the accompanying Proxy Statement (in which event the number of
shares of Media Stock to be issued to holders of Continental Common Stock would
be reduced, the number of shares of Series D Preferred Stock to be issued to
holders of Class A Common Stock would be increased and the number of shares of
Series D Preferred Stock to be issued to holders of Class B Common Stock would
be reduced). In the event U S WEST elects to increase the amount of cash to be
paid to holders of Class B Common Stock to $1.5 billion, based on the October 8
Media Stock Price the value of the aggregate consideration to be received by
stockholders of Continental would be approximately $4.8 billion. The value of
the aggregate consideration to be received by stockholders of Continental upon
the consummation of the Merger will depend, among other things, upon the market
price of the Media Stock at such time.
Assuming that U S WEST elects to pay $1.0 billion of cash in the Merger and
that the number of shares of Class A Common Stock and Class B Common Stock
outstanding as of September 20, 1996 remains unchanged, at the effective time of
the Merger (a) each share of Class A Common Stock, other than shares issued to
Continental employees that are subject to vesting pursuant to restricted stock
purchase agreements with Continental ("Restricted Continental Common Stock"),
would be converted into the right to receive .882 of a share of Media Stock and
.229 of a share of Series D Preferred Stock and (b) each share of Class B Common
Stock (other than Restricted Continental Common Stock) would be converted into
the right to receive (i) in the case of a Standard Election, .882 of a share of
Media Stock, .082 of a share of Series D
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Preferred Stock and $7.39 in cash, (ii) in the case of a Stock Election that is
not subject to proration, 1.171 shares of Media Stock and .108 of a share of
Series D Preferred Stock, and (iii) in the case of a Cash Election that is not
subject to proration, $30 in cash.
Assuming that U S WEST elects to increase the amount of cash payable in the
Merger to $1.5 billion and that the number of shares of Class A Common Stock and
Class B Common Stock outstanding as of September 20, 1996 remains unchanged, at
the effective time of the Merger (a) each share of Class A Common Stock (other
than Restricted Continental Common Stock) would be converted into the right to
receive .746 of a share of Media Stock and .287 of a share of Series D Preferred
Stock and (b) each share of Class B Common Stock (other than Restricted
Continental Common Stock) would be converted into the right to receive (i) in
the case of a Standard Election, .746 of a share of Media Stock, .065 of a share
of Series D Preferred Stock and $11.08 in cash, (ii) in the case of a Stock
Election that is not subject to proration, 1.183 shares of Media Stock and .103
of a share of Series D Preferred Stock, and (iii) in the case of a Cash Election
that is not subject to proration, $30 in cash.
At the effective time of the Merger, each share of Restricted Continental
Common Stock will be converted into the right to receive 1.429 shares of Media
Stock.
As further described in the accompanying Proxy Statement, the consideration
to be received by stockholders of Continental in the Merger may be subject to
certain upward adjustments if the closing of the Merger occurs after January 3,
1997. Continental stockholders have the right to dissent from the Merger and
have the fair value of their shares paid to them in cash if the Merger is
consummated by submitting a written notice prior to the Special Meeting and
following the other procedures described in the accompanying Proxy Statement.
The Merger is subject to, among other things, the approvals of various
governmental entities and other third parties, including the Federal
Communications Commission, and will not be consummated until such approvals have
been obtained. As a result, it is expected that the Merger will be completed
during the fourth quarter of 1996.
Your Board of Directors has carefully considered the terms of the proposed
Merger Agreement and believes that the Merger and related transactions are in
the best interests of and fair to Continental and its stockholders. The Board of
Directors has unanimously approved the Merger Agreement and the related
transactions and recommends that stockholders vote FOR this proposal.
In order to maintain the tax-free status of the recent merger of Providence
Journal Company with and into Continental, the stockholders will be asked to
approve an amendment to Continental's Restated Certificate of Incorporation (the
"Restated Certificate") that will allow holders of Class A Common Stock,
comprised mainly of former Providence Journal Company stockholders, to receive
only stock consideration in the Merger, while holders of Class B Common Stock
may receive cash or stock consideration, or a combination thereof. The Board of
Directors has unanimously approved this amendment to the Restated Certificate
and recommends that stockholders vote FOR this proposal.
The stockholders will also be asked to approve an amendment to the Restated
Certificate that will, so long as the Merger Agreement remains in effect, remove
certain restrictions on the transfer of shares of Class B Common Stock and
impose certain restrictions on the conversion of shares of Class B Common Stock
into shares of Class A Common Stock. The Board of Directors has unanimously
approved this amendment to the Restated Certificate and recommends that
stockholders vote FOR this proposal.
The stockholders will also be asked to elect four Class A Directors of
Continental and to ratify the appointment by the Board of Directors of Deloitte
& Touche LLP as Continental's independent auditors for the current fiscal year
ending December 31, 1996.
2
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The accompanying Proxy Statement sets forth the respective voting rights of
holders of shares of Continental stock with respect to these matters. We hope
you will be able to attend the Special Meeting. However, whether or not you
anticipate attending in person, we urge you to sign, date and return the
enclosed proxy card promptly to ensure that your shares will be represented at
the Special Meeting. If you do attend the Special Meeting, you will, of course,
be entitled to vote in person.
Thank you, and I look forward to seeing you at the meeting.
Sincerely,
/s/ Amos B. Hostetter, Jr.
Amos B. Hostetter, Jr.
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
3
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CONTINENTAL CABLEVISION, INC.
------------------
NOTICE OF SPECIAL MEETING
IN LIEU OF THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 14, 1996
------------------------
TO THE STOCKHOLDERS OF CONTINENTAL CABLEVISION, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting in Lieu of the Annual Meeting
of Stockholders (the "Special Meeting") of Continental Cablevision, Inc.
("Continental"), will be held on November 14, 1996 at 10:00 a.m., local time, at
the Hotel Meridien, 250 Franklin Street, Boston, Massachusetts 02110, for the
purpose of considering and voting upon the following proposals (collectively,
the "Proposals"):
(1) A proposal to approve and adopt an Agreement and Plan of Merger, dated
as of February 27, 1996, as amended and restated as of June 27, 1996 and
as further amended as of October 7, 1996 (the "Merger Agreement"), among
U S WEST, Inc., a Delaware corporation ("U S WEST"), Continental Merger
Corporation, a Delaware corporation and wholly owned subsidiary of U S
WEST ("Sub"), and Continental, pursuant to which either (i) Continental
will be merged with and into Sub, with Sub continuing as the surviving
corporation and a wholly owned subsidiary of U S WEST (the "Subsidiary
Merger"), or (ii) Continental will be merged with and into U S WEST, with
U S WEST continuing as the surviving corporation (the "Direct Merger").
As used herein, the "Merger" refers to the Subsidiary Merger or the
Direct Merger, as applicable.
(2) A proposal to approve and adopt an amendment (the "Consideration Charter
Amendment") to Continental's Restated Certificate of Incorporation (the
"Restated Certificate") that will permit holders of Continental's Class A
Common Stock, $.01 par value per share (the "Class A Common Stock"), to
receive only stock consideration in the Merger, while holders of
Continental's Class B Common Stock, $.01 par value per share (the "Class
B Common Stock"), may receive cash or stock consideration or a
combination thereof.
(3) A proposal to approve and adopt an amendment (the "Conversion Charter
Amendment" and, together with the Consideration Charter Amendment, the
"Charter Amendments") to the Restated Certificate that will, so long as
the Merger Agreement remains in effect, remove certain restrictions on
the transfer of shares of Class B Common Stock and impose certain
restrictions on the conversion of shares of Class B Common Stock into
shares of Class A Common Stock.
(4) The election of four (4) Class A Directors of Continental.
(5) The ratification of the appointment by the Board of Directors of
Deloitte & Touche LLP as Continental's independent auditors for the
current fiscal year ending December 31, 1996.
(6) Such other business as may properly come before the Special Meeting or
any adjournments or postponements thereof.
The Continental Board of Directors has fixed the close of business on
September 20, 1996 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and any adjournments or
postponements thereof. Only stockholders of record at the close of business on
such date are entitled to notice of and to vote at the Special Meeting. A list
of Continental stockholders entitled to vote at the Special Meeting or any
adjournments or postponements thereof will be available for examination for any
purpose germane to the Special Meeting, during ordinary business hours, at the
principal executive offices of Continental located at The Pilot House, Lewis
Wharf, Boston, Massachusetts 02110, for 10 days prior to the Special Meeting.
<PAGE>
Shares of the Class A Common Stock, Class B Common Stock and Continental
Series A Participating Convertible Preferred Stock, par value $.01 per share,
are the only securities of Continental whose holders are entitled to vote upon
the Proposals and any other proposals to be presented at the Special Meeting.
Each proposal shall be voted upon separately by the Continental stockholders
entitled to vote at the Special Meeting; however, failure of the stockholders to
approve either the Merger Agreement or the Consideration Charter Amendment will
result in the abandonment by Continental of the Merger.
Continental stockholders entitled to vote at the Special Meeting have a
right to dissent from the Merger and, if the Merger is consummated, to obtain
payment for their shares of Continental stock by complying with the provisions
of Section 262 of the Delaware General Corporation Law ("Section 262"). A copy
of Section 262 is attached as ANNEX IV to the accompanying Proxy Statement.
Your vote is important regardless of the number of shares you own. Each
stockholder, whether or not he or she now plans to attend the Special Meeting,
is requested to sign, date and return the enclosed proxy card without delay in
the enclosed postage-paid return envelope. You may revoke your proxy at any time
prior to its exercise. Any stockholder present at the Special Meeting or at any
adjournments or postponements thereof may revoke his or her proxy and vote
personally on each matter brought before the Special Meeting.
By Order of the Board of Directors,
/s/ Robert B. Luick
Robert B. Luick,
SECRETARY
October 15, 1996
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE
AND ADOPT THE MERGER AGREEMENT AND FOR EACH OF THE OTHER PROPOSALS BEING
SUBMITTED TO THE SPECIAL MEETING.
PLEASE DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE.
2
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CONTINENTAL CABLEVISION, INC.
PROXY STATEMENT
FOR SPECIAL MEETING IN LIEU OF
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD NOVEMBER 14, 1996
------------------------
U S WEST, INC.
PROSPECTUS
---------------------
This Proxy Statement and Prospectus (this "Proxy Statement") is being
furnished to the stockholders of Continental Cablevision, Inc., a Delaware
corporation ("Continental," which term includes its consolidated subsidiaries
unless the context indicates otherwise), in connection with the solicitation of
proxies by the Board of Directors of Continental (the "Continental Board") from
holders of outstanding shares of Class A Common Stock, par value $.01 per share
(the "Class A Common Stock"), Class B Common Stock, par value $.01 per share
(the "Class B Common Stock" and, together with the Class A Common Stock, the
"Continental Common Stock"), and Series A Participating Convertible Preferred
Stock, par value $.01 per share (the "Continental Preferred Stock"), of
Continental for use at the Special Meeting in Lieu of Annual Meeting of
Stockholders of Continental to be held at 10:00 a.m., local time, on November
14, 1996, and at any adjournment or postponement thereof (the "Special
Meeting"). This Proxy Statement and the accompanying form of proxy are first
being mailed to stockholders of Continental on or about October 15, 1996. For an
index indicating the pages on which certain terms used in this Proxy Statement
are defined, see "Definition Cross Reference Sheet" beginning on page viii.
Continental stockholders will be asked at the Special Meeting to consider
and vote upon the following proposals (collectively, the "Proposals"):
1. A Proposal to approve and adopt an Agreement and Plan of Merger,
dated as of February 27, 1996, as amended and restated as of June 27, 1996
and as further amended as of October 7, 1996 (the "Merger Agreement"), among
U S WEST, Inc., a Delaware corporation ("U S WEST"), Continental Merger
Corporation, a Delaware corporation and wholly owned subsidiary of U S WEST
("Sub"), and Continental, pursuant to which either (i) Continental will be
merged with and into Sub, with Sub continuing as the surviving corporation
and a wholly owned subsidiary of U S WEST (the "Subsidiary Merger") or (ii)
Continental will be merged with and into U S WEST, with U S WEST continuing
as the surviving corporation (the "Direct Merger"). As used herein, the
"Merger" refers to the Subsidiary Merger or the Direct Merger, as
applicable.
2. A Proposal to approve and adopt an amendment (the "Consideration
Charter Amendment") to the Restated Certificate of Incorporation of
Continental (the "Continental Restated Certificate") required pursuant to
the Merger Agreement that will permit holders of Class A Common Stock to
receive only stock consideration in the Merger while holders of Class B
Common Stock may receive cash or stock consideration or a combination
thereof.
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 21 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY STOCKHOLDERS OF CONTINENTAL IN EVALUATING AN INVESTMENT IN THE
MEDIA STOCK AND SERIES D PREFERRED STOCK.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
October 11, 1996
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
3. A Proposal to approve and adopt an amendment (the "Conversion
Charter Amendment" and, together with the Consideration Charter Amendment,
the "Charter Amendments") to the Continental Restated Certificate that will,
so long as the Merger Agreement remains in effect, remove certain
restrictions on the transfer of shares of Class B Common Stock and impose
certain restrictions on the conversion of shares of Class B Common Stock
into shares of Class A Common Stock.
4. The election of four (4) Class A Directors of Continental.
5. The ratification of the appointment by the Continental Board of
Deloitte & Touche LLP as Continental's independent public accountants for
the current fiscal year ending December 31, 1996.
THE CONTINENTAL BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE
CHARTER AMENDMENTS AND EACH OF THE OTHER PROPOSALS, BELIEVES THAT THE APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT, THE CHARTER AMENDMENTS AND EACH OF THE
OTHER PROPOSALS IS IN THE BEST INTERESTS OF CONTINENTAL AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT CONTINENTAL'S STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT, THE CHARTER AMENDMENTS AND EACH OF THE OTHER
PROPOSALS.
Consummation of the Merger is conditioned upon adoption of both the Merger
Agreement and the Consideration Charter Amendment by the stockholders of
Continental. Accordingly, if the Merger Agreement is adopted but the
Consideration Charter Amendment is not adopted, the Merger will not be
consummated. The Subsidiary Merger will only be effected in lieu of the Direct
Merger if either (i) a certain ruling is received from the Internal Revenue
Service (the "Service"), which ruling must be acceptable to U S WEST,
Continental and The Providence Journal Company or (ii) U S WEST, Continental and
The Providence Journal Company are otherwise satisfied that such ruling is not
necessary.
This Proxy Statement also constitutes a Prospectus of U S WEST with respect
to (i) the shares of U S WEST Media Group Common Stock, par value $.01 per
share, of U S WEST (the "Media Stock") and the shares of Series D Convertible
Preferred Stock, par value $1.00 per share, of U S WEST (the "Series D Preferred
Stock") that will be issued to stockholders of Continental at the effective time
of the Merger (the "Effective Time") and (ii) the shares of Media Stock issuable
upon conversion of such shares of Series D Preferred Stock. As further described
herein, at the Effective Time (a) each share of Class A Common Stock (excluding
shares of Restricted Continental Common Stock (as defined below), Dissenting
Shares (as defined below) and shares owned by Continental, by U S WEST or by a
wholly owned subsidiary of Continental or U S WEST) will be converted into the
right to receive shares of Media Stock and Series D Preferred Stock, (b) each
share of Class B Common Stock (including each share issued upon conversion of
Continental Preferred Stock but excluding shares of Restricted Continental
Common Stock, Dissenting Shares and shares owned by Continental, by U S WEST or
by a wholly owned subsidiary of Continental or U S WEST) will be converted into
the right to receive, at the election of the holder thereof (subject in certain
circumstances to proration), (i) a combination of cash, shares of Media Stock
and shares of Series D Preferred Stock (the "Standard Election"), (ii) a
combination of shares of Media Stock and shares of Series D Preferred Stock (the
"Stock Election") or (iii) $30 in cash (the "Cash Election"), and (c) each share
of Continental Common Stock issued to a Continental employee that is subject to
vesting pursuant to a restricted stock purchase agreement with Continental
("Restricted Continental Common Stock") will be converted into the right to
receive shares of Media Stock, which shares will thereafter be subject to the
same contractual restrictions as the Restricted Continental Common Stock. See
"The Merger Agreement -- Conversion of Continental Common Stock" and "--
Election and Exchange Procedures."
The Merger could not occur if the continuing tax-free status of the recent
transactions (the "Providence Journal Merger Transactions") involving the merger
of Providence Journal Company ("Providence Journal") with and into Continental
(the "Providence Journal Merger") were to be jeopardized thereby. Because the
tax-free status of these transactions cannot be ensured unless the former
Providence Journal stockholders, who as of September 20, 1996 held approximately
77% of the Class A Common Stock, are precluded from receiving any of the cash
consideration to be paid in the Merger, the Merger has been structured to
preclude the receipt of cash by holders of Class A Common Stock. See "The Merger
- -- Recommendation of the Continental Board; Reasons for the Merger -- Charter
Amendments."
Holders of Continental Common Stock have the right to dissent from the
Merger and, if the Merger is consummated, to have the fair value of their shares
paid to them in cash by submitting a written notice to Continental prior to the
Special Meeting and following the other procedures described under "Rights of
ii
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Dissenting Stockholders." Any shares of Continental Common Stock held by holders
exercising such rights are referred to herein as "Dissenting Shares."
The value of the consideration to be received by stockholders of Continental
(other than holders of Class B Common Stock making a Cash Election that is not
subject to proration) will depend upon the market value of the Media Stock at
the Effective Time. On October 8, 1996, the closing sale price of the Media
Stock as reported on the New York Stock Exchange (the "NYSE") Composite Tape
(the "Composite Tape") was $17.625 per share (the "October 8 Media Stock
Price"). See "Market Prices and Dividend Data." The Series D Preferred Stock
will be a new issue of U S WEST equity securities. Accordingly, no market or
market value currently exists for the Series D Preferred Stock. Based on the
October 8 Media Stock Price and other factors described under "The Merger
Agreement -- Conversion of Continental Common Stock -- Form and Value of
Consideration to be Received in the Merger," Lehman Brothers Inc. ("Lehman"),
the financial advisor for U S WEST in connection with the Merger, has, solely
for illustrative purposes, estimated the value of the Series D Preferred Stock
to be $47.00 per share. Based on the October 8 Media Stock Price and the other
factors described under "The Merger Agreement -- Conversion of Continental
Common Stock -- Form and Value of Consideration to be Received in the Merger"
and subject to the disclosures, conditions and qualifications set forth under
"Risk Factors -- Risk Factors Related to the Merger -- No Assurance as to Market
Value of Series D Preferred Stock" and "The Merger -- Opinions Considered by the
Continental Board -- Lazard," Lazard Freres & Co. LLC ("Lazard"), the financial
advisor for Continental in connection with the Merger, has, solely for
illustrative purposes, estimated the value of the Series D Preferred Stock to be
$46.375 per share. For the purpose of illustrating the value that holders of
Continental Common Stock might have received if the Merger had been consummated
on October 8, 1996, a value of $46.375 per share (the "Assumed October 8
Preferred Stock Price") has been ascribed to the Series D Preferred Stock in
this Proxy Statement. At such time as a market develops for the Series D
Preferred Stock, the actual market value of such stock may be higher or lower
than the Assumed October 8 Preferred Stock Price depending, among other things,
on the market value of the Media Stock at such time.
Based on the October 8 Media Stock Price and the Assumed October 8 Preferred
Stock Price, the value of the aggregate consideration to be received by
stockholders of Continental in the Merger would be approximately $4.7 billion,
which will consist of $1.0 billion of cash (all of which will be paid to holders
of Class B Common Stock), shares of Series D Preferred Stock with an aggregate
liquidation value of $1.0 billion and an estimated market value of $927.5
million (which will be allocated between holders of Class A Common Stock and
Class B Common Stock as described herein) and the remainder in shares of Media
Stock. U S WEST will have the right to increase the amount of cash to be paid to
holders of Class B Common Stock to a maximum of $1.5 billion, as described
herein (in which event the number of shares of Media Stock to be issued to
holders of Continental Common Stock would be reduced, the number of shares of
Series D Preferred Stock to be issued to the holders of Class A Common Stock
would be increased and the number of shares of Series D Preferred Stock to be
issued to the holders of Class B Common Stock would be reduced). In the event U
S WEST elects to increase the amount of cash payable in the Merger to $1.5
billion, based on the October 8 Media Stock Price and the Assumed October 8
Preferred Stock Price, the value of the aggregate consideration to be received
by stockholders of Continental in the Merger would be approximately $4.8
billion.
Assuming that U S WEST elects to pay $1.0 billion of cash in the Merger and
that the number of shares of Class A Common Stock and Class B Common Stock
outstanding as of September 20, 1996 remains unchanged, at the Effective Time
(a) each share of Class A Common Stock (other than shares of Restricted
Continental Common Stock, Dissenting Shares and shares owned by Continental, by
U S WEST or by any wholly owned subsidiary of Continental or U S WEST) would be
converted into the right to receive .882 of a share of Media Stock and .229 of a
share of Series D Preferred Stock having an aggregate value, based on the
October 8 Media Stock Price and the Assumed October 8 Preferred Stock Price, of
approximately $26.19 and (b) each share of Class B Common Stock (other than
shares of Restricted Continental Common Stock, Dissenting Shares and shares
owned by Continental, by U S WEST or by any wholly owned subsidiary of
Continental or U S WEST) would be converted into the right to receive (i) in the
case of a Standard Election, .882 of a share of Media Stock, .082 of a share of
Series D Preferred Stock and $7.39 in cash having an aggregate value, based on
the October 8 Media Stock Price and the Assumed October 8 Preferred Stock Price,
of approximately $26.73, (ii) in the case of a Stock Election that is not
subject to proration, 1.171 shares of Media Stock and .108 of a share of Series
D Preferred Stock having an aggregate value, based on the October 8 Media Stock
Price and the Assumed October 8 Preferred Stock Price, of approximately $25.66,
and (iii) in the case of a Cash Election that is not subject to proration, $30
in cash.
iii
<PAGE>
Assuming that U S WEST elects to increase the amount of cash payable in the
Merger to $1.5 billion and that the number of shares of Class A Common Stock and
Class B Common Stock outstanding as of September 20, 1996 remains unchanged, at
the Effective Time (a) each share of Class A Common Stock (other than shares of
Restricted Continental Common Stock, Dissenting Shares and shares owned by
Continental, by U S WEST or by any wholly owned subsidiary of Continental or U S
WEST) would be converted into the right to receive .746 of a share of Media
Stock and .287 of a share of Series D Preferred Stock having an aggregate value,
based on the October 8 Media Stock Price and the Assumed October 8 Preferred
Stock Price, of approximately $26.44 and (b) each share of Class B Common Stock
(other than shares of Restricted Continental Common Stock, Dissenting Shares and
shares owned by Continental, by U S WEST or by any wholly owned subsidiary of
Continental or U S WEST) would be converted into the right to receive (i) in the
case of a Standard Election, .746 of a share of Media Stock, .065 of a share of
Series D Preferred Stock and $11.08 in cash having an aggregate value, based on
the October 8 Media Stock Price and the Assumed October 8 Preferred Stock Price,
of approximately $27.25, (ii) in the case of a Stock Election that is not
subject to proration, 1.183 shares of Media Stock and .103 of a share of Series
D Preferred Stock having an aggregate value, based on the October 8 Media Stock
Price and the Assumed October 8 Preferred Stock Price, of approximately $25.63,
and (iii) in the case of a Cash Election that is not subject to proration, $30
in cash.
At the Effective Time, each share of Restricted Continental Common Stock
will be converted into the right to receive 1.429 shares of Media Stock having
an aggregate value, based on the October 8 Media Stock Price, of approximately
$25.19.
In certain circumstances, the consideration to be received by holders of
Continental Common Stock in the Merger is subject to certain upward adjustments
if the closing of the Merger occurs after January 3, 1997. See "The Merger
Agreement -- Conversion of Continental Common Stock -- Adjustment of Share
Price."
The Merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Assuming the Merger is so treated, for federal income tax purposes, the Merger
will not result in the recognition of gain or loss to holders of Continental
Common Stock except to (i) those holders of Class B Common Stock who receive
cash in the Merger, but only to the extent of the cash received, and (ii) those
holders of Continental Common Stock who receive cash in lieu of fractional
shares or pursuant to the exercise of appraisal rights. See "Certain Federal
Income Tax Considerations." Throughout this Proxy Statement the examples of
possible respective values of the Merger consideration to be received by holders
of the different classes of Continental Common Stock do not give effect to the
tax consequences of receiving cash consideration.
THE PROVISIONS OF THE MERGER AGREEMENT RELATING TO THE CONSIDERATION TO BE
RECEIVED BY HOLDERS OF CONTINENTAL COMMON STOCK IN CONNECTION WITH THE MERGER
ARE COMPLEX AND CANNOT BE EASILY SUMMARIZED. ACCORDINGLY, STOCKHOLDERS ARE URGED
TO READ CAREFULLY AND FULLY THE INFORMATION DESCRIBED UNDER "THE MERGER
AGREEMENT -- CONVERSION OF CONTINENTAL COMMON STOCK."
U S WEST has two classes of Common Stock: the Media Stock and U S WEST
Communications Group Common Stock, par value $.01 per share (the "Communications
Stock"). The Media Stock is intended to reflect separately the performance of
the U S WEST Media Group, which is principally comprised of U S WEST's
multimedia businesses (the "Media Group"), and the Communications Stock is
intended to reflect separately the performance of the U S WEST Communications
Group, which is principally comprised of U S WEST's communications businesses
(the "Communications Group"). Upon consummation of the Merger, the Board of
Directors of U S WEST (the "U S WEST Board") will attribute the businesses of
Continental and its subsidiaries to the Media Group. The Media Stock and the
Communications Stock are sometimes referred to herein collectively as the "U S
WEST Common Stock" and individually as a class of "U S WEST Common Stock." The
Media Group and the Communications Group are sometimes referred to herein
collectively as the "Groups" and individually as a "Group."
Dividends on the Media Stock will be payable when, as and if declared by the
U S WEST Board out of the lesser of (i) all funds of U S WEST legally available
therefor and (ii) the Media Group Available Dividend Amount (as defined herein).
The U S WEST Board does not currently pay dividends on the Media Stock. Subject
to certain conditions, the Media Stock may be redeemed or converted into shares
of Communications Stock. Except as otherwise described herein, the holders of
Communications Stock and Media Stock vote together as a single class. The
relative voting power of shares of Communications Stock and Media Stock
fluctuates from time to time, with each share of Communications Stock having one
vote and each share of Media Stock having a variable vote, based upon the
relative market values of one share of
iv
<PAGE>
Media Stock and one share of Communications Stock. The rights of the holders of
Communications Stock and Media Stock upon liquidation of U S WEST are in
proportion to the "liquidation units" of each such class of U S WEST Common
Stock (each, a "Liquidation Unit"). Each share of Communications Stock has one
Liquidation Unit and each share of Media Stock has .80 of a Liquidation Unit.
See "Risk Factors" and "Description of U S WEST Capital Stock -- Communications
Stock and Media Stock."
Dividends on the Series D Preferred Stock will be payable quarterly out of
funds of U S WEST legally available therefor at a dividend rate calculated in
the manner described herein (which shall not be less than 4.375%). The Series D
Preferred Stock will rank senior to the Communications Stock and the Media Stock
as to dividends and upon liquidation. Shares of the Series D Preferred Stock
will be convertible at any time at the option of the holder into shares of Media
Stock at a conversion rate calculated in the manner described herein. The Series
D Preferred Stock will not be redeemable or exchangeable by U S WEST prior to
the third anniversary of the Effective Time. Thereafter, the Series D Preferred
Stock will, in certain circumstances, at the option of U S WEST, be redeemable
by U S WEST for cash and/or exchangeable by U S WEST for shares of Media Stock.
The Series D Preferred Stock will be mandatorily redeemable by U S WEST at any
time upon the occurrence of a Media Group Special Event (as defined herein) or
certain similar events and on the 20th anniversary of the Effective Time. The
liquidation value of the Series D Preferred Stock is $50 per share, plus accrued
and unpaid dividends. See "Risk Factors -- Risk Factors Related to the Merger --
No Assurance as to Market Value of Series D Preferred Stock" and "Description of
U S WEST Capital Stock -- Series D Preferred Stock."
Holders of Communications Stock and Media Stock are common stockholders of U
S WEST and are subject to the 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 U S
WEST Common Stock relating to the other Group and reduce the funds of U S WEST
legally available for the payment of future dividends on such class of U S WEST
Common Stock.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT IN CONNECTION WITH THE
OFFERING AND SOLICITATION MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, THE SECURITIES OFFERED BY THIS PROXY STATEMENT, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION OR FROM ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT NOR ANY DISTRIBUTION OF THE SECURITIES OFFERED PURSUANT TO THIS PROXY
STATEMENT SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE INFORMATION CONTAINED HEREIN OR IN THE AFFAIRS OF U S WEST
OR CONTINENTAL SINCE THE DATE HEREOF.
The information set forth or incorporated by reference herein concerning U S
WEST and its subsidiaries has been furnished by U S WEST. The information set
forth herein concerning Continental and its subsidiaries has been furnished by
Continental. The pro forma information contained herein relating to U S WEST has
been prepared by U S WEST and includes historical and pro forma financial
information regarding Continental that was furnished to U S WEST by Continental.
U S WEST does not have independent knowledge of the matters set forth herein
concerning Continental and its subsidiaries. Continental does not have
independent knowledge of the matters set forth or incorporated by reference
herein concerning U S WEST and its subsidiaries.
On November 1, 1995, U S WEST changed its state of incorporation from
Colorado to Delaware and issued the Media Stock and Communications Stock (the
"Recapitalization"). Pursuant to the Recapitalization, U S WEST, Inc., a
Colorado corporation and U S WEST's predecessor ("U S WEST Colorado"), was
merged with and into U S WEST, with U S WEST continuing as the surviving
corporation, and each share of Common Stock, without par value, of U S WEST
Colorado ("Old Common Stock") was converted into one share of Communications
Stock and one share of Media Stock. As used herein, unless the context otherwise
requires, references to "U S WEST" refer to U S WEST and U S WEST Colorado, its
Colorado predecessor.
v
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AVAILABLE INFORMATION..................................................................................... 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................................................... 1
SUMMARY................................................................................................... 2
RISK FACTORS.............................................................................................. 21
Risk Factors Related to the Media Stock................................................................. 21
Risk Factors Related to the Merger...................................................................... 27
THE SPECIAL MEETING....................................................................................... 30
Matters to be Discussed at the Special Meeting.......................................................... 30
Record Dates; Stock Entitled to Vote; Quorum............................................................ 30
Required Votes.......................................................................................... 30
Solicitation and Voting of Proxies...................................................................... 31
Ownership of Continental Securities..................................................................... 32
THE MERGER................................................................................................ 36
General Background of the Merger........................................................................ 36
Recommendation of the Continental Board; Continental's Reasons for the Merger........................... 41
Opinions Considered by the Continental Board............................................................ 45
U S WEST'S Reasons for the Merger....................................................................... 52
Stock Exchange Listing.................................................................................. 52
Corporate Governance.................................................................................... 52
Accounting Treatment.................................................................................... 52
Federal Securities Laws Implications.................................................................... 53
THE MERGER AGREEMENT...................................................................................... 54
The Merger.............................................................................................. 54
Conversion of Continental Common Stock.................................................................. 54
Election and Exchange Procedures........................................................................ 59
Representations and Warranties.......................................................................... 60
Certain Covenants....................................................................................... 60
Conditions to the Merger................................................................................ 65
Termination............................................................................................. 67
Regulatory and Other Third Party Approvals.............................................................. 67
Fees and Expenses....................................................................................... 68
Amendment; Waiver....................................................................................... 69
ANCILLARY AGREEMENTS...................................................................................... 69
Stockholders' Agreement................................................................................. 69
Registration Rights Agreement........................................................................... 70
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................................................. 70
Tax Consequences of the Merger.......................................................................... 71
Ownership and Disposition of Media Stock and Series D Preferred Stock................................... 74
PROPOSALS TO APPROVE AND ADOPT THE CHARTER AMENDMENTS, ELECTION OF CONTINENTAL DIRECTORS AND RATIFICATION
OF APPOINTMENT OF ACCOUNTANTS............................................................................ 75
THE COMPANIES............................................................................................. 78
U S WEST................................................................................................ 78
Continental............................................................................................. 79
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS OF U S WEST AND THE MEDIA GROUP............... 80
MARKET PRICES AND DIVIDEND DATA........................................................................... 91
DESCRIPTION OF U S WEST CAPITAL STOCK..................................................................... 92
General................................................................................................. 92
Communications Stock and Media Stock.................................................................... 92
</TABLE>
vi
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<TABLE>
<CAPTION>
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Series D Preferred Stock................................................................................ 104
<S> <C>
Restated Rights Agreement............................................................................... 119
Anti-Takeover Considerations............................................................................ 120
Certain Definitions..................................................................................... 122
Stock Transfer Agent and Registrar...................................................................... 124
U S WEST MANAGEMENT AND ACCOUNTING POLICIES............................................................... 125
Management Policies..................................................................................... 125
Accounting Matters and Policies......................................................................... 126
COMPARISON OF RIGHTS OF STOCKHOLDERS OF U S WEST AND CONTINENTAL.......................................... 128
Terms of Common Stock................................................................................... 128
Other Stockholder Rights................................................................................ 131
RIGHTS OF DISSENTING STOCKHOLDERS......................................................................... 133
LEGAL MATTERS............................................................................................. 136
EXPERTS................................................................................................... 136
ANNEXES:
Annex I -- Agreement and Plan of Merger................................................................. I-1
Annex II -- Opinion of Lazard Freres & Co. LLC.......................................................... II-1
Annex III -- Opinion of Allen & Company Incorporated.................................................... III-1
Annex IV -- Section 262 of the Delaware General Corporation Law......................................... IV-1
Annex V -- Description of Continental................................................................... V-1
Business.............................................................................................. V-2
Selected Consolidated Financial Data.................................................................. V-24
Management's Discussion and Analysis of Financial Condition and Results of Operations................. V-26
Unaudited Pro Forma Condensed Consolidated Financial Information...................................... V-36
Legislation and Regulation............................................................................ V-41
Management............................................................................................ V-50
Certain Transactions.................................................................................. V-57
Credit Arrangements of the Company.................................................................... V-57
Index to Consolidated Financial Statements............................................................ F-1
</TABLE>
vii
<PAGE>
DEFINITION CROSS REFERENCE SHEET
SET FORTH BELOW IS A LIST OF CERTAIN DEFINED TERMS USED IN THIS PROXY
STATEMENT AND THE PAGE ON WHICH SUCH TERMS IS DEFINED:
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ----------------------------------------------- -----
<S> <C>
1996 Telecommunications Act.................... 36
Acquiring Person............................... 119
Acquisition Proposal........................... 63
Acquisition Trigger Date....................... 120
Additional Amount.............................. 57
Additional Meeting............................. 62
Additional Payment............................. 65
Adjustment Amount.............................. 105
AirTouch....................................... 2
Allen & Company................................ 10
Assumed October 8 Preferred Stock Price........ iii
Available Dividend Amount...................... 93
Base Dividend Rate............................. 104
BV Co. III..................................... 34
BV Co. IV...................................... 34
Cable Act...................................... 61
Calculation Price.............................. 6
Cap Price...................................... 39
Cash Consideration Amount...................... 54
Cash Cap....................................... 57
Cash Election.................................. ii
Change In Credit Spread........................ 105
Change In Weighted Average Yield............... 105
Charter Amendment Adoption Date................ 8
Charter Amendments............................. ii
Class A Common Stock........................... i
Class A Merger Consideration................... 4
Class A Per Share Value........................ 50
Class A Preferred Consideration Amount......... 58
Class A Preferred Conversion Number............ 58
Class A Preferred Percentage................... 58
Class B Aggregate Consideration Amount......... 58
Class B Common Consideration Amount............ 58
Class B Common Percentage...................... 58
Class B Common Stock........................... i
Class B Common Stock Election Conversion
Number........................................ 58
Class B Merger Consideration................... 5
Class B Preferred Consideration Amount......... 58
Class B Preferred Conversion Number............ 58
Class B Preferred Percentage................... 58
Closing........................................ 54
Closing Date................................... 54
Closing Price.................................. 122
Code........................................... iv
Co-Investment Agreement........................ 35
Comcast........................................ 46
<CAPTION>
DEFINED TERM PAGE
- ----------------------------------------------- -----
<S> <C>
Commission..................................... 1
Common Consideration Amount.................... 58
Common Consideration Net Amount................ 58
Common Percentage.............................. 58
Communications Group........................... iv
Communications Group Available Dividend
Amount........................................ 92
Communications Group Net Earnings (Loss)....... 93
Communications Group Region.................... 2
Communications Group Subsidiaries.............. 96
Communications Right........................... 119
Communications Stock........................... iv
Comparable Companies........................... 46
Comparable Transactions........................ 47
Composite Tape................................. iii
Consideration Charter Amendment................ i
ContCable...................................... 35
Continental.................................... i
Continental Board.............................. i
Continental Bylaws............................. 128
Continental Certificates....................... 59
Continental Common Stock....................... i
Continental Preferred Stock.................... i
Continental Restated Certificate............... i
Continental Restricted Stock Purchase
Program....................................... 11
Continental Voting Stock....................... 3
Conversion Charter Amendment................... ii
Conversion Number.............................. 58
Conversion Price............................... 113
Convertible Securities......................... 122
Converting Holder.............................. 107
Corporate Advisors............................. 34
Corporate Offshore Partners.................... 35
Corporate Partners............................. 35
Cox............................................ 46
Current Market Price........................... 122
DBS............................................ 3
Deemed Record Holder........................... 8
Delaware Court................................. 134
Determination Price............................ 39
DGCL........................................... 12
Direct Merger.................................. i
Discount Factor................................ 105
Disposition.................................... 93
Dissenting Shares.............................. iii
</TABLE>
viii
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ----------------------------------------------- -----
Distribution Date.............................. 119
<S> <C>
Dividend Payment Date.......................... 104
Dividend Rate.................................. 104
Dividend Record Date........................... 104
DOJ............................................ 40
EBITDA......................................... 16
Effective Time................................. ii
Election Deadline.............................. 59
Election Form.................................. 59
Engagement Letter.............................. 51
Excess Cash Amount............................. 57
Exchange Act................................... 1
Exchange Agent................................. 59
Exchange Rate.................................. 106
Excise Tax..................................... 29
Expiration Date................................ 119
Extraordinary Cash Distributions............... 122
Fair Value..................................... 122
FCC............................................ 25
Floor Price.................................... 39
FPGT........................................... 35
Fractional Shares.............................. 60
Franchise Consents............................. 67
FTC............................................ 65
GAAP........................................... 15
GMIMC.......................................... 35
Group.......................................... iv
Groups......................................... iv
Hostetter...................................... 69
Hostetter Trust................................ 69
HSN............................................ 46
HSR Act........................................ 65
In-Region Systems.............................. 40
Incremental Excise Tax......................... 64
Indemnified Liabilities........................ 64
Indemnified Parties............................ 64
Inter-Group Interest........................... 103
Inter-Group Interest Fraction.................. 103
Junior Stock................................... 122
Lazard......................................... iii
Lehman......................................... iii
LFA............................................ 68
Liquidation Value.............................. 118
Liquidation Unit............................... v
Market Capitalization.......................... 122
Market Value................................... 122
Market Value Ratio of the Communications Stock
to the Media Stock............................ 123
Market Value Ratio of the Media Stock to the
Communications Stock.......................... 123
Marketing Resources............................ 125
<CAPTION>
DEFINED TERM PAGE
- ----------------------------------------------- -----
<S> <C>
Media Group.................................... iv
Media Group Available Dividend Amount.......... 92
Media Group Disposition Dividend............... 106
Media Group Disposition Redemption............. 106
Media Group Net Earnings (Loss)................ 93
Media Group Special Dividend................... 106
Media Group Special Events..................... 107
Media Group Subsidiaries....................... 96
Media Group Subsidiary Redemption.............. 106
Media Group Tender or Exchange Offer........... 107
Media Right.................................... 119
Media Stock.................................... ii
Merger......................................... i
Merger Agreement............................... i
MSA............................................ 67
Net Proceeds................................... 95
NewVector...................................... 2
Number of Shares Issuable with Respect to the
Inter-Group Interest.......................... 103
NYSE........................................... iii
October 8 Media Stock Price.................... iii
Old Common Stock............................... v
Original Calculation Price..................... 38
Outstanding Media Fraction..................... 103
Ownership Trigger Date......................... 119
Parity Stock................................... 124
PCS............................................ 3
Permitted Percentage........................... 8
Permitted Transferees.......................... 8
Preferred Consideration Amount................. 58
Preferred Stock................................ 92
Primeco........................................ 3
PrimeStar...................................... 46
Proposals...................................... i
Proposed October 1996 Amendments............... 40
Prorated Cash Amount........................... 57
Providence Journal............................. ii
Providence Journal Merger...................... ii
Providence Journal Merger Transactions......... ii
Proxy Statement................................ i
PSE............................................ 1
Publicly Traded................................ 124
PUCs........................................... 25
Recapitalization............................... v
Record Date.................................... 3
Record Date Shares............................. 8
Redemption Price............................... 120
Redemption Rescission Event.................... 124
Registration Rights Agreement.................. 70
Registration Statement......................... 1
Related Business Transaction................... 95
Requested Cash Amount.......................... 57
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
DEFINED TERM PAGE
- ----------------------------------------------- -----
Rescission Date................................ 107
<S> <C>
Restated Rights Agreement...................... 92
Restricted Continental Common Stock............ ii
Rights......................................... 119
Rights Redemption Date......................... 120
RSPA........................................... 28
S&P 500........................................ 48
SBA............................................ 35
Section 262.................................... 12
Securities Act................................. 1
Senior Stock................................... 124
Series A Preferred Stock....................... 92
Series A Purchase Price........................ 119
Series B Preferred Stock....................... 92
Series B Purchase Price........................ 119
Series C Preferred Stock....................... 92
Series D Certificate........................... 92
Series D Preferred Stock....................... ii
Service........................................ ii
Share Price.................................... 59
Special Meeting................................ i
Standard Election.............................. ii
Stock Election................................. ii
<CAPTION>
DEFINED TERM PAGE
- ----------------------------------------------- -----
<S> <C>
Stockholders................................... 69
Stockholders' Agreement........................ 9
Sub............................................ i
Subsidiary Merger.............................. i
Sullivan & Worcester........................... 37
Tax Liability Financing Agreement.............. 28
TCG............................................ 46
TCG Transaction................................ 80
TCI............................................ 46
Termination for Cause.......................... 29
Time Warner.................................... 47
Transaction Value.............................. 59
Turner......................................... 46
TWE............................................ 2
U S WEST....................................... i
U S WEST/AirTouch Joint Venture................ 2
U S WEST Board................................. iv
U S WEST Bylaws................................ 120
U S WEST Colorado.............................. v
U S WEST Common Stock.......................... iii
U S WEST Communications........................ 2
U S WEST Restated Certificate.................. 21
Vencap......................................... 35
</TABLE>
x
<PAGE>
AVAILABLE INFORMATION
U S WEST and Continental are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements, and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information concerning U S WEST and Continental can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the Commission's Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a site on
the Internet's World Wide Web at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission, including U S WEST and Continental. In
addition, reports, proxy statements and other information concerning U S WEST
may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New
York 10005 and the Pacific Stock Exchange (the "PSE"), 115 Sansome Street, 2nd
Floor, San Francisco, California 94104, the securities exchanges on which shares
of the Media Stock and the Communications Stock are listed.
U S WEST has filed with the Commission a registration statement on Form S-4
(herein, together with all amendments, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
covering the shares of Media Stock and Series D Preferred Stock issuable in
connection with the Merger and the shares of Media Stock issuable upon
conversion of such shares of Series D Preferred Stock. This Proxy Statement,
which also constitutes the Prospectus of U S WEST filed as part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement,
which is available for inspection and copying as set forth above. Statements
contained in this Proxy Statement or in any document incorporated by reference
in this Proxy Statement as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or such other document, each such
statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by U S WEST with the
Commission (File No. 1-8611), are incorporated herein by reference: (i) Annual
Report on Form 10-K for the year ended December 31, 1995, (ii) Quarterly Reports
on Form 10-Q for the quarters ended March 31, 1996 and June 30, 1996 and (iii)
Current Reports on Form 8-K dated February 12, 1996, February 29, 1996, April 4,
1996, May 1, 1996, June 10, 1996, July 29, 1996 and October 7, 1996. All
documents filed by U S WEST pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act subsequent to the date of this Proxy Statement and prior to the
date of the Special Meeting shall be deemed to be incorporated by reference into
this Proxy Statement and to be a part hereof from the date any such document is
filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein (or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein) modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
U S WEST WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS
PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, BY
FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF
RECEIPT OF SUCH REQUEST, A COPY OF ANY OR ALL OF THE DOCUMENTS THAT ARE
INCORPORATED BY REFERENCE HEREIN, OTHER THAN EXHIBITS TO SUCH DOCUMENTS (UNLESS
SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS).
REQUESTS SHOULD BE DIRECTED TO INVESTOR RELATIONS, U S WEST, 7800 EAST ORCHARD
ROAD, ENGLEWOOD, COLORADO 80111. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH
DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE NOVEMBER 7, 1996.
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS PROXY
STATEMENT. THIS SUMMARY IS NOT INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION SET FORTH ELSEWHERE IN
THIS PROXY STATEMENT AND ITS ANNEXES, ALL OF WHICH SHOULD BE REVIEWED CAREFULLY.
IN ALL DISCUSSIONS CONTAINED HEREIN REGARDING THE MERGER CONSIDERATION, THE
CONVERSION AS OF THE EFFECTIVE TIME OF ALL SHARES OF CONTINENTAL PREFERRED STOCK
INTO CLASS B COMMON STOCK HAS BEEN ASSUMED.
THE COMPANIES
U S WEST. U S WEST is a diversified global communications company engaged
in the telecommunications, cable, wireless communications and directory and
information services businesses. U S WEST conducts its businesses through two
groups: the Media Group and the Communications Group. The Media Group is
comprised of (i) cable and telecommunications network businesses outside the
Communications Group Region and internationally, (ii) domestic and international
wireless communications network businesses and (iii) domestic and international
directory and information services businesses, including telephone directory
businesses. The Communications Group, through U S WEST Communications, Inc. ("U
S WEST Communications"), 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 "Communications
Group Region"). Such services include local telephone services, exchange access
services (which connect customers to the facilities of carriers, including
long-distance providers and wireless operators), and certain long-distance
services within geographic areas in the Communications Group Region. The
Communications Group also provides other products and services, including custom
calling features, voice messaging, caller identification, high speed data
applications, customer premises equipment and certain communications services to
business customers and governmental agencies both inside and outside the
Communications Group Region.
U S WEST has two classes of common stock: the Media Stock and the
Communications Stock. The Media Stock is intended to reflect separately the
performance of the Media Group, and the Communications Stock is intended to
reflect separately the performance of the Communications Group. For a
description of the terms of the Media Stock and the Communications Stock, see
"Description of U S WEST Capital Stock." Holders of Media Stock and
Communications Stock are holders of common stock of U S WEST and are subject to
the risks associated with an investment in a single company and all of U S
WEST's businesses, assets and liabilities. See "Risk Factors." U S WEST's
principal offices are located at 7800 East Orchard Road, Englewood, Colorado
80111 and its telephone number is (303) 793-6500.
THE U S WEST MEDIA GROUP. The Media Group is comprised of (i) cable and
telecommunications network businesses outside the Communications Group Region
and internationally, (ii) domestic and international wireless communications
network businesses and (iii) domestic and international directory and
information services businesses, including telephone directory businesses.
The Media Group's cable and telecommunications businesses include MediaOne,
U S WEST's cable systems in the Atlanta, Georgia metropolitan area, U S WEST's
interest in Time Warner Entertainment Company, L.P. ("TWE"), and international
cable and telecommunications investments, including U S WEST's interest in
Telewest Communications plc, the largest provider of combined cable and
telecommunications services in the United Kingdom, and cable and
telecommunications properties in the Netherlands, the Czech Republic, Malaysia,
Indonesia and Belgium.
The Media Group, through U S WEST NewVector Group, Inc. ("NewVector"),
provides domestic wireless communications services, including cellular services,
to a rapidly growing customer base. U S WEST and AirTouch Communications, Inc.
("AirTouch") have entered into Phase I of a cellular joint venture pursuant to
which their domestic cellular properties will receive centralized services from
a wireless management company on a contract basis. Upon consummation of Phase II
of the joint venture, the domestic cellular properties of U S WEST and AirTouch
will be combined to form the third largest cellular company in the United States
(the "U S WEST/AirTouch Joint Venture"). In addition, U S WEST and AirTouch, in
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partnership with Bell Atlantic Corporation and NYNEX Corporation, have formed
Primeco Personal Communications, L.P. ("Primeco"), which successfully bid on 11
personal communications services ("PCS") licenses in March 1995, and have agreed
to coordinate the operation of their PCS and cellular businesses. The Media
Group's international wireless businesses include Mercury One 2 One, a joint
venture in the United Kingdom which provides the world's first PCS service, as
well as wireless businesses in Hungary, the Czech and Slovak Republics, Russia,
Malaysia, India and Poland.
The Media Group's directory and information services businesses develop and
package content and information services, including telephone directories,
database marketing and other interactive services in domestic and international
markets. The Media Group's telephone directories businesses publish more than
300 White and Yellow Pages directories in 14 western and mid-western states and
nearly 200 directories in the United Kingdom and Poland. The Media Group also
holds a 50 percent interest in Listel, Brazil's largest publisher of telephone
directories.
Following consummation of the Merger, the businesses of Continental and its
subsidiaries will be attributed by the U S WEST Board to the Media Group.
CONTINENTAL. Continental is a leading provider of broadband communications
services. As of June 30, 1996, giving effect to a pending acquisition,
Continental's systems and those of its U.S. affiliates passed approximately 7.4
million homes and provided service to approximately 4.3 million basic
subscribers, making Continental the third-largest cable television system
operator in the United States. In addition, Continental has pursued investments
in sectors that are complementary to its core business, including (i)
international broadband communications; (ii) telecommunications and technology
industries, including competitive-access telephony and direct broadcast
satellite ("DBS") service; and (iii) programming services. Continental was
incorporated under the laws of the State of Delaware in 1963. Continental's
principal offices are located at The Pilot House, Lewis Wharf, Boston,
Massachusetts 02110, and its telephone number is (617) 742-9500.
THE SPECIAL MEETING
The Special Meeting will be held at the Hotel Meridien, 250 Franklin Street,
Boston, Massachusetts 02110 on November 14, 1996, beginning at 10:00 a.m. local
time. The purpose of the Special Meeting is to consider and vote upon the
Proposals. See "The Special Meeting -- Matters to Be Discussed at the Special
Meeting."
The record date for the Special Meeting is September 20, 1996 (the "Record
Date"). Accordingly, holders of record of Class A Common Stock, Class B Common
Stock and Continental Preferred Stock (collectively, the "Continental Voting
Stock") as of the Record Date will be entitled to notice of, and to vote at, the
Special Meeting.
The presence in person or by proxy of shares representing a majority of
votes entitled to be cast by holders of the Continental Voting Stock as of the
Record Date is required to constitute a quorum for the transaction of business
at the Special Meeting.
The Merger Agreement must be approved and adopted by a majority of the votes
entitled to be cast by the holders of the Continental Voting Stock, voting as a
single class. The Charter Amendments must be approved and adopted by 66 2/3% of
the votes entitled to be cast by the holders of Continental Voting Stock, voting
as a single class. In addition, the Consideration Charter Amendment must be
approved and adopted by a majority of the votes entitled to be cast by the
holders of each of (i) the Class A Common Stock, voting as a separate class, and
(ii) the Class B Common Stock and the Continental Preferred Stock, voting
together as a separate class, and the Conversion Charter Amendment must be
approved and adopted by a majority of the votes entitled to be cast by the
holders of the Class B Common Stock and the Continental Preferred Stock, voting
together as a separate class. The election of Directors will be determined by a
plurality of the votes cast at the Special Meeting by the holders of the
Continental Voting Stock, voting as a single class.
THE MERGER
GENERAL. If the Subsidiary Merger is effected, at the Effective Time
Continental will be merged with and into Sub, with Sub continuing as the
surviving corporation and a wholly owned subsidiary of U S WEST.
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Upon the consummation of the Subsidiary Merger, the name of Sub will be changed
to "Continental Cablevision, Inc." If the Direct Merger is effected, at the
Effective Time Continental will be merged with and into U S WEST, with U S WEST
continuing as the surviving corporation. The Subsidiary Merger will only be
effected in lieu of the Direct Merger if either (i) a certain ruling is received
from the Service, which ruling must be acceptable to U S WEST, Continental and
The Providence Journal Company or (ii) U S WEST, Continental and The Providence
Journal Company are otherwise satisfied that such ruling is not necessary. As a
result of the Merger, regardless of whether the Subsidiary Merger or Direct
Merger is effected, the separate corporate existence of Continental will cease.
Subject to the terms and conditions of the Merger Agreement, the closing of the
transactions contemplated thereby will take place on the later of (i) the fifth
business day after the date on which the last of the conditions set forth in the
Merger Agreement is fulfilled or waived, other than conditions requiring
deliveries at the closing, and (ii) November 15, 1996, unless another date is
agreed to by U S WEST and Continental. The Merger will become effective at the
Effective Time, which will be the time at which a Certificate of Merger is filed
with the Secretary of State of the State of Delaware or such time thereafter as
may be provided in the Certificate of Merger.
REASONS FOR THE STRUCTURE OF THE MERGER. The Merger could not occur if the
continuing tax-free status of the Providence Journal Merger Transactions were
jeopardized thereby. Under the terms of the merger agreement for the Providence
Journal Merger, the consent of The Providence Journal Company (a company to
which certain non-cable assets of Providence Journal were transferred
immediately prior to the Providence Journal Merger) to the Merger was a
prerequisite to Continental's entering into the Merger Agreement. The Providence
Journal Company's consent to the Merger would have been withheld unless the
former Providence Journal stockholders, who as of the Record Date held
approximately 77% of the outstanding shares of Class A Common Stock, were
precluded from receiving cash consideration in the Merger, thereby ensuring the
continuing tax-free status of the Providence Journal Merger Transactions.
Because U S WEST was unwilling to proceed with the Merger unless cash was
included as a portion of the Merger consideration, the Merger has been
structured to preclude the receipt of cash consideration in the Merger by
holders of Class A Common Stock. See "The Merger -- Recommendation of the
Continental Board; Continental's Reasons for the Merger -- Charter Amendments."
CONSIDERATION AMOUNT. Based on the October 8 Media Stock Price and the
Assumed October 8 Preferred Stock Price, the value of the consideration to be
received by stockholders of Continental in the Merger would be approximately
$4.7 billion in the aggregate, consisting of $1.0 billion of cash (all of which
will be paid to holders of Class B Common Stock), shares of Series D Preferred
Stock with an aggregate liquidation value of $1.0 billion and an estimated
market value of $927.5 million and the remainder in shares of Media Stock. U S
WEST will have the right to increase the amount of cash payable in the Merger to
a maximum of $1.5 billion, in which event the number of shares of Media Stock to
be issued to holders of Continental Common Stock would be reduced, the number of
shares of Series D Preferred Stock to be issued to the holders of Class A Common
Stock would be increased and the number of shares of Series D Preferred Stock to
be issued to the holders of Class B Common Stock would be reduced. In the event
U S WEST elects to increase the amount of cash payable in the Merger to $1.5
billion, based on the October 8 Media Stock Price and the Assumed October 8
Preferred Stock Price, the value of the aggregate consideration to be received
by stockholders of Continental in the Merger would be approximately $4.8
billion. In certain circumstances, the consideration to be received by holders
of Continental Common Stock in the Merger will be subject to certain upward
adjustments if the closing of the Merger occurs after January 3, 1997.
CONVERSION OF CLASS A COMMON STOCK. Upon consummation of the Merger, each
share of Class A Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Restricted Continental Common Stock,
Dissenting Shares and shares owned by Continental, by U S WEST or by any wholly
owned subsidiary of Continental or U S WEST) will be converted into the right to
receive a combination of shares of Media Stock and shares of Series D Preferred
Stock (collectively, the "Class A Merger Consideration").
Assuming that U S WEST elects to pay $1.0 billion of cash in the Merger and
that the number of shares of Class A Common stock and Class B Common Stock
outstanding as of the Record Date remains
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unchanged, each share of Class A Common Stock (other than shares of Restricted
Continental Common Stock, Dissenting Shares and shares owned by Continental, by
U S WEST or by any wholly owned subsidiary of Continental or U S WEST) would be
converted at the Effective Time into the right to receive .882 of a share of
Media Stock and .229 of a share of Series D Preferred Stock having an aggregate
value, based on the October 8 Media Stock Price and the Assumed October 8
Preferred Stock Price, of approximately $26.19. Assuming that U S WEST elects to
increase the amount of cash payable in the Merger to $1.5 billion and that the
number of shares of Class A Common Stock and Class B Common Stock outstanding as
of the Record Date remains unchanged, each share of Class A Common Stock (other
than shares of Restricted Continental Common Stock, Dissenting Shares and shares
owned by Continental, by U S WEST or by any wholly owned subsidiary of
Continental or U S WEST) would be converted at the Effective Time into the right
to receive .746 of a share of Media Stock and .287 of a share of Series D
Preferred Stock having an aggregate value, based on the October 8 Media Stock
Price and the Assumed October 8 Preferred Stock Price, of approximately $26.44.
CONVERSION OF CLASS B COMMON STOCK. Upon consummation of the Merger, each
share of Class B Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Restricted Continental Common Stock,
Dissenting Shares and shares owned by Continental, by U S WEST or by any wholly
owned subsidiary of Continental or U S WEST) will be converted into the right to
receive, subject to proration in certain circumstances, at the election of the
holder, either cash, a combination of shares of Media Stock and shares of Series
D Preferred Stock or a combination of cash, shares of Media Stock and shares of
Series D Preferred Stock (collectively, the "Class B Merger Consideration").
Each holder of shares of Class B Common Stock will have an opportunity to
specify, on an election form, whether such holder desires to make either a
Standard Election, a Stock Election or a Cash Election. A holder will only be
entitled to make one election with respect to all of the shares of Class B
Common Stock owned by such holder. Holders of Class B Common Stock who make a
Cash Election will receive, for each share of Class B Common Stock owned by such
holder, an amount equal to $30 in cash (subject to proration). Holders of Class
B Common Stock who make a Stock Election will receive, for each share of Class B
Common Stock owned by such holder, a combination of shares of Media Stock and
shares of Series D Preferred Stock (subject to proration). Holders of Class B
Common Stock who make a Standard Election will receive, for each share of Class
B Common Stock owned by such holder, a combination of cash, shares of Media
Stock and shares of Series D Preferred Stock. If a holder of Class B Common
Stock fails to make an election, or properly revokes an effective, properly
completed election form without submitting a revised, properly completed
election form, such holder will be deemed to have made a Standard Election.
Assuming that U S WEST elects to pay $1.0 billion of cash in the Merger and
that the number of shares of Class A Common Stock and Class B Common Stock
outstanding as of the Record Date remains unchanged, each share of Class B
Common Stock (other than shares of Restricted Continental Common Stock,
Dissenting Shares and shares owned by Continental, by U S WEST or by any wholly
owned subsidiary of Continental or U S WEST) would be converted at the Effective
Time into the right to receive (i) in the case of a Standard Election, .882 of a
share of Media Stock, .082 of a share of Series D Preferred Stock and $7.39 in
cash having an aggregate value, based on the October 8 Media Stock Price and the
Assumed October 8 Preferred Stock Price, of approximately $26.73, (ii) in the
case of a Stock Election that is not subject to proration, 1.171 shares of Media
Stock and .108 of a share of Series D Preferred Stock having an aggregate value,
based on the October 8 Media Stock Price and the Assumed October 8 Preferred
Stock Price, of approximately $25.66, and (iii) in the case of a Cash Election
that is not subject to proration, $30 in cash. Assuming that U S WEST elects to
increase the amount of cash payable in the Merger to $1.5 billion and that the
number of shares of Class A Common Stock and Class B Common Stock outstanding as
of the Record Date remains unchanged, each share of Class B Common Stock (other
than shares of Restricted Continental Common Stock, Dissenting Shares and shares
owned by Continental, by U S WEST or by any wholly owned subsidiary of
Continental or U S WEST) would be converted at the Effective Time into the right
to receive (i) in the case of a Standard Election, .746 of a share of Media
Stock, .065 of a share of Series D Preferred Stock and $11.08 in cash having an
aggregate value, based on the October 8 Media Stock Price and the Assumed
October 8 Preferred Stock Price, of approximately $27.25, (ii) in the case of a
Stock Election that is not subject to proration, 1.183 shares of Media Stock and
.103 of a share of Series D
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Preferred Stock having an aggregate value, based on the October 8 Media Stock
Price and the Assumed October 8 Preferred Stock Price, of approximately $25.63
and (iii) in the case of a Cash Election that is not subject to proration, $30
in cash.
NONE OF U S WEST, CONTINENTAL, THE U S WEST BOARD OR THE CONTINENTAL BOARD
MAKES ANY RECOMMENDATION AS TO WHETHER HOLDERS OF CLASS B COMMON STOCK SHOULD
MAKE A CASH ELECTION, STOCK ELECTION OR STANDARD ELECTION. EACH HOLDER OF CLASS
B COMMON STOCK MUST MAKE HIS OR HER OWN DECISION WITH RESPECT TO ANY SUCH
ELECTION. A STOCKHOLDER WHO MAKES A CASH ELECTION OR A STOCK ELECTION MAY BE
SUBJECT TO PRORATION.
CONVERSION OF RESTRICTED CONTINENTAL COMMON STOCK. Upon consummation of the
Merger, each share of Restricted Continental Common Stock (regardless of whether
such stock is Class A Common Stock or Class B Common Stock) will be converted
into the right to receive 1.429 shares of Media Stock having an aggregate value,
based on the October 8 Media Stock Price, of approximately $25.19. Such shares
will thereafter be subject to the same contractual restrictions as the
Restricted Continental Common Stock. Holders of Restricted Continental Common
Stock that is Class B Common Stock will not be entitled to make a Cash Election,
a Stock Election or a Standard Election and, accordingly, will not receive any
shares of Series D Preferred Stock or cash in the Merger.
CALCULATION PRICE. The number of shares of Media Stock to be issued in the
Merger will be based upon a fixed exchange price of $21.00 per share (the
"Calculation Price"). Therefore, the number of shares of Media Stock issued in
the Merger will not depend upon the market price of the Media Stock. However, as
a result of the fixed exchange price, the value at the Effective Time of the
consideration to be received by holders of Continental Common Stock in the
Merger (other than holders of Class B Common Stock who make a Cash Election that
is not subject to proration) will depend upon the market price of the Media
Stock at such time. See "Risk Factors -- Risk Factors Related to the Merger --
Value of Merger Consideration" and "Market Prices and Dividend Data."
PRORATION. The consideration to be received by holders of Class B Common
Stock who make Cash Elections or Stock Elections may be subject to proration in
certain circumstances. If the aggregate amount of cash represented by the Cash
Elections exceeds the difference between the total amount of cash being paid by
U S WEST in the Merger and the amount of cash being paid to holders of Class B
Common Stock making Standard Elections, then the amount of cash to be received
by each holder making a Cash Election will be reduced and such holder will
receive shares of Media Stock and shares of Series D Preferred Stock in lieu
thereof. The ratio of shares of Media Stock to shares of Series D Preferred
Stock to be received by such holder in the event proration is required will be
the same as the ratio of shares of Media Stock to shares of Series D Preferred
Stock that would be issued in connection with either a Stock Election or a
Standard Election.
If the aggregate amount of cash represented by the Cash Elections is less
than the difference between the total amount of cash being paid by U S WEST in
the Merger and the amount of cash being paid to holders of Class B Common Stock
making Standard Elections, then the number of shares of Media Stock and Series D
Preferred Stock to be received by each holder making a Stock Election will be
reduced and such holder will receive cash in lieu thereof.
The number of shares of Media Stock and Series D Preferred Stock to be
distributed to holders of Class A Common Stock and the number of shares of Media
Stock and Series D Preferred Stock and the amount of cash to be distributed to
holders of Class B Common Stock who make, or are deemed to make, an effective
Standard Election will not be subject to proration. No holder will ever receive,
as a result of proration, a smaller percentage of a class of consideration than
that received pursuant to a Standard Election. See "The Merger Agreement --
Conversion of Continental Common Stock -- Proration of Class B Merger
Consideration."
THE PROVISIONS OF THE MERGER AGREEMENT RELATING TO THE CONSIDERATION TO BE
RECEIVED BY HOLDERS OF CONTINENTAL COMMON STOCK IN CONNECTION WITH THE
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MERGER ARE COMPLEX AND CANNOT BE EASILY SUMMARIZED. ACCORDINGLY, STOCKHOLDERS
ARE URGED TO READ CAREFULLY THE INFORMATION DESCRIBED UNDER "THE MERGER
AGREEMENT -- CONVERSION OF CONTINENTAL COMMON STOCK."
MEDIA STOCK
For a description of the terms of the Media Stock, see "Description of U S
WEST Capital Stock -- Communications Stock and Media Stock" and "Comparison of
Rights of Stockholders of U S WEST and Continental -- Terms of Common Stock."
SERIES D PREFERRED STOCK
DIVIDENDS. The Series D Preferred Stock will be entitled to receive annual
cumulative dividends, payable in cash on or about the first day of February,
May, August and November, as and when declared by the U S WEST Board out of
funds legally available under applicable law. The annual dividend rate on the
Series D Preferred Stock (which will not be less than 4.375%) will be determined
prior to the Effective Time in the manner described under "Description of U S
WEST Capital Stock -- Series D Preferred Stock -- Dividends."
CONVERSION AT THE OPTION OF THE HOLDER; CONVERSION RATE. Each holder of a
share of Series D Preferred Stock will have the right at any time to convert
such shares into a number of shares of Media Stock equal to the Conversion Rate.
The Conversion Rate will be equal to 1.905; provided, however, that U S WEST has
the right, in its sole discretion prior to the Effective Time, to set the
Conversion Rate equal to 1.701 and to increase the dividend rate as described
under "Description of U S WEST Capital Stock -- Series D Preferred Stock --
Dividends." See "Risk Factors -- Risk Factors Related to the Merger -- No
Assurance as to Market Value of Series D Preferred Stock" and "Description of U
S WEST Capital Stock -- Series D Preferred Stock -- Conversion."
MANDATORY REDEMPTION AND REDEMPTION AT THE OPTION OF U S WEST. The Series D
Preferred Stock will not be redeemable or exchangeable by U S WEST prior to the
third anniversary of the Effective Time. Thereafter, the Series D Preferred
Stock will, in certain circumstances, at the option of U S WEST, be redeemable
by U S WEST for cash and/or exchangeable by U S WEST for shares of Media Stock.
The Series D Preferred Stock will be mandatorily redeemable by U S WEST at any
time upon the occurrence of a Media Group Special Event or certain similar
events and on the 20th anniversary of the Effective Time. See "Description of U
S WEST Capital Stock -- Series D Preferred Stock -- Redemption and Exchange."
VOTING RIGHTS. Holders of shares of Series D Preferred Stock will have no
voting rights, except as otherwise required by law or as set forth under
"Description of U S WEST Capital Stock -- Series D Preferred Stock -- Voting
Rights."
RANKING. The Series D Preferred Stock will rank senior to the
Communications Stock, the Media Stock and any other junior stock issued by U S
WEST, and on parity with U S WEST's existing series of preferred stock and any
other preferred stock issued by U S WEST, with respect to the payment of
dividends and upon the dissolution, liquidation or winding up of U S WEST. While
any shares of Series D Preferred Stock are outstanding, U S WEST may not
authorize any class or series of stock senior to the Series D Preferred Stock
without the prior affirmative vote of at least a majority of the then
outstanding shares of Series D Preferred Stock, voting as a separate class.
LIQUIDATION. Upon the dissolution, liquidation or winding up of U S WEST,
whether voluntary or involuntary, the holders of the shares of Series D
Preferred Stock will be entitled to receive out of the assets of U S WEST
available for distribution to stockholders, in preference to the holders of, and
before any payment or distribution is made on, shares of Communications Stock or
Media Stock, an amount equal to $50.00 per share, plus an amount equal to all
accrued and unpaid dividends to the date of final distribution.
THE PROVISIONS OF THE SERIES D PREFERRED STOCK ARE COMPLEX AND CANNOT BE
EASILY SUMMARIZED. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ CAREFULLY THE
INFORMATION DESCRIBED UNDER "DESCRIPTION OF U S WEST CAPITAL STOCK -- SERIES D
PREFERRED STOCK."
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THE CHARTER AMENDMENTS
CONSIDERATION CHARTER AMENDMENT. The Continental Restated Certificate
currently requires that holders of Class A Common Stock and holders of Class B
Common Stock receive identical consideration in the event of a merger of
Continental with a third party. However, the Merger cannot be consummated unless
holders of Class A Common Stock are precluded from receiving cash consideration
in the Merger. See "-- Reasons for the Structure of the Merger." Accordingly, it
is a condition to the consummation of the Merger that the Consideration Charter
Amendment, which will allow the holders of Class A Common Stock to receive only
Media Stock and Series D Preferred Stock in the Merger, be approved by the
requisite holders of the Continental Voting Stock.
CONVERSION CHARTER AMENDMENT. The Continental Restated Certificate
currently prohibits holders of shares of Class B Common Stock from transferring
any such shares to any person other than certain permitted transferees
("Permitted Transferees"). Any transfer of shares of Class B Common Stock to
other than a Permitted Transferee would, under the current Continental Restated
Certificate, result in such shares being automatically converted into shares of
Class A Common Stock. In addition, the Continental Restated Certificate
currently permits holders of shares of Class B Common Stock to convert any or
all of their shares into shares of Class A Common Stock at any time.
Pursuant to the Merger Agreement, holders of Class B Common Stock are
required to receive, in the aggregate, at least $1.0 billion, and up to $1.5
billion, in cash. Holders of Class B Common Stock could, however, avoid
receiving cash consideration in the Merger by converting their shares of Class B
Common Stock into shares of Class A Common Stock prior to the Effective Time,
thereby resulting in a disproportionate amount of the cash consideration being
received by the remaining holders of Class B Common Stock (including those
holders of Class B Common Stock who are prohibited under the terms of the
Stockholders' Agreement described below from converting their shares of Class B
Common Stock into shares of Class A Common Stock unless, following any such
conversions, there are a sufficient number of shares of Class B Common Stock
outstanding at the Effective Time to receive the aggregate amount of cash
consideration that U S WEST elects to pay in the Merger).
The Conversion Charter Amendment will provide that, so long as the Merger
Agreement remains in effect and from and after the adoption of the Conversion
Charter Amendment at the Special Meeting, (i) any holder of shares of Class B
Common Stock may transfer any of such shares to any transferee regardless of
whether such transferee is a Permitted Transfee, and any such transfer will not
result in the conversion of such shares into shares of Class A Common Stock, and
(ii) only a person who was a Deemed Record Holder (as defined below) of Record
Date Shares (as defined below) on the Record Date or who is a Permitted
Transferee of such holder to which such holder has transferred any such shares
on or after the Record Date may convert any such Record Date Shares into shares
of Class A Common Stock, and any such conversion shall only be permissible if
the aggregate number of such Record Date Shares so converted by such holder and
any such Permitted Transferees of such holder does not exceed, at the time any
such conversion is requested by such holder or any such Permitted Transferee,
the Permitted Percentage (as defined below) of such holder's Record Date Shares,
provided that such restriction on conversion shall not apply to conversions in
connection with the enforcement by a secured party of its rights in and to
Record Date Shares pursuant to a BONA FIDE pledge of such shares to secure
obligations. For purposes of the foregoing, (A) the term "Deemed Record Holder"
means any record holder of shares of Class B Common Stock or Continental
Preferred Stock as of the close of business on the Record Date, (B) the term
"Record Date Shares" means (i) the aggregate number of shares of Class B Common
Stock registered in the name of a Deemed Record Holder as of the close of
business on the Record Date and (ii) in the case of any holder of Continental
Preferred Stock as of the close of business on the Record Date, the aggregate
number of shares of Class B Common Stock that would have been registered in the
name of such holder had such holder converted prior to the Record Date all of
the shares of Continental Preferred Stock registered in the name of such holder
into shares of Class B Common Stock, and (C) the term "Permitted Percentage,"
which will be determined as of the close of business on the date of the Special
Meeting (the "Charter Amendment Adoption Date"), means the percentage obtained
by dividing (1) (x) the aggregate number of shares of Class B Common Stock that
would be outstanding as of the Charter Amendment Adoption Date (other than
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Restricted Continental Common Stock) if all outstanding shares of Continental
Preferred Stock had been converted into Class B Common Stock as of such date
(the "Outstanding Class B Shares") less (y) the maximum amount of cash
consideration then payable by U S WEST in the Merger divided by the Share Price
of $30, by (2) the Outstanding Class B Shares.
For illustrative purposes only, if on the Charter Amendment Adoption Date
(i) the Outstanding Class B Shares were equal to the number of shares of Class B
Common Stock outstanding on the Record Date (after giving effect to the
conversion of all outstanding shares of Contintental Preferred Stock but
excluding Restricted Continental Common Stock) (i.e., 135,373,598 shares in
aggregate) and (ii) U S WEST had elected, or still retained the right to elect,
to pay the maximum cash amount of $1.5 billion in the Merger, the Permitted
Percentage would be 63%. Applying this Permitted Percentage, a record holder of
shares of Class B Common Stock as of the Record Date and any Permitted
Transferee of such holder to which such holder had transferred any such shares
on or after the Record Date could together voluntarily convert up to 63% of such
shares into shares of Class A Common Stock after the Charter Amendment Adoption
Date and prior to the Effective Time. See "Background of the Merger --
Recommendation of the Continental Board; Continental's Reasons for the Merger --
Charter Amendments."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Code. The obligation of each of U S WEST and Continental
to consummate the Merger is subject to the condition that it shall have received
an opinion of its counsel, dated the Closing Date, to the effect that the Merger
should be treated for tax purposes as a reorganization within the meaning of
Section 368(a) of the Code. Assuming the Merger is so treated, for federal
income tax purposes, the Merger will not result in the recognition of gain or
loss to Continental, U S WEST or, if applicable, Sub, and the holders of
Continental Common Stock except (i) with respect to cash received by such
holders in lieu of fractional shares or pursuant to the exercise of appraisal
rights and (ii) if a holder of Class B Common Stock receives cash, gain, if any,
realized by such holder pursuant to the Merger will be recognized, but only to
the extent of the cash received. See "Certain Federal Income Tax
Considerations."
SECURITY OWNERSHIP OF MANAGEMENT AND STOCKHOLDERS' AGREEMENT
CONTINENTAL. As of the Record Date, Directors and executive officers of
Continental and their respective affiliates may be deemed to be the beneficial
owners of 91,591,069 shares of the outstanding Continental Common Stock
(treating the Continental Preferred Stock as if it were converted into Class B
Common Stock), which constitute in the aggregate approximately 64.11% of the
total votes entitled to be cast by the holders of Continental Voting Stock. It
is anticipated that each of such Directors, executive officers and their
respective affiliates will vote their shares in favor of each of the Proposals.
See "The Special Meeting -- Ownership of Continental Securities" and "Ancillary
Agreements -- Stockholders' Agreement."
In connection with the execution of the Merger Agreement, U S WEST and
certain stockholders of Continental entitled to exercise voting power with
respect to an aggregate of 83,807,275 shares of Class B Common Stock (treating
the Continental Preferred Stock as if it were converted into Class B Common
Stock) and 462,249 shares of Class A Common Stock, which in the aggregate
represents approximately 59.1% of the voting power of the Continental Voting
Stock, entered into an agreement (the "Stockholders' Agreement") pursuant to
which such Continental stockholders agreed, among other things, to vote all of
their shares of Continental Voting Stock (and granted to U S WEST their proxies
to vote all such shares) (i) in favor of the adoption of the Merger Agreement,
(ii) in favor of the adoption of the Consideration Charter Amendment, (iii)
against any action or agreement that would result in a breach in any material
respect of any covenant, representation or warranty or any other obligation of
Continental under the Merger Agreement, and (iv) against any proposal for any
merger, consolidation, recapitalization, sale of assets, business combination,
or other material change in Continental's corporate structure or business that
is inconsistent with or that would, or is reasonably likely to, directly or
indirectly, impede, interfere with or attempt to discourage the Merger or any
other transaction contemplated by the Merger Agreement. In addition, certain
holders of Class B Common Stock who are parties to the Stockholders' Agreement
have agreed to convert a sufficient number of shares of Class B Common Stock
into Class A Common Stock to constitute a majority of the outstanding shares of
Class A Common Stock and to vote such shares in favor of
9
<PAGE>
the Consideration Charter Amendment if a second stockholder meeting is required
to approve the Consideration Charter Amendment. The parties to the Stockholders'
Agreement have also agreed not to convert their shares of Class B Common Stock
or Continental Preferred Stock into shares of Class A Common Stock; provided,
however, that such conversions will be permitted immediately prior to the
Effective Time if, after giving effect to such conversions, there remains a
sufficient number of shares of Class B Common Stock outstanding at the Effective
Time to enable the holders thereof to receive the aggregate amount of cash that
U S WEST elects to pay in the Merger. See "Ancillary Agreements -- Stockholders'
Agreement."
U S WEST. The directors and executive officers of U S WEST are beneficial
owners in the aggregate of less than 1% of the outstanding shares of Media Stock
and less than 1% of the outstanding shares of Communications Stock.
RECOMMENDATION OF THE CONTINENTAL BOARD
The Continental Board, by unanimous vote, has determined that the Merger is
in the best interests of the stockholders of Continental and recommends that
holders of Continental Voting Stock vote in favor of the Merger Agreement and
the Charter Amendments. The decision of the Continental Board to enter into the
Merger Agreement and to recommend that the stockholders vote in favor of the
Merger is based upon its evaluation of a number of factors, including, among
others, the oral opinions (subsequently confirmed in writing) of (i) Lazard,
Continental's investment banker and financial advisor in connection with the
Merger, that the consideration to be received by the stockholders of Continental
in the Merger is fair from a financial point of view, and (ii) Allen & Company
Incorporated ("Allen & Company"), that the consideration to be received by the
holders of Class A Common Stock pursuant to the Merger is fair from a financial
point of view. See "The Merger -- Recommendation of the Continental Board of
Directors; Continental's Reasons for the Merger" and "-- Opinions Considered by
the Continental Board."
OPINIONS CONSIDERED BY THE CONTINENTAL BOARD
LAZARD. Continental has retained Lazard to act as its investment banker and
financial advisor in connection with the Merger. At the meeting of the
Continental Board held on October 1, 1996, Lazard delivered its opinion to the
Continental Board that, as of that date, the consideration to be received by the
stockholders of Continental pursuant to the Merger was fair to the stockholders
of Continental from a financial point of view.
A copy of the full text of the Lazard opinion, dated as of October 1, 1996,
which sets forth the assumptions made, matters considered and limitations of the
review undertaken, is attached as Annex II hereto. Continental stockholders are
urged to read the text of the Lazard opinion in its entirety. The summary
discussion of the opinion of Lazard set forth in this Proxy Statement is
qualified in its entirety by reference to the full text of such opinion. The
Lazard opinion does not constitute a recommendation to any stockholder as to how
such stockholder should vote at the Special Meeting. See "The Merger -- Opinions
Considered by the Continental Board -- Lazard."
ALLEN & COMPANY. Continental retained Allen & Company to evaluate the
fairness of the Merger to the holders of Class A Common Stock. At the meeting of
the Continental Board held on October 1, 1996, Allen & Company delivered its
opinion to the Continental Board that, as of that date, the consideration to be
received by holders of Class A Common Stock pursuant to the Merger was fair to
such holders from a financial point of view.
A copy of the full text of the Allen & Company opinion, dated as of October
1, 1996, which sets forth the assumptions made, matters considered and
limitations of the review undertaken, is attached as Annex III hereto. Holders
of Class A Common Stock are urged to read the text of the Allen & Company
opinion in its entirety. The summary discussion of the opinion of Allen &
Company set forth in this Proxy Statement is qualified in its entirety by
reference to the full text of such opinion. The Allen & Company opinion does not
constitute a recommendation to any stockholder as to how such stockholder should
vote at the Special Meeting. See "The Merger -- Opinions Considered by the
Continental Board -- Allen & Company."
CONDITIONS TO THE MERGER
The obligations of U S WEST, Sub and Continental to consummate the Merger
are subject to various conditions, including, among others, the adoption of the
Merger Agreement and the Consideration Charter
10
<PAGE>
Amendment by the stockholders of Continental, the receipt of certain required
regulatory approvals and the receipt of opinions from tax counsel for U S WEST
and Continental. See "The Merger Agreement -- Conditions to the Merger."
STOCK EXCHANGE LISTING
Application will be made to list the shares of Media Stock to be issued in
connection with the Merger on the NYSE and the PSE. The Media Stock is currently
traded on the NYSE and the PSE under the symbol "UMG." Application will also be
made to list the shares of Series D Preferred Stock to be issued in connection
with the Merger on the NYSE. It is a condition to consummation of the Merger
that the shares of Media Stock to be issued in connection with the Merger shall
have been approved for listing on the NYSE, subject only to official notice of
issuance, and that the shares of Series D Preferred Stock to be issued in the
connection with the Merger shall have been approved for listing on the NYSE or
on another stock exchange or trading facility, subject only to official notice
of issuance. See "The Merger -- Stock Exchange Listing," "The Merger Agreement
- -- Certain Covenants -- Certain Other Covenants" and "-- Conditions to the
Merger."
TERMINATION AND CERTAIN FEES
The Merger Agreement will be subject to termination by either U S WEST or
Continental if the Merger is not consummated on or before August 31, 1997 (which
date may be extended until December 31, 1997 by either U S WEST or Continental
under certain circumstances) and prior to such time by the mutual consent of U S
WEST and Continental. The Merger Agreement will also be subject to termination
by either U S WEST or Continental under certain circumstances described herein.
If the Merger Agreement is terminated by U S WEST or Continental under certain
circumstances described herein, Continental will be obligated to pay to U S WEST
$125 million plus U S WEST's reasonable fees and expenses (not to exceed $15
million). See "The Merger Agreement -- Termination" and "-- Fees and Expenses."
CORPORATE GOVERNANCE
If the Subsidiary Merger is effected, the directors of Sub immediately prior
to the Effective Time will be the directors of the surviving corporation
following the Effective Time and the officers of Continental immediately prior
to the Effective Time will be the officers of the surviving corporation
following the Effective Time, until their successors have been elected or until
their resignation or removal. If the Direct Merger is effected, all of the
officers and directors of U S WEST immediately prior to the Effective Time will
continue as officers and directors of U S WEST after the Effective Time, until
their successors have been elected or until their resignation or removal.
Following the Effective Time, it is presently intended that selected
management of Continental together with selected management of the Media Group's
cable and telecommunications businesses will operate and manage the businesses
of Continental and MediaOne, U S WEST's cable television systems in the Atlanta,
Georgia metropolitan area.
INTERESTS OF CERTAIN PERSONS
In considering the recommendation of the Continental Board with respect to
the Merger, stockholders of Continental should be aware that certain members of
Continental's management and the Continental Board have certain interests in the
Merger that may present them with actual or potential conflicts of interest due
to their participation in Continental's Restricted Stock Purchase Program (the
"Continental Restricted Stock Purchase Program"). Vesting and other restrictions
will apply to the Media Stock received in the Merger by holders of Restricted
Continental Common Stock. Under the Merger Agreement, Continental is permitted
to issue up to an additional 350,000 shares of Restricted Continental Common
Stock pursuant to the Continental Restricted Stock Purchase Program as an
incentive to employees to remain with Continental following the Merger, 330,725
of which had been issued as of September 30, 1996, and to forgive up to $35.7
million in principal amount of outstanding loans made to employees in connection
with restricted stock grants to cover the tax liabilities incurred in connection
with such grants. As of September 30, 1996, approximately $32.5 million in
aggregate principal amount of such loans was outstanding. In connection with the
execution of the Merger Agreement, the vesting provisions of the restricted
stock purchase agreements were modified to include acceleration of vesting after
the Merger upon an employee's termination upon the
11
<PAGE>
occurrence of specified events, and the tax liability financing agreements were
amended to provide for the forgiveness of the loans, subject to certain
conditions, including continued employment, and forgiveness of the entire amount
of an employee's loan upon such employee's termination after the Merger upon the
occurrence of the same events that cause acceleration of vesting of the unvested
stock. Under the Merger Agreement, U S WEST has agreed to assume all of
Continental's obligations under the restricted stock purchase agreements and
related tax liability financing agreements and, in addition, has agreed to
reimburse each employee for any excise tax liabilities incurred due to the
accelerated vesting of his or her restricted stock and the forgiveness of his or
her outstanding loan as a result of such employee's termination of employment
under certain circumstances after the Merger. See "Risk Factors -- Risk Factors
Related to the Merger -- Interests of Certain Persons in the Transactions," "The
Merger Agreement -- Certain Covenants -- Employee Benefits" and "-- Treatment of
Restricted Stock."
ACCOUNTING TREATMENT
The Merger will be accounted for by U S WEST under the "purchase" method of
accounting in accordance with generally accepted accounting principles.
Therefore, the aggregate consideration paid by U S WEST in connection with the
Merger will be allocated to Continental's assets and liabilities based upon
their fair values, with any excess being treated primarily as cable television
franchises and goodwill. The assets and liabilities and results of operations of
Continental will be consolidated into the assets and liabilities and results of
operations of U S WEST subsequent to the Effective Time.
RIGHTS OF DISSENTING STOCKHOLDERS
Pursuant to Delaware General Corporation Law (the "DGCL"), any holder of
Continental Voting Stock (i) who files a demand for appraisal in writing prior
to the vote taken at the Special Meeting, (ii) whose shares are not voted in
favor of the Merger and (iii) who follows certain other procedural requirements,
shall be entitled to appraisal rights under Section 262 of the DGCL ("Section
262"). See "Rights of Dissenting Stockholders." All of the holders of
Continental Voting Stock subject to the Stockholders' Agreement have waived
their appraisal rights with respect to their shares of Continental Voting Stock.
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
On February 26, 1996, the trading day prior to the announcement of the
Merger, the closing sales prices of the Communications Stock and the Media
Stock, as reported on the Composite Tape were $33.875 and $22.125, respectively.
On October 8, 1996, the closing sales prices of the Communications Stock and the
Media Stock, as reported on the Composite Tape, were $31.375 and $17.625,
respectively. No established public trading market exists for the Class A Common
Stock or the Class B Common Stock of Continental and, accordingly, no price
information is available with respect thereto. See "Market Prices and Dividend
Data."
Holders of Continental Common Stock are urged to obtain current market
quotations prior to making any decision with respect to the Merger.
12
<PAGE>
U S WEST SELECTED FINANCIAL DATA
The following table sets forth Selected Financial Data of U S WEST and
should be read in conjunction with the U S WEST Management's Discussion and
Analysis of Financial Condition and Results of Operations and financial
statements and notes thereto incorporated by reference herein. See
"Incorporation of Certain Documents by Reference." The Selected Financial Data
at December 31, 1995, 1994, 1993, 1992 and 1991 and for each of the five years
ended December 31, 1995, have been derived from the Consolidated Financial
Statements of U S WEST. The Selected Financial Data at June 30, 1996 and 1995
and for the six months ended June 30, 1996 and 1995 have been derived from the
unaudited Consolidated Financial Statements of U S WEST, which have been
prepared on the same basis as U S WEST's audited Consolidated Financial
Statements and, in the opinion of management, contain all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for these
periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OR AS OF
JUNE 30, YEAR ENDED OR AS OF DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and other revenues............................. $ 6,174 $ 5,722 $ 11,746 $ 10,953 $ 10,294 $ 9,823 $ 9,528
Income from continuing operations (1)................ 610 648 1,329 1,426 476 1,076 840
Net income (loss) (2)................................ 644 648 1,317 1,426 (2,806) (614) 553
Total assets......................................... 25,289 24,193 25,071 23,204 20,680 23,461 23,375
Total debt (3)....................................... 9,095 8,990 8,855 7,938 7,199 5,430 5,969
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company-guaranteed debentures....................... 600 -- 600 -- -- -- --
Preferred stock subject to mandatory redemption...... 51 51 51 51 -- -- --
Shareowners' equity.................................. 8,217 7,679 7,948 7,382 5,861 8,268 9,587
Percentage of debt to total capital (3).............. 50.6% 53.8% 50.7% 51.6% 55.1% 39.6% 38.4%
Ratio of earnings to combined fixed charges and
preferred stock dividends........................... 3.63 4.06 4.03 4.85 2.38 3.85 3.11
Capital expenditures (3)............................. $ 1,561 $ 1,365 $ 3,140 $ 2,820 $ 2,441 $ 2,554 $ 2,425
Earnings per common share (continuing
operations) (1)(4).................................. -- -- -- 3.14 1.13 2.61 2.09
Earnings (loss) per common share (1)(2)(4)........... -- -- -- 3.14 (6.69) (1.49) 1.38
Weighted average common shares outstanding
(thousands) (4)..................................... -- -- -- 453,316 419,365 412,518 401,332
Dividends per common share (4)....................... -- -- -- $ 2.14 $ 2.14 $ 2.12 $ 2.08
Return on common shareowners' equity (5)............. 14.9% 17.0% 17.2% 21.6% -- 14.4% 5.7%
Earnings per share of Communications Stock (4)....... $ 1.37 $ 1.29 $ 2.50 -- -- -- --
Dividends per share of Communications Stock (4)...... 1.07 1.07 2.14 -- -- -- --
Number of holders of U S WEST, Inc. Stock (4)........ -- 798,009 -- 816,099 836,328 867,773 899,092
Average shares of Communications Stock outstanding
(thousands) (4)..................................... 475,929 469,490 470,716 -- -- -- --
Number of holders of Communications Stock (4)........ 744,489 -- 775,125 -- -- -- --
Earnings (loss) per share of Media Stock (4)......... $ (0.02) $ 0.08 $ 0.29 -- -- -- --
Average shares of Media Stock outstanding (thousands)
(4)................................................. 473,298 469,490 470,549 -- -- -- --
Number of holders of Media Stock (4)................. 727,328 -- 770,346 -- -- -- --
</TABLE>
- ------------------------------
(1) For the first six months of 1996 and 1995 income from continuing operations
includes gains of $30 ($.06 per share of Communications Stock) and $49 ($.10
per share of Communications Stock), respectively, on the sales of certain
rural telephone exchanges. 1995 income from continuing operations includes a
gain of $95 ($0.20 per share of Media Stock) from the merger of U S WEST's
joint venture interest in Telewest Communications plc with SBC CableComms
(UK), a gain of $85 ($0.18 per share of Communications Stock) on the sales
of certain rural telephone exchanges and $17 ($0.01 per share of
Communications Stock and $0.02 per share of Media Stock) for expenses
associated with the Recapitalization. 1994 income from continuing operations
includes a gain of $105 ($0.23 per share) on the partial sale of U S WEST's
joint venture interest in Telewest Communications plc, 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
13
<PAGE>
telephone exchanges. 1993 income from continuing operations 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. 1991 income from continuing
operations was reduced by a restructuring charge of $230 ($0.57 per share).
(2) 1996 net income includes a gain of $34 ($0.07 per share of Communications
Stock) for the cumulative effect of the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." 1995 net
income was reduced by extraordinary items 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. 1992 net income
includes a charge of $1,793 ($4.35 per share) for the adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," and SFAS No. 112 "Employers' Accounting for Postemployment
Benefits." Discontinued operations provided net income (loss) of $38 ($0.09
per share), $103 ($0.25 per share) and $(287) ($0.71 per share) in 1993,
1992 and 1991, respectively.
(3) 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.
(4) Effective November 1, 1995, pursuant to the Recapitalization, each share of
Old Common Stock was converted into one share of Communications Stock and
one share of Media Stock. Earnings and dividends per share of Communications
Stock and earnings per share of Media Stock for the year ended December 31,
1995 and the six months ended June 30, 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
Recapitalization, the average shares of Communications Stock or Media Stock
outstanding are assumed to be equal to the average shares of Old Common
Stock outstanding for U S WEST Colorado.
(5) 1996 and 1992 return on shareowners' equity is based on income before the
cumulative effect of change in accounting principles. 1995 return on
shareowners' equity is based on income before extraordinary items. 1993
return on shareowners' equity is not presented. Return on shareowners'
equity for fourth-quarter 1993 was 19.9 percent based on income from
continuing operations.
14
<PAGE>
MEDIA GROUP SELECTED FINANCIAL DATA
The Media Group uses consolidation and proportionate principles of
accounting to present certain financial data. Consolidation accounting
principles are used to prepare the Combined Financial Statements. Proportionate
financial information is not required by generally accepted accounting
principles ("GAAP"), or intended to replace the Combined Financial Statements of
the Media Group prepared in accordance with GAAP. Under GAAP, the Media Group
combines the entities in which it has a controlling interest and uses the equity
method to account for entities in which the Media Group does not have a
controlling interest. In contrast, proportionate accounting reflects the Media
Group's relative ownership interests in operating revenues and expenses for both
its consolidated and equity method entities. U S WEST believes that
proportionate financial and operating data facilitate the understanding and
assessment of the Media Group's Combined Financial Statements.
SELECTED COMBINED FINANCIAL DATA
The following table sets forth Selected Combined Financial Data of the Media
Group and should be read in conjunction with the Media Group Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Combined Financial Statements incorporated by reference herein. See
"Incorporation of Certain Documents by Reference." The Selected Combined
Financial Data at December 31, 1995, 1994 and 1993, and for each of the four
years ended December 31, 1995, have been derived from the Media Group's Combined
Financial Statements. The Selected Combined Financial Data at December 31, 1992
and 1991 and at June 30, 1996 and 1995 and for the year ended December 31, 1991
and for the six months ended June 30, 1996 and 1995, have been derived from the
unaudited Combined Financial Statements of the Media Group, which have been
prepared on the same basis as the Media Group's audited Combined Financial
Statements and, in the opinion of management, contain all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for these
periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OR AS OF
JUNE 30, YEAR ENDED OR AS OF DECEMBER 31,
---------------------- -------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
Sales and other revenues:
Directory and information services.......... $ 592 $ 564 $ 1,180 $ 1,075 $ 956 $ 949 $ 891
Wireless communications..................... 554 430 941 781 561 407 325
Cable and telecommunications................ 116 109 215 18 -- -- --
Other....................................... 9 18 38 34 32 28 45
---------- ---------- ---------- ---------- --------- --------- ---------
Total sales and other revenues................ $ 1,271 $ 1,121 $ 2,374 $ 1,908 $ 1,549 $ 1,384 $ 1,261
---------- ---------- ---------- ---------- --------- --------- ---------
---------- ---------- ---------- ---------- --------- --------- ---------
Income (loss) from continuing operations
before extraordinary item (1)................ $ (8) $ 40 $ 145 $ 276 $ 85 $ 146 $ 69
Earnings (loss) available for common stock.... (10) 38 138 276 85 146 69
Total assets.................................. 8,682 8,220 8,615 7,394 5,446 3,130 3,235
Total debt (2)................................ 2,264 2,333 2,101 1,814 1,526 249 682
Preferred securities (3)...................... 651 51 651 51 -- -- --
Media Group equity............................ 4,482 4,488 4,472 4,203 3,139 2,265 2,057
Capital expenditures.......................... 215 172 401 343 215 169 231
Earnings (loss) per share of Media Stock
(4).......................................... $ (0.02) $ 0.08 $ 0.29 $ 0.61 -- -- --
Average shares of Media Stock outstanding
(thousands) (4).............................. 473,298 469,490 470,549 453,316 -- -- --
OTHER DATA:
EBITDA (5).................................... $ 410 $ 345 $ 716 $ 533 $ 485 $ 410 $ 373
(FOOTNOTES ON FOLLOWING PAGE)
</TABLE>
15
<PAGE>
SELECTED PROPORTIONATE DATA
The following table is not required by GAAP or intended to replace the
Combined Financial Statements of the Media Group prepared in accordance with
GAAP. It is presented supplementally because U S WEST believes that
proportionate financial and operating data facilitate the understanding and
assessment of the Media Group's Combined Financial Statements. The table does
not reflect financial data of the capital assets segment, which had net assets
of $407 at June 30, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
OR AS OF YEAR ENDED OR AS OF DECEMBER
JUNE 30, 31,
---------------------- -------------------------------
1996 1995 1995 1994 1993
---------- ---------- --------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C> <C> <C>
Sales and other revenues.................................... $ 2,836 $ 2,355 $ 5,115 $ 4,213 $ 2,157
Operating income............................................ 280 239 476 401 195
Income (loss) from continuing operations before
extraordinary item (1)..................................... (8) 40 145 276 85
EBITDA (excludes 1993 restructuring charge) (5)............. 683 548 1,149 902 527
Subscribers/advertisers (thousands)......................... 6,242 4,907 5,959 4,234 3,086
</TABLE>
- ------------------------------
(1) Income from continuing operations before extraordinary item for the year
ended December 31, 1995 includes a gain of $95 from the merger of U S WEST's
joint venture interest in Telewest Communications plc with SBC CableComms
(UK) and costs of $9 associated with the Recapitalization. 1994 income from
continuing operations before extraordinary item includes a gain of $105 on
the partial sale of U S WEST's joint venture interest in Telewest
Communications plc and a gain of $41 on the sale of U S WEST's paging
operation. 1993 and 1991 income from continuing operations before
extraordinary item was reduced by restructuring charges of $76 and $57,
respectively.
(2) Excludes debt associated with the capital assets segment, which has been
discontinued and is held for sale.
(3) Includes Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company-guaranteed debentures of $600 in
1996 and at December 31, 1995 and preferred stock subject to mandatory
redemption of $51 in 1996, 1995 and 1994.
(4) Effective November 1, 1995, pursuant to the Recapitalization, each share of
Old Common Stock was converted into one share of Communications Stock and
one share of Media Stock. Earnings per share of Media Stock for the years
ended December 31, 1995 and 1994 and the six months ended June 30, 1995,
have been presented on a pro forma basis to reflect the Media Stock as if it
had been outstanding since January 1, 1994. For periods prior to the
Recapitalization, the average shares of Media Stock outstanding are assumed
to be equal to the average shares of Old Common Stock outstanding for U S
WEST Colorado.
(5) Earnings before interest, taxes, depreciation, amortization, and other. Also
excludes gains on asset sales, equity losses and guaranteed minority
interest expense.
16
<PAGE>
CONTINENTAL SUMMARY FINANCIAL DATA
The summary consolidated historical financial data provided below have been
derived from, and should be read in conjunction with, the Consolidated Financial
Statements of Continental for the years ended December 31, 1993 through December
31, 1995 and the six months ended June 30, 1995 and 1996. The unaudited summary
historical financial data for the six months ended June 30, 1995 and 1996
reflects all adjustments of a normal recurring nature that are, in the opinion
of management, necessary for a fair presentation of that data. Results of
operations for the six months ended June 30, 1995 and 1996 are not necessarily
indicative of the results that may be expected for any other interim period or
the year as a whole.
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED JUNE
30, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------
1996 1995 1995 1994 1993
----------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenue....................................... $ 942,930 $ 650,048 $ 1,442,392 $ 1,197,977 $ 1,177,163
Operating, selling, general and administrative
expenses..................................... 556,360 375,178 837,241 672,884 649,571
Depreciation and amortization................. 231,696 148,412 341,171 283,183 279,009
Restricted stock purchase program(1).......... 8,654 5,905 12,005 11,316 11,004
----------- ---------- ------------ ------------ ------------
Operating income.............................. 146,220 120,553 251,975 230,594 237,579
Interest expense (net)........................ 233,578 166,314 363,826 315,541 282,252
Loss before extraordinary item and cumulative
effect of accounting change.................. (110,186) (33,067) (112,027) (68,576) (25,774)
Extraordinary item............................ -- -- -- (18,265) --
Cumulative effect of accounting change........ -- -- -- -- (184,996)
Net loss...................................... (110,186) (33,067) (112,027) (86,841) (210,770)
Preferred stock preferences................... (21,041) (19,347) (39,802) (36,800) (34,115)
----------- ---------- ------------ ------------ ------------
Loss applicable to common stockholders........ $ (131,227) $ (52,414) $ (151,829) $ (123,641) $ (244,885)
----------- ---------- ------------ ------------ ------------
----------- ---------- ------------ ------------ ------------
OTHER DATA:
EBITDA(2)..................................... $ 386,570 $ 274,870 $ 605,151 $ 525,093 $ 527,592
Net cash provided from operating activities... 175,030 77,527 221,264 236,304 250,504
Capital expenditures.......................... 311,447 231,021 518,161 300,511 185,691
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED) AS OF DECEMBER 31,
AS OF JUNE 30, 1996 1995
---------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................................ $ 27,056 $ 18,551
Total assets........................................................ 5,284,734 5,080,593
Total debt.......................................................... 5,604,137 5,285,159
Redeemable common stock............................................. 270,290 256,135
Stockholders' equity (deficiency)................................... (1,319,133) (1,215,951)
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
17
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE AS OF DECEMBER 31,
30, -------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CONTINENTAL SUBSCRIBER DATA FOR U.S. CABLE SYSTEMS
(3):
Homes passed by cable (4)............................ 7,243,000 7,191,000 5,372,000 5,192,000
Number of basic subscribers (5)...................... 4,234,000 4,190,000 3,081,000 2,895,000
Basic penetration (6)................................ 58.5% 58.3 % 57.4 % 55.8 %
Monthly cable revenue per average basic
subscriber (7)...................................... $ 37.06 $ 35.99 $ 35.06 $ 35.69
</TABLE>
- ------------------------------
(1) Represents the difference between the consideration paid by employees for
shares of Restricted Continental Common Stock under Continental's Restricted
Stock Purchase Program and the fair market value of such shares (as
determined by the Continental Board) at the date of issuance, amortized over
such shares' vesting schedule. See Note 11 to Continental's Consolidated
Financial Statements.
(2) Operating income before depreciation and amortization and non-cash stock
compensation (Continental Restricted Stock Purchase Program expense). Based
on its experience in the cable television industry, Continental believes
that EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing cable television companies in
several areas, such as liquidity, operating performance and leverage. EBITDA
should not be considered by the reader as an alternative to operating or net
income as determined in accordance with GAAP as an indicator of
Continental's performance or as an alternative to cash flows from operating
activities (as determined in accordance with GAAP) as a measure of
liquidity. See "Description of Continental -- Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) In reporting subscriber and other data for U.S. cable systems not controlled
or managed by Continental, only that portion of data corresponding to
Continental's percentage interest is included.
(4) Represents estimated dwelling units located sufficiently close to
Continental's cable plant to be practicably connected without any further
extension of principal transmission lines.
(5) A "basic subscriber" means a person who, at a minimum, subscribes to
Continental's Basic Broadcast Tier, which consists of broadcast television
signals available off-air locally, local origination channels and public,
educational and governmental access channels. Bulk subscribers are accounted
for on an "equivalent billing unit" basis, dividing aggregate Basic
Broadcast Tier revenues by the stated Basic Broadcast Tier rate.
(6) Basic subscribers as a percentage of homes passed by cable.
(7) Cable revenues (excluding DBS-service revenues) divided by the weighted
average number of basic subscribers for Continental's subsidiaries during
the twelve-month period ended December 31 for each year presented and the
six month period ended June 30, 1996.
18
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth (i) historical earnings, cash dividends and
book value per share for U S WEST, (ii) historical earnings, cash dividends and
book value per share for Continental, (iii) unaudited pro forma combined
earnings, cash dividends and book value per share for U S WEST and (iv)
unaudited pro forma equivalent combined earnings, cash dividends and book value
per share for Continental. The unaudited pro forma combined per share data gives
effect to the Merger and related transactions, certain acquisitions,
dispositions and refinancings by Continental and the consummation of the U S
WEST/AirTouch Joint Venture. The data set forth below should be read in
conjunction with U S WEST's Consolidated Financial Statements and the Media
Group's Combined Financial Statements, including the notes thereto, which are
incorporated herein by reference and with Continental's Consolidated Financial
Statements, including the notes thereto, and the unaudited pro forma condensed
combined financial statements, including the notes thereto, included elsewhere
in this Proxy Statement. See "Incorporation of Certain Documents by Reference,"
"Annex V -- Description of Continental" and "Unaudited Pro Forma Financial
Statements of U S WEST and the Media Group."
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
OR AS OF OR AS OF
JUNE 30, 1996 DECEMBER 31, 1995
----------------- -------------------
<S> <C> <C>
HISTORICAL:
U S WEST
Earnings per share of Communications Stock (1).......................... $ 1.30 $ 2.52
Earnings (loss) per share of Media Stock (1)............................ (0.02) 0.30
Cash dividends per share of Communications Stock (1).................... 1.07 2.14
Cash dividends per share of Media Stock (2)............................. -- --
Book value per share of Communications Stock............................ 7.82 7.34
Book value per share of Media Stock..................................... 9.46 9.47
Continental
Earnings (loss) per share............................................... (0.88) (1.22)
Cash dividends per share................................................ -- --
Book value per share.................................................... (14.16) (13.27)
PRO FORMA:
U S WEST
Earnings per share of Communications Stock (1).......................... $ 1.30 $ 2.52
Loss per share of Media Stock (1)....................................... (0.42) (0.49)
Cash dividends per share of Communication Stock (1)..................... 1.07 2.14
Cash dividends per share of Media Stock (2)............................. -- --
Book value per share of Communications Stock............................ 7.82
Book value per share of Media Stock..................................... 12.86
Continental equivalent pro forma (3)
Earnings (loss) per share............................................... (0.37) (0.43)
Cash dividends per share................................................ -- --
Book value per share.................................................... 11.34 --
</TABLE>
- ------------------------------
(1) Earnings and dividends per share of Communications Stock and earnings (loss)
per share of Media Stock for the year ended December 31, 1995 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
Recapitalization, the average number of shares of Communications Stock and
Media Stock outstanding are assumed to be equal to the average number of
shares of Old Common Stock outstanding. Earnings per share of Communications
Stock excludes an extraordinary item in 1995 and the cumulative effect of a
change in accounting principle in 1996. Earnings per share of Media Stock
for 1995 exclude an extraordinary item.
(2) U S WEST intends to retain future earnings of the Media Group, if any, for
the Media Group businesses and does not anticipate paying dividends to the
Media Group stockholders in the foreseeable future.
(3) Equivalent pro forma per share data for Continental has been prepared based
upon the number of shares of Media Stock to be received by a holder of Class
A Common Stock or a holder of Class B Common Stock who makes a Standard
Election assuming that U S WEST elects to pay $1.0 billion of cash in the
Merger and the number of shares of Class A Common Stock and Class B Common
Stock outstanding as of the Record Date remains unchanged.
19
<PAGE>
U S WEST AND MEDIA GROUP UNAUDITED SELECTED PRO FORMA FINANCIAL DATA
The following unaudited selected pro forma condensed combined financial data
of U S WEST and the Media Group gives effect to the Merger and related
transactions, certain acquisitions, dispositions and refinancings by Continental
and the consummation of the U S WEST/AirTouch Joint Venture. The selected
unaudited pro forma condensed combined financial data have been derived from, or
prepared on a basis consistent with, the Unaudited Pro Forma Condensed Combined
Financial Statements of U S WEST and the Media Group, including the notes
thereto, included elsewhere in this Proxy Statement. This data is presented for
illustrative purposes only and is not necessarily indicative of the combined
results of operations or financial position that would have occurred if the
transactions had occurred at the beginning of each period presented or on the
dates indicated, nor is it necessarily indicative of the future operating
results or financial position of U S WEST or the Media Group. This data should
also be read in conjunction with the Unaudited Pro Forma Financial Statements of
U S WEST and the Media Group, including the notes thereto, included elsewhere in
this Proxy Statement. See "Unaudited Pro Forma Condensed Combined Financial
Statements of U S WEST and the Media Group."
<TABLE>
<CAPTION>
U S WEST PRO FORMA
------------------------------------
SIX MONTHS ENDED YEAR ENDED
OR AS OF OR AS OF
JUNE 30, 1996 DECEMBER 31, 1995
----------------- -----------------
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
RESULTS OF OPERATIONS DATA:
Sales and other revenues.................................................... $ 6,623 $ 12,646
Income from operations...................................................... 1,325 2,423
Income before extraordinary items and cumulative effect of change in
accounting principle....................................................... 382 928
Income before extraordinary items and cumulative effect of change in
accounting principle available for common stock............................ 356 877
Earnings before extraordinary item and cumulative effect of change in
accounting principle per share of Communications Stock..................... 1.30 2.52
Loss before extraordinary item per share of Media Stock..................... (0.42) (0.49)
BALANCE SHEET DATA:
Total assets................................................................ $ 39,148
Total debt.................................................................. 16,113
Shareowners' equity......................................................... 11,847
Book value per common share:
Communications Stock...................................................... 7.82
Media Stock............................................................... 12.86
<CAPTION>
MEDIA GROUP PRO FORMA
------------------------------------
SIX MONTHS ENDED YEAR ENDED
OR AS OF OR AS OF
JUNE 30, 1996 DECEMBER 31, 1995
----------------- -----------------
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
RESULTS OF OPERATIONS DATA:
Sales and other revenues.................................................... $ 1,687 $ 3,217
Income from operations...................................................... 155 245
Loss before extraordinary item.............................................. (236) (256)
Loss before extraordinary item available for common stock................... (262) (307)
Loss before extraordinary item per share of Media Stock..................... (0.42) (0.49)
BALANCE SHEET DATA:
Total assets................................................................ $ 22,534
Total debt.................................................................. 9,282
Total equity................................................................ 8,112
Book value per common share................................................. 12.86
</TABLE>
20
<PAGE>
RISK FACTORS
RISK FACTORS RELATED TO THE MEDIA STOCK
STOCKHOLDERS OF ONE COMPANY; FINANCIAL IMPACTS ON ONE GROUP COULD AFFECT THE
OTHER. Notwithstanding the allocation of assets and liabilities (including
contingent liabilities) and stockholders' equity between the Communications
Group and the Media Group for the purpose of preparing the respective financial
statements of such Groups, holders 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 U S WEST Common Stock
relating to the other Group. In addition, the incurrence of significant
indebtedness by U S WEST or one of its subsidiaries on behalf of a Group,
including indebtedness incurred or assumed in connection with acquisitions of or
investments in businesses, including the Merger, would continue to affect the
credit ratings of U S WEST and its subsidiaries and therefore could increase the
borrowing costs of the other Group and U S WEST as a whole. 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 future dividends
on the Communications Stock and the Media Stock. Accordingly, U S WEST's
consolidated financial information should be read in conjunction with the
Communications Group's and the Media Group's combined financial information.
U S WEST provides to holders of Communications Stock and Media Stock
financial statements, management's discussion and analysis of financial
condition and results of operations, business descriptions and other information
for each Group and for the consolidated company. The financial statements of
each Group reflect the financial position, results of operations and cash flows
of the businesses included therein. Consistent with the Restated Certificate of
Incorporation of U S WEST (the "U S WEST Restated Certificate") and relevant
policies, such Group's financial statements also include allocated portions of U
S WEST's corporate assets and liabilities (including contingent liabilities)
that are not separately identified with the operations of a specific Group. The
financial statements, management's discussion and analysis of financial
condition and results of operations, business descriptions and other information
for each Group and for U S WEST on a consolidated basis are included in U S
WEST's Annual Report on Form 10-K for the year ended December 31, 1995 and U S
WEST's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996 and
June 30, 1996 and are incorporated herein by reference. See "Incorporation of
Certain Documents by Reference."
LIMITED SEPARATE STOCKHOLDER RIGHTS; NO ADDITIONAL RIGHTS WITH RESPECT TO
THE GROUPS; EFFECTS ON VOTING POWER. Holders of Communications Stock and Media
Stock have only the rights customarily held by common stockholders of U S WEST
and do not have any rights related to their corresponding Group or have any
right to vote on matters as a separate class other than (i) as set forth in the
provisions relating to dividend and liquidation rights and requirements for a
mandatory dividend, redemption or conversion upon the disposition of assets
attributed to their corresponding Group described under "Description of U S WEST
Capital Stock -- Communications Stock and Media Stock -- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of U S WEST Common
Stock" and (ii) separate voting rights in limited circumstances under the DGCL.
Separate meetings for the holders of Communications Stock and Media Stock are
not held. In addition, principles of Delaware law established in cases involving
differing treatment of two classes of capital stock or two groups of holders of
the same class of capital stock provide that a board of directors owes an equal
duty to all stockholders regardless of class or series and does not have
separate or additional duties to either group of stockholders.
The relative voting power of shares of Communications Stock and Media Stock
fluctuate from time to time, with each share of Communications Stock having one
vote and each share of Media Stock having a variable number of votes, based upon
the ratio, over a specified period, of the time-weighted average Market Value of
one share of Media Stock to the time-weighted average Market Value of one share
of Communications Stock. This formula is intended to equate the proportionate
voting rights of each class of U S WEST
21
<PAGE>
Common Stock to their respective Market Values at the time of any vote. Market
Value could be influenced by many factors, including the results of operations
of U S WEST and each of the Groups, the regulatory environment, trading volume,
share issuances and repurchases and general economic and market conditions. See
"Description of U S WEST Capital Stock -- Communications Stock and Media Stock
- -- Voting Rights." Such changes in the aggregate votes or relative voting power
of the Media Stock or Communications Stock could result from the market's
reaction to a decision by U S WEST's management or the U S WEST Board that is
perceived to disparately affect one class of U S WEST Common Stock in comparison
to another.
At U S WEST's 1996 Annual Meeting of stockholders held on June 7, 1996, each
share of Communications Stock had one vote and each share of Media Stock had
0.64 votes on all matters submitted to stockholders. Based upon the number of
shares of Communications Stock and Media Stock outstanding as of the record date
for determining stockholders entitled to vote at such meeting, the shares of
Communications Stock and Media Stock represented 61% and 39%, respectively, of
the total voting power of the U S WEST Common Stock. Assuming approximately
160,000,000 shares of Media Stock are issued in the Merger (which is based upon
the payment by U S WEST of $1 billion in cash in the Merger), if such shares had
been outstanding on such record date (and no shares of Series D Preferred Stock
issued in the Merger had been converted into shares of Media Stock), the shares
of Communications Stock and Media Stock would have represented 54% and 46%,
respectively, of the total voting power of the U S WEST Common Stock.
When a vote is taken on any matter as to which all stock is voting together
as one class, any class or series that is entitled to more than the number of
votes required to approve such matter will be in a position to control the
outcome of the vote on such matter. Certain matters on which holders of
Communications Stock and Media Stock would vote together as a single class could
involve a divergence or the appearance of a divergence of the interests between
the holders of Communications Stock and the Media Stock. For example, the U S
WEST Restated Certificate and the DGCL do not require that a merger or
consolidation of U S WEST be approved by a separate vote of holders of any class
of U S WEST Common Stock. As a result, if the holders of U S WEST Common Stock
having a majority of the voting power of all shares of U S WEST Common Stock
outstanding approved a merger or consolidation of U S WEST, then (a) the merger
or consolidation could be consummated even if the holders of a majority of any
class of U S WEST Common Stock had voted against the merger or consolidation and
(b) the amount to be received by the holders of such class of U S WEST Common
Stock in the merger or consolidation might be materially less than the amount
such holders would have received had the approval of the holders of a majority
of such class of U S WEST Common Stock been required. See "-- Potential
Diverging Interests" and "-- Allocation of Proceeds of Mergers or
Consolidations" below.
POTENTIAL DIVERGING INTERESTS. The existence of separate classes of U S
WEST Common Stock could give rise to occasions when the interests of the holders
of Communications Stock and holders of Media Stock diverge or appear to diverge.
Examples include determinations by the U S WEST Board to (i) pay or omit the
payment of dividends on Communications Stock or Media Stock, (ii) allocate
consideration to be received by holders of U S WEST Common Stock in connection
with a merger or consolidation involving U S WEST among holders of
Communications Stock and Media Stock, (iii) convert one class of U S WEST Common
Stock into shares of the other class of U S WEST Common Stock, (iv) approve
certain dispositions of assets attributed to any Group, (v) if and to the extent
there is an Inter-Group Interest, allocate the proceeds of issuances of Media
Stock either to the Communications Group in respect of the Inter-Group Interest
or to the equity of the Media Group, (vi) formulate uniform public policy
positions for U S WEST and (vii) make operational and financial decisions with
respect to one Group that could be considered to be detrimental to the other
Group, including whether to make transfers of funds between Groups as described
below. When making decisions with regard to matters that create potential
diverging interests, the U S WEST Board would act in accordance with the terms
of the U S WEST Restated Certificate, management and accounting policies
described under "U S WEST Management and Accounting Policies," to the extent
applicable, and its fiduciary duties, which require the U S WEST Board to
consider the impact of such decisions on all stockholders. See "-- Fiduciary
Duties of the U S WEST Board" below. The U S WEST
22
<PAGE>
Board could also from time to time refer to an existing committee or one or more
new committees of the board matters involving such conflict issues and have such
committee or committees report to the board on such matters or decide such
matters to the extent permitted by the Bylaws of U S WEST and applicable law.
Each of the foregoing potential conflicts of interest is discussed below:
NO ASSURANCE OF PAYMENT OF DIVIDENDS. The U S WEST Board currently pays
a dividend on the Communications stock equal to $0.535 per quarter. The U
S WEST Board does not currently pay dividends on the Media Stock.
Determinations as to the future dividends on the Communications Stock and
the Media Stock will be based primarily upon the financial condition,
results of operations and business requirements of the relevant Group and U
S WEST as a whole. Dividends on the Communications Stock and the Media
Stock, if any, are payable out of the lesser of (i) all funds of U S WEST
legally available for the payment of dividends and (ii) the Available
Dividend Amount with respect to the relevant Group. Subject only to such
limitations, the U S WEST Board reserves the right to declare and pay
dividends on the Communications Stock and the Media Stock in any amount and
could, in its sole discretion, declare and pay dividends exclusively on the
Communications Stock, exclusively on the Media Stock or on both, in equal or
unequal amounts, notwithstanding the relative amounts of the Communications
Group Available Dividend Amount and the Media Group Available Dividend
Amount, the amount of prior dividends declared on each class, the respective
voting or liquidation rights of each class or any other factor. In addition,
net losses of any Group, dividends and distributions on, and repurchases of,
any class of U S WEST Common Stock or Preferred Stock would reduce the
assets of U S WEST legally available for future dividends on the
Communications Stock and the Media Stock. See "Description of U S WEST
Capital Stock -- Communications Stock and Media Stock -- Dividends."
ALLOCATION OF PROCEEDS OF MERGERS OR CONSOLIDATIONS. The U S WEST
Restated Certificate does not contain any provisions governing how
consideration to be received by holders of U S WEST Common Stock in
connection with a merger or consolidation involving the entire company is to
be allocated among holders of different classes of U S WEST Common Stock. In
any such merger or consolidation, the percentage of the consideration to be
allocated to holders of any class of U S WEST Common Stock will be
determined by the U S WEST Board and may be materially more or less than
that which might have been allocated to such holders had the U S WEST Board
chosen a different method of allocation. See "-- Limited Separate
Stockholder Rights; No Additional Rights with Respect to the Groups; Effects
on Voting Power" above.
OPTIONAL CONVERSION OF CLASS OF U S WEST COMMON STOCK. The U S WEST
Board could, in its sole discretion, at any time determine to convert
shares of Media Stock into shares of Communications Stock at a premium equal
to 115% until November 1, 2000 and thereafter declining annually to 100% by
November 1, 2004 and could also, following November 1, 2004, in its sole
discretion, determine to convert shares of Communications Stock into shares
of Media Stock at no premium. In addition, the U S WEST Board could, in its
sole discretion, determine to convert shares of the class of U S WEST Common
Stock of one Group into shares of the class of U S WEST Common Stock of the
other Group at a 110% premium following any dividend or partial redemption
undertaken in connection with a disposition of all or substantially all of
the properties or assets attributed to the Group whose stock is being
converted. Any such determination could be made at a time when either or
both of the Communications Stock and the Media Stock may be considered to be
overvalued or undervalued. In addition, any such conversion at any premium
would dilute the interests in U S WEST of the holders of the class of U S
WEST Common Stock not subject to conversion and would preclude holders of
both classes of U S WEST Common Stock from retaining their investment in a
security that is intended to reflect separately the performance of the
relevant Group. In determining whether to convert one class of U S WEST
Common Stock into the other class of U S WEST Common Stock, the U S WEST
Board would act in accordance with its good faith business judgment that any
such conversion is in the best interests of U S WEST and all of its
stockholders, including both the holders of the class of U S WEST
23
<PAGE>
Common Stock being converted and the holders of the class of U S WEST Common
Stock into which it is to be converted. See "Description of U S WEST Capital
Stock -- Communications Stock and Media Stock -- Conversion and Redemption."
DISPOSITIONS OF GROUP ASSETS. Assuming the assets attributed to any
Group represent less than substantially all of the properties and assets
of U S WEST, the U S WEST Board could, in its sole discretion and without
stockholder approval, approve sales and other dispositions of any amount of
the properties and assets attributed to such Group because Delaware law and
the U S WEST Restated Certificate require stockholder approval only for a
sale or other disposition of all or substantially all of the properties and
assets of the entire company. The proceeds from any such disposition would
be assets attributed to such Group and used for its benefit, subject to the
management policies described under "U S WEST Management and Accounting
Policies -- Management Policies." The U S WEST Restated Certificate contains
provisions that, in the event of a Disposition of all or substantially all
of the properties and assets attributed to any Group (i.e., 80% or more on a
current market value basis), other than in a Related Business Transaction,
require U S WEST to either (i) distribute to holders of the class of U S
WEST Common Stock relating to the Group subject to such Disposition an
amount equal to their proportionate interest in the Fair Value of the Net
Proceeds of such Disposition, either by special dividend or by redemption of
all or part of the outstanding shares of such U S WEST Common Stock, or (ii)
convert the outstanding shares of such U S WEST Common Stock into a number
of shares of the class of U S WEST Common Stock relating to the other Group
equal to 110% of the ratio, calculated over a period of time, of the average
Market Value of one share of the U S WEST Common Stock relating to the Group
subject to such Disposition to the average Market Value of one share of U S
WEST Common Stock relating to the other Group. For a discussion of these
provisions and for definitions of capitalized terms, see "Description of U S
WEST Capital Stock -- Communications Stock and Media Stock -- Conversion and
Redemption." The terms of the U S WEST Common Stock do not require the U S
WEST Board to select the option which would result in the distribution with
the highest value to the holders of the U S WEST Common Stock relating to
the Group subject to such Disposition or with the smallest effect on the U S
WEST Common Stock relating to the other Group. The U S WEST Board would
select an option based upon its good faith business judgment that such
option is in the best interests of U S WEST and all of its stockholders. See
"-- Fiduciary Duties of the U S WEST Board." In the event, following a
Disposition of all or substantially all of the properties and assets
attributed to the Media Group, the U S WEST Board determines to effect a
distribution described in clause (i) above, U S WEST would be required to
redeem all of the outstanding shares of the Series D Preferred Stock. See
"Description of U S WEST Capital Stock -- Series D Preferred Stock --
Redemption and Exchange -- Mandatory Redemption and Exchange."
ALLOCATION OF PROCEEDS UPON ISSUANCE OF MEDIA STOCK. If the
Communications Group, at the time U S WEST issues any shares of Media
Stock, holds an Inter-Group Interest representing an interest in the equity
value of the Media Group, the U S WEST Board would, in its sole discretion,
determine whether to allocate all or any portion of the proceeds of such
issuance to the Media Group or to the Communications Group. To the extent
the net proceeds of such issuance of shares of Media Stock are allocated to
the Media Group, the financial statements of the Media Group would reflect
the receipt of such proceeds. To the extent such net proceeds are allocated
to the Communications Group, the financial statements of the Communications
Group would reflect a reduction in the Inter-Group Interest and the receipt
of such proceeds.
PUBLIC POLICY DETERMINATIONS. Because of the nature of the businesses of
the Communications Group and the Media Group, the Groups may have
diverging interests as to the position U S WEST should take with respect to
various regulatory issues. For example, the Communications Group's interests
may be advanced by regulation requiring all common carriers, including new
entrants, to comply with the same tariff filing and approval requirements,
while the Media Group's interests may be advanced by regulation permitting
non-dominant, new entrants to comply with a relaxed set of requirements. In
addition, increasing overlap between the businesses of the two Groups
resulting from regulatory changes and technological advancements may
increase such conflicts. Management has
24
<PAGE>
implemented procedures to resolve any such conflict. In the event any such
conflict cannot be resolved or otherwise requires resolution by the U S WEST
Board, the U S WEST Board would resolve such conflict in accordance with its
good faith business judgment of the best interests of U S WEST and all of
its stockholders.
OPERATIONAL AND FINANCIAL DECISIONS. The U S WEST Board could, in its
sole discretion, from time to time, make operational and financial
decisions or implement policies that affect disproportionately the
businesses of the Communications Group and the Media Group, such as
transfers of services, funds or assets between Groups and other inter-Group
transactions, the allocation of financing opportunities in the public
markets and the allocation of business opportunities, resources and
personnel that may be suitable for both Groups. Any such decision may favor
one Group at the expense of the other. For example, the decision to obtain
funds for one Group may adversely affect the ability of the other Group to
obtain funds sufficient to implement its growth strategies. In addition, the
increasing overlap between the businesses of the two Groups as a result of
regulatory changes and technological advancements will make such operational
and financial decisions more difficult. All such decisions will be made by
the U S WEST Board in its good faith business judgment or in accordance with
procedures and policies adopted by the U S WEST Board from time to time,
including the policies described under "U S WEST Management and Accounting
Policies -- Management Policies," to ensure that such decisions will be made
in a manner consistent with the best interests of U S WEST and its
stockholders. For further discussion of potential divergences of interests,
see "-- Fiduciary Duties of the U S WEST Board," "-- Transfer of Funds
Between Groups; Equity Contributions" and "U S WEST Management and
Accounting Policies -- Management Policies."
FIDUCIARY DUTIES OF THE U S WEST BOARD. Although U S WEST is not aware of
any legal precedent involving the fiduciary duties of directors of corporations
having two classes of common stock, or separate classes or series of capital
stock, the rights of which are defined by reference to specified operations of
the corporation, principles of Delaware law established in cases involving
differing treatment of two classes of capital stock or two groups of holders of
the same class of capital stock provide that a board of directors owes an equal
duty to all stockholders regardless of class or series. Under these principles
of Delaware law and the related principle known as the "business judgment rule,"
absent abuse of discretion, a good faith business decision made by a
disinterested and adequately informed board of directors, or a committee
thereof, with respect to any matter having disparate impacts upon holders of
Communications Stock and holders of Media Stock would be a defense to any
challenge to such determination made by or on behalf of the holders of either
class of U S WEST Common Stock. Nevertheless, a Delaware court hearing a case
involving such a challenge may decide to apply principles of Delaware law other
than those discussed above, or may develop new principles of Delaware law, in
order to decide such a case, which would be a case of first impression.
MANAGEMENT AND ACCOUNTING POLICIES SUBJECT TO CHANGE. The U S WEST Board
has adopted certain management and accounting policies described herein
applicable to the preparation of the financial statements of the Communications
Group and the Media Group and the conduct of their respective businesses, which
policies may be modified or rescinded in the sole discretion of the U S WEST
Board without approval of the stockholders, although there is no present
intention to do so. The U S WEST Board may also adopt additional policies
depending upon the circumstances. Any determination of the U S WEST Board to
modify or rescind such policies, or to adopt additional policies, including any
such decision that would have disparate impacts upon holders of Communications
Stock and Media Stock, would be made by the board based on its good faith
business judgment that such decision is in the best interests of U S WEST and
all of its stockholders, including the holders of Communications Stock and the
holders of Media Stock. In making such determination, the U S WEST Board may
also consider regulatory requirements, including those imposed on U S WEST
Communications by the public utility commissions of various states (the "PUCs")
and the Federal Communications Commission (the "FCC"). In addition, generally
accepted accounting principles require that any change in accounting policy be
preferable (in accordance with such principles) to the policy previously
established. See "U S WEST Management and Accounting Policies."
TRANSFER OF FUNDS BETWEEN GROUPS; EQUITY CONTRIBUTIONS. U S WEST does not,
and does not intend in the future, to transfer funds between the Groups, except
for certain short-term ordinary course advances of
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<PAGE>
funds at market rates associated with U S WEST's centralized cash management.
The U S WEST Board may, however, in certain circumstances determine to transfer
funds between Groups. Any such determination to transfer funds between Groups
would be made by the U S WEST Board in the exercise of its good faith business
judgment based upon all relevant circumstances, including the financing and
investing needs and objectives of each Group, the availability, cost and time
associated with alternative financing sources, investment opportunities,
prevailing interest rates and general economic conditions. Any such transfer
would be accounted for, in the sole discretion of the U S WEST Board, as either
a market rate interest bearing loan or, as described in the next paragraph, an
equity contribution. No loans are or will be made by the regulated businesses of
the Communications Group to the Media Group. See "U S WEST Management and
Accounting Policies."
Under management policies adopted by the U S WEST Board, the U S WEST Board
could, in its sole discretion, determine from time to time to contribute, as
additional equity, cash or other property of the Communications Group to the
Media Group, thereby creating or increasing the Inter-Group Interest, which will
represent an interest of the Communications Group in the equity value of U S
WEST attributable to the Media Group. Similarly, the U S WEST Board could, in
its sole discretion, determine from time to time to transfer cash or other
property from the Media Group to the Communications Group, thereby decreasing
the Inter-Group Interest. Although any increase in the Inter-Group Interest
resulting from an equity contribution by the Communications Group to the Media
Group or any decrease in the Inter-Group Interest resulting from a transfer of
funds from the Media Group to the Communications Group would be determined by
reference to the then current Market Value of Media Stock, such an increase
could occur at a time when such shares could be considered undervalued and such
a decrease could occur at a time when such shares could be considered
overvalued. The holders of outstanding shares of Media Stock would not have an
opportunity to participate in a similar transaction. See "Description of U S
WEST Capital Stock -- Communications Stock and Media Stock -- Future Inter-Group
Interest."
LIMITATIONS ON POTENTIAL UNSOLICITED ACQUISITIONS. If the Communications
Group or Media Group were stand-alone corporations, any person interested in
acquiring either of such corporations without negotiation with U S WEST's
management could seek control of the outstanding stock of such corporation by
means of a tender offer or proxy contest. A person interested in acquiring
either the Communications Group or the Media Group without negotiation with U S
WEST's management would still be required to seek control of the voting power
represented by all of the outstanding capital stock of U S WEST entitled to vote
on such acquisition, including the class of U S WEST Common Stock related to the
other Group. See "-- Limited Separate Stockholder Rights; No Additional Rights
with Respect to the Groups; Effects on Voting Power" and "Description of U S
WEST Capital Stock -- Communications Stock and Media Stock -- Voting Rights."
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS ATTRIBUTED TO A
GROUP. The terms of the U S WEST Common Stock provide that upon a Disposition
of all or substantially all of the properties and assets attributed to any
Group, U S WEST would be required, subject to certain exceptions, either to pay
a special dividend on or redeem the outstanding shares of the class of U S WEST
Common Stock relating to such Group or convert such U S WEST Common Stock into
shares of the class of U S WEST Common Stock relating to the other Group. If the
Group subject to such Disposition were a separate independent company and its
shares were acquired by another person, certain costs of such Disposition,
including corporate level taxes, might not be payable in connection with such an
acquisition. As a result, the consideration that would be received by
stockholders of such separate independent company in connection with such an
acquisition might be greater than the Fair Value of the Net Proceeds that would
be received by holders of the class of U S WEST Common Stock relating to such
Group if the assets attributed to such Group were sold. In addition, no
assurance can be given that the Net Proceeds per share of the class of U S WEST
Common Stock relating to such Group to be received in connection with a
Disposition of all of the assets attributed to such Group will be equal to or
more than the market value per share of such U S WEST Common Stock prior to or
after announcement of such Disposition. See "-- No Assurance as to Market Price"
and "Description of U S WEST Capital Stock -- Communications Stock and Media
Stock -- Conversion and Redemption -- Mandatory Dividend, Redemption or
Conversion of U S WEST Common Stock."
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<PAGE>
NO ASSURANCE AS TO MARKET PRICE. The market price of the Media Stock is
determined in the trading markets and could be influenced by many factors,
including the consolidated results of U S WEST, as well as the performance of
the Media Group, investors' expectations for U S WEST as a whole and the Media
Group, the regulatory environment, trading volume, share issuances and
repurchases and general economic and market conditions. The Media Stock has been
publicly traded since November 1, 1995. See "Market Price and Dividend Data."
There can be no assurance that investors have assigned or will assign a value to
the Media Stock based on the reported financial results and prospects of the
Media Group or the dividend policies established by the U S WEST Board with
respect to the Media Group. Accordingly, financial effects of the Communications
Group that affect U S WEST's consolidated results of operations or financial
condition could affect the market price of shares of the Media Stock. In
addition, U S WEST cannot predict the impact on its market price of certain
terms of the Media Stock, such as the redemption and conversion rights
applicable upon the disposition of substantially all the assets attributed to
the Media Group, the ability of U S WEST to convert shares of one class of U S
WEST Common Stock into shares of the other class of U S WEST Common Stock or the
discretion of the U S WEST Board to make various determinations.
RISK FACTORS RELATED TO THE MERGER
VALUE OF MERGER CONSIDERATION. The number of shares of Media Stock to be
issued in the Merger will be based upon a fixed Calculation Price of $21.00 per
share. Therefore, the number of shares of Media Stock issued in the Merger will
not depend upon the market price of the Media Stock. However, because the market
price of the Media Stock is subject to fluctuation, the value at the Effective
Time of the Merger consideration to be received by holders of Continental Common
Stock (other than holders of Class B Common Stock who make a Cash Election which
is not subject to proration) will depend upon the market price of the Media
Stock at such time. If the market price of the Media Stock at the Effective Time
is less than the Calculation Price (which was the case as of the date of this
Proxy Statement), the value of the Merger consideration to be received by
holders of Class A Common Stock and holders of Class B Common Stock making a
Stock Election that is not subject to proration will be less than the value of
the Merger consideration to be received by holders of Class B Common Stock
making a Cash Election that is not subject to proration or a Standard Election.
Conversely, if the market price of the Media Stock at the Effective Time is
greater than the Calculation Price, the value of the Merger consideration to be
received by holders of Class A Common Stock and holders of Class B Common Stock
making a Stock Election that is not subject to proration will be greater than
the value of the Merger consideration to be received by holders of Class B
Common Stock making a Cash Election that is not subject to proration or a
Standard Election. In addition, there can be no assurance that the Series D
Preferred Stock will trade at a price equal to its liquidation value of $50 per
share. See "-- No Assurance as to Market Value of Series D Preferred Stock."
Accordingly, there can be no assurance as to the fair market value at the
Effective Time of the consideration to be received by holders of Continental
Common Stock in the Merger. For the historical and current market prices of the
Media Stock, see "Market Prices and Dividend Data."
NO ASSURANCE AS TO MARKET VALUE OF SERIES D PREFERRED STOCK. Continental
and U S WEST negotiated the terms of the Series D Preferred Stock so that such
shares could be expected to trade at their liquidation value of $50 per share
based on conditions existing at the time the Merger Agreement was executed on
February 27, 1996. The value of the Series D Preferred Stock as of the Effective
Time will depend upon, among other factors, the market value of the underlying
Media Stock, the dividend and conversion rates of the Series D Preferred Stock
and the market conditions at such time for other comparable publicly traded
convertible securities. The rate at which the Series D Preferred Stock will be
convertible into Media Stock will be determined based on the Calculation Price
of $21. If the market value of the Media Stock at the Effective Time is equal to
the Calculation Price of $21, the Series D Preferred Stock could be expected to
trade at approximately its liquidation value of $50 per share, based on the
current market for convertible securities. If, however, the market price of the
Media Stock at the Effective Time is less than the Calculation Price, the
premium of the conversion price of the Series D Preferred Stock over the market
price of the Media Stock at the Effective Time could be greater than the
conversion premiums for other comparable publicly traded convertible securities.
In such event, the Series D Preferred Stock could trade at a per-share price
below its liquidation value of $50 per share. Conversely, if the market price of
the Media Stock at the
27
<PAGE>
Effective Time is greater than the Calculation Price, the premium of the
conversion price of the Series D Preferred Stock over the market price of the
Media Stock at the Effective Time could be less than the conversion premiums for
other comparable publicly traded convertible securities. In such event, the
Series D Preferred Stock could trade at a per-share price above its liquidation
value of $50 per share.
Lehman, U S WEST's financial advisor, has, solely for illustrative purposes,
estimated, based upon the October 8 Media Stock Price, a dividend rate of 4.50%
and a conversion premium of 25% over the Calculation Price and assuming the
existence of a liquid market for the Series D Preferred Stock, that the value of
the Series D Preferred Stock would be $47.00 per share. Based on the same
factors, and subject to the disclosures, conditions and qualifications set forth
in this risk factor and under "The Merger -- Opinions Considered by the
Continental Board -- Lazard," Lazard, Continental's financial advisor, has,
solely for illustrative purposes, estimated that the value of the Series D
Preferred Stock would be $46.375 per share. For the purpose of illustrating the
value that holders of Continental Common Stock might have received if the Merger
had been consummated on October 8, 1996, the Assumed October 8 Preferred Stock
Price is assumed to be $46.375. There can be no assurance, however, that the
actual market value of the Series D Preferred Stock will not materially differ
from the Assumed October 8 Preferred Stock Price. See "The Merger Agreement --
Conversion of Continental Common Stock -- Form and Value of Consideration to be
Received in the Merger."
UNCERTAINTY AS TO TRADING MARKET AND LIQUIDITY FOR SERIES D PREFERRED
STOCK. Although it is a condition to Continental's obligation to consummate the
Merger that the shares of Series D Preferred Stock issuable in the Merger shall
have been approved for listing on the NYSE (or such other stock exchange or
trading facility as Continental may request if U S WEST is unable to cause such
shares to be approved for listing on the NYSE), there can be no assurance that
an active market for the Series D Preferred Stock will develop or be sustained
and, accordingly, that there will be liquidity for the Series D Preferred Stock.
Even though the shares of Series D Preferred Stock issuable in the Merger may be
listed on the NYSE or another stock exchange, such shares may be relatively
illiquid. This illiquidity may adversely affect the market price of such shares
prevailing from time to time and subject the market price of such shares to
significant fluctuations due to relatively small trading volumes.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS. In considering the
recommendation of the Continental Board with respect to the Merger, stockholders
of Continental should be aware that certain members of Continental's management
and the Continental Board have certain interests in the Merger that may present
them with actual or potential conflicts of interest due to their participation
in the Continental Restricted Stock Purchase Program. In connection with the
Merger, U S WEST will assume Continental's obligations under the Continental
Restricted Stock Purchase Program and the Restricted Stock Purchase Agreements
(each an "RSPA") and related Tax Liability Financing Agreements (each a "Tax
Liability Financing Agreement") entered into between Continental and certain of
its key employees pursuant thereto. Continental employees holding Restricted
Continental Common Stock purchased pursuant to an RSPA cannot elect to receive
cash or Series D Preferred Stock in the Merger with respect to such Restricted
Continental Common Stock and will receive only Media Stock in exchange for their
shares of Restricted Continental Common Stock. After the Merger, the provisions
of the RSPA, including the vesting provisions, will apply to the Media Stock
received in the Merger for such shares of Restricted Continental Common Stock.
Pursuant to the Continental Restricted Stock Purchase Program, Continental
has sold to key employees shares of Restricted Continental Common Stock for a
purchase price of $.01 per share. Each employee entered into an RSPA containing
restrictions on transfer, vesting provisions and a non-competition covenant,
among other provisions. All of the RSPAs provide for Continental's repurchase,
for the amount that the employee has paid, of the unvested stock of any employee
whose employment terminates for any reason. Vesting occurs over time according
to a schedule designated in each RSPA.
Pursuant to the Merger Agreement, Continental is permitted to issue up to an
additional 350,000 shares of Restricted Continental Common Stock pursuant to the
Continental Restricted Stock Purchase Program after February 27, 1996 as an
incentive to employees to remain with Continental following the Merger. As of
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<PAGE>
September 30, 1996, Continental has issued 330,725 shares of Restricted
Continental Common Stock to key employees and amended all outstanding RSPAs
pursuant to which Restricted Continental Common Stock was outstanding. The RSPAs
pursuant to which shares of Restricted Continental Common Stock have been
granted since February 27, 1996 and the amendments to outstanding RSPAs provide
that if the Merger is consummated, vesting is accelerated upon the first to
occur of the following events after the Effective Time: (i) death or disability;
(ii) in the case of an employee based in the existing corporate headquarters of
Continental, termination by reason of an involuntary relocation to a place of
employment that is more than 25 miles from the existing headquarters, or
relocation of the corporate headquarters; or (iii) termination of employment
within twenty-four months of the Effective Time, other than in connection with
the sale, swap or other disposition of a system or other business unit in which
the employee is employed, if such termination is by reason of: (a) a diminution
in the employee's compensation, including a material adverse change in employee
benefits; (b) the assignment to the employee of duties and responsibilities
which are materially less than the employee's duties and responsibilities as of
the Effective Time; or (c) an involuntary termination of employment other than a
"Termination for Cause." "Termination for Cause" means termination because of
the employee's (A) refusal or failure (other than for reasons of illness,
incapacity due to physical or mental illness or physical injury) to perform, or
persistent and material deficiencies in performing, his or her duties, provided
such duties are substantially similar to such person's duties prior to the
Merger; (B) misappropriation of any funds or property of Continental; (C)
conduct which could reasonably result in the employee's conviction of a felony;
or (D) conduct which could reasonably result in termination of the employee's
employment due to a violation of published internal policies.
In connection with the execution of an RSPA, each employee has the option of
entering into a Tax Liability Financing Agreement, pursuant to which Continental
agrees to lend the employee an amount up to the employee's total additional
Federal, state and local income taxes incurred in connection with the grant of
Restricted Continental Common Stock. The Merger Agreement permits Continental to
forgive up to $35.7 million in principal amount of outstanding loans made
pursuant to Tax Liability Financing Agreements. As of September 30, 1996, loans
outstanding pursuant to Tax Liability Financing Agreements were approximately
$32.5 million in the aggregate. The Tax Liability Financing Agreements executed
in connection with RSPAs entered into since February 27, 1996 provide, and the
outstanding Tax Liability Financing Agreements under existing RSPAs were amended
to provide, that, conditioned upon the consummation of the Merger and continued
employment through January 1, 1999, the entire principal amount of the
outstanding loans will be forgiven on January 2, 2002. If an employee's
employment terminates before January 2, 1999 and after January 1, 1998,
two-thirds of the principal amount will be forgiven on January 2, 2002. If an
employee's employment terminates before January 2, 1998 and after January 1,
1997, one-third of the principal amount will be forgiven on January 2, 2002. In
addition, if the Merger is consummated, the loan will be forgiven in full upon
the occurrence of the same events that would result in acceleration of vesting
under the RSPAs described above. A loan must be repaid in full if an employee
violates the non-competition agreement in the RSPA or his or her employment is
terminated under certain circumstances. The maturity dates of the loans were all
extended to January 2, 2002.
In addition, if, following the Effective Time, the termination of any former
Continental employee's employment with U S WEST results in the acceleration of
the vesting of an award under any RSPA or the forgiveness of a loan related to
an RSPA pursuant to a Tax Liability Financing Agreement (other than as a result
of termination of employment by reason of the employee's death or disability)
and as a result of such acceleration, either (i) the employee becomes subject to
an excise tax (the "Excise Tax") under Section 4999 of the Code that such
employee would not have been subject to without the occurrence of such
acceleration or (ii) the amount of the Excise Tax imposed on such employee is
greater than the amount of the Excise Tax that would have been imposed without
the occurrence of such acceleration, U S WEST has, under the Merger Agreement,
agreed to pay an amount to the employee to reimburse the employee for the Excise
Tax or the amount of the additional Excise Tax, as the case may be, and for any
Federal, state or local income tax or any additional excise tax under Section
4999 of the Code payable because of the reimbursement payments made by U S WEST.
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All of Continental's executive officers entered into such amendments to
their outstanding RSPAs and the related Tax Liability Financing Agreements. In
addition, Mr. Cooper and Ms. Hawthorne purchased additional shares of restricted
stock under the February 28, 1996 RSPA and will receive loans under the related
Tax Liability Financing Agreements.
THE SPECIAL MEETING
MATTERS TO BE DISCUSSED AT THE SPECIAL MEETING
At the Special Meeting or any adjournments or postponements thereof, holders
of shares of Continental Voting Stock will be asked to approve and adopt the
following proposals: (i) the approval and adoption of the Merger Agreement; (ii)
the approval and adoption of the Charter Amendments; (iii) the election of four
Class A Directors; and (iv) the ratification of the appointment by the
Continental Board of Deloitte & Touche LLP as Continental's independent public
accountants for the current fiscal year ending December 31, 1996.
THE CONTINENTAL BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE
CHARTER AMENDMENTS AND EACH OF THE OTHER PROPOSALS, BELIEVES THAT APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT, THE CHARTER AMENDMENTS AND EACH OF THE OTHER
PROPOSALS IS IN THE BEST INTERESTS OF CONTINENTAL AND ITS STOCKHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT CONTINENTAL'S STOCKHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT, THE CHARTER AMENDMENTS AND EACH OF THE OTHER
PROPOSALS.
RECORD DATES; STOCK ENTITLED TO VOTE; QUORUM
The Record Date for the determination of shares of those holders of
Continental Voting Stock entitled to notice of, and to vote at, the Special
Meeting is September 20, 1996. Only holders of record of shares of Continental
Voting Stock at the close of business on the Record Date will be entitled to
notice of, and to vote at, the Special Meeting or any adjournments or
postponements thereof. As of the Record Date, there were outstanding 38,994,507
shares of Class A Common Stock held by 630 holders of record, 109,424,371 shares
of Class B Common Stock held by 351 holders of record, and 1,142,858 shares of
Continental Preferred Stock, held by six holders of record. The holders of Class
A Common Stock are entitled to one vote per share, and the holders of Class B
Common Stock are entitled to 10 votes per share. The holders of the Continental
Preferred Stock currently vote as a single class, together with the holders of
Class B Common Stock, as if they had converted their shares into Class B Common
Stock. Each share of Continental Preferred Stock is convertible into 25 shares
of Class B Common Stock. Since each share of Class B Common Stock is entitled to
10 votes, each share of Continental Preferred Stock is entitled to 250 votes.
The presence in person or by proxy of shares representing a majority of
votes (709,476,360 votes) entitled to be cast by holders of Continental Voting
Stock issued and outstanding and entitled to vote as of the Record Date is
required to constitute a quorum for the transaction of business at any meeting
of stockholders. Abstentions and broker non-votes are included in the
determination of the number of shares of Continental Voting Stock present and
voting.
REQUIRED VOTES
The affirmative vote of a majority of the votes (709,476,360 votes) of
holders of the outstanding shares of the Continental Voting Stock, voting
together as a class, is required for approval and adoption of the Merger
Agreement. The affirmative vote of (i) 66 2/3% of the votes (945,968,478 votes)
of holders of the outstanding shares of the Continental Voting Stock, voting
together as a class, (ii) a majority of the votes of holders of the outstanding
shares of Class A Common Stock, voting as a separate class, and (iii) a majority
of the votes of holders of the outstanding shares of Class B Common Stock and
Continental Preferred Stock, voting together as a separate class, is required
for approval and adoption of the Consideration Charter Amendment. The
affirmative vote of (i) 66 2/3% of the votes of holders of the outstanding
shares of Continental Voting Stock, voting together as a class, and (ii) a
majority of the votes of holders of the outstanding shares of Class B Common
Stock and Continental Preferred Stock, voting together as a separate class, is
required for approval and adoption of the Conversion Charter Amendment. The
affirmative vote of
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a plurality of the votes cast by holders of Continental Voting Stock at the
Special Meeting, voting together as a class, is required to elect Directors. The
affirmative vote of a majority of the votes cast by holders of Continental
Voting Stock at the Special Meeting, voting together as a class, is required to
ratify the appointment of Continental's independent public accountants.
Abstentions and broker non-votes are considered present for purposes of
determining a quorum. Abstentions and broker non-votes do not affect the
election of the Directors or ratification of accountants. Abstentions and broker
non-votes will have the same effect as a vote against the Merger Agreement and
the Charter Amendments.
In connection with the execution of the Merger Agreement, U S WEST and
certain stockholders of Continental entitled to exercise voting power with
respect to an aggregate of 83,807,275 shares of Class B Common Stock (treating
the Continental Preferred Stock as if it were converted into Class B Common
Stock) and 462,249 shares of Class A Common Stock, which in the aggregate
represent approximately 59.1% of the voting power of the Continental Voting
Stock, entered into the Stockholders' Agreement, pursuant to which such
Continental stockholders agreed, among other things, to vote all of their shares
of Continental Voting Stock (and granted to U S WEST their proxies to vote all
such shares) (i) in favor of the adoption of the Merger Agreement, (ii) in favor
of the adoption of the Consideration Charter Amendment, (iii) against any action
or agreement that would result in a breach in any material respect of any
covenant, representation or warranty or any other obligation of Continental
under the Merger Agreement, and (iv) against any proposal for any merger,
consolidation, recapitalization, sale of assets, business combination, or other
material change in Continental's corporate structure or business that is
inconsistent with or that would, or is reasonably likely to, directly or
indirectly, impede, interfere with or attempt to discourage the Merger or any
other transactions contemplated by the Merger Agreement.
Each Proposal shall be voted upon separately by the Continental stockholders
entitled to vote at the Special Meeting. Consummation of the Merger is
conditioned upon adoption of both the Merger Agreement and the Consideration
Charter Amendment by the stockholders of Continental. In the event the
Consideration Charter Amendment is not adopted by the requisite vote of
Continental's stockholders at the Special Meeting, Continental is required to
call another meeting of its stockholders to seek such adoption. See "The Merger
Agreement -- Certain Covenants -- Meetings of Continental Stockholders." In such
event, certain holders of Class B Common Stock that are parties to the
Stockholders' Agreement have agreed to convert their shares of Class B Common
Stock into Class A Common Stock and vote such shares of Class A Common Stock in
favor of adoption of the Consideration Charter Amendment. See "Ancillary
Agreements -- Stockholders' Agreement." If the Conversion Charter Amendment is
adopted by the requisite vote of Continental's stockholders at the Special
Meeting but the Consideration Charter Amendment is not so adopted at the Special
Meeting, the Conversion Charter Amendment will not be effected until the
Consideration Charter Amendment is adopted and effected.
SOLICITATION AND VOTING OF PROXIES
Stockholders of record on the Record Date are entitled to cast their votes,
in person or by properly executed proxy, at the Special Meeting. All shares
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting and not properly revoked will be voted at the
Special Meeting in accordance with the instructions indicated in such proxies.
If no instructions are indicated, such proxies will be voted FOR approval of the
Proposals. The Continental Board does not know of any matters, other than the
matters described in the Notice of Special Meeting attached to this Proxy
Statement, that will come before the Special Meeting.
If a quorum is not present at the time the Special Meeting is convened, or
if for any other reason Continental believes that additional time should be
allowed for the solicitation of proxies or for the satisfaction of conditions to
the Merger or the transactions contemplated thereby, Continental may adjourn the
Special Meeting with a vote of the holders of a majority of the voting power
represented by the Continental Voting Stock present at such meeting. If
Continental proposes to adjourn the Special Meeting, the persons named in the
enclosed proxy card will vote all shares for which they have voting authority in
favor of such adjournment.
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Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted in the following manner. Proxies may be
revoked by (i) filing with the Secretary of Continental, at or before the
Special Meeting, a written notice of revocation bearing a date later than the
date of the proxy, (ii) duly executing a subsequent proxy relating to the same
shares and delivering it to the Secretary of Continental at or before the
Special Meeting or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
revocation of a proxy). Any written notice revoking a proxy should be sent to
Continental Cablevision, Inc., c/o Sullivan & Worcester LLP, One Post Office
Square, Boston, Massachusetts 02109, Attention: Robert B. Luick, Secretary.
Proxies are being solicited by and on behalf of the Continental Board. All
expenses of this solicitation, including the cost of preparing and mailing this
Proxy Statement (except for printing costs, which will be shared with U S WEST),
will be borne by Continental. In addition to solicitation by use of the mails,
proxies may be solicited by Directors, officers and employees of Continental in
person or by telephone, telegram or other means of communications. Such
Directors, officers and employees will not be additionally compensated, but may
be reimbursed for out-of-pocket expenses in connection with such solicitation.
Arrangements will be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of Continental
Voting Stock held of record by such persons, and Continental may reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith.
OWNERSHIP OF CONTINENTAL SECURITIES
The following table provides information as of September 20, 1996, with
respect to the shares of Continental Common Stock and the Continental Preferred
Stock beneficially owned by (i) each person known by Continental to own more
than 5% of the outstanding Continental Common Stock or Continental Preferred
Stock, (ii) each Director of Continental, (iii) each executive officer required
to be identified in the Summary Compensation Table of Continental and (iv) all
Directors and executive officers of Continental as a group. The number of shares
beneficially owned by each Director or executive officer is determined according
to the rules of the Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual or entity
has sole or shared voting power or investment power and also any shares which
the individual or entity has the right to acquire within 60 days of September
20, 1996 through the exercise of an option, conversion feature or similar right.
Except as noted below, each holder has sole voting and investment power with
respect to all shares of Continental Common Stock or Continental Preferred Stock
listed as owned by such person or entity.
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<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES OF PERCENTAGE OF
SHARES OF SERIES A OUTSTANDING
COMMON PERCENTAGE OF PREFERRED SHARES OF
STOCK (1) OUTSTANDING STOCK (2) SERIES A
BENEFICIALLY SHARES OF BENEFICIALLY PREFERRED AGGREGATE
NAME OWNED COMMON STOCK OWNED STOCK VOTING POWER
- ----------------------------------------------- ------------ -------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Amos B. Hostetter, Jr. (3)..................... 45,207,362 30.46% -- -- 31.86%
Timothy P. Neher (4)........................... 1,673,662 1.13 -- -- 1.18
William T. Schleyer............................ 766,200 * -- -- *
Roy F. Coppedge III (5)........................ 7,514,075 5.06 -- -- 5.00
Stephen Hamblett............................... 185,130 * -- -- *
Jonathan H. Kagan (6).......................... 28,571,450 16.14 1,142,858 100.00% 20.14
Robert B. Luick (7)............................ 229,575 * -- -- *
Henry F. McCance (8)........................... 258,125 * -- -- *
Trygve E. Myhren............................... 36,390 * -- -- *
Lester Pollack (6)............................. 28,571,450 16.14 1,142,858 100.00 20.14
Michael J. Ritter.............................. 589,150 * -- -- *
Vincent J. Ryan (9)............................ 5,719,825 3.85 -- -- 4.03
Jeffrey T. DeLorme............................. 391,525 * -- -- *
Ronald H. Cooper............................... 209,275 * -- -- *
Nancy Hawthorne................................ 239,325 * -- -- *
Directors and Executive Officers as a Group (15
persons) (6).................................. 91,591,069 51.75 1,142,858 100.00 64.11
H. Irving Grousbeck (10)....................... 10,033,000 6.76 -- -- 7.07
Boston Ventures Company Limited Partnership III
Boston Ventures Limited Partnership III
(11)........................................ 3,034,525 2.04 -- -- 2.14
Boston Ventures Limited Partnership IIIA
(11)........................................ 799,825 * -- -- *
Boston Ventures Company Limited Partnership IV
Boston Ventures Limited Partnership IV
(11)........................................ 2,381,725 1.60 -- -- 1.39
Boston Ventures Limited Partnership IVA
(11)........................................ 1,298,000 * *
----- ----------- ------ -----
Total as a group........................... 7,514,075 5.06 -- -- 5.00
LFCP Corp. and Corporate Advisors, L.P. (12)
Corporate Partners, L.P. (12)................ 18,223,825 10.94 728,953 63.78 12.84
Mellon Bank, N.A. as Trustee for First Plaza
Group Trust (12)(13)........................ 4,285,725 2.81 171,429 15.00 3.02
The State Board of Administration of Florida
(12)........................................ 1,902,100 1.27 76,084 6.66 1.34
Vencap Holdings (1992) Pte Ltd (12).......... 1,785,700 1.19 71,428 6.25 1.26
Corporate Offshore Partners, L.P. (12)......... 1,302,675 * 52,107 4.56 *
ContCable Co-Investors, L.P. (12).............. 1,071,425 * 42,857 3.75 *
------------ ----- ----------- ------ -----
Total as a group........................... 28,571,450 16.14%(14) 1,142,858 100.00% 20.14%
</TABLE>
- ------------------------------
* Less than 1% of class.
(1) The Continental Common Stock includes Class A Common Stock, which has one
vote per share, and Class B Common Stock, which has ten votes per share. As
the number of shares of Class A Common Stock currently represents 26.27% of
the Continental
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Common Stock and approximately 3.44% of the voting power of the Continental
Common Stock, the Class A Common Stock has not been shown as a separate
class of stock, but rather Continental Common Stock has been treated as one
class. Every greater than 5% beneficial owner of Class B Common Stock would
be a greater than 5% beneficial owner of Class A Common Stock.
(2) Under the rules for determining beneficial ownership promulgated by the
Commission, each holder of Continental Preferred Stock is deemed to own
currently that number of shares of Continental Common Stock into which the
Continental Preferred Stock is convertible. Each share of the Continental
Preferred Stock is presently convertible into Continental Common Stock on a
25-for-one basis. The table therefore shows the number of shares of
Continental Preferred Stock owned by each holder in the column for the
Continental Preferred Stock and includes that number of shares in the column
for Continental Common Stock into which the Continental Preferred Stock
would be convertible.
(3) Mr. Hostetter has shared voting and investment power as to 42,843,550
shares of Continental Common Stock held by the Amos B. Hostetter, Jr. 1989
Trust of which Messrs. Hostetter and Neher are the sole trustees. Mr.
Hostetter has shared voting and investment power as to a further 446,400
shares of Continental Common Stock; as to 223,200 of such shares, he
disclaims beneficial ownership. Additionally, Mr. Hostetter disclaims
beneficial ownership of 550,000 shares of Continental Common Stock with
respect to which his wife acts as a trustee with Mr. Neher and 49,075 shares
of Continental Common Stock held by him as custodian for five minor
children. The shares listed in the table as being beneficially owned by Mr.
Hostetter include those as to which Mr. Hostetter has shared voting and/or
investment power and those as to which Mr. Hostetter disclaims beneficial
ownership. Mr. Hostetter's address is The Pilot House, Lewis Wharf, Boston,
Massachusetts 02110.
(4) Mr. Neher has shared voting and investment power as to 550,000 shares of
Continental Common Stock with respect to which he acts as a trustee with
Mrs. Hostetter, and as to 42,843,550 shares of Continental Common Stock with
respect to which he acts as a trustee with Mr. Hostetter. Mr. Neher
disclaims beneficial ownership as to such shares, and the table does not
indicate such shares as being beneficially owned by Mr. Neher. See footnote
(3) above. Additionally, Mr. Neher disclaims beneficial ownership as to
165,000 shares with respect to which he acts as trustee and 55,000 shares
held by his wife as custodian for their children, which are included in the
table as being beneficially owned by Mr. Neher.
(5) All the shares listed in the table as beneficially owned by Mr. Coppedge
are held by the four limited partnerships described in footnote (11) below.
Mr. Coppedge, a partner of each of the general partners of the limited
partnerships and a Director of Boston Ventures Management, Inc., which
manages the investments of the four limited partnerships, has shared voting
and investment power as to these shares. Mr. Coppedge is entitled to
beneficial ownership of an indeterminate number of these shares and
disclaims beneficial ownership as to the balance. Mr. Coppedge's address is
c/o Boston Ventures Management, Inc., 21 Custom House Street, Boston,
Massachusetts 02110.
(6) All shares listed in the table as being beneficially owned by Mr. Pollack
and Mr. Kagan are beneficially owned by Corporate Advisors L.P. ("Corporate
Advisors"). See footnote (12) below. Mr. Pollack may be deemed to have
shared voting and investment power over such shares as the Chairman and
Treasurer and as a Director of LFCP Corp., and Mr. Kagan may be deemed to
have shared voting and investment power over such shares as the President of
LFCP Corp. LFCP Corp. is the sole general partner of Corporate Advisors and
a wholly owned subsidiary of Lazard. Mr. Pollack and Mr. Kagan are both
Managing Directors of Lazard. Mr. Pollack's and Mr. Kagan's address is c/o
Corporate Advisors, L.P., 30 Rockefeller Plaza, New York, New York 10020.
Mr. Pollack and Mr. Kagan disclaim beneficial ownership of all such shares.
(7) The shares listed in the table as being beneficially owned by Mr. Luick
include 73,800 shares owned by Mr. Luick's daughter and 37,500 shares with
respect to which she acts as trustee for Mr. Luick's grandchildren. Mr.
Luick disclaims beneficial ownership of these shares.
(8) The shares listed in the table as being beneficially owned by Mr. McCance
include 225,000 shares held by Greylock Limited Partnership, of which Mr.
McCance is a general partner. Mr. McCance has shared voting and investment
power as to these shares, is entitled to beneficial ownership of an
indeterminate number of these shares and disclaims beneficial ownership as
to the balance. Of the remaining shares, Mr. McCance disclaims beneficial
ownership as to 12,500 shares with respect to which his wife acts as trustee
for his daughter and 12,500 shares held by his daughter.
(9) Mr. Ryan holds 131,125 shares of Continental Common Stock. The remaining
shares of Continental Common Stock listed in the table as being beneficially
owned by Mr. Ryan are held by Schooner Capital Corporation (and its
subsidiaries), over which Mr. Ryan has shared voting and investment power as
the Chairman and principal stockholder.
(10) All of these shares are subject to the Stock Liquidation Agreement pursuant
to which Mr. Grousbeck must sell such shares to Continental in either 1998
or 1999. See "Description of Continental -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- 1998-1999 Share Repurchase Program." Mr. Grousbeck's
address is Room 382, Graduate School of Business, Stanford University,
Stanford, California 94305.
(11) These four limited partnerships may be deemed to be a "group" of persons
acting together for the purpose of acquiring, holding, voting or disposing
of shares of Continental Common Stock. Boston Ventures Company Limited
Partnership III ("BV Co. III"), as the sole general partner of each of
Boston Ventures Limited Partnership III and Boston Ventures Limited
Partnership IIIA, is deemed to be the beneficial owner of the shares held by
such limited partnerships and to have shared voting and investment power
with respect to such shares. Boston Ventures Company Limited Partnership IV
("BV Co. IV"), as the sole general partner of each of Boston Ventures
Limited Partnership IV and Boston Ventures Limited Partnership IVA, is
deemed to be the beneficial owner of
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<PAGE>
the shares held by such limited partnerships and to have shared voting and
investment power with respect to such shares. BV Co. III disclaims
beneficial ownership of the shares beneficially owned by BV Co. IV; and BV
Co. IV disclaims beneficial ownership of the shares beneficially owned by BV
Co. III. Mr. Coppedge may be deemed to beneficially own all such shares. See
footnote (5).
(12) These stockholders may be deemed to be a "group" of persons acting together
for the purpose of acquiring, holding, voting or disposing of shares of
Continental Preferred Stock. Corporate Advisors, as the general partner of
Corporate Partners, L.P. ("Corporate Partners") and Corporate Offshore
Partners, L.P. ("Corporate Offshore Partners"), has sole voting and
investment power as to the shares held by them. Corporate Advisors serves as
investment manager over a certain investment management account for The
State Board of Administration of Florida ("SBA") and has sole voting and
dispositive power with respect to the shares of Continental Preferred Stock
held by SBA. Pursuant to the Co-Investment Agreement dated as of April 27,
1992 (the "Co-Investment Agreement") by and among Corporate Advisors,
Corporate Partners, Corporate Offshore Partners, First Plaza Group Trust
("FPGT"), Vencap Holdings (1992) Pte. Ltd. ("Vencap") and ContCable
Co-Investors, L.P. ("ContCable"), Corporate Advisors has sole voting and
dispositive power with respect to the shares held by Vencap and ContCable.
The address of Corporate Advisors, Corporate Partners, Corporate Offshore
Partners, FPGT, SBA, ContCable and Vencap is: c/o Corporate Advisors, L.P.,
30 Rockefeller Plaza, New York, New York 10020. See footnote (6) above.
(13) Mellon Bank, N.A. acts as the trustee for FPGT, a trust under and for the
benefit of certain employee benefit plans of General Motors Corporation and
its subsidiaries. The shares listed in the table may be deemed to be
beneficially owned by General Motors Investment Management Corporation
("GMIMC"), a wholly owned subsidiary of General Motors Corporation. GMIMC's
principal business is providing investment advice and investment management
services with respect to the assets of certain employee benefit plans of
General Motors Corporation and its subsidiaries and with respect to the
assets of certain direct and indirect subsidiaries of General Motors
Corporation and associated entities. GMIMC is serving as FPGT's investment
manager with respect to these shares and, in that capacity, it has the sole
power to direct Mellon Bank, N.A. as to the voting and disposition of these
shares. Because of its limited role as trustee, Mellon Bank, N.A. disclaims
beneficial ownership of these shares. Pursuant to the Co-Investment
Agreement, FPGT is obligated, subject to its fiduciary duties under the
Employee Retirement Income Security Act of 1974, as amended, (i) to transfer
shares held by it only in a transaction in which the other parties to the
Co-Investment Agreement participate on a pro rata basis and (ii) to exercise
all voting and other rights with respect to such shares in the same manner
as is done by Corporate Advisors on behalf of Corporate Partners and
Corporate Offshore Partners.
(14) The percentage ownership for the group assumes the conversion of shares of
Continental Preferred Stock into Continental Common Stock by all members of
the group. The percentage ownership for each individual member of the group
assumes conversion by only that stockholder.
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<PAGE>
THE MERGER
GENERAL BACKGROUND OF THE MERGER
The cable television industry has undergone significant changes in the last
several years due to technological advances, expanded service offerings and a
new regulatory structure. The passage in February 1996 of the Telecommunications
Act of 1996 (the "1996 Telecommunications Act") fundamentally altered the
landscape in the telecommunications industry by establishing a pro-competitive,
deregulatory policy framework for both video and telecommunications services. As
a result of technological advances and the reduction of regulatory barriers, the
traditional services provided by cable television operators are expanding beyond
video programming to include enhanced video, high-speed data, telephony and
other telecommunications services. In addition, the telecommunications industry,
including the cable television and telephony industries, has been, and continues
to be, in a period of consolidation characterized by mergers, joint ventures,
acquisitions, cable system exchanges and similar transactions. In order to
capitalize on the demands for new services and to counter increasing competitive
pressures, Continental embarked upon a strategy to deploy technologically
advanced broadband networks capable of delivering these new services and to
expand its nationwide operating scale through strategic acquisitions. As a
result, Continental determined that it would need to broaden its financial
resources in order to access the capital necessary to implement such a strategy.
Accordingly, over the past two years, Continental has considered various ways to
raise capital and position itself to compete effectively against the growing
field of large, well-capitalized companies in the telecommunications industry.
During this period, Continental, among other things, conducted discussions with
various regional Bell operating companies and interexchange carriers regarding
possible investments in, or strategic alliances with, Continental.
PRIOR NEGOTIATIONS WITH U S WEST AND OTHER PARTIES. Commencing in the
spring of 1994, representatives of Continental met with representatives from U S
WEST several times to discuss possible strategic relationships, including a
possible minority investment by U S WEST in Continental pursuant to which U S
WEST would have had the right to call, and Continental would have had the right
to put to U S WEST, the remaining non-U S WEST-owned interest in Continental at
certain future times. After extensive negotiations, which involved the exchange
of financial and other due diligence information, the parties failed to reach
agreement on the proposed investment and considered instead a direct business
combination of Continental with U S WEST. The parties were again unable to reach
agreement on the terms that would govern such a transaction, resulting in the
termination of negotiations in March 1995.
Throughout 1995, Continental weighed alternative transactions designed to
fund its strategy to (i) rebuild and upgrade its systems to create advanced
hybrid fiber-optic and coaxial cable networks that would serve as the
infrastructure for the provision of enhanced video, high-speed data, telephony
and other telecommunications services, and (ii) expand its nationwide operating
scale through acquisitions, including possible strategic alliances with the
various regional Bell operating companies and interexchange carriers, none of
which resulted in a specific proposal. Continental filed a registration
statement in October 1995 for a public offering of up to $345 million in
aggregate amount of Continental Class A Common Stock and placed in December 1995
$600 million in principal amount of its 8.30% Senior Notes Due 2006. During
December 1995, Continental also entered into negotiations with a
telecommunications company as well as several private investors to make an
approximate $1 billion investment in Continental in the form of convertible
preferred stock. See "-- Recommendation of the Continental Board; Continental's
Reasons for the Merger -- Alternative Transactions."
NEGOTIATIONS OF THE MERGER. During December 1995, Continental and U S WEST
again initiated preliminary discussions concerning a possible business
combination. In early January 1996, representatives of Continental's senior
management provided U S WEST with certain updated financial and operating
information of Continental. Over the course of the next two weeks, Timothy P.
Neher, Vice Chairman of Continental, and Pearre A. Williams, Vice President -- U
S WEST Media Group, conducted several meetings in person and engaged in numerous
telephone conversations during which they discussed possible variations by which
a merger of the two companies could be accomplished. During these conversations
and meetings, the discussions focused principally on four issues: (i) the
valuation of Continental, (ii) the valuation of the Media Stock, (iii) the type
of securities that U S WEST would issue in exchange for
36
<PAGE>
Continental Common Stock and (iv) the type of exchange ratio that would be used,
including whether it would be a fixed or floating exchange ratio. No agreement
was reached, and no further discussions took place for an approximate ten-day
period.
During the last week of January 1996, negotiations resumed in which the
parties discussed various alternative combinations of consideration and exchange
ratios, including a proposal pursuant to which (i) the exchange ratio for
determining the number of shares of Media Stock to be issued would not be fixed,
(ii) the Continental Common Stock would be valued at $30.00 per share, (iii) the
Media Stock would be valued based on its average trading price at the time of
the Merger with a price-protection mechanism or "collar" with a mid-point price
of $24.50 per share of Media Stock and (iv) the merger consideration would be
paid in the form of $1 billion in cash, $1 billion in a new, market-rate
convertible preferred stock of U S WEST and the remainder in shares of Media
Stock. A meeting was held on February 2, during which other issues regarding the
integration of the two companies and their management teams were discussed. Amos
Hostetter, Jr., the Chairman of the Board and Chief Executive Officer of
Continental, Richard D. McCormick, the Chairman of the Board, Chief Executive
Officer and President of U S WEST, and Charles M. Lillis, the Executive Vice
President of U S WEST and President and Chief Executive Officer of the Media
Group, were in attendance, in addition to Messrs. Neher and Williams. The
parties determined that discussions relating to the proposed business
combination had advanced to a point where the parties should proceed to
negotiate definitive pricing terms and documentation.
Over the next two weeks, numerous discussions between the parties and their
respective financial advisors transpired regarding the details of the Merger and
each of Continental and U S WEST conducted further due diligence reviews of the
other party. On February 13, Messrs. Hostetter, Neher, McCormick, Lillis and
Williams met and discussed the economic terms and conditions of the Merger.
Later that day Messrs. Neher and Williams further discussed, by telephone, the
proposed structure, terms and conditions of the Merger.
The Continental Board held a regularly scheduled meeting on February 15,
1996 attended by all of the members of the Continental Board, certain members of
Continental senior management and representatives from Sullivan & Worcester LLP
("Sullivan & Worcester"), Continental's legal advisor, at which Messrs.
Hostetter and Neher presented the then-current status of the negotiations with U
S WEST, including a discussion of the structure of the proposed business
combination, the proposed consideration to be paid to each of the holders of
Class A Common Stock and Class B Common Stock, the conditions to closing the
Merger and the termination rights of each of the parties. Messrs. Hostetter and
Neher also discussed the capital raising alternatives that had been pursued by
management in the prior two years, including possible strategic alliances with
other regional Bell operating companies and interexchange carriers, a public
offering of Continental Common Stock and private placements of equity
securities. A special meeting to further discuss and evaluate the proposed
Merger was scheduled for February 26, 1996.
During the week after the February 15th Continental Board meeting,
Continental, U S WEST and their financial and legal representatives negotiated
the definitive terms of the Merger. In the course of negotiating the
documentation for the Merger, Continental and U S WEST were advised by their
respective legal advisors that the Merger could not be consummated without
jeopardizing the tax-free status of the Providence Journal Merger Transactions
unless the former Providence Journal stockholders who received Class A Common
Stock in the Providence Journal Merger were precluded from receiving cash
consideration in the Merger. The Providence Journal Company, the successor to
Providence Journal Company in the spin-off that preceded the Providence Journal
Merger, also informed Continental that it would withhold its consent to the
Merger, which was a prerequisite to Continental's entering into a merger
agreement with U S WEST pursuant to the terms of the merger agreement for the
Providence Journal Merger, unless the tax-free status of the Providence Journal
Merger Transactions was safeguarded by ensuring that cash consideration was not
paid in the Merger to the holders of Class A Common Stock. As a result,
Continental and U S WEST agreed that only holders of Class B Common Stock would
receive cash in the Merger. Continental and U S WEST also agreed that the
Consideration Charter Amendment would be a condition to the consummation of the
Merger in order to ensure that holders of Class A Common Stock could receive
consideration different from holders of Class B Common Stock. During this
period, U S WEST also proposed a stockholders' agreement
37
<PAGE>
pursuant to which certain significant stockholders of Continental would
contractually agree, among other things, to vote in favor of the Merger. Messrs.
Hostetter and Neher agreed to enter such stockholders' agreement and contacted
representatives of Corporate Advisors, L.P., Boston Ventures Management, Inc.
and Schooner Capital Corporation, each of which is a substantial stockholder of
Continental with a representative on the Continental Board, regarding their
willingness to enter into such a stockholders' agreement.
U S WEST also requested that, because the consummation of the Merger would
be contingent on the approval of the Consideration Charter Amendment by the
holders of the Class A Common Stock, Mr. Hostetter contractually agree to
convert a sufficient number of his shares of Class B Common Stock into Class A
Common Stock to ensure stockholder approval of the Consideration Charter
Amendment at a subsequent meeting of the Continental stockholders in the event
that current holders of Class A Common Stock failed to approve the Consideration
Charter Amendment at the initial meeting of the Continental stockholders called
to approve the Merger and the Consideration Charter Amendment. Mr. Hostetter
agreed to this undertaking, among other provisions in the Stockholders'
Agreement, that would be binding upon him and not the other parties to the
agreement.
On February 21 and 22, 1996, Messrs. Neher and Williams had final meetings
to resolve remaining open business issues that arose during the preparation and
negotiation of final documentation.
FEBRUARY 26 AND 27, 1996 CONTINENTAL BOARD MEETINGS. On February 26, 1996,
the entire Continental Board met again to consider the proposed merger agreement
and other ancillary agreements and the transactions contemplated thereby,
including the proposed consideration to be paid to Continental stockholders. Mr.
Hostetter and other members of Continental management, representatives of
Sullivan & Worcester, Chadbourne & Parke LLP, special counsel to Continental,
Lazard, Continental's investment banker and financial advisor, and Allen &
Company, retained by Continental solely to evaluate the fairness of the
consideration to be paid to the holders of the Class A Common Stock, made
presentations to the Continental Board and discussed with the Continental Board
their views and analyses of various aspects of the proposed transactions. The
Continental Board reviewed and discussed, among other things, (i) the background
of the proposed transactions; (ii) Continental's strategic alternatives; (iii)
financial and valuation analyses of the transactions; (iv) the terms of the
proposed merger agreement, the stockholders' agreement, and the Series D
Preferred Stock; (v) regulatory and tax aspects of the Merger; (vi) the proposal
that holders of Class A Common Stock be precluded from receiving cash
consideration in the Merger in order to protect the tax-free nature of the
Providence Journal Merger Transactions and (vii) other matters described below
under "-- Recommendation of the Continental Board; Continental's Reasons for the
Merger." Lazard rendered its oral opinion (subsequently confirmed in writing)
that, based upon the matters presented to the Continental Board and as set forth
in its opinion, as of such date, the consideration to be received by the
stockholders of Continental pursuant to the Merger was fair to the stockholders
of Continental from a financial point of view. Allen & Company also rendered its
oral opinion (subsequently confirmed in writing) that, based upon the matters
presented to the Continental Board and as set forth in its opinion, as of such
date, the consideration to be received by the holders of Class A Common Stock
pursuant to the Merger was fair to such holders from a financial point of view.
On February 27, 1996, the meeting of the Continental Board reconvened by
telephone and, after further deliberation, the Continental Board unanimously
approved the original terms of the Merger Agreement and the ancillary agreements
presented to them and the transactions contemplated thereby and authorized the
execution of the Merger Agreement. The Providence Journal Company executed a
consent to the Merger on February 27, 1996.
ORIGINAL CALCULATION PRICE. As executed on February 27, 1996, the Merger
Agreement provided that the calculation price used to determine the number of
shares of Media Stock to be issued in the Merger (the "Original Calculation
Price") would be determined in the following manner: if the average of the
volume-weighted average sale price of the Media Stock as shown on the Composite
Tape for 20 trading days selected by lot from the 30 trading days ending on the
fourth trading day prior to the Closing Date (the "Determination Price") was
greater than or equal to $20.825 (the "Floor Price") and less than or equal to
$28.175 (the
38
<PAGE>
"Cap Price"), the number of shares of Media Stock to be issued in the Merger
would be based upon the Determination Price. If the Determination Price was less
than the Floor Price, U S WEST would have the option to increase the number of
shares of Media Stock to be issued in the Merger to a number based upon such
Determination Price. If, under such circumstances U S WEST did not elect to so
increase the number of shares of Media Stock to be issued in the Merger, the
Continental Board would have had the right to either terminate the Merger
Agreement (in which event Continental would have had the right to require U S
WEST to purchase $282.5 million in aggregate amount of a newly created class of
Continental preferred stock) or to consummate the Merger (in which event the
number of shares of Media Stock to be issued in the Merger would have been based
upon the Floor Price). If the Determination Price was greater than the Cap
Price, Continental would have had the option to decrease the number of shares of
Media Stock to be issued in the Merger to a number based upon such Determination
Price. If, under such circumstances Continental did not elect to so decrease the
number of shares of Media Stock to be issued in the Merger, the U S WEST Board
would have had the right to either terminate the Merger Agreement or to
consummate the Merger (in which event the number of shares of Media Stock to be
issued in the Merger would have been based upon the Cap Price). The Original
Calculation Price would also have been used for determining the Conversion Rate
of the Series D Preferred Stock.
On February 26, 1996, the trading day prior to the announcement of the
Merger, the closing sales price of the Media Stock, as reported on the Composite
Tape, was $22.125. At its February 26 meeting, the Continental Board discussed
the fact that the "collar" described above had a mid-point range of $24.50 per
share of Media Stock, which was higher than the then-current market price of the
Media Stock or any price at which the Media Stock had traded since its issuance
in October 1995. The Continental Board considered Lazard's explanation that, all
things being equal, during the period before the closing of the Merger,
appreciation in the Media Stock could be expected to result from (i) the
"seasoning" of the Media Stock as growth-oriented investors replace more
risk-averse, dividend-oriented investors in owning the Media Stock, (ii) the
anticipation of the integration of Continental and its management team into the
Media Group, (iii) the anticipation of the creation of a broad-based and
better-capitalized Media Group through the Merger, and (iv) certain other
developments; however, such appreciation would be by no means certain and would
be subject to risks, including, without limitation, those relating to overall
market and industry conditions, regulatory uncertainties, material adverse
changes in the business, operations or financial condition of the Media Group
and general economic conditions.
FEBRUARY 26, 1996 U S WEST BOARD MEETING. On February 26, 1996, the U S
WEST Board met to consider the Merger Agreement and ancillary agreements and the
transactions contemplated thereby and unanimously approved the terms of the
Merger Agreement and the ancillary agreements presented to them and the
transactions contemplated thereby and authorized the execution and delivery
thereof.
JUNE 1996 AMENDMENTS TO MERGER AGREEMENT. In May 1996, U S WEST requested
that the Merger Agreement be amended to permit the merger of Continental into a
wholly owned subsidiary of U S WEST, rather than directly into U S WEST, on the
condition that the Service issue a certain ruling in connection therewith. At a
regularly scheduled Continental Board meeting held on May 16, 1996, the
Continental Board determined that such a change would not affect the rights of
Continental or its stockholders under the Merger Agreement and authorized
Continental's senior officers to negotiate revisions to the Merger Agreement to
reflect the revised merger structure. At the May 16th meeting, the Continental
Board also discussed the Conversion Charter Amendment and proposed revisions to
the stockholder election mechanism that would allow greater flexibility to the
holders of Class B Common Stock in choosing the form of consideration that they
would receive in the Merger. Under the Merger Agreement before it was amended,
each holder of Class B Common Stock would have had a choice between receiving
all cash or all stock (including both Media Stock and Series D Preferred Stock)
as consideration for the shares of Class B Common Stock in the Merger, subject
to proration. Continental's management proposed a change that would allow
holders of Class B Common Stock to have a choice among: (i) a "standard"
package, consisting of Media Stock, cash and Series D Preferred Stock in fixed
percentages, (ii) an equity package consisting of Media Stock and Series D
Preferred stock in fixed percentages, or (iii) a cash package consisting of 100%
cash, subject, in the case of (ii) and (iii), to proration. The Continental
Board agreed with management that
39
<PAGE>
this proposal was fair in that it afforded the Class B Common Stock holders
greater flexibility and certainty as to the forms of the consideration to be
received by them in the Merger. The revised stockholder election mechanism as
set forth in the Merger Agreement was approved by a unanimous written consent of
the Continental Board dated June 26, 1996. The Merger Agreement, as amended, was
approved by the Executive Committee of the Continental Board on June 26, 1996
and executed on June 27, 1996.
OCTOBER 1996 AMENDMENTS TO MERGER AGREEMENT. As executed on February 27,
1996, the Merger Agreement provided that U S WEST would not be required to
consummate the Merger unless appropriate governmental authorities granted U S
WEST at least a one-year period following the Merger, with an additional
one-year period under a customary custodian or trustee arrangement, to dispose
of cable television systems owned by Continental that are located in the
Communications Group Region (the "In-Region Systems"). Following extensive
negotiations with the United States Department of Justice (the "DOJ"), which was
reviewing the proposed Merger for antitrust clearance, Continental and U S WEST
concluded that U S WEST would be required to dispose of such systems within a
shorter period.
Following the execution of the Merger Agreement on February 27, 1996, the
average closing price of the Media Stock for the trading days through October 8,
1996 was $18.46, with a high closing price on February 27, 1996 of $21.625 and a
low closing price on July 16, 1996 of $15.625. In July and August 1996, Mr.
Neher and Mr. Williams discussed fixing the Calculation Price below the Floor
Price in order to remove any uncertainty as to the Merger not being consummated
as a result of the trading price of the Media Stock. Mr. Neher and Mr. Williams
also discussed whether or not to shorten the disposition period for the
In-Region Systems required by the Merger Agreement. After several conversations
Mr. Williams informed Mr. Neher that U S WEST was not willing to consummate the
Merger at a Calculation Price less than the Floor Price. Mr. Williams also
informed Mr. Neher that U S WEST was unwilling to amend the Merger Agreement to
shorten the disposition period for the In-Region Systems unless agreement was
also reached on fixing the Calculation Price at an agreeable level.
The Continental Board held a regularly scheduled meeting on September 5,
1996 attended by all of the members of the Continental Board, certain members of
the Continental senior management and representatives from Sullivan & Worcester,
at which Mr. Neher described his discussions with U S WEST concerning the
establishment of a fixed Calculation Price and the need to obtain a waiver as to
the time period for the disposition of In-Region Systems in the Merger
Agreement. The Continental Board concluded that negotiations to establish an
acceptable fixed Calculation Price and to procure such waiver from U S WEST
should be pursued.
On September 17, 1996, Mr. Neher and Mr. Williams agreed to a Calculation
Price of $21.00 and agreed to shorten the minimum divestiture period required
for disposition of the In-Region Systems.
Continental requested Lazard and Allen & Company to analyze the proposed
amendments (the "Proposed October 1996 Amendments") and to advise the
Continental Board as to the fairness of such amendments from a financial point
of view to Continental's stockholders (in the case of Lazard) and to the holders
of Class A Common Stock (in the case of Allen & Company).
On October 1, 1996, the entire Continental Board met to consider the
Proposed October 1996 Amendments. Mr. Hostetter and Mr. Neher, representatives
of Sullivan & Worcester, Lazard and Allen & Company made presentations to the
Continental Board and discussed with the Continental Board their views and
analyses of the Proposed October 1996 Amendments. The Continental Board, among
other things, reviewed and discussed (i) the reasons for the Merger considered
at its meetings on February 26 and 27, 1996, (ii) financial and valuation
analyses of the proposed amendment to the Calculation Price, and (iii) other
matters described below under "Recommendation of the Continental Board;
Continental's Reasons for the Merger." Lazard rendered its oral opinion
(subsequently confirmed in writing) that, based upon the matters presented to
the Continental Board and as set forth in its opinion, as of such date, the
consideration to be received by the stockholders of Continental pursuant to the
Proposed October 1996 Amendments to the Merger Agreement was fair to the
stockholders of Continental from a financial point of view. Allen & Company also
rendered its oral opinion (subsequently confirmed in writing) that, based upon
the matters
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presented to the Continental Board and as set forth in its opinion, as of such
date, the consideration to be received by the holders of Class A Common Stock
pursuant to the Proposed October 1996 Amendments to the Merger Agreement was
fair to such holders from a financial point of view.
Following the deliberations, the Continental Board unanimously approved the
Proposed October 1996 Amendments and the Conversion Charter Amendment.
RECOMMENDATION OF THE CONTINENTAL BOARD; CONTINENTAL'S REASONS FOR THE MERGER
The Continental Board believes that the Merger Agreement and the
transactions contemplated thereby are fair to, and in the best interests of, its
stockholders. Accordingly, the Continental Board recommends that the
stockholders of Continental vote FOR the approval of the Merger Agreement and
the transactions contemplated thereby. The Continental Board, in reaching its
determinations during the course of the Continental Board meetings on February
26 and 27, 1996, May 16, 1996, September 5, 1996 and October 1, 1996, considered
the factors discussed below. In view of the wide variety of factors considered
in connection with the evaluation of the Merger, the Continental Board did not
find it practicable to, nor did it attempt to, quantify or otherwise assign
relative weights to the specific factors it considered in reaching its
determinations.
STRATEGIC ALLIANCE. The Continental Board reviewed presentations from, and
discussed the proposed business combination with, senior executive officers of
Continental and representatives of its legal counsel and financial advisors. The
Continental Board agreed with management's view that, because of its highly
clustered systems, the technical quality of its cable plant, its management
expertise, its strong relationships within the cable industry and its reputation
for quality service, Continental was well-positioned to form a strategic
alliance with a well-capitalized partner such as U S WEST. A strategic alliance
with U S WEST also enhanced Continental's strategy to expand in size and become
technologically more advanced. Continental's management expressed the views that
the combination of the Media Group's and Continental's systems would result in
the type of highly clustered fiber-coaxial broadband network that is necessary
for the delivery of enhanced video, high-speed data, telephony and other
telecommunications services in the future and that the technical and management
expertise of the two companies would enable the combined company to effectively
deliver a broad range of services to an expanded customer base. The Continental
Board also discussed the fact that the Media Group's cable properties included
both its 25.51% interest in TWE, which manages cable television systems with
approximately 11.4 million subscribers, and its Atlanta cable properties serving
approximately 517,000 cable television subscribers, and that the Media Group has
other businesses, including a domestic wireless venture and international cable
and wireless investments. Continental's management indicated that size would be
an important advantage in the new competitive environment in the
telecommunications industry. The Continental Board concluded that a business
combination between Continental and the Media Group would result in a combined
enterprise that would be a strong presence in the telecommunications industry,
both nationally and internationally. In making its determination, the
Continental Board also considered the view expressed by Continental's management
that the Merger would benefit those Continental stockholders who, through their
continued equity interest in the Media Group, would participate in the value
generated by the business combination. The Continental Board also observed that
exploratory conversations regarding the possibility of a business combination
between Continental and U S WEST had taken place between senior executive
officers of the two companies on a number of occasions in the one and one-half
years prior to the execution of the Merger Agreement on February 27, 1996 and
that Continental's management was convinced that such a combination was the most
viable transaction between Continental and a major telephone company and came at
an opportune time due to rapid advances in technology and the fundamental
realignment taking place in the telecommunications industry. See "-- General
Background of the Merger."
INCREASED FINANCIAL STRENGTH. The Continental Board considered
Continental's need for future capital to fund its aggressive program of system
rebuilds and upgrades and its financial commitments to joint ventures and other
equity investments. See "Description of Continental -- Business -- U.S.
Regulatory Strategy; Social Contract." The Continental Board concurred in the
view expressed by Continental's management that large, well-capitalized
enterprises will have a competitive advantage in the evolving telecommunications
industry. The Continental Board concluded that, through the Merger, the combined
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organization's ability to finance the strategic expansion of its systems should
be greatly strengthened. In addition, as part of U S WEST, Continental will have
access to financing alternatives that are currently unavailable to it, which is
critical to its commitment to expand its broadband network.
ALTERNATIVE TRANSACTIONS. The Continental Board agreed with management's
view that, in light of the growing competitive pressures in the cable television
and telecommunications industries, Continental needed to consider various
capital-raising and business-combination transactions. At its February 26, 1996
meeting, the Continental Board reviewed several possible alternative
transactions, including: (i) a public offering of Continental equity securities
- -- either common stock, preferred stock or a combination thereof -- in the range
of $300-600 million; (ii) private investments by one or more large investors in
Continental Common Stock or preferred stock, including a possible $1 billion
investment by a prospective investor in convertible preferred stock; and (iii) a
business combination or joint venture with another regional Bell operating
company or an interexchange carrier. It was determined that neither a public nor
private offering of equity securities would offer the benefits of a strategic
alliance with U S WEST or result in a full realization of the value of
Continental because, (i) in the case of a public offering, the range of
valuation multiples at which public cable companies were trading were lower than
both the range of multiples that had been used in recent private market
transactions involving cable companies and the valuation multiple that U S WEST
used to value Continental and (ii) in the case of a private offering for a
minority investment in Continental, the price per share offered by potential
private investors had been lower than the $30 price per share ascribed to the
Continental Common Stock in the Merger. In addition, a public offering or a
private placement of its equity securities would have been insufficient to meet
Continental's long-term capital needs necessitated by its rebuild and expansion
strategy. With respect to a transaction with another regional Bell operating
company or an interexchange carrier, Continental's management observed that
despite its various discussions over the course of the past two years with many
such companies, none had materialized into a realistic proposal. Continental's
management also noted that a business combination with U S WEST would alleviate
certain legal and regulatory issues that might arise in a possible business
combination with another regional Bell operating company because U S WEST,
unlike many of the other regional Bell operating companies, had telephone
service areas that did not materially overlap with Continental's service areas.
At its February 26, 1996 meeting, the Continental Board also considered the
possibility of a regional liquidation of Continental's systems, which it
rejected because, among other things, it carried the risk that Continental would
be left with incongruous pieces of its cable business that would not be
successful on a stand-alone basis and thus would not give stockholders an
ongoing interest in a viable enterprise. Also, such a liquidation would have
involved substantial tax issues. The Continental Board determined that, taking
into account, among other things, applicable regulatory and financial
considerations, no alternative transaction would be likely to offer the same
immediate and long-term value to Continental stockholders as the Merger.
CONTINENTAL'S BUSINESS, CONDITION AND PROSPECTS. In evaluating the terms of
the Merger, the Continental Board reviewed, among other things, information with
respect to the financial condition, results of operations and businesses of
Continental, on both a historical and prospective basis, and current industry,
economic and market conditions. The members of the Continental Board were
generally familiar with and knowledgeable about Continental's affairs and
further reviewed these matters in the course of their deliberations. In
evaluating Continental's prospects, the Continental Board considered, among
other things, the strengths of Continental's cable television business,
including its nationwide operating scale, regional system clusters,
technologically advanced broadband networks, strong management team, marketing
expertise, commitment to customer service and community relations, leadership in
regulatory and other industry matters and international investments, as well as
the challenges facing the business, including increasing capital requirements,
higher programming costs, competition from other cable operators, increased
competition from Multi-channel, Multi-point Distribution Services and DBS
operators and telephone companies and the difficulty of maintaining historical
growth rates in such an environment.
U S WEST'S BUSINESS, CONDITION AND PROSPECTS. The Continental Board also
reviewed information presented by management and Lazard with respect to the
financial condition, results of operations and businesses of U S WEST and, in
particular, the Media Group. The Continental Board considered, among
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other things, the Media Group's cable and telecommunications businesses and
investments, its domestic and international wireless communications network
businesses and its domestic and international directory and information services
businesses, including its White and Yellow Pages directories, which generate
substantial cash flow.
THE TERMS OF THE MERGER AGREEMENT. The Continental Board discussed with
senior executive officers of Continental and representatives from its legal and
financial advisors the terms of the Merger Agreement, including, but not limited
to, the amount and form of consideration, the degree of flexibility provided to
Continental to conduct its business prior to closing the Merger, the fact that
Continental's senior management would continue to manage the domestic cable
operations of the combined enterprise, and the termination provisions. The
Continental Board considered that, pursuant to the Merger Agreement, U S WEST
may, in its sole discretion, increase the Cash Consideration Amount by up to
$500 million and that any such increase would decrease the portion of the
consideration consisting of shares of Media Stock paid to holders of Continental
Common Stock in the Merger. The Continental Board also acknowledged that the
adoption of the Proposed October 1996 Amendments would substantially increase
the likelihood that the Merger would be consummated. The Continental Board
considered the provisions of the Merger Agreement that (i) prohibit Continental
and its subsidiaries, and their respective directors, officers, employees, and
representatives from soliciting or encouraging any Acquisition Proposals by
third parties, or, subject to the fiduciary duties of the Continental Board,
from negotiating with any other parties with respect to an Acquisition Proposal
and (ii) permit the Continental Board, in the exercise of its fiduciary duties,
to terminate the Merger Agreement upon payment of a fee of $125.0 million
(approximately 2.3% of the consideration to be paid pursuant to the Merger
Agreement excluding the assumption of Continental's indebtedness and other
liabilities). The Continental Board accepted the views of its legal advisors and
Lazard that a 2.3% termination fee was within the range of fees payable in
comparable transactions. The Continental Board reviewed the terms of the
Stockholders' Agreement pursuant to which, among other things, Messrs. Hostetter
and Neher, Corporate Advisors, L.P., Boston Ventures Management, Inc., and
Schooner Capital Corporation, which together control 59.1% of the voting power
of Continental's Voting Stock, would agree to grant U S WEST a proxy to vote
their shares in favor of the transactions contemplated by the Merger Agreement.
OPINION OF LAZARD. The Continental Board considered as favorable to its
determination the oral opinion delivered by Lazard, subsequently confirmed in
writing, that, as of the date of such opinion, the consideration to be received
by the stockholders of Continental pursuant to the Merger was fair to the
stockholders of Continental from a financial point of view. The Continental
Board also considered the oral and written presentation made to it by Lazard.
See "-- Opinions Considered by the Continental Board." A copy of the opinion of
Lazard is attached as Annex II and is incorporated herein by reference.
CHARTER AMENDMENTS. Continental's management and legal advisors informed
the Continental Board that the Merger could be consummated only if the tax-free
status of the Providence Journal Merger Transactions were not jeopardized
thereby. The Continental Board was informed that (i) the consent of The
Providence Journal Company to the Merger, which was a prerequisite to
Continental's entering into the Merger Agreement pursuant to the terms of the
merger agreement for the Providence Journal Merger, would be withheld unless the
former Providence Journal stockholders who received Class A Common Stock in the
Providence Journal Merger were precluded from receiving cash consideration in
the Merger and (ii) U S WEST was unwilling to proceed with the Merger unless
cash was included as a portion of the Merger consideration and the tax-free
status of the Providence Journal Merger Transactions was not jeopardized.
Continental and its legal advisors determined that the Consideration Charter
Amendment, together with the provisions in the Merger Agreement providing that
the holders of Class A Common Stock would not receive cash consideration in the
Merger, was the best vehicle for ensuring that the tax-free status of the
Providence Journal Merger Transactions would not be affected by the Merger. The
Continental Board discussed the provisions of the Stockholders' Agreement under
which Mr. Hostetter would agree to convert a sufficient number of his shares of
Class B Common Stock into Class A Common Stock to ensure stockholder approval of
the Consideration Charter Amendment at a subsequent meeting of the Continental
stockholders in the
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event that current holders of Class A Common Stock failed to approve the
Consideration Charter Amendment at the initial meeting of the Continental
stockholders called to approve the Merger and the Consideration Charter
Amendment. In reaching its determination that the holders of Continental Voting
Stock vote for the approval and adoption of the Consideration Charter Amendment,
the Continental Board also considered the oral opinion delivered by Allen &
Company, subsequently confirmed in writing, that, as of the date of the such
opinion, the consideration to be received by the holders of Class A Common Stock
pursuant to the Merger and the Consideration Charter Amendment was fair to such
holders from a financial point of view. The Continental Board also considered
the oral and written presentations made to it by Allen & Company. See "--
Opinions Considered by the Continental Board." A copy of the opinion of Allen &
Company is attached as Annex III and is incorporated herein by reference. The
consent of The Providence Journal Company to the Merger was obtained.
In reaching its determination that the holders of Continental Voting Stock
vote for the approval and adoption of the Conversion Charter Amendment, the
Continental Board considered the fact that at least $1 billion and up to $1.5
billion in cash consideration would be given to holders of Class B Common Stock
as part of the merger consideration and that certain holders of Class B Common
Stock who had agreed to enter into the Stockholders' Agreement were precluded
from converting their shares of Class B Common Stock or Continental Preferred
Stock into Class A Common Stock under any circumstances. The Continental Board
foresaw the possibility that, if other holders of Class B Common Stock converted
to Class A Common Stock prior to the Effective Time in order to avoid receiving
cash consideration, the remaining Class B Common Stockholders would be forced to
accept a larger percentage of their merger consideration in cash. The
Continental Board felt that it would be unfair under such circumstances for the
remaining holders of Class B Common Stock, including those holders of Class B
Common Stock who had agreed to enter into the Stockholders' Agreement in order
to facilitate the Merger, to be placed in a position of having to receive a
disproportionate amount of the merger consideration in the form of cash. The
Continental Board concluded that it would be fair to the holders of Class B
Common Stock as a class to require such holders to retain a sufficient number of
shares of Class B Common Stock, on a PRO RATA basis, to absorb the maximum
amount of the cash portion of the Merger consideration payable to the holders of
Class B Common Stock in the Merger. In reaching its determination that the
holders of Class B Common Stock vote for the approval and adoption of the
Conversion Charter Amendment, the Continental Board also considered that, under
the terms of the proposed Conversion Charter Amendment, Class B Common Stock
holders (other than those holders who are parties to the Stockholders'
Agreement) would in no event be prevented from transferring shares of Class B
Common Stock or converting a permitted percentage of their shares of Class B
Common Stock into Class A Common Stock. The final version of the Conversion
Charter Amendment was approved by the Continental Board at its October 1
meeting. A corresponding change to the Stockholder's Agreement was also made to
allow the stockholders subject thereto to convert a portion of their shares of
Class B Common Stock to Class A Common Stock so long as a sufficient number of
shares of Class B Common Stock would remain outstanding to receive the cash
portion of the Merger consideration.
ABILITY OF THE STOCKHOLDERS OF CONTINENTAL TO OBTAIN A CONTINUING EQUITY
INTEREST IN U S WEST. The Continental Board regarded as favorable to its
determination the fact that the terms of the Merger Agreement permit holders of
Class B Common Stock who wish to do so to continue to hold an equity interest in
the Media Group following the Merger, thus enabling them to benefit from the
synergies expected to result from the combination of the two companies while
obtaining liquidity for their shares and favorable tax-free treatment to the
extent that they receive stock in the Merger.
TAX CONSIDERATIONS. The Continental Board considered, among other things,
information provided by Continental's legal advisors with respect to the Federal
income tax consequences of the Merger to Continental stockholders. The
Continental Board was advised that, for Federal income tax purposes,
stockholders who exchange Continental capital stock solely for Media Stock and
the Series D Preferred Stock generally would not recognize taxable gain or loss
on the exchange, that holders of Class B Common Stock who exchange Continental
capital stock solely for cash would be taxed on the difference between their tax
basis in the Continental capital stock exchanged and the cash received, and that
stockholders who exchange Class B Common Stock for a combination of cash, Media
Stock and Series D Preferred Stock generally would
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recognize taxable gain in an amount equal to the lesser of (i) the excess of the
sum of the cash and the fair market value of the Media Stock and the Series D
Preferred Stock received over the tax basis in the Class B Common Stock
exchanged and (ii) the amount of cash received. The Continental Board was also
advised that holders of Class B Common Stock who elect to receive all cash or
all stock could not ascertain their tax consequences at the time of making an
election due to the possible applicability of proration.
THE CONTINENTAL BOARD UNANIMOUSLY RECOMMENDS THAT HOLDERS OF CONTINENTAL
VOTING STOCK VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT,
FOR THE PROPOSAL TO APPROVE AND ADOPT THE CHARTER AMENDMENTS AND FOR THE OTHER
PROPOSALS.
OPINIONS CONSIDERED BY THE CONTINENTAL BOARD
Continental retained Lazard to act as its financial advisor in connection
with the Merger and to render a fairness opinion with respect to the
transaction. Continental retained Allen & Company to deliver to the Continental
Board its opinion as to the fairness to holders of Class A Common Stock of the
consideration to be received by such holders in the Merger from a financial
point of view.
LAZARD
At the meeting of the Continental Board held on October 1, 1996, Lazard
delivered its oral opinion to the Continental Board (which was later confirmed
in writing) that, as of that date, the consideration to be received by the
stockholders of Continental pursuant to the Merger was fair to the stockholders
of Continental from a financial point of view. Previously, on February 27, 1996
Lazard delivered an opinion to the Continental Board that the consideration to
be received by the stockholders of Continental pursuant to the Merger was fair
from a financial point of view.
A copy of the full text of the most recent Lazard opinion, dated as of
October 1, 1996, which sets forth the assumptions made, matters considered and
limitations of the review undertaken, is attached as Annex II hereto.
CONTINENTAL STOCKHOLDERS ARE URGED TO READ THE TEXT OF THE LAZARD OPINION IN ITS
ENTIRETY. THE SUMMARY DISCUSSION OF THE OPINION OF LAZARD SET FORTH IN THIS
PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF
SUCH OPINION. THE LAZARD OPINION DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING.
In connection with rendering its oral opinion to the Continental Board on
October 1, 1996, and its presentation to the Continental Board on the same date,
Lazard, among other things: (i) reviewed the financial terms of the Merger
Agreement; (ii) analyzed certain historical business and financial information
relating to Continental and U S WEST; (iii) reviewed various financial forecasts
and other data provided to it by Continental and U S WEST relating to their
businesses; (iv) held discussions with members of senior management of
Continental and U S WEST with respect to the past and current operations and
financial condition of Continental and U S WEST and the business, prospects and
strategic objectives of Continental and U S WEST; (v) reviewed public
information with respect to certain other companies in lines of business it
believed to be generally comparable, in whole or in part, to the businesses of
Continental and U S WEST; (vi) reviewed the financial terms of certain business
combinations involving companies in lines of businesses that it believed to be
generally comparable to those of Continental, and in other industries generally;
(vii) reviewed historical stock prices and trading volumes of the stock of U S
WEST (including the Media Stock); and (viii) conducted such other financial
studies, analyses, and investigations as it deemed appropriate.
Additionally, Lazard assumed and relied upon the accuracy and the
completeness of the financial and other information provided to it by
Continental and U S WEST and does not assume responsibility for any independent
verification of such information or any independent valuation or appraisal of
the assets or liabilities of Continental or U S WEST. With respect to financial
forecasts, Lazard assumed that such
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forecasts were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of management of Continental or U S WEST, and
Lazard assumes no responsibility for, and expresses no view as to, such
forecasts or the assumptions on which they are based.
Lazard also assumed that the Merger will be consummated on the terms
contained in the Merger Agreement, without any waiver of any material terms or
conditions by Continental, and that obtaining the necessary regulatory and
governmental approvals for the Merger will not impose any material adverse
impact on the contemplated benefits of the Merger. Further, Lazard's opinion is
necessarily based on economic, monetary, market and other conditions as in
effect on, and the other information made available to it as of, the date of
such opinion. Lazard expresses no opinion as to what the value of U S WEST stock
(including the Media Stock or Series D Preferred Stock to be issued in the
Merger) actually will be upon consummation of the Merger.
COMPONENT VALUATION ANALYSIS
Lazard performed a component valuation analysis of Continental on both a
private and public market basis and of the Media Group on a public market basis.
The component valuation analysis involved the valuation, using a variety of
techniques, of the constituent assets of Continental and the Media Group
respectively, to determine an enterprise value of such assets, which value was
then adjusted by, among other things, subtracting the debt net of cash on hand
of Continental and the Media Group, respectively, to yield an implied equity
valuation of each of Continental and the Media Group.
CONTINENTAL. Lazard analyzed the constituent assets of Continental
consisting of (i) domestic cable operations; (ii) marketable equity securities
of Turner Broadcasting System, Inc. ("Turner"), Teleport Communications Group,
Inc. ("TCG") and Home Shopping Network, Inc. ("HSN") owned by Continental; (iii)
interests held by Continental in various programming and related companies; (iv)
minority interests held by Continental in various U.S. cable television
companies; (v) Continental's business as a distributor of DBS service for
PrimeStar Partners, LP ("PrimeStar," a provider of DBS services); (vi)
Continental's minority interest in PrimeStar; (vii) interests held by
Continental in several cable companies located outside of the United States; and
(viii) other miscellaneous assets. Using the component valuation analysis,
Lazard derived a private market valuation of Continental of from $24.13 to
$28.65 per share and a public market valuation of Continental of from $10.53 to
$15.92 per share.
DOMESTIC CABLE OPERATIONS OF CONTINENTAL. As part of the component
valuation analysis of Continental, Lazard reviewed the valuation of
Continental's domestic cable operations based on an analysis of generally
comparable publicly traded companies, an analysis of comparable transactions and
a discounted cash flow analysis. No company or transaction used in the
comparable company and selected transaction analyses is identical to Continental
or the Merger. Accordingly, interpretation of the results of the such analyses
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of Continental and other factors that
could affect the public trading value of the companies to which it is being
compared. Mathematical analysis (such as determining the average or median) is
not in itself a meaningful method of using comparable transaction data or
comparable company data.
(i) ANALYSIS OF GENERALLY COMPARABLE PUBLICLY TRADED COMPANIES. Lazard
reviewed and compared the multiple of adjusted public market value to
annualized trailing quarter domestic cable EBITDA of four publicly traded
corporations: Cablevision Systems Corporation (8.8x), Comcast Corporation
("Comcast") (6.5x), Cox Communications Inc. ("Cox") (7.6x) and
Tele-Communications, Inc.-TCI Group ("TCI") (8.8x) (collectively, the
"Comparable Companies"). Based upon the public market multiples of the
Comparable Companies, Lazard applied multiples of 8.0x to 9.0x the
annualized 1996 second quarter domestic cable EBITDA of Continental of $800
million, which implied a public market valuation of Continental's domestic
cable operations of $6.4 billion to $7.2 billion. The Comparable Companies
were selected because they are publicly traded companies with cable
operations that for purposes of analysis may be considered similar to those
of Continental. Due to the fact that, like Continental, most of the
Comparable Companies also own other media and communications assets, the
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multiples for the Comparable Companies were derived by subtracting Lazard's
estimate of the value of such assets from the total market capitalization of
each of the Comparable Companies in order to estimate the value ascribed by
the public market to the domestic cable assets alone.
(ii) COMPARABLE TRANSACTIONS ANALYSIS. Lazard reviewed and compared
the multiple of acquisition price to annualized quarter prior to
announcement EBITDA of four completed, one announced and pending and one
proposed, but later abandoned, acquisitions of cable companies: Comcast's
acquisition of The E.W. Scripps Company's cable systems (13.2x), TCI's
acquisition of Viacom Inc.'s cable systems (10.0x), Continental's
acquisition of Providence Journal's cable systems (13.3x), Cox's acquisition
of The Times Mirror Company's cable systems (11.6x), U S WEST's acquisition
of Wometco Cable Corp. (11.1x), and Bell Atlantic Corp's proposed
acquisition of TCI (12.4x) (collectively, the "Comparable Transactions").
Lazard noted that in each of the Comparable Transactions, other than Bell
Atlantic Corp's proposed acquisition of TCI, costs savings and synergies
created by geographic clustering of cable systems would have lowered the
effective acquisition multiples. Based upon the multiples of the Comparable
Transactions and upon the recent decline in publicly traded cable stock
prices, Lazard applied multiples of 10.5x to 11.5x the annualized 1996
second quarter EBITDA of Continental of $800 million, which implied a
private market valuation of Continental's domestic cable operations of $8.4
billion to $9.2 billion.
(iii) DISCOUNTED CASH FLOW ANALYSIS. Lazard performed discounted cash
flow analysis using Continental's management projections. Lazard calculated
a net present value of EBITDA for Continental for the years 1996 through
2001 using discount rates ranging from 9% to 15%. Lazard calculated
Continental's terminal value in the year 2001 based upon a multiple of 7.0x
to 10.0x EBITDA. At the mid-range of the discounted cash flow analysis,
using discount rates of 11% to 13% and terminal multiples of 8.0x to 9.0x
EBITDA (in line with public market multiples of the Comparable Companies),
Lazard calculated a discounted cash flow value of Continental's domestic
cable operations of $8.9 billion to $10.7 billion.
OTHER ASSETS OF CONTINENTAL. The non-cable and international assets of
Continental, which Lazard valued at an aggregate of from $1.4 billion on a
public market basis to $2.0 billion on a private market basis, were valued using
a variety of techniques, including current market value of marketable
securities, comparable asset analyses using EBITDA multiples for minority cable
interests, management estimates, and discounted cash flow valuations based upon
management forecasts. In certain instances Lazard estimated public market values
based on appropriate discounts to the private market valuations.
THE MEDIA GROUP. Lazard analyzed the constituent assets of the Media Group
consisting of (i) domestic cable operations including cable systems in the
Atlanta, Georgia metropolitan area and the Media Group's investment in TWE; (ii)
domestic wireless telephone operations consisting of the Media Group's stake in
the U S WEST/AirTouch Joint Venture, and an interest in Primeco held by the
Media Group; (iii) the domestic and international directory and information
services business of the Media Group; (iv) the Media Group's interests in
international cable assets; (v) the Media Group's interests in international
wireless telephone services; and (vi) other miscellaneous assets. Based on the
above analyses, Lazard derived a public market valuation of the components of
the Media Group of from $23.04 to $28.06 per share.
DOMESTIC CABLE OPERATIONS OF THE MEDIA GROUP. As part of the component
valuation analysis of the Media Group, Lazard reviewed the valuation of the
Media Group's Atlanta cable operations based on an analysis of generally
comparable publicly traded companies. Based upon the public market multiples of
the Comparable Companies, Lazard applied multiples of 8.0x to 9.0x to the
estimated 1996 EBITDA of the Media Group's Atlanta cable operations, which
implied a public market valuation of such operations of $833 million to $944
million. Lazard estimated values for the Media Group's 25.51% ownership stake in
TWE ranging from $2.9 billion to $3.5 billion based on (i) a component analysis
of the constituent assets of TWE which implied a public market valuation of such
stake of $2.3 billion to $3.1 billion, and (ii) the valuation of $3.5 billion to
$3.8 billion of such stake implied by the exchange by Toshiba Corporation and
ITOCHU
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Corporation of their 11.22% interest in TWE for $1.5 billion of Time Warner Inc.
("Time Warner") stock and cash, adjusted to reflect a value range for the
management fees received by the Media Group and options held by the Media Group.
OTHER ASSETS OF THE MEDIA GROUP. The non-cable and international assets of
the Media Group were valued by Lazard using a variety of valuation techniques.
Lazard valued the domestic cellular operations of the Media Group at $3.2
billion to $3.6 billion based upon the Media Group's proportionate share of
estimated 1997 PRO FORMA EBITDA for the U S WEST/AirTouch Joint Venture and an
analysis of selected publicly traded comparable companies that yielded multiples
of 1997 estimated EBITDA of 8.0x to 9.0x. Lazard valued the Media Group's
directory and information services business using a comparable public company
trading analysis of marketing database and newspaper companies, implying a value
of such business unit at $3.9 billion to $4.4 billion (based upon multiples of
7.5x to 8.5x 1996 estimated EBITDA). Other assets were valued using comparable
public-company trading analysis, cash investments made to date (which in some
instances was discounted), and management and market estimates.
MEDIA STOCK TRADING HISTORY. Lazard reviewed (i) the recent Media Stock
price performance and compared that performance to the price performance of the
Standard & Poor's 500 Index (the "S&P 500") and (ii) the recent Media Stock
price performance compared to a series of indices of stock prices of selected
publicly traded companies in the cable, wireless cable, satellite, diversified
media and telecommunications industries.
PRO FORMA MERGER ANALYSIS
Lazard prepared a pro forma merger analysis of the financial impact of the
Merger on the Media Group and resultant impact on the stockholders of
Continental, which assumed no synergies or cost savings as a result of the
Merger. Based upon this analysis, Lazard estimated the PRO FORMA public market
valuation of the components of the Media Group at $18.47 to $21.33 per share,
assuming a pre-transaction value of $24.00 to $26.00 per share of Media Group
Stock and public market cable EBITDA multiples of 8.0x to 9.0x.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Lazard
believes that its analyses must be considered as a whole and that selecting
portions of its analyses, without considering all analyses, would create an
incomplete view of the process underlying its opinion. In addition, Lazard may
have given various analyses more or less weight than other analyses, and may
have deemed various assumptions more or less probable than other assumptions, so
that the ranges of valuations resulting from any particular analysis described
above should not be taken to be Lazard's view of the actual value of
Continental.
As described above, Lazard's opinion and presentation to the Continental
Board was one of many factors taken into consideration by the Continental Board
in making its determination to approve the Merger. Consequently, the Lazard
analyses described above should not be viewed as determinative of the
Continental Board's or Continental management's opinion with respect to the
value of Continental or of whether the Continental Board or Continental
management would have been willing to agree to different financial terms than
those that are set forth in the Merger Agreement.
The Continental Board retained Lazard based upon its experience and
expertise. Lazard is an internationally recognized investment banking firm and
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements, leveraged
buyouts, and valuations for estate, corporate and other purposes.
Lazard has in the past provided investment banking and financial advisory
services to Continental and has received customary investment banking and
financial advisory fees for rendering such services. See "Annex V -- Description
of Continental -- Management" and "-- Certain Transactions." Lazard, certain of
its managing directors, and its affiliate, Corporate Partners, L.P., and certain
related entities, have direct or indirect interests in stock of Continental,
including ownership of all of the outstanding Continental Preferred Stock, and
principals of Corporate Partners, L.P. (who are also managing directors of
Lazard) are members of the Continental Board.
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Lazard received a fee of $4.0 million upon the public announcement of the
Merger and will receive an additional $16.0 million upon the consummation of the
Merger. In addition, Continental has agreed, among other things, to reimburse
Lazard for all reasonable out-of-pocket expenses incurred in connection with the
services provided by Lazard, and to indemnify and hold harmless Lazard and
certain related parties to the full extent lawful from and against certain
liabilities and expenses, including certain liabilities under the federal
securities laws, in connection with its engagement.
ALLEN & COMPANY
At the meeting of the Continental Board on October 1, 1996, Allen & Company
delivered its oral opinion (subsequently confirmed in writing) to the effect
that, as of such date, the consideration to be received by holders of Class A
Common Stock in connection with the Merger was fair to such holders from a
financial point of view. Previously, on February 27, 1996 Allen & Company
delivered an opinion to the Continental Board that the consideration to be
received by the holders of Class A Common Stock pursuant to the Merger was fair
from a financial point of view.
The full text of the written opinion of Allen & Company, dated October 1,
1996, is set forth as Annex III to this Proxy Statement and describes the
assumptions made, matters considered and limits on the review undertaken.
CONTINENTAL STOCKHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY. ALLEN &
COMPANY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF
VIEW, OF THE CONSIDERATION WHICH THE HOLDERS OF CLASS A COMMON STOCK WOULD
RECEIVE IN THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION OF THE MERGER
OVER OTHER COURSES OF ACTION THAT MAY BE AVAILABLE TO CONTINENTAL OR CONSTITUTE
A RECOMMENDATION TO ANY CONTINENTAL STOCKHOLDER CONCERNING HOW SUCH HOLDER
SHOULD VOTE WITH RESPECT TO THE PROPOSALS. The summary of the opinion of Allen &
Company set forth in this Proxy Statement is qualified in its entirety by
reference to the full text of such opinion.
In arriving at its opinion, Allen & Company (i) reviewed the terms and
conditions of the Merger Agreement; (ii) analyzed publicly available historical
business and financial information relating to Continental and U S WEST, as
presented in documents filed with the Commission; (iii) reviewed certain
financial forecasts, budgets and other data provided to Allen & Company by U S
WEST relating to its business for its 1996 and 1997 fiscal years and by
Continental relating to its 1995 and 1996 fiscal years; (iv) conducted
discussions with certain members of the senior management of Continental and U S
WEST with respect to the financial condition, business, operations, strategic
objectives and prospects of Continental and U S WEST, respectively; (v) reviewed
and analyzed public information, including certain stock market data and
financial information relating to selected public companies which Allen &
Company deemed generally comparable to Continental and U S WEST; (vi) reviewed
the trading history of U S WEST Common Stock and the Media Stock, including its
performance in comparison to market indices and to selected companies in
comparable businesses; (vii) reviewed public financial and transaction
information relating to merger and acquisition transactions Allen & Company
deemed to be comparable to the Merger; and (viii) conducted such other financial
analyses and investigations as Allen & Company deemed necessary or appropriate
for the purposes of the opinion expressed therein.
In connection with its review, Allen & Company assumed and relied on the
accuracy and completeness of the information it reviewed for the purpose of its
opinion and did not assume any responsibility for independent verification of
such information or for any independent evaluation or appraisal of the assets of
Continental or U S WEST. With respect to Continental's and U S WEST's financial
forecasts, Allen & Company assumed that they had been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
management of Continental and U S WEST, respectively, and Allen & Company
expressed no opinion with respect to such forecasts or the assumptions on which
they were based. Allen & Company's opinion was necessarily based upon business,
market, economic and other conditions as they existed on, and could be evaluated
as of, the date of its opinion. Allen & Company's opinion does not imply any
conclusion as to the likely trading range of the Media Stock or Series D
Preferred Stock following
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the consummation of the Merger, which may vary depending on, among other
factors, changes in interest rates, dividend rates, market conditions, general
economic conditions and other factors that generally influence the price of
securities.
The following is a summary of the presentation made by Allen & Company to
the Continental Board in connection with the rendering of Allen & Company's
fairness opinion:
Prior to delivering its written opinion to the Continental Board, Allen &
Company reviewed certain information with the Continental Board relating to
Continental and U S WEST, including the financial terms of the Merger Agreement,
the consideration to be received by holders of Class A Common Stock, the terms
of the Series D Preferred Stock, and the financial analyses summarized below.
Allen & Company noted that the Merger Agreement provides that each
outstanding share of Class A Common Stock will be exchanged in the Merger for
Class A Merger Consideration valued at $30.00 if the market price of Media Stock
at the closing of the Merger is equal to $21.00. Allen & Company estimated that,
assuming that the per share value of the consideration payable to the holders of
Class A Common Stock was $25.76 (based on the Calculation Price of $21.00, the
closing price of Media Stock of $16.88 on September 30, 1996 and a Cash
Consideration Amount of $1.0 billion) (the "Class A Per Share Value"), the
transaction or enterprise value (the value of all equity securities plus
long-term debt less cash) of Continental as a result of the Merger was $11.3
billion.
Allen & Company performed a component valuation analysis of Continental on
both a private and public market basis. The component valuation analysis
involved the valuation, using a variety of techniques, of the constituent assets
of Continental, to determine an enterprise value of such assets, which value was
then adjusted by, among other things, subtracting debt of Continental, to yield
an implied equity valuation of Continental. Allen & Company analyzed the
constituent assets of Continental consisting of (i) domestic cable operations;
(ii) marketable equity securities of Turner, HSN and TCG owned by Continental;
(iii) interests held by Continental in various programming and related
companies; (iv) minority interests held by Continental in various U.S. cable
television companies; (v) Continental's business as a distributor of DBS Service
for PrimeStar; (vi) Continental's minority interest in PrimeStar; (vii)
interests held by Continental in several cable companies located outside of the
United States; and (viii) other miscellaneous assets. Using the component
valuation analysis, Allen & Company derived a private market valuation of
Continental of from $20.23 to $26.35 per share and a public market valuation of
Continental of from $8.65 to $15.25 per share. Allen & Company noted that, based
on the Calculation Price of $21.00 and the closing price of Media Stock of
$16.88 on September 30, 1996, the Class A Merger Consideration represented a
premium of 116% based upon the midpoint of the range of public market values of
$11.95 per share.
Allen & Company also performed an analysis to estimate the potential time it
would take for Continental's hypothetical independent public market valuation to
reach the Class A Per Share Value assuming a range of EBITDA growth rates from
5% to 20%, based upon a price-to-EBITDA trading multiple of 8.0x and projected
EBITDA of Continental's cable assets of $829 million. This analysis indicated
that Continental's hypothetical independent public market valuation would not
likely reach the Class A Per Share Value in the near term under the assumptions
used.
Allen & Company also analyzed the enterprise value represented by the
consideration to be received by the Continental stockholders in the Merger based
upon the Class A Per Share Value as multiples of various financial performance
criteria, including 1996 estimated revenue (5.6x) and 1996 estimated EBITDA
(13.5x), and in terms of value per basic subscriber ($2,612) and compared such
figures to multiples of 1996 estimated revenue and 1996 estimated EBITDA and to
value per basic subscriber for a selected group of five publicly traded
companies deemed comparable by Allen & Company because such companies had cable
operations that for purposes of analysis may be considered similar to those of
Continental (Adelphia Communications, Cablevision Systems Corporation, Comcast,
Cox and TCI). Allen & Company noted such multiples of financial performance
criteria for the selected group of comparable companies ranged from 2.8x to 4.3x
and averaged 3.4x for 1996 revenues and ranged from 6.6x to 9.9x and averaged
7.8x for 1996 EBITDA and that the value per basic subscriber for such comparable
companies ranged from $1,149 to $1,884 and averaged $1,482.
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Allen & Company also analyzed the enterprise value represented by the
consideration to be received by the Continental stockholders in the Merger based
upon the Class A Per Share Value in terms of value-per-basic-subscriber ($2,612)
and as a multiple of EBITDA (13.5x) and compared such amounts to those derived
from selected comparable merger and acquisition transactions that occurred
during the period from 1986 through 1995 and that exceeded $500 million in
transaction value. Allen & Company noted the value-per-basic-subscriber in such
selected merger and acquisition transactions ranged from $1,039 to $2,889 and
averaged $2,005 and that the multiples of enterprise value to EBITDA ranged from
8.1x to 14.2x and averaged 11.0x. Allen & Company also analyzed the transaction
value per basic subscriber in eight acquisitions consummated by Continental from
November 1994 through September 1995 and noted that the value per basic
subscriber ranged from $1,091 to $2,835 and averaged $1,942 in such
transactions.
Allen & Company also calculated that the market price of Media Stock at the
closing of the Merger would have to fall to $10.67 for the value of the Class A
Merger Consideration to equal the low private market valuation of Continental of
$20.23 derived from the above-described analysis and result in no premium being
paid to stockholders of Continental in the Merger.
Allen & Company reviewed the recent Media Stock and Old Common Stock price
performance and compared that performance to the price performance of the S&P
500 and an index made up of comparable cable companies. Allen & Company also
reviewed the recent Media Stock volume trading history, including the volume of
Media Stock traded at a series of price ranges.
Allen & Company prepared a pro forma merger analysis of the financial impact
of the Merger on the Media Group and resulting effects on the stockholders of
Continental, which assumed no synergies or cost savings as a result of the
Merger. This analysis indicated that the Merger could result in economic
dilution to the Media Group but that such dilution could be affected by the
credit rating which U S WEST will have after the Merger given the assumption of
Continental's debt and the potential incurrence of additional debt that may be
required to implement U S WEST's business plan and by the integration of
Continental and its management team into the Media Group.
No company used in the comparable company analyses summarized above is
identical to Continental, and no transaction used in the comparable transaction
analysis summarized above is identical to the Merger. Accordingly, any such
analysis of the value of the consideration to be received by the holders of
Class A Common Stock pursuant to the Merger involves complex considerations and
judgments concerning differences in the potential financial and operating
characteristics of the comparable companies and transactions and other factors
in relation to the trading and acquisition values of the comparable companies.
The preparation of a fairness opinion is not susceptible to partial analysis
or summary description. Allen & Company believes that its analyses and the
summary set forth above must be considered as a whole and that selecting
portions of its analyses and the factors considered by it, without considering
all analyses and factors, could create an incomplete view of the processes
underlying the analysis set forth in its opinion. Allen & Company has not
indicated that any of the analyses which it performed had a greater significance
than any other.
In determining the appropriate analyses to conduct and when performing those
analyses, Allen & Company made numerous assumptions with respect to industry
performance, general business, financial, market and economic conditions and
other matters, many of which are beyond the control of Continental or U S WEST.
The analyses which Allen & Company performed are not necessarily indicative of
actual values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely as
part of Allen & Company's analysis of the fairness, from a financial point of
view, of the consideration which the holders of Class A Common Stock would
receive pursuant to the Merger. The analyses do not purport to be appraisals or
to reflect the prices at which a company might actually be sold or the prices at
which any securities may trade at the present time or at any time in the future.
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Allen & Company is a nationally recognized investment banking firm that is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bids, secondary distributions of listed and unlisted securities, private
placements and valuations for estate, corporate and other purposes. Continental
retained Allen & Company based on such qualifications as well as its familiarity
with Continental.
Continental entered into a letter agreement with Allen & Company as of
February 16, 1996 (the "Engagement Letter"), pursuant to which Allen & Company
agreed to evaluate the fairness from a financial point of view of the
consideration to be received by holders of Class A Common Stock pursuant to the
Merger. Pursuant to the Engagement Letter, Continental agreed to pay Allen &
Company a fee of $1,000,000, $50,000 of which was payable upon execution of the
Engagement Letter, $625,000 of which was payable upon submission of Allen &
Company's fairness opinion to Continental's Board of Directors and $325,000 of
which was payable upon Allen & Company's provision of its fairness opinion for
inclusion in this Proxy Statement. Whether or not the Merger is consummated,
Continental has agreed, pursuant to the Engagement Letter, to reimburse Allen &
Company for all its reasonable out-of-pocket expenses, including the fees and
disbursements of its counsel, incurred in connection with its engagement by
Continental and to indemnify Allen & Company against certain liabilities and
expenses in connection with its engagement.
U S WEST'S REASONS FOR THE MERGER
The U S WEST Board believes that the consummation of the Merger will
constitute a further step in the implementation of the Media Group's strategy of
becoming a leading provider of integrated communications, entertainment and
information services to its customers over wired broadband and wireless networks
in selected national and international markets. As part of this strategy, the
Media Group is developing a national footprint of wired broadband networks in
the United States outside of the Communications Group Region through its cable
and telecommunications businesses, which include MediaOne, U S WEST's cable
television systems in the Atlanta, Georgia metropolitan area, and U S WEST's
interest in TWE. The acquisition of Continental's cable television systems will
expand U S WEST's national footprint of wired broadband networks. Following
consummation of the Merger, the wired broadband networks of the Media Group and
its affiliates (including TWE) will serve over 17,000,000 million subscribers.
STOCK EXCHANGE LISTING
Application will be made to list the shares of Media Stock to be issued in
connection with the Merger on the NYSE and the PSE. The Media Stock is currently
traded on the NYSE and the PSE under the symbol "UMG." Application will also be
made to list the shares of Series D Preferred Stock to be issued in connection
with the Merger on the NYSE. It is a condition to consummation of the Merger
that the shares of Media Stock to be issued in connection with the Merger shall
have been approved for listing on the NYSE, subject only to official notice of
issuance, and that the shares of Series D Preferred Stock to be issued in
connection with the Merger shall have been approved for listing on the NYSE or
on another stock exchange or trading facility, subject only to official notice
of issuance. See "The Merger -- Stock Exchange Listing" and "The Merger
Agreement -- Certain Covenants -- Certain Other Covenants" and "-- Conditions to
the Merger."
CORPORATE GOVERNANCE
If the Subsidiary Merger is effected, the directors of Sub immediately prior
to the Effective Time will be the directors of the surviving corporation
following the Effective Time and the officers of Continental immediately prior
to the Effective Time will be the officers of the surviving corporation
following the Effective Time, until their successors have been elected or until
their resignation or removal. For information with respect to the officers of
Continental, see "Annex V -- Description of Continental -- Management." If the
Direct Merger is effected, all of the officers and directors of U S WEST
immediately prior to the Effective Time will continue as officers and directors
of U S WEST after the Effective Time, until their successors have been elected
or until their resignation or removal. Information with respect to the directors
and executive officers of U S WEST is included in U S WEST's Annual Report on
Form 10-K for the year ended December 31, 1995 and incorporated herein by
reference. See "Incorporation of Certain Documents by Reference."
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Following the Effective Time, it is presently intended that selected
management of Continental together with selected management of the Media Group's
cable and telcommunications businesses will operate and manage the businesses of
Continental and MediaOne, U S WEST's cable systems in the Atlanta, Georgia
metropolitan area.
ACCOUNTING TREATMENT
The Merger will be accounted for by U S WEST under the "purchase" method of
accounting in accordance with generally accepted accounting principles.
Therefore, the aggregate consideration paid by U S WEST in connection with the
Merger will be allocated to Continental's assets and liabilities based upon
their fair values, with any excess being treated primarily as cable television
franchises and goodwill. The assets and liabilities and results of operations of
Continental will be consolidated into the assets and liabilities and results of
operations of U S WEST and the Media Group subsequent to the Effective Time. See
"Unaudited Pro Forma Financial Statements of U S WEST and the Media Group."
FEDERAL SECURITIES LAWS IMPLICATIONS
All shares of Media Stock and Series D Preferred Stock received by
Continental stockholders in the Merger will be freely transferable, except that
shares of Media Stock and Series D Preferred Stock received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act) of
Continental prior to the Merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 promulgated under the Securities
Act (or Rule 144 in the case of such persons who become affiliates of U S WEST)
or as otherwise permitted under the Securities Act. Persons who may be deemed to
be affiliates of Continental are generally defined as individuals or entities
that control, are controlled by, or are under common control with, Continental
and include certain executive officers and directors, as well as principal
stockholders, of Continental. The Merger Agreement requires Continental to use
reasonable efforts to cause to be delivered to U S WEST, prior to the Closing,
from each Continental affiliate a letter agreement to the effect that such
person will not offer or sell or otherwise dispose of any of the shares of Media
Stock or Series D Preferred Stock issued to such persons in or pursuant to the
Merger in violation of the Securities Act or the rules and regulations
promulgated by the Commission thereunder.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the Merger
Agreement, a copy of which is attached as Annex I to this Proxy Statement and is
incorporated by reference herein. This summary is qualified in its entirety by
reference to the full and complete text of the Merger Agreement. The definitions
of certain capitalized terms used in the following description are set forth
below under "-- Conversion of Continental Common Stock -- Certain Definitions."
THE MERGER
If the Subsidiary Merger is effected, pursuant to the Merger Agreement and
subject to the terms and conditions thereof, Continental will be merged with and
into Sub, with Sub continuing as the surviving corporation and a wholly owned
subsidiary of U S WEST. Sub will be renamed "Continental Cablevision, Inc." upon
consummation of the Subsidiary Merger. If the Direct Merger is effected,
pursuant to the Merger Agreement and subject to the terms and conditions
thereof, Continental will be merged with and into U S WEST, with U S WEST
continuing as the surviving corporation. The Subsidiary Merger will only be
effected in lieu of the Direct Merger if either (i) a certain ruling is received
from the Service by U S WEST, Continental and The Providence Journal Company or
(ii) U S WEST, Continental and The Providence Journal Company are otherwise
satisfied that such ruling is not necessary. As a result of the Merger, the
separate corporate existence of Continental will cease.
Subject to the terms and conditions of the Merger Agreement, the closing of
the transactions contemplated thereby (the "Closing") will take place on the
later of (i) the fifth business day after the date on which the last of the
conditions set forth in the Merger Agreement is fulfilled or waived, other than
conditions requiring deliveries at the Closing and (ii) November 15, 1996,
unless another date is agreed to by U S WEST and Continental (such later day,
the "Closing Date"). The Merger will become effective at the Effective Time,
which will be the time at which a Certificate of Merger is filed with the
Secretary of State of the State of Delaware or such time thereafter as is
provided in the Certificate of Merger.
CONVERSION OF CONTINENTAL COMMON STOCK
FORM AND VALUE OF CONSIDERATION TO BE RECEIVED IN THE MERGER. The
consideration to be issued by U S WEST in the Merger will consist of $1.0
billion in cash, shares of Series D Preferred Stock with an aggregate
liquidation value of $1.0 billion and the remainder in shares of Media Stock.
The U S WEST Board will have the right, in its sole discretion, to increase the
cash amount to a maximum of $1.5 billion upon notice of such change to
Continental not later than one business day prior to the Effective Time, in
which event the number of shares of Media Stock to be issued by U S WEST in the
Merger would be reduced. The amount of cash which U S WEST elects to pay in the
Merger is referred to herein as the "Cash Consideration Amount."
The number of shares of Media Stock to be issued in the Merger will be based
upon a fixed Calculation Price of $21.00 per share. Therefore, the number of
shares of Media Stock issued in the Merger will not depend upon the market price
of the Media Stock. However, as a result of the fixed-exchange price, the value
at the Effective Time of the consideration to be received by holders of
Continental Common Stock in the Merger (other than holders of Class B Common
Stock who make a Cash Election that is not subject to proration) will depend
upon the market price of the Media Stock at such time. On October 8, 1996, the
closing sale price of the Media Stock was $17.625 per share. See "Market Prices
and Dividend Data."
The Series D Preferred Stock will be a new issue of U S WEST equity
securities. Accordingly, no market or market value currently exists for the
Series D Preferred Stock. Lehman, U S WEST's financial advisor, has, solely for
illustrative purposes, estimated, based upon the October 8 Media Stock Price, a
dividend rate of 4.50% and a conversion premium of 25% over the Calculation
Price and assuming the existence of a liquid market for the Series D Preferred
Stock, that the value of the Series D Preferred Stock Price would be $47.00 per
share. Based on the same factors and subject to the disclosures, conditions and
qualifications set forth under "Risk Factors -- Risk Factors Related to the
Merger -- No Assurance as to Market Value of Series D Preferred Stock" and "The
Merger -- Opinions Considered by the Continental Board -- Lazard," Lazard,
Continental's financial advisor, has, solely for illustrative purposes,
estimated that the value of the Series D
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Preferred Stock would be $46.375 per share, which is the Assumed October 8
Preferred Stock Price. Throughout this Proxy Statement, the Assumed October 8
Preferred Stock Price has been used for the purpose of providing examples of
possible respective values of the Merger consideration to be received by holders
of the different classes of Continental Common Stock. There can be no assurance,
however, that the actual market value of the Series D Preferred Stock will not
materially differ from the Assumed October 8 Preferred Stock Price. If the
Assumed October 8 Preferred Stock Price were different from the actual value of
the Series D Preferred Stock at the Effective Time, the values of the
consideration to be received in the Merger would vary from the examples given in
this Proxy Statement. The Assumed October 8 Preferred Stock Price is an estimate
only and the actual value of the Series D Preferred Stock could vary materially
therefrom based upon a number of factors, some of which are beyond U S WEST's
control, including among other things, interest rates, inflation, general
business and economic conditions, the credit rating of U S WEST's securities,
changes in the securities markets and the regulatory environment.
Based upon the October 8 Media Stock Price and the Assumed October 8
Preferred Stock Price, if the Cash Consideration Amount (as defined below)
equals $1.0 billion, the total value of the consideration to be received by
holders of Continental Common Stock would equal approximately $4.7 billion, and,
if the Cash Consideration Amount were equal to $1.5 billion, the total value of
the consideration to be received by holders of Continental Common Stock would
equal approximately $4.8 billion. As of the date of this Proxy Statement, the U
S WEST Board has made no decisions regarding whether it will increase the amount
of cash to be paid in the Merger. It is anticipated that such decision will be
made shortly prior to the business day preceding the Effective Time based upon,
among other things, the market price of Media Stock at such time, the number of
shares of Media Stock which would otherwise be issued in the Merger and
potential dilution issues relating thereto, the impact, if any, on the credit
ratings and borrowing costs of U S WEST and it subsidiaries, of an increase in
the amount of cash to be paid in the Merger and other conditions prevailing in
the financial markets at the time the decision is made.
In order to protect the tax-free nature of the Providence Journal Merger
Transactions (as is more fully discussed in "Proposals to Approve and Adopt the
Charter Amendments, Election of Continental Directors and Ratification of
Appointment of Accountants"), the Merger has been structured so that, as
permitted by the Consideration Charter Amendment, holders of Class A Common
Stock will receive only Media Stock and Series D Preferred Stock in the Merger
and not any cash consideration.
CONVERSION OF CLASS A COMMON STOCK. Upon consummation of the Merger, each
share of Class A Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Restricted Continental Common Stock,
Dissenting Shares and shares owned by Continental, by U S WEST or by any wholly
owned subsidiary of Continental or U S WEST) will be converted into the right to
receive (i) a number of shares of Media Stock equal to the Conversion Number and
(ii) a number of shares of Series D Preferred Stock equal to the Class A
Preferred Conversion Number. Upon consummation of the Merger, each share of
Class A Common Stock owned by Continental, by U S WEST or by any wholly owned
subsidiary of Continental or U S WEST will be canceled.
CONVERSION OF CLASS B COMMON STOCK. Upon consummation of the Merger, each
share of Class B Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Restricted Continental Common Stock,
Dissenting Shares and shares owned by Continental, by U S WEST or by any wholly
owned subsidiary of Continental or U S WEST) will be converted, at the election
of the holder thereof, into one of the following:
(i) the right to receive (a) a number of shares of Media Stock equal to
the Conversion Number, (b) an amount in cash equal to the Share Price
multiplied by a fraction, the numerator of which will be the Cash
Consideration Amount and the denominator of which will be the Class B
Aggregate Consideration Amount, and (c) a number of shares of Series D
Preferred Stock equal to the Share Price multiplied by a fraction, the
numerator of which will be the Class B Preferred Consideration Amount and
the denominator of which will be the product of $50 (the liquidation value
of the Series D Preferred Stock) multiplied by the Class B Aggregate
Consideration Amount.
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(ii) the right to receive (a) a number of shares of Media Stock equal to
the Class B Common Stock Election Conversion Number and (b) a number of
shares of Series D Preferred Stock equal to the Class B Preferred Conversion
Number; or
(iii) the right to receive an amount in cash, without interest, equal to
the Share Price.
Stock Elections and Cash Elections will be subject to proration as described
under "-- Proration of Class B Merger Consideration." Upon consummation of the
Merger, each share of Class B Common Stock owned by Continental, by U S WEST or
by any wholly owned subsidiary of Continental or U S WEST will be canceled.
NONE OF U S WEST, CONTINENTAL, THE U S WEST BOARD OR THE CONTINENTAL BOARD
MAKES ANY RECOMMENDATION AS TO WHETHER HOLDERS OF CLASS B COMMON STOCK SHOULD
MAKE A CASH ELECTION, STOCK ELECTION OR STANDARD ELECTION. EACH HOLDER OF CLASS
B COMMON STOCK MUST MAKE HIS OR HER OWN DECISION WITH RESPECT TO ANY SUCH
ELECTION. AS A RESULT OF THE PRORATION PROCEDURES DESCRIBED HEREIN, A
STOCKHOLDER WHO MAKES A CASH ELECTION OR A STOCK ELECTION MAY NOT RECEIVE THE
CONSIDERATION HE OR SHE HAS ELECTED.
CONVERSION OF RESTRICTED CONTINENTAL COMMON STOCK. Upon consummation of the
Merger, pursuant to the Merger Agreement, each share of Restricted Continental
Common Stock will be converted into the right to receive a number of shares of
Media Stock equal to (x) the Share Price divided by (y) the Calculation Price.
Applying this equation and subject to the adjustment described under "--
Adjustment to Share Price," each share of Restricted Continental Common Stock
will be converted into the right to receive 1.429 shares of Media Stock.
ILLUSTRATIONS OF MERGER CONSIDERATION. The illustrations of the Merger
consideration given below do not give effect to the tax consequences of
receiving cash consideration. See "Certain Federal Income Tax Considerations."
Assuming that U S WEST elects to pay $1.0 billion of cash in the Merger and
that the number of shares of Class A Common Stock and Class B Common Stock
outstanding as of the Record Date remains unchanged, (a) each share of Class A
Common Stock (other than shares of Restricted Continental Common Stock,
Dissenting Shares and shares owned by Continental, by U S WEST or by any wholly
owned subsidiary of Continental or U S WEST) would be converted at the Effective
Time into the right to receive .882 of a share of Media Stock and .229 of a
share of Series D Preferred Stock having an aggregate value, based on the
October 8 Media Stock Price and the Assumed October 8 Preferred Stock Price, of
approximately $26.19 and (b) each share of Class B Common Stock (other than
shares of Restricted Continental Common Stock, Dissenting Shares and shares
owned by Continental, by U S WEST or by any wholly owned subsidiary of
Continental or U S WEST) would be converted at the Effective Time into the right
to receive, subject to the adjustment described under "-- Adjustment of Share
Price," (i) in the case of a Standard Election, .882 of a share of Media Stock,
.082 of a share of Series D Preferred Stock and $7.39 in cash, having an
aggregate value, based on the October 8 Media Stock Price and the Assumed
October 8 Preferred Stock Price, of approximately $26.73, (ii) in the case of a
Stock Election that is not subject to proration, 1.171 shares of Media Stock,
and .108 of a share of Series D Preferred Stock, having an aggregate value,
based on the October 8 Media Stock Price and the Assumed October 8 Preferred
Stock Price, of approximately $25.66, and (iii) in the case of a Cash Election
that is not subject to proration, $30 in cash.
Assuming that U S WEST elects to increase the amount of cash payable in the
Merger to $1.5 billion and that the number of shares of Class A Common Stock and
Class B Common Stock outstanding as of the Record Date remains unchanged, (a)
each share of Class A Common Stock (other than shares of Restricted Continental
Common Stock, Dissenting Shares and shares owned by Continental, by U S WEST or
by any wholly owned subsidiary of Continental or U S WEST) would be converted at
the Effective Time into the right to receive .746 of a share of Media Stock and
.287 of a share of Series D Preferred Stock having an aggregate value, based on
the October 8 Media Stock Price and the Assumed October 8 Preferred Stock Price,
of approximately $26.44 and (b) each share of Class B Common Stock (other than
shares of Restricted
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Continental Common Stock, Dissenting Shares and shares owned by Continental, by
U S WEST or by any wholly owned subsidiary of Continental or U S WEST) would be
converted at the Effective Time into the right to receive, subject to the
adjustment described under "-- Adjustment of Share Price," (i) in the case of a
Standard Election, .746 of a share of Media Stock, .065 of a share of Series D
Preferred Stock and $11.08 in cash, having an aggregate value, based on the
October 8 Media Stock Price and the Assumed October 8 Preferred Stock Price, of
approximately $27.25, (ii) in the case of a Stock Election that is not subject
to proration, 1.183 shares of Media Stock and .103 of a share of Series D
Preferred Stock, having an aggregate value, based on the October 8 Media Stock
Price and the Assumed October 8 Preferred Stock Price, of approximately $25.63,
and (iii) in the case of a Cash Election that is not subject to proration, $30
in cash.
PRORATION OF CLASS B MERGER CONSIDERATION. The maximum amount of cash to be
paid to holders of Class B Common Stock will equal the Cash Consideration
Amount. In the event that the aggregate amount of cash represented by the Cash
Elections received by the Exchange Agent (the "Requested Cash Amount") exceeds
the Cash Consideration Amount less the amount of cash necessary to satisfy the
requirements with respect to holders who make Standard Elections (the difference
being the "Cash Cap"), each holder making a Cash Election will receive, for each
share of Class B Common Stock for which a Cash Election has been made (i) cash
in an amount equal to the product of the Share Price and a fraction, the
numerator of which is the Cash Cap and the denominator of which is the Requested
Cash Amount (such product, the "Prorated Cash Amount"), (ii) a number of shares
of Media Stock equal to the product of the Class B Common Percentage and a
fraction, the numerator of which is equal to the Share Price minus the Prorated
Cash Amount and the denominator of which is equal to the Calculation Price and
(iii) a number of shares of Series D Preferred Stock equal to the product of the
Class B Preferred Percentage and a fraction, the numerator of which is equal to
the Share Price minus the Prorated Cash Amount and the denominator of which is
equal to $50 (the liquidation value of the Series D Preferred Stock).
In the event the Requested Cash Amount is less than the Cash Cap, each
holder making a Stock Election will receive for each share of Class B Common
Stock for which a Stock Election has been made (i) cash in an amount equal to
the quotient of (a) the excess of the Cash Cap over the Requested Cash Amount
divided by (b) the number of shares of Class B Common Stock for which Stock
Elections have been made (such quotient, the "Excess Cash Amount"), (ii) a
number of shares of Media Stock equal to the product of the Class B Common
Percentage and a fraction, the numerator of which is equal to the difference
between the Share Price and the Excess Cash Amount and the denominator of which
is equal to the Calculation Price and (iii) a number of shares of Series D
Preferred Stock equal to the product of the Class B Preferred Percentage and a
fraction, the numerator of which is equal to the difference between the Share
Price and the Excess Cash Amount and the denominator of which is equal to $50
(the liquidation value of the Series D Preferred Stock).
The number of shares of Media Stock and Series D Preferred Stock to be
distributed to holders of Class A Common Stock and the number of shares of Media
Stock and Series D Preferred Stock and the amount of cash to be distributed to
holders of Class B Common Stock who make an effective Standard Election will not
be affected in any way by the proration procedures described above, while the
allocation of Media Stock and Series D Preferred Stock and cash among holders of
Class B Common Stock not opting for the Standard Election will depend upon the
Stock Elections and Cash Elections made by the holders of Class B Common Stock.
No holder will ever receive a smaller percentage of a class of consideration
than that received pursuant to a Standard Election.
ADJUSTMENT OF SHARE PRICE. If the Closing does not occur on or prior to
January 3, 1997, the Share Price will be increased at a rate equal to 8% per
annum from and including January 1, 1997 to and excluding the Closing Date
calculated on the basis of the actual number of days in the period (such amount
being the "Additional Amount"); provided, however, that no such amount will be
added to the Share Price if (i) the Closing has not occurred on or prior to
January 3, 1997 and the last of the conditions to the Merger to be fulfilled is
the condition described in clause (a) of the first paragraph under "Conditions
to the Merger" (other than as a result of any action taken or not taken by U S
WEST) or (ii) Continental has taken any action that would result in any of the
conditions to the consummation of the Merger not being satisfied at
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such time. Upon satisfaction of the condition described in clause (i) above (if
such condition is the last condition to be fulfilled), the Additional Amount
will be added to the Share Price and will be calculated commencing five business
days after the date of such satisfaction.
TREATMENT OF U S WEST OR SUB CAPITAL STOCK. If the Subsidiary Merger is
effected, upon consummation thereof, pursuant to the Merger Agreement, each
share of common stock of Sub issued and outstanding immediately prior to the
Effective Time will remain outstanding. If the Direct Merger is effected, upon
consummation thereof, pursuant to the Merger Agreement, each share of each class
of capital stock of U S WEST issued and outstanding immediately prior to the
Effective Time will remain outstanding.
CERTAIN DEFINITIONS. As used herein, the following terms have the following
meanings:
"CALCULATION PRICE" means $21.00.
"CASH CONSIDERATION AMOUNT" has the meaning set forth above under "-- Cash,
Preferred and Common Consideration Amounts."
"CASH ELECTION" means the election by a holder of shares of Class B Common
Stock to receive only cash consideration in the Merger, as described above under
"-- Conversion of Class B Common Stock."
"CLASS A PREFERRED CONSIDERATION AMOUNT" means the Class A Preferred
Percentage multiplied by the product of (i) the Share Price times (ii) the
number of shares of Class A Common Stock outstanding immediately prior to the
Effective Time.
"CLASS A PREFERRED CONVERSION NUMBER" means (i) the product of the Share
Price multiplied by the Class A Preferred Percentage divided by (ii) $50 (the
liquidation of the Series D Preferred Stock).
"CLASS A PREFERRED PERCENTAGE" means one minus the Common Percentage.
"CLASS B AGGREGATE CONSIDERATION AMOUNT" means the Class B Common
Consideration Amount plus the sum of the Cash Consideration Amount and the Class
B Preferred Consideration Amount.
"CLASS B COMMON STOCK ELECTION CONVERSION NUMBER" means (i) the product of
the Class B Common Percentage multiplied by the Share Price divided by (ii) the
Calculation Price.
"CLASS B COMMON CONSIDERATION AMOUNT" means the Common Consideration Net
Amount multiplied by a fraction, the numerator of which will be the number of
shares of Class B Common Stock outstanding at the Effective Time (excluding any
shares of Restricted Continental Common Stock) and the denominator of which will
be the number of shares of Continental Common Stock outstanding at the Effective
Time (excluding any shares of Restricted Continental Common Stock).
"CLASS B COMMON PERCENTAGE" means the Class B Common Consideration Amount
divided by the sum of the Class B Common Consideration Amount plus the Class B
Preferred Consideration Amount.
"CLASS B PREFERRED CONSIDERATION AMOUNT" means the difference between (i)
the Preferred Consideration Amount and (ii) the Class A Preferred Consideration
Amount.
"CLASS B PREFERRED CONVERSION NUMBER" means (i) the product of the Share
Price multiplied by the Class B Preferred Percentage divided by (ii) $50 (the
liquidation value of the Series D Preferred Stock).
"CLASS B PREFERRED PERCENTAGE" means the Class B Preferred Consideration
Amount divided by the sum of the Class B Common Consideration Amount plus the
Class B Preferred Consideration Amount.
"COMMON CONSIDERATION AMOUNT" means the difference between the Transaction
Value and the sum of the Cash Consideration Amount and the Preferred
Consideration Amount.
"COMMON CONSIDERATION NET AMOUNT" means the Common Consideration Amount less
the product of the number of shares of Restricted Continental Common Stock
outstanding at the Effective Time multiplied by the Share Price.
"CONVERSION NUMBER" means (i) the product of the Common Percentage
multiplied by the Share Price divided by (ii) the Calculation Price.
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"COMMON PERCENTAGE" means the Common Consideration Net Amount divided by the
Transaction Value.
"PREFERRED CONSIDERATION AMOUNT" means $1 billion.
"SHARE PRICE" means $30, subject to adjustment as desribed above under "--
Adjustment of Share Price."
"STANDARD ELECTION" means the election by a holder of shares of Class B
Common Stock to receive a combination of cash, shares of Media Stock and shares
of Series D Preferred Stock in the Merger, as described above under "--
Conversion of Class B Common Stock."
"STOCK ELECTION" means the election by a holder of shares of Class B Common
Stock to receive only shares of Media Stock and shares of Series D Preferred
Stock in the Merger, as described above under "-- Conversion of Class B Common
Stock."
"TRANSACTION VALUE" means the product of the Share Price multiplied by the
number of shares of Continental Common Stock (excluding any shares of Restricted
Continental Common Stock) outstanding at the Effective Time.
ELECTION AND EXCHANGE PROCEDURES
As soon as reasonably practicable after the Effective Time, State Street
Bank and Trust Company, in its capacity as Exchange Agent (the "Exchange
Agent"), will mail to each holder of record of a certificate or certificates
that immediately prior to the Effective Time evidenced outstanding shares of
Continental Common Stock (other than Dissenting Shares, shares owned by
Continental as treasury stock and shares owned by U S WEST or by any subsidiary
of Continental or U S WEST) ("Continental Certificates") (i) a letter of
transmittal and (ii) instructions for use in effecting the surrender of the
Continental Certificates in exchange for the Class A Merger Consideration or
Class B Merger Consideration, as applicable.
The Exchange Agent will also mail to holders of record of Class B Common
Stock (other than those holding only Restricted Continental Common Stock),
together with the items specified in the preceding paragraph, an election form
(the "Election Form"), pursuant to which each such holder will have the right to
specify whether such holder desires to make a Cash Election, Stock Election or
Standard Election. A holder will only be entitled to make one election with
respect to all of the shares of Class B Common Stock owned by such holder.
Holders of record of shares of Class B Common Stock who hold such shares as
nominees, trustees or in other representative capacities may submit multiple
Election Forms, provided that such record holder certifies that each such
Election Form covers all the shares of Class B Common Stock held by such record
holder for a particular beneficial owner. The Election Form will include
information as to the Share Price, the Cash Consideration Amount, the number of
shares of Media Stock and Series D Preferred Stock to be received (subject to
proration) by a holder of Class B Common Stock making a Stock Election and the
number of shares of Media Stock and Series D Preferred Stock and the amount of
cash to be received by a holder of Class B Common Stock making a Standard
Election, and will state the pricing terms of the Series D Preferred Stock.
STOCKHOLDERS ARE URGED TO CAREFULLY REVIEW THE ELECTION FORM, WHICH WILL CONTAIN
IMPORTANT INFORMATION WITH RESPECT TO THE SHARE PRICE AND THE NUMBER OF THE
SHARES OF MEDIA STOCK AND SERIES D PREFERRED STOCK TO BE RECEIVED BY A HOLDER
MAKING A STOCK ELECTION.
A holder of Class B Common Stock will have the right to make a Cash
Election, Stock Election or Standard Election by submitting to the Exchange
Agent, at any time prior to 5:00 p.m., New York time, on a date agreed upon by U
S WEST and Continental, which is no later than the 20th business day after the
Effective Time (the "Election Deadline"), an Election Form properly completed
and executed by such holder accompanied by such holder's Continental
Certificates, or by an appropriate guarantee of delivery of such Continental
Certificates. Any holder of Class B Common Stock who has made an election by
submitting an Election Form to the Exchange Agent will have the right, prior to
the Election Deadline, to change such holder's election by submitting a revised
Election Form, properly completed and executed and received by the Exchange
Agent prior to the Election Deadline. Any holder of Class B Common Stock may at
any time prior to the Election Deadline revoke such holder's election and
withdraw such holder's Continental Certificates deposited with the Exchange
Agent by written notice to the Exchange Agent received by the close of business
on the day prior to the Election Deadline. As of the Election Deadline, all
holders of
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Class B Common Stock immediately prior to the Effective Time that shall not have
submitted to the Exchange Agent, or shall have properly revoked an effective,
properly completed Election Form without submitting a revised, properly
completed Election Form shall be deemed to have made a Standard Election.
Upon surrender of a Continental Certificate for cancellation to the Exchange
Agent, together with the letter of transmittal, duly executed, and such other
documents as U S WEST or the Exchange Agent reasonably requests, the holder of
such Continental Certificate will be entitled to receive promptly after the
Election Deadline in exchange therefor (i) any cash that such holder has the
right to receive pursuant to the Merger Agreement (including any cash in lieu of
fractional shares) and/or (ii) certificates representing that number of shares
of Media Stock and Series D Preferred Stock that such holder has the right to
receive (in each case less the amount of any required withholding taxes, if
any), and the Continental Certificate so surrendered shall forthwith be
canceled. Until surrendered, each Continental Certificate will, at any time
after the Effective Time, represent only the right to receive the Class A Merger
Consideration or Class B Merger Consideration, as applicable, with respect to
the shares of Continental Common Stock formerly represented thereby.
HOLDERS OF CONTINENTAL COMMON STOCK SHOULD NOT SEND CONTINENTAL CERTIFICATES
WITH THE ENCLOSED PROXY CARD. CONTINENTAL STOCKHOLDERS SHOULD SEND CONTINENTAL
CERTIFICATES TO THE EXCHANGE AGENT ONLY AFTER THEY RECEIVE, AND IN ACCORDANCE
WITH THE INSTRUCTIONS ACCOMPANYING, THE LETTER OF TRANSMITTAL.
No fractional shares of Media Stock or Series D Preferred Stock will be
issued upon the surrender for exchange of Continental Certificates, and such
fractional shares will not entitle the owner thereof to vote or to any rights of
a stockholder of U S WEST. In lieu of any such fractional shares, the Exchange
Agent will, on behalf of all holders of fractional shares of Media Stock and
Series D Preferred Stock, as soon as practicable after the Effective Time,
aggregate all such fractional shares (collectively, the "Fractional Shares")
and, at U S WEST's option, such Fractional Shares will be purchased by U S WEST
or otherwise sold by the Exchange Agent as agent for the holders of such
Fractional Shares, in either case at the then prevailing price on the NYSE. The
Exchange Agent will determine the portion, if any, of the net proceeds of such
sale to which each holder of Fractional Shares is entitled by multiplying the
amount of the aggregate net proceeds of the sale of the Fractional Shares by a
fraction, the numerator of which is the amount of Fractional Shares to which
such holder is entitled and the denominator of which is the aggregate amount of
Fractional Shares to which all holders of Fractional Shares are entitled.
No dividends or other distributions declared after the Effective Time on
Media Stock or Series D Preferred Stock will be paid with respect to any shares
of Media Stock or Series D Preferred Stock represented by a Continental
Certificate until such Continental Certificate is surrendered for exchange in
accordance with the procedures described above.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain customary representations and
warranties relating to, among other things: (a) each of U S WEST's, Sub's and
Continental's organization and similar corporate matters; (b) each of U S
WEST's, Sub's and Continental's capital structure; (c) the authorization,
execution, delivery, performance and enforceability of the Merger Agreement with
respect to U S WEST, Sub and Continental; (d) documents filed by U S WEST and
Continental with the Commission and the accuracy of the information contained
therein; (e) the absence of undisclosed material litigation and other
undisclosed liabilities relating to U S WEST and Continental; (f) the absence of
material changes with respect to the business of U S WEST and Continental; (g)
certain tax and employee benefit matters with respect to Continental and its
subsidiaries; (h) the cable television systems of Continental; and (i) certain
environmental matters with respect to Continental.
CERTAIN COVENANTS
The Merger Agreement contains certain customary covenants and agreements,
including, without limitation, the following:
CONDUCT OF BUSINESS. Continental has agreed that, during the period from
February 27, 1996 until the Effective Time, except as permitted by the Merger
Agreement or as otherwise consented to in writing by U S WEST, Continental will,
and will cause its subsidiaries to, carry on their respective businesses in the
ordinary course in substantially the same manner as presently conducted
(including with respect to advertising, promotions and capital expenditures) and
in compliance in all material respects with applicable laws, and use
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their reasonable best efforts consistent with past practices to keep available
the services of the present employees of Continental and its subsidiaries and to
preserve their relationships with customers, suppliers and others with whom
Continental and its subsidiaries deal to the end that their goodwill and ongoing
businesses will not be materially impaired in any material respect at the
Closing Date. Continental will not, and will cause its subsidiaries not to, take
any action that would, or that is reasonably likely to, result in any of the
representations and warranties of Continental set forth in the Merger Agreement
being untrue in any material respect as of the date made or in any of the
conditions to the consummation of the Merger not being satisfied. In addition,
without limiting the generality of the foregoing, Continental has agreed that it
will not and will cause its subsidiaries not to, among other things, subject to
certain exceptions: (a) amend its Certificate of Incorporation, Bylaws or other
comparable organizational documents, except for the Charter Amendments; (b)
except for RSPA issuances permitted by the Merger Agreement, redeem or otherwise
acquire any shares of its capital stock, or issue any capital stock or any
option, warrant or right relating thereto or any securities convertible into or
exchangeable for any shares of its capital stock, or split, combine or
reclassify any of its capital stock or issue any securities in exchange or in
substitution for shares of its capital stock; (c) grant or agree to grant to any
employee any increase in wages or bonus, severance, profit sharing, retirement,
deferred compensation, insurance or other compensation or benefits, or establish
any new compensation or benefit plans or arrangements, or amend or agree to
amend any existing benefit plans, except as may be required under existing
agreements or in the ordinary course of business consistent with past practices
or enter into any new RSPA or amend the terms of any existing RSPA or accelerate
the vesting of any shares of Class B Common Stock issued thereunder; (d) merge,
amalgamate or consolidate with any other entity in any transaction in which
Continental is not the surviving corporation, sell all or substantially all of
its business or assets, or acquire all or substantially all of the business or
assets of any other person; (e) enter into or amend any employment, consulting,
severance or similar agreement with any individual, except with respect to
severance gifts or payments of a nominal nature to persons holding
non-officer/executive level positions in the ordinary course of business
consistent with past practice; (f) declare, set aside or make any dividends,
payments or distributions in cash, securities or property to the stockholders of
Continental; (g) incur or assume any new indebtedness, other than certain
permitted indebtedness; (h) make any change in any accounting practice, except
as required by applicable laws or by GAAP; (i) make or incur any capital
expenditures except for certain permitted capital expenditures or for capital
expenditures that are, individually, not in excess of $25 million or, in the
aggregate, not in excess of $50 million; (j) sell, lease, swap or otherwise
dispose of any assets, other than (i) sales, leases, swaps or other dispositions
of such assets not having a fair market value in excess of $15 million
individually or $30 million in the aggregate or (ii) subject to certain
specified limitations, swaps of cable television systems or assets of cable
television systems which would either facilitate the clustering of systems or
result in the disposition of systems located in the Communications Group Region;
(k) abandon, avoid, dispose, surrender, fail to file for timely renewal,
terminate or amend in any materially adverse manner the terms of any material
franchises, any FCC license that would have a material adverse effect on the
operation of a system or Continental's Social Contract (see "Description of
Continental -- Business -- U.S. Operating Strategy -- U.S. Regulatory Strategy;
Social Contract"), or, with respect to any material franchise, fail to file for
renewal of such franchise pursuant to Section 626(a) of the Cable Communications
Policy Act of 1984, as amended (the "Cable Act"); (l) modify, amend, terminate,
renew or fail to use reasonable efforts to renew any material contract or
agreement necessary to continue Continental's business in the ordinary course or
waive, release or assign any material rights or claims, other than in the
ordinary course of business; (m) except as permitted by applicable law,
implement any rate change, retiering or repackaging of programming (other than
rate changes disclosed to U S WEST in writing at least 30 days prior thereto),
make any cost-of-service election under the rules and regulations adopted under
the Cable Act (other than elections disclosed to U S WEST in writing at least 30
days prior thereto), determine a method of refund pursuant to 47 C.F.R. Section
76.942(d) or 76.961(c) or amend any franchise or agree to make any payments or
commitments, including commitments to make future capital improvements or
provide future services, in connection with any renewal of any franchise other
than that which Continental would make in the ordinary course of business; (n)
enter into any agreement, understanding or commitment that restrains, limits or
impedes Continental's or U S WEST's ability to compete with or conduct any
business or line of business; (o) invest or enter into any agreement,
understanding or commitment, whether written or oral, by or on behalf of
Continental or its subsidiaries, to invest or provide additional capital in
respect of assets, businesses or entities, other than certain permitted
investments; (p) enter into any material contract or agreement with, or make any
loan or advance to, any affiliate (other than a wholly
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owned subsidiary) of Continental or any stockholder or affiliate thereof; (q)
enter into, or amend the terms of, any agreement relating to interest rate
swaps, caps or other hedging or derivative instruments relating to indebtedness
of Continental and its subsidiaries, except as required under existing or
permitted indebtedness; or (r) conduct its business in a manner or take, or
cause to be taken, any other action (including, without limitation, effecting or
agreeing to effect or announcing an intention or proposal to effect, any
acquisition, business combination, merger, consolidation, restructuring or
similar transaction) that would or might reasonably be expected to prevent U S
WEST, Sub or Continental from consummating the transactions contemplated by the
Merger Agreement (regardless of whether such action would otherwise be permitted
or not prohibited by the terms of the Merger Agreement), including, without
limitation, any action which may limit the ability of U S WEST, Sub or
Continental to consummate the transactions contemplated by the Merger Agreement
as a result of antitrust or other regulatory concerns.
During the period from February 27, 1996 until the Effective Time, except as
permitted by the Merger Agreement or as otherwise consented to in writing by
Continental, U S WEST has agreed that it will not and will cause its
subsidiaries not to: (a) issue shares of Media Stock or any option, warrant or
right relating thereto or any securities convertible into or exchangeable for
any shares of Media Stock at less than fair market value as determined by the U
S WEST Board (other than pursuant to the terms of existing options or benefit
plans), or split, combine, redeem, convert or reclassify the Media Stock or
issue any securities in exchange or in substitution for shares of Media Stock;
(b) amend its Certificate of Incorporation or Bylaws (other than the filing of a
Certificate of Designation for the issuance of any series of Preferred Stock) in
any manner adverse to the holders of Media Stock; (c) declare, set aside or make
any dividends or distributions in cash, securities or
property to holders of Media Stock; (d) conduct its business in a manner or
take, or cause to be taken, any other action (including, without limitation,
effecting or agreeing to effect or announcing an intention or proposal to
effect, any acquisition, business combination, merger, consolidation,
restructuring or similar transaction) that would or might reasonably be expected
to prevent U S WEST, Sub or Continental from consummating the transactions
contemplated by the Merger Agreement (regardless of whether such action would
otherwise be permitted or not prohibited by the Merger Agreement), including,
without limitation, any action which may limit the ability of U S WEST, Sub or
Continental to consummate the transactions contemplated by the Merger Agreement
as a result of antitrust or other regulatory concerns; (e) take any action that
would, or that is reasonably likely to, result in any of the representations and
warranties of U S WEST set forth in the Merger Agreement being untrue in any
material respect as of the date made or any of the conditions to the Merger not
being satisfied; (f) purchase or sell (or announce any intention or proposal to
purchase or sell) shares of Media Stock for cash at a price less than the
Calculation Price, other than pursuant to benefit plans in the ordinary course
of business or pursuant to the U S WEST Shareowner Investment Plan; provided
that if the Effective Time is later than December 31, 1996, U S WEST and its
subsidiaries will have the right to purchase (or announce an intention to
purchase) shares of Media Stock for cash at a price less than the Calculation
Price after such date; (g) sell all or substantially all of the properties and
assets of the Media Group (within the meaning of the U S WEST Restated
Certificate); or (h) acquire, or agree to acquire, any shares of Continental
Capital Stock if, after giving effect to such acquisition, U S WEST would
beneficially own 10% or more of the Continental Capital Stock. Sub has agreed
that, during the period of time from the date of the Merger Agreement until the
Effective Time, Sub will not engage in any activities of any nature, except as
provided in or contemplated by the Merger Agreement.
MEETINGS OF CONTINENTAL STOCKHOLDERS. As discussed under "-- Conditions to
the Merger," consummation of the Merger is conditioned upon adoption of the
Consideration Charter Amendment by Continental's stockholders. In the event the
Consideration Charter Amendment is not adopted at the Special Meeting,
Continental has agreed, as promptly as practicable following the date of the
Special Meeting, to duly call, give notice of, convene and hold another meeting
of its stockholders (the "Additional Meeting") for the purpose of obtaining the
adoption by the stockholders of Continental of the Consideration Charter
Amendment. Without limiting the generality of the foregoing, Continental has
agreed that the foregoing obligations will not be altered by the commencement,
public proposal or communication to Continental of any Acquisition Proposal (as
defined herein). Certain holders of Class B Common Stock have agreed to convert
a
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significant number of their shares of Class B Common Stock into Class A Common
Stock and to vote such shares of Class A Common Stock in favor of adoption of
the Consideration Charter Amendment at the Additional Meeting. See "Ancillary
Agreements -- Stockholders' Agreement."
Subject to the fiduciary duties of the Continental Board under applicable
laws and to the right of the Continental Board to terminate the Merger Agreement
as described in clause (b) of the third paragraph under "-- Termination --
Termination Events," Continental has agreed, through the Continental Board, to
recommend, and to use its best efforts to solicit from stockholders proxies in
favor of, adoption of the Merger Agreement and the Consideration Charter
Amendment and to take all other action necessary to secure such approvals at the
Special Meeting or the Additional Meeting, as the case may be.
NO SOLICITATION. From the date of the Merger Agreement until the Effective
Time, Continental has agreed that it will not, nor will it permit any of its
subsidiaries, nor will it authorize or permit any of its officers, directors,
employees, agents, investment bankers, attorneys, financial advisors or other
representatives or those of any of its subsidiaries to, directly or indirectly,
solicit, initiate or encourage (including by way of furnishing information or
assistance) or take other action to facilitate any inquiries or the making of
any proposal that constitutes or may reasonably be expected to lead to, an
Acquisition Proposal from any third party, or engage in any discussions or
negotiations relating thereto or in furtherance thereof or accept or enter any
agreement with respect to any Acquisition Proposal; provided, however, that (i)
prior to the approval of the Merger Agreement by the stockholders of
Continental, Continental is permitted to engage in discussions or negotiations
with, and is permitted to furnish information concerning Continental and its
business, properties and assets to, a third party who, without any solicitation,
initiation, encouragement, discussion or negotiation, directly or indirectly, by
or with Continental or any of its representatives, or in furtherance thereof
makes a written, bona fide Acquisition Proposal that is not subject to any
material contingencies relating to financing and that is reasonably capable of
being financed and is financially superior to the consideration to be received
by Continental's stockholders pursuant to the Merger (as determined in good
faith by the Continental Board after consultation with Continental's financial
advisors) if (1) the Continental Board determines in its good faith, after
receipt of written advice of Continental's outside legal counsel, that such
action is advisable for the Continental Board to act in a manner consistent with
its fiduciary duties under applicable law and (2) prior to furnishing
information with respect to Continental and its subsidiaries to such third
party, Continental receives from such third party an executed confidentiality
agreement in reasonably customary form on terms not more favorable to such
person or entity than the terms contained in the existing confidentiality
agreements between U S WEST and Continental, and (ii) the Continental Board is
permitted to take and disclose to Continental's stockholders a position with
regard to a tender offer or exchange offer to the extent required by Rule
14e-2(a) under the Exchange Act. Any violation of the restrictions set forth in
the preceding sentence by any investment banker or financial advisor retained by
Continental, whether or not such person is purporting to act on behalf of
Continental or any of its subsidiaries or otherwise, will constitute a breach of
the foregoing provisions. "Acquisition Proposal" means any proposal or offer,
other than a proposal or offer by U S WEST or any of its affiliates, for a
tender or exchange offer, merger, consolidation or other business combination
involving Continental or any of its material subsidiaries or any proposal to
acquire in any manner a substantial equity interest in or a substantial portion
of the assets of Continental or any of its material subsidiaries; provided,
however, that, the term "Acquisition Proposal" does not include any acquisition
by Continental or any of its subsidiaries of any assets, businesses or entities
in any transaction or series of related transactions in exchange for other
assets, businesses or entities of any third party.
Continental has agreed to promptly notify U S WEST orally and in writing of
any Acquisition Proposal or any inquiry with respect to or which could lead to
any Acquisition Proposal, within 24 hours of the receipt thereof, including the
identity of the third party making any such Acquisition Proposal or inquiry and
the material terms and conditions of any Acquisition Proposal, and, if such
Acquisition Proposal or inquiry is in writing, to deliver to U S WEST a copy of
such Acquisition Proposal or inquiry. Continental has also agreed to keep U S
WEST informed of the status and details of any such Acquisition Proposal or
inquiry.
INDEMNIFICATION. If the Subsidiary Merger is effected, U S WEST has agreed
to include in the Certificate of Incorporation and Bylaws of the surviving
corporation the provisions with respect to indemnification
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set forth in the Continental Restated Certificate and Continental's Bylaws and
has agreed not to amend, repeal or otherwise modify such provisions for a period
of six years after the Effective Time in any manner that would adversely affect
the rights thereunder of individuals who at any time prior to the Effective Time
were directors or officers of Continental in respect of actions or omissions
occurring at or prior to the Effective Time (including, without limitation, the
transaction contemplated by the Merger Agreement), unless such modification is
required by law. If the Direct Merger is effected, U S WEST has agreed not to
amend, repeal or otherwise modify the U S WEST Restated Certificate or the
Bylaws of U S WEST for a period of six years after the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who at
any time prior to the Effective Time were directors or officers of Continental
or its subsidiaries in respect of actions or omissions occurring at or prior to
the Effective Time (including, without limitation, the transactions contemplated
by the Merger Agreement), unless such modification is required by law. From and
after the Effective Time, U S WEST has agreed to indemnify, defend and hold
harmless each individual who at the date of the Merger Agreement is, at any time
prior thereto was, or who becomes prior to the Effective Time, an officer or
director of Continental or any of its subsidiaries (the "Indemnified Parties")
against all losses, claims, damages, costs, expenses (including attorneys' fees
and expenses), liabilities or judgments or amounts that are paid in settlement
with the approval of the indemnifying party (which approval shall not be
unreasonably withheld) of or in connection with any threatened or actual claim,
action, suit, proceeding or investigation based in whole or in part on or
arising in whole or in part out of the fact that such person is or was a
director or officer of Continental or any of its subsidiaries or served as a
director of any third party on behalf of Continental or any of its subsidiaries,
whether pertaining to any matter existing or occurring at or prior to the
Effective Time and whether asserted or claimed prior to, or at or after, the
Effective Time ("Indemnified Liabilities"), including, without limitation, all
Indemnified Liabilities based in whole or in part on, or arising in whole or in
part out of, or pertaining to the Merger Agreement or the transactions
contemplated thereby, in each case to the fullest extent a corporation is
permitted under the DGCL to indemnify its own directors or officers (and
Continental or U S WEST, as the case may be, will pay expenses in advance of the
final disposition of any such action or proceeding to each Indemnified Party to
the full extent permitted by law).
EMPLOYEE BENEFITS. For a period of one year following the Effective Time, U
S WEST has agreed to cause the surviving corporation to maintain in effect for
employees of Continental and its subsidiaries benefits (other than RSPAs or
similar benefits) no less favorable in the aggregate than the benefits offered
by Continental immediately prior to the Effective Time. U S WEST has also agreed
to cause the surviving corporation to honor and perform all severance,
employment and similar agreements of Continental.
Following the date of the Merger Agreement, Continental, after consultation
with U S WEST, is permitted to (i) forgive (or cause eventually to be forgiven)
up to $35.7 million of principal amount of outstanding loans made by Continental
to employees to enable such employees to pay income taxes incurred by such
employees as a result of the purchase of shares of Continental Common Stock by
such employees pursuant to the RSPAs; provided, however, that any loan to an
employee of Continental who is, or reasonably can be expected to become, a
"covered employee" (within the meaning of Section 162(m) of the Code) will in no
event be forgiven, in whole or in part, prior to the day following the Closing
Date and (ii) issue up to 350,000 shares of Continental Common Stock pursuant to
RSPAs to employees of Continental or any of its subsidiaries, so long as, in
each case, such forgiveness or issuance acts as incentive for the purpose of
retaining and motivating such employees to continue in the employment of
Continental following the Effective Time and is implemented in a manner
consistent with such purpose.
If, following the Effective Time, the termination of the employee's
employment with Continental or any of its subsidiaries results in the
acceleration of the vesting of an award under any RSPA or the forgiveness of a
loan related to an RSPA pursuant to a Tax Liability Financing Agreement (other
than as a result of termination of employment by reason of the employee's death
or disability) and as a result of such acceleration, either (i) the employee
becomes subject to an Excise Tax that such employee would not have been subject
to without the occurrence of such acceleration or (ii) the amount of the Excise
Tax imposed on such employee is greater than the amount of the Excise Tax that
would have been imposed without the occurrence of such acceleration (the
"Incremental Excise Tax"), U S WEST has agreed to pay or cause to be
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paid to the employee, at the time specified below, an additional amount (the
"Additional Payment") sufficient to (a) in the case of clause (i) above,
reimburse the employee for the Excise Tax, and in the case of clause (ii) above,
reimburse the employee for the Incremental Excise Tax and (b) in either case,
reimburse the employee for any federal, state or local income tax or any
additional excise tax under Section 4999 of the Code payable with respect to any
Additional Payment. See "Risk Factors -- Risk Factors Related to the Merger --
Interest of Certain Persons in the Transactions."
CERTAIN EFFORTS. Pursuant to the Merger Agreement, both Continental and U S
WEST have agreed to use their reasonable best efforts to take, or cause to be
taken, all action and to do, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by the Merger Agreement, subject to
obtaining the necessary approvals of Continental's stockholders, including
obtaining the franchise consents and license consents described under "--
Regulatory and Other Third Party Approvals."
Each of Continental and U S WEST have agreed to use its reasonable best
efforts to obtain any clearance required under the Hart-Scott Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") for the consummation of the
Merger, which efforts will not, except as mutually agreed by U S WEST and
Continental, require U S WEST in order to obtain any consent or clearance from
any governmental authority to (i) hold separate, sell or otherwise dispose of
any assets, including assets of Continental, the effect of any of which, in the
reasonable judgment of U S WEST, would be to materially impair the value of the
Merger to U S WEST or (ii) contest any suit brought or threatened by the Federal
Trade Commission ("FTC") or the DOJ or attempt to lift or rescind any injunction
or restraining order obtained by the FTC or DOJ adversely affecting the ability
of U S WEST and Continental to consummate the transactions contemplated by the
Merger Agreement.
CERTAIN OTHER COVENANTS. Both U S WEST and Continental have also agreed,
among other things: (i) to promptly make all required filings under the HSR Act;
(ii) to consult with each other prior to issuing any press release or public
statement; (iii) that U S WEST and its representatives be granted access to the
management, facilities, suppliers, accounts, books records, contracts, and other
materials, as well as to the directors, officers, employees and independent
accountants, of Continental and that Continental and its representatives be
granted access to the management, facilities, suppliers, accounts, books
records, contracts, and other materials, as well as to the directors, officers,
employees and independent accountants, of the Media Group; (iv) that U S WEST
will use its best efforts to cause the shares of Media Stock and Series D
Preferred Stock to be issued in the Merger to be listed on the NYSE; (v) that
Continental will use its best efforts to cause to be delivered to U S WEST,
prior to the Closing, a letter from each "affiliate" of Continental; and (vi)
that the U S WEST Board will attribute all of the assets and liabilities of
Continental and its subsidiaries to the Media Group following the Effective
Time.
CONDITIONS TO THE MERGER
The obligations of U S WEST, Sub and Continental to consummate the Merger
are subject to the satisfaction of the following conditions: (a) the
stockholders of Continental shall have adopted the Merger Agreement and the
Consideration Charter Amendment and the Consideration Charter Amendment shall
have become effective in accordance with the DGCL; (b) the waiting periods (and
any extension thereof) applicable to the Merger under the HSR Act shall have
expired or been terminated, 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 Merger Agreement and no such proceeding will be
pending as of the Closing Date; (c) no statute, rule, regulation, injunction,
restraining order or decree of any court or governmental authority of competent
jurisdiction shall be in effect that restrains or prevents the transactions
contemplated by the Merger Agreement; (d) the Registration Statement shall have
been declared effective under the Securities Act and shall not be the subject of
any stop order or proceedings seeking a stop order, and any material "blue sky"
and other state securities laws applicable to the issuance of the Media Stock
and Series D Preferred Stock shall have been complied with; (e) the shares of
Media Stock issuable in the Merger shall have been approved for listing on
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the NYSE, subject only to official notice of issuance; and (f) the holders of
shares of Continental Preferred Stock shall have converted such shares into
shares of Class B Common Stock, effective no later than immediately prior to the
Effective Time.
The obligations of U S WEST and Sub to consummate the Merger are also
subject to the satisfaction of the following additional conditions: (a) there
shall be no breach of any representation or warranty of Continental contained in
the Merger Agreement that, individually or together with all other such
breaches, results in a material adverse effect with respect to Continental; (b)
Continental shall have performed and complied in all material respects with all
of its undertakings, covenants, conditions and agreements required by the Merger
Agreement to be performed or complied with by it prior to or at the Closing; (c)
U S WEST shall have received an opinion of Weil, Gotshal & Manges LLP, dated the
Closing Date, to the effect that (i) the Merger should be treated for Federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code; (ii) each of U S WEST, Continental and, in the case of the Subsidiary
Merger, Sub, should be a party to the reorganization within the meaning of
Section 368(b) of the Code; and (iii) no gain or loss should be recognized by
Continental, U S WEST, or, in the case of the Subsidiary Merger, Sub as a result
of the Merger; (d) U S WEST shall have received a letter from each "affiliate"
of Continental in the form attached to the Merger Agreement; (e) all required
consents (other than franchise consents) shall have been obtained, except where
the failure to obtain any such consent would not have a material adverse effect
with respect to Continental or U S WEST, as applicable; (f) U S WEST shall have
received evidence, in form and substance reasonably satisfactory to it, that the
number of Dissenting Shares shall constitute no greater than 10% of the total
number of shares of Continental Common Stock (assuming conversion of the
Continental Preferred Stock) outstanding immediately prior to the Effective
Time; (g) except as described in the second paragraph under "-- Certain
Covenants -- Certain Efforts," there shall not be pending or threatened by any
governmental authority certain types of suits, actions or proceedings; (h)
Continental shall have obtained the franchise consents and license consents
described under "-- Regulatory and Other Third Party Approvals"; and (i) all
corporate proceedings taken by Continental in connection with the transactions
contemplated by the Merger Agreement and all documents incident thereto shall be
reasonably satisfactory in all material respects to U S WEST and U S WEST's
counsel.
The obligation of Continental to consummate the Merger is also subject to
the satisfaction of the following additional conditions: (a) there shall be no
breach of any representation or warranty of U S WEST or Sub contained in the
Merger Agreement that, individually or together with all other such breaches,
results in a material adverse effect with respect to U S WEST; (b) U S WEST and
Sub shall have performed and complied in all material respects with all of its
undertakings, covenants, conditions and agreements required by the Merger
Agreement to be performed or complied with by U S WEST prior to or at the
Closing; (c) Continental shall have received an opinion of Sullivan & Worcester,
dated the Closing Date, to the effect that (i) the Merger should be treated for
Federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code; (ii) each of U S WEST, Continental and, in the case of the
Subsidiary Merger, Sub should be a party to the reorganization within the
meaning of Section 368(b) of the Code; and (iii) no gain or loss will be
recognized by a stockholder of Continental except (x) with respect to cash
received by such stockholder in lieu of fractional shares or pursuant to the
exercise of appraisal rights and (y) if a stockholder of Continential receives
cash, gain, if any, realized by such stockholder will be recognized, but only to
the extent of the cash received; (d) all required consents (other than franchise
consents) shall have been obtained, except where the failure to obtain any such
consent would not have a material adverse effect with respect to Continental or
U S WEST, as applicable; (e) the shares of Series D Preferred Stock issuable in
the Merger shall have been approved for listing on the NYSE or otherwise
approved for listing or eligible for trading, subject only to official notice of
issuance; (f) Continental shall have obtained the Franchise Consents and license
consents described under "-- Regulation and Other Third Party Approvals"; and
(g) all corporate proceedings taken by U S WEST and Sub in connection with the
transactions contemplated by the Merger Agreement and all documents incident
thereto shall be reasonably satisfactory in all material respects to Continental
and Continental's counsel.
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TERMINATION
TERMINATION EVENTS. The Merger Agreement may be terminated at any time
prior to the Effective Time by either U S WEST or Continental if: (a) the
Closing has not occurred by August 31, 1997; provided, however, that such date
may be extended by either party to December 31, 1997 if all conditions to the
Merger have been satisfied other than certain conditions relating to the absence
of injunctions or litigation and the receipt of certain third party and
governmental approvals; or (b) the Consideration Charter Amendment and the
Merger Agreement are not adopted at the Special Meeting or at the Additional
Meeting. In addition, the Merger Agreement may be terminated by the mutual
consent of U S WEST and Continental.
The Merger Agreement may also be terminated by U S WEST if: (a) any of the
conditions to the obligations of U S WEST set forth in the Merger Agreement
become incapable of fulfillment and are not waived by U S WEST, or if
Continental breaches in any material respect any of its representations,
warranties or obligations set forth in the Merger Agreement and such breach is
not cured in all material respects or waived and Continental does not provide
reasonable assurance that such breach will be cured in all material respects on
or before the Closing Date, but only if such breach, singly or together with all
other such breaches, would have a material adverse effect with respect to
Continental; or (b) Continental (i) withdraws or modifies, in a manner adverse
to U S WEST, its approval or recommendation of the Merger Agreement or any of
the transactions contemplated thereby, (ii) fails to include such recommendation
in the Proxy Statement, (iii) approves or recommends any Acquisition Proposal
from a third party or (iv) resolves to do any of the foregoing.
The Merger Agreement may also be terminated by Continental: (a) if any of
the conditions to the obligations of Continental set forth in the Merger
Agreement become incapable of fulfillment and are not waived by Continental, or
if U S WEST or Sub breaches in any material respect any of its representations,
warranties or obligations set forth in the Merger Agreement and such breach is
not cured in all material respects or waived and U S WEST does not provide
reasonable assurance that such breach will be cured in all material respects on
or before the Closing Date, but only if such breach, singly or together with all
other such breaches, would have a material adverse effect with respect to U S
WEST; or (b) prior to the adoption of the Merger Agreement by the stockholders
of Continental so long as (i) Continental is not then in breach of the
provisions described under "-- Certain Covenants -- No Solicitation," (ii) prior
to such termination, Continental negotiates with U S WEST in good faith to make
such adjustments in the terms and conditions of the Merger Agreement as would
enable Continental to proceed with the Merger and (iii) the Continental Board
determines in good faith (on the basis of the terms of such Acquisition Proposal
and the terms of the Merger Agreement, after giving effect to any concessions
offered by U S WEST pursuant to clause (ii) above), after receipt of written
advice from Continental's outside legal counsel, that such termination is
advisable for the Continental Board to act in a manner consistent with its
fiduciary duties to stockholders under applicable law and (iv) Continental
provides to U S WEST prior written notice of such termination, which notice
advises U S WEST of the matters described in clauses (ii) and (iii) above.
EFFECT OF TERMINATION. In the event of termination by U S WEST or
Continental, written notice thereof is required to be given promptly to the
other party and, except as otherwise provided in the Merger Agreement, the
transactions contemplated by the Merger Agreement will be terminated, without
further action by any party. Notwithstanding the foregoing, nothing in the
Merger Agreement will be deemed to release any party from any liability for any
breach by such party of the terms and provisions of the Merger Agreement or to
impair the right of Continental, on the one hand, and U S WEST and Sub, on the
other hand, to compel specific performance of the other party of its obligations
under the Merger Agreement.
REGULATORY AND OTHER THIRD PARTY APPROVALS
It is a condition to the obligations of U S WEST that, by the Closing,
Continental obtain the consents of governmental authorities with jurisdiction
over the transfer of control of its franchises (the "Franchise Consents"),
which, when taken together with franchises that do not require a Franchise
Consent, cover (i) at least 90% of all of Continental's subscribers and at least
95% of Continental's basic subscribers covered by franchises located in the 30
largest Metropolitan Statistical Areas ("MSA") in which Continental operates a
franchise, in each case as of March 31, 1996 and (ii) at least 85% of all
franchises existing on February 27,
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1996, both as adjusted for acquisitions and dispositions. Continental and U S
WEST have jointly filed for a transfer approval with the local franchising
authority ("LFA") in each jurisdiction where Continental has determined that
consent is required; the LFA's by statute have 120 days to act on the transfer
request. If no decision is reached by an LFA during such period, consent is
deemed to be granted. Out of Continental's approximately 910 franchises
(including franchises that Continental has a binding agreement to acquire),
Continental has determined that approximately 55% require a consent to the
transfer of control of the franchise to U S WEST, approximately 8% require
notice of such transfer, and approximately 36% require no action on the part of
the LFA to effectuate the transfer. As of October 9, 1996, Continental has
obtained Franchise Consents which, when taken together with franchises that do
not require a consent, cover 95% of all of Continental's subscribers, 94% of
Continental's subscribers in the top 30 MSA's and 98% of Continental's
franchises. The parties anticipate that Continental will have satisfied all
three criteria by the date of the Special Meeting.
With regard to the rights and obligations embodied in the Social Contract,
adopted by the FCC on August 3, 1995, and the Social Contract Amendment, adopted
August 21, 1996, the FCC has acknowledged that all provisions of both agreements
will continue to apply after the Merger. No separate consent is required.
Because the Merger will result in U S WEST's owning the In-Region Systems, U
S WEST must obtain a temporary waiver from the FCC of the rules that prohibit
such cross-ownership until such systems are divested. The In-Region Systems,
located in Idaho, Iowa, Minnesota, Arizona and Utah, represented approximately
380,031 basic subscribers as of June 30, 1996, or approximately 9% of
Continental's total basic subscribers.
U S WEST may also need to seek a petition for special relief from the FCC
with respect to its engagement in the provision of the "in-region" interLATA
services, either directly or through an "affiliate" because U S WEST will
acquire Continental's minority equity interest in TCG as a result of the Merger.
TCG currently operates, among other areas, in U S WEST's telephone service area.
See "Description of Continental -- Business -- Telecommunications and
Technology."
In addition to the foregoing, both Continental and U S WEST and certain of
their affiliates submitted notifications to the DOJ pursuant to the HSR Act.
This notification process provides an opportunity for the DOJ to review the
proposed Merger for any anti-competitive impact. The DOJ has issued a "second
request" for additional information, to which the parties are in the process of
responding. U S WEST and Continental anticipate that all of the In-Region
Systems and Continental's interests in TCG will need to be divested after the
Merger.
FEES AND EXPENSES
Except as described below, each of U S WEST and Continental has agreed to
pay the fees and expenses of its respective counsel, accountants and other
experts and to pay all other costs and expenses incurred by it in connection
with the negotiation, preparation and execution of the Merger Agreement and the
consummation of the transactions contemplated thereby.
In the event the Merger Agreement is terminated (a) by U S WEST in the
circumstances described in clause (b) of the second paragraph under "--
Termination -- Termination Events," (b) by Continental in the circumstances
described in clause (b) of the third paragraph under "-- Termination --
Termination Events," or (c) by Continental or U S WEST in the circumstances
described in clause (b) of the first paragraph under "-- Termination --
Termination Events" and the Continental Board materially modified or withdrew
its approval, determination or recommendation of the Merger Agreement or any of
the transactions contemplated thereby prior to the Special Meeting or there was
an Acquisition Proposal and such proposal was not withdrawn prior to the Special
Meeting and within one year thereafter Continental enters into a definitive
agreement with respect to such Acquisition Proposal (including any definitive
agreement relating to an Acquisition Proposal offered by the same proponent or
its affiliate of such Acquisition Proposal), then Continental will be required
to promptly pay to U S WEST a fee of $125 million, plus an amount (not to exceed
$15 million) equal to the actual reasonable fees and expenses paid or payable by
or on behalf of
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U S WEST to its attorneys, accountants, environmental consultants, management
consultants and other consultants and advisors in connection with the
negotiation, execution and delivery of the Merger Agreement and the transactions
contemplated thereby.
AMENDMENT; WAIVER
The Merger Agreement may be amended, modified or supplemented only by
written agreement of U S WEST and Continental at any time prior to the Effective
Time with respect to any of the terms contained in the Merger Agreement;
provided, however, that, after the Merger Agreement is adopted by Continental's
stockholders, U S WEST and Continental will not be permitted to make any
amendments or modifications to the Merger Agreement which would (a) alter or
change the amount or kind of consideration to be delivered to the stockholders
of Continental or (b) alter or change any of the terms and conditions of the
Merger Agreement if such alteration or change would adversely affect the holders
of any class of capital stock of Continental.
At any time prior to the Effective Time, U S WEST or Continental may, to the
extent permitted by law: (a) extend the time for the performance of any of the
obligations or other acts of the other party; (b) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement or in any
document delivered pursuant to the Merger Agreement; and (c) waive compliance
with any of the agreements or conditions contained in the Merger Agreement.
ANCILLARY AGREEMENTS
STOCKHOLDERS' AGREEMENT
Concurrently with the execution and delivery of the Merger Agreement, U S
WEST and certain stockholders of Continental (the "Stockholders") entitled to
exercise voting power with respect to an aggregate of 83,807,275 shares of Class
B Common Stock (treating the Continental Preferred Stock as if it were converted
into Class B Common Stock) and 462,249 shares of Class A Common Stock, which in
the aggregate, represent approximately 59.1% of the voting power of the
Continental Voting Stock, including Amos B. Hostetter, Jr. ("Hostetter") and the
Amos B. Hostetter, Jr. 1989 Trust (the "Hostetter Trust"), entered into the
Stockholders' Agreement. Set forth below is a summary of certain provisions of
the Stockholders' Agreement, a copy of which has been filed as an exhibit to the
Registration Statement. This summary is qualified in its entirety by reference
to the full and complete text of the Stockholders' Agreement.
Each of the Stockholders has agreed to vote all of the shares of Continental
Voting Stock then owned by such Stockholder or which such Stockholder has the
right to vote (and have granted to U S WEST their proxies to vote all such
shares) (i) in favor of the adoption of the Merger Agreement, as in effect on
the date of the Stockholders' Agreement, and each of the transactions
contemplated thereby and any action required in furtherance thereof, (ii) in
favor of adoption of the Consideration Charter Amendment, (iii) against any
action or agreement that would result in a breach in any material respect of any
covenant, representation or warranty or any other obligation of Continental
under the Merger Agreement, and (iv) against any Acquisition Proposal or any
other action or agreement that, directly or indirectly, is inconsistent with or
that would, or is reasonably likely to, directly or indirectly, impede,
interfere with or attempt to discourage the Merger or any other transaction
contemplated by the Merger Agreement, including, but not limited to (1) any
extraordinary corporate transaction (other than the Merger on the terms set
forth in the Merger Agreement), such as a merger, consolidation, business
combination, reorganization, recapitalization or liquidation involving
Continental or any of its subsidiaries, (2) a sale or transfer of a material
amount of assets of Continental or any of its subsidiaries, or (3) any material
change in Continental's corporate structure or business.
In the event the Consideration Charter Amendment is not approved at the
Special Meeting, Hostetter and the Hostetter Trust have agreed to convert a
number of shares of Class B Common Stock into Class A Common Stock in an amount
equal to the lesser of (i) all of their respective shares of Class B Common
Stock or (ii) a number of shares of Class B Common Stock such that Hostetter
will beneficially own at least a majority of the outstanding shares of Class A
Common Stock as of the record date for the Additional
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Meeting, and to vote such shares in the manner described in the preceding
paragraph. The number of shares of Class B Common Stock to be converted by
Hostetter and the Hostetter Trust may be reduced by the number of shares of
Class A Common Stock beneficially owned by persons other than Hostetter for
which an irrevocable voting agreement or proxy has been submitted to U S WEST to
vote such shares in favor of adoption of the Consideration Charter Amendment and
the Merger Agreement.
Hostetter and the Hostetter Trust have also agreed, among other things, to
certain transfer restrictions with respect to the shares of Media Stock and
Series D Preferred Stock received by them in connection with the Merger and to
certain "standstill" restrictions with respect to U S WEST's equity securities.
In addition, Hostetter has agreed that he will not, so long as he is an employee
of U S WEST or Continental and for one year thereafter, except as an employee of
U S WEST or Continental, engage in the telecommunications business.
The Stockholders (including holders of Continental Preferred Stock) have
agreed that they may not convert their shares of Class B Common Stock or
Continental Preferred Stock into Class A Common Stock; provided however, that
such conversions will be permitted immediately prior to the Effective Time if,
after giving effect to such conversions, there remain a sufficient number of
shares of Class B Common Stock outstanding at the Effective Time to enable the
holders thereof to receive, in the aggregate, the Cash Consideration Amount.
The holders of the Continental Preferred Stock have agreed to convert all
such shares into Class B Common Stock immediately prior to the Effective Time.
The Stockholders' Agreement will terminate upon the earliest to occur of (i)
the mutual consent of U S WEST and the Stockholders, (ii) the termination of the
Merger Agreement prior to the consummation of the Merger and (iii) the tenth
anniversary of the Closing Date.
REGISTRATION RIGHTS AGREEMENT
Pursuant to the Merger Agreement, on or prior to the Closing Date, U S WEST
has agreed to enter into a Registration Rights Agreement with Hostetter, the
Hostetter Trust and the Hostetter Foundation (the "Registration Rights
Agreement"), pursuant to which, subject to certain limitations, such
stockholders will collectively be entitled to four "demand" registration rights
and unlimited "piggy back" registration rights to register under the Securities
Act the shares of Media Stock and Series D Preferred Stock received by such
stockholders from U S WEST in connection with the Merger.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general summary of the material United States
federal income tax consequences of (i) the Merger and (ii) the ownership and
disposition of shares of Media Stock and Series D Preferred Stock received by
holders of Continental Common Stock in the Merger. This discussion is based upon
the Code, regulations proposed or promulgated thereunder, judicial precedent
relating thereto, and current rulings and administrative practice of the
Service, in each case as in effect as of the date hereof and all of which are
subject to change at any time, possibly with retroactive effect. It is assumed
that shares of Continental Common Stock are held as "capital assets" within the
meaning of Section 1221 of the Code (I.E., property held for investment). This
discussion does not address all aspects of federal income taxation that might be
relevant to particular holders of Continental Common Stock in light of their
status or personal investment circumstances nor does it discuss the consequences
to such holders who are subject to special treatment under the federal income
tax laws, such as foreign persons, dealers in securities, regulated investment
companies, life insurance companies, other financial institutions, tax-exempt
organizations, pass-through entities, taxpayers who hold Continental Common
Stock as part of a "straddle," "hedge" or "conversion transaction" or who have a
"functional currency" other than the United States dollar. In addition, this
discussion does not address the tax consequences to holders of Restricted
Continental Common Stock or other persons who have received their Continental
Common Stock as compensation.
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HOLDERS OF CONTINENTAL COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER AND THE OWNERSHIP AND
DISPOSITION OF SHARES OF MEDIA STOCK AND SERIES D PREFERRED STOCK, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAWS.
TAX CONSEQUENCES OF THE MERGER
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Code. It is a condition to the obligation of U S WEST to consummate the
Merger that U S WEST shall have received an opinion from its counsel, Weil,
Gotshal & Manges LLP, to the effect that the Merger should be treated as a
reorganization within the meaning of Section 368(a) of the Code and that no gain
or loss should be recognized by Continental, U S WEST or, if applicable, Sub, as
a result of the Merger. It is a condition to the obligation of Continental to
consummate the Merger that Continental shall have received an opinion from its
counsel, Sullivan & Worcester, to the effect that the Merger should be treated
as a reorganization within the meaning of Section 368(a) of the Code and that no
gain or loss will be recognized by a holder of Continental Common Stock as a
result of the Merger except (i) with respect to cash received by such holder in
lieu of fractional shares or pursuant to the exercise of appraisal rights and
(ii) if a holder of Continental Common Stock receives cash, gain, if any,
realized by such holder of Continental Common Stock pursuant to the Merger will
be recognized, but only to the extent of the cash received. In rendering such
opinions, counsel to U S WEST and Continental will rely upon certain
representations made by U S WEST, Continental, and, if applicable, Sub, and
certain stockholders of Continental.
Holders of Continental Common Stock should be aware that there are no
federal income tax regulations, court decisions, or published Service rulings
bearing directly on the effect of certain features of the Media Stock on the
Merger. In addition, the Service announced during 1987 that it was studying the
federal income tax consequences of stock, like the Media Stock, that has certain
voting and liquidation rights in an issuing corporation, but whose dividend
rights are determined by reference to the earnings and profits of a segregated
portion of the issuing corporation's assets, and would not issue any advance
rulings regarding such stock. Last year, the Service withdrew such stock from
its list of matters under consideration and reiterated that it would not issue
advance rulings regarding such stock. Therefore, the Service may take the
position that the Media Stock represents property other than stock of U S WEST.
Were the Media Stock treated as property other than stock of U S WEST, the
Merger would not be treated as a reorganization within the meaning of Section
368(a) of the Code and the receipt of the Media Stock and Series D Preferred
Stock by a holder of Continental Common Stock pursuant to the Merger would be a
fully taxable transaction. In addition, such a conclusion might possibly affect
the tax-free nature of the distribution in 1995 by Providence Journal of the
stock of The Providence Journal Company to its stockholders. While counsel to U
S WEST and Continental recognize that this matter cannot be viewed as free from
doubt, counsel believe that if challenged, a court would conclude that the Media
Stock is common stock of U S WEST for federal income tax purposes.
Assuming that the Merger is treated as a reorganization within the meaning
of Section 368(a) of the Code, no gain or loss will be recognized for federal
income tax purposes by U S WEST, Continental and, if applicable, Sub, as a
result of the Merger. The federal income tax consequences to a holder of Class A
Common Stock is described below under the heading "-- Exchange Solely for Media
Stock and Series D Preferred Stock," except for those holders of Class A Common
Stock who elect appraisal rights, whose federal income tax consequences are
described below under the heading "-- Exchange Solely for Cash." Because a
holder of Class B Common Stock may elect to receive either (i) cash, (ii) Media
Stock and Series D Preferred Stock, or (iii) a combination of the foregoing, as
described below, the federal income tax consequences to a holder of Class B
Common Stock will depend, in part, on the form of consideration such holder
receives in the Merger.
EXCHANGE SOLELY FOR MEDIA STOCK AND SERIES D PREFERRED STOCK. A holder of
Continental Common Stock who receives solely Media Stock and Series D Preferred
Stock in exchange for Continental Common Stock pursuant to the Merger will not
recognize gain or loss upon the exchange (except as described below with respect
to cash received in lieu of fractional shares). The aggregate tax basis of the
Media Stock and Series D
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Preferred Stock received by such holder will be the same as the aggregate tax
basis of the Continental Common Stock surrendered therefor (reduced by the
amount of such tax basis allocable to fractional shares for which cash is
received), which basis will be allocated between the Media Stock and the Series
D Preferred Stock based on their relative fair market values. The holding period
of the Media Stock and Series D Preferred Stock will include the holding period
of the Continental Common Stock surrendered therefor.
EXCHANGE SOLELY FOR CASH. A holder of Continental Common Stock who receives
solely cash (including pursuant to the exercise of such holder's appraisal
rights) in exchange for Continental Common Stock pursuant to the Merger will
recognize gain or loss equal to the difference between the amount of cash
received and the aggregate tax basis in the Continental Common Stock surrendered
therefor. Such gain or loss generally will be capital gain or loss and will be
long-term if such Continental Common Stock surrendered in the Merger has been
held for more than one year at the Effective Time. If, however, any such holder
actually or by attribution owns shares of U S WEST stock at the time of the
Merger, such holder may be subject to the rules discussed under "-- Additional
Considerations -- Recharacterization of Gain as Dividend" below.
EXCHANGE FOR MEDIA STOCK, SERIES D PREFERRED STOCK AND CASH. A holder of
Class B Common Stock who receives a combination of Media Stock, Series D
Preferred Stock and cash in exchange for Class B Common Stock pursuant to the
Merger will realize gain or loss equal to the difference between (i) the sum of
the cash and the fair market value of the Media Stock and Series D Preferred
Stock received and (ii) the aggregate tax basis in Class B Common Stock
surrendered therefor. However, any such loss will not be recognized, and any
such gain will only be recognized to the extent of the cash received. For this
purpose, gain or loss must be calculated separately for each identifiable block
of shares of Class B Common Stock surrendered in the Merger, and a loss realized
on one block of shares of Class B Common Stock cannot be used to offset a gain
realized on another block of shares of Class B Common Stock. Subject to the
discussion under "-- Additional Considerations -- Recharacterization of Gain as
Dividend" below, any such gain recognized generally will be treated as capital
gain and will be long-term if the Continental Common Stock surrendered in the
Merger has been held for more than one year at the Effective Time.
The aggregate tax basis of the Media Stock and Series D Preferred Stock
received by a holder of Class B Common Stock will be the same as the aggregate
tax basis of the Class B Common Stock surrendered therefor, decreased by the
cash received (including cash received in lieu of fractional shares) and
increased by any gain recognized (whether capital gain or dividend income),
which basis will be allocated between the Media Stock and the Series D Preferred
Stock based on their relative fair market values. The holding period of the
Media Stock and Series D Preferred Stock will include the holding period of the
Class B Common Stock surrendered therefor.
ADDITIONAL CONSIDERATIONS
RECHARACTERIZATION OF GAIN AS DIVIDEND. With respect to holders of
Continental Common Stock who receive cash in the Merger, it is possible that,
under certain circumstances, some or all of the gain recognized by such holder
could be treated as a dividend taxable as ordinary income, and not capital gain,
if the cash received has the effect of the distribution of a dividend. In such
case, the gain recognized would be treated as a dividend to the extent of the
holder's ratable share of Continental's accumulated earnings and profits.
For purposes of determining whether the cash received has the effect of the
distribution of a dividend, the holder should be treated as if he first
exchanged all of his Continental Common Stock solely for Media Stock and Series
D Preferred Stock and then U S WEST immediately redeemed (the "deemed U S WEST
redemption") a portion of such Media Stock and Series D Preferred Stock in
exchange for the cash the holder actually received. Under this analysis, in
general, if the receipt of cash in this deemed U S WEST redemption by such
holder results in a "substantially disproportionate" reduction in the holder's
voting stock interest in U S WEST or is "not essentially equivalent to a
dividend," the receipt of the cash will not have the effect of the distribution
of a dividend. For purposes of this determination, the holder's voting stock
interest in U S WEST before the deemed U S WEST redemption is compared to such
holder's interest in U S WEST after the deemed U S WEST redemption, taking into
account in each case any U S WEST stock constructively owned by such holder as a
result of the application of the attribution rules of the Code. Generally, if
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(taking into account actual ownership and ownership by attribution) the holder's
interest in the voting stock of U S WEST has declined, as a result of the deemed
U S WEST redemption, by more than 20%, then the receipt of cash will not be
taxed as a dividend. If such interest in the voting stock of U S WEST has
declined, as a result of the deemed U S WEST redemption, by 20% or less, then
generally, in the case of a minority shareholder who is neither an officer or
director of U S WEST or who exercises no control over U S WEST's corporate
affairs, the receipt of cash likely would not be taxed as a dividend. Each
holder of Continental Common Stock should consult with his own tax advisor as to
whether the receipt of the cash has the effect of a distribution of a dividend,
and, if so, the consequences thereof.
SECTION 306 STOCK. Holders of Continental Common Stock who receive Series D
Preferred Stock pursuant to the Merger could be subject to special rules under
Section 306 of the Code on the sale, exchange, redemption or other disposition
thereof if the receipt of cash in lieu of such stock would have been treated as
a dividend under the "substantially disproportionate" and "not essentially
equivalent to a dividend" rules described immediately above. See "--
Recharacterization of Gain as Dividend." Each holder of Continental Common Stock
should consult his own tax advisor on the potential application of Section 306
to the receipt of the Series D Preferred Stock.
CASH IN LIEU OF A FRACTIONAL SHARE. Cash received by a holder of
Continental Common Stock in lieu of a fractional share interest in Media Stock
or Series D Preferred Stock will be treated as received in exchange for such
fractional share interest, and gain or loss will be recognized for federal
income tax purposes, measured by the difference between the amount of cash
received and the portion of the basis of the Continental Common Stock allocable
to such fractional share interest. Such gain or loss will be capital gain or
loss and will be long-term if such share of Continental Common Stock has been
held for more than one year at the Effective Time.
TRANSFER AND GAINS TAXES. Some states and localities impose taxes on
certain transfers (including transfers such as the Merger) of an interest in
real property (including leases) located therein. Pursuant to the Merger
Agreement, Continental will pay any such transfer taxes imposed with respect to
the Merger (the portion of any such payment attributable to each holder of
Continental Common Stock being referred to herein as a "Transfer Tax Payment").
For federal income tax purposes, any Transfer Tax Payment should generally be
treated as a deemed distribution by Continental to each holder of Continental
Common Stock taxable to such holder as a dividend to the extent of Continental's
current and accumulated earnings and profits. Any income taxes owing on account
of such deemed distribution will be the responsibility of the holder of
Continental Common Stock. Although there is no direct authority on the question,
there is a reasonable basis to conclude that, if treated as a distribution from
Continental and taxed as a dividend in the manner described above, any Transfer
Tax Payment should result in an increase of equal amount in the tax basis of
each holder's Continental Common Stock and, thus, (i) other than in the case of
holders of Continental Common Stock receiving solely cash, result in a
corresponding increase in the shares of any Media Stock and Series D Preferred
Stock received in the Merger and (ii) in the case of holders of Continental
Common Stock receiving solely cash, result in a decrease in the gain (or an
increase in the loss) recognized in the Merger.
PROPOSED LEGISLATION. Under statutory proposals released by the Clinton
administration early this year, certain types of preferred stock (not including
preferred stock that participates significantly in corporate growth (including
through a conversion right)) that is received in connection with transactions
intended to qualify as tax-free reorganizations, such as the Merger, will be
treated as taxable "other property" rather than as tax-free stock consideration.
According to a joint statement issued by the Chairmen of the two Congressional
tax-writing committees, the effective date of any of the statutory proposals
ultimately enacted is expected to be no earlier than the date of the appropriate
Congressional action. Based on the foregoing, U S WEST and Continental believe
that even if the proposed legislation is enacted in its current form, such
legislation would not apply to the Series D Preferred Stock.
BACKUP WITHHOLDING. Under the Code, a holder of Continental Common Stock
may be subject, under certain circumstances, to backup withholding at a 31% rate
with respect to the amount of cash, if any, received pursuant to the Merger
unless such holder provides proof of an applicable exemption or a correct
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taxpayer identification number, and otherwise complies with applicable
requirements of the backup withholding rules. Any amounts withheld under the
backup withholding rules are not an additional tax and may be refunded or
credited against the holder's federal income tax liability, provided the
required information is furnished to the Service.
OWNERSHIP AND DISPOSITION OF MEDIA STOCK AND SERIES D PREFERRED STOCK
DIVIDENDS. Dividends paid on Media Stock or Series D Preferred Stock will
be taxable as ordinary income to the extent of US WEST's current and accumulated
earnings and profits. To the extent that a distribution on Media Stock or Series
D Preferred Stock exceeds the current and accumulated earnings and profits of U
S WEST, such distribution will be treated as a nontaxable return of capital that
reduces the holder's basis in its Media Stock or Series D Preferred Stock and
any such distribution in excess of a holder's basis will be treated as gain from
the sale or exchange of a capital asset. Subject to certain limitations,
dividends received by corporate holders of Media Stock and Series D Preferred
Stock out of such earnings and profits will qualify for the dividends received
deduction allowable to corporations under Section 243 of the Code. In addition,
dividends received by a corporate holder of Media Stock and Series D Preferred
Stock may constitute an "extraordinary dividend" under Section 1059 of the Code.
For this purpose, all dividends received by a corporate holder of Media Stock or
Series D Preferred Stock within, and having their ex-dividend date within, an
85-day period (expanded to a 365-day period in the case of dividends received in
such period that in the aggregate exceed 20% of such holder's adjusted tax basis
in such Media Stock or Series D Preferred Stock) are aggregated. Accordingly, if
applicable, a corporate holder of Media Stock or Series D Preferred Stock
receiving an extraordinary dividend would be required under Section 1059(a) of
the Code to reduce its basis (but not below zero) in its Media Stock or Series D
Preferred Stock by the non-taxed portion of the dividend (I.E., the portion of
the dividend for which a deduction is allowed), and if such portion exceeds such
holder's tax basis for its Media Stock or Series D Preferred Stock, to treat the
excess as gain from the sale of such Media Stock or Series D Preferred Stock in
the year in which a sale or disposition of such Media Stock or Series D
Preferred Stock occurs. Under another of the statutory proposals discussed
above, immediate gain recognition (rather than recognition at the time of sale
or disposition) would be required whenever the basis of the Media Stock or
Series D Preferred Stock with respect to which any extraordinary dividend was
received is reduced below zero. See "-- Tax Consequences of the Merger --
Proposed Legislation."
CONVERSION. Any conversion of either the Media Stock into Communications
Stock upon U S WEST's exercise of any of its rights to do so or of Series D
Preferred Stock solely into Media Stock (pursuant to either U S WEST's or the
holder's right to do so) should constitute a tax-free exchange to the exchanging
shareholder, with a carryover adjusted tax basis in the newly received
Communications Stock or Media Stock, as the case may be, and generally a tacked
holding period from the stock previously held. If, however, dividends on the
Series D Preferred Stock were in arrears at the time of conversion, a portion of
the Media Stock received in exchange for Series D Preferred Stock could be
viewed under Section 305(c) of the Code as a distribution with respect to the
Series D Preferred Stock, taxable as a dividend.
ADJUSTMENT OF CONVERSION PRICE. With respect to the Series D Preferred
Stock, an adjustment in the conversion rates of the Series D Preferred Stock
pursuant to certain anti-dilution provisions contained in the terms of the
Series D Preferred Stock, or the failure to make such an adjustment, may, in
certain circumstances, be treated as a constructive distribution to holders of
Series D Preferred Stock or to holders of Media Stock under Section 305 of the
Code.
REDEMPTION OF MEDIA STOCK. If U S WEST redeems the Media Stock for shares
of the Media Group Subsidiaries, it intends to do so in a manner that will be
tax free under Section 355 of the Code. If the redemption does not qualify under
Section 355 of the Code, then (i) U S WEST could recognize gain on the
distribution of stock of the Media Group Subsidiaries in an amount equal to the
difference between the fair market value of such stock distributed and U S
WEST's tax basis in such stock and (ii) the holders of Media Stock could,
depending on their individual circumstances, either (a) recognize gain or loss
on the redemption in an amount equal to the difference between the fair market
value of the stock received and the holders' tax basis in their shares being
redeemed or (b) be treated as having received a taxable dividend in an amount
equal to the fair market value of the stock.
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REDEMPTION OF SERIES D PREFERRED STOCK FOR CASH. A redemption of the Series
D Preferred Stock for cash will be treated as a sale or exchange of such Series
D Preferred Stock by the holder thereof (and therefore eligible for capital
gains treatment except to the extent of any declared but unpaid dividends) if
the redemption either (i) is a complete redemption of all stock of U S WEST
owned by the holder under Section 302(b)(3) of the Code (after taking into
account certain attribution rules) or (ii) meets the "substantially
disproportionate" or "not essentially equivalent to a dividend" rules discussed
above. See "-- Tax Consequences of the Merger -- Additional Considerations --
Recharacterization of Gain as Dividend." If the redemption fails to qualify
under any of these tests, the proceeds of the redemption will be taxed as a
dividend to the extent of U S WEST's current and accumulated earnings and
profits.
SALE OR EXCHANGE OF MEDIA STOCK OR SERIES D PREFERRED STOCK. Upon the
taxable sale or exchange of Media Stock or Series D Preferred Stock, a holder
will recognize gain or loss. Such gain or loss would be equal to the difference
between (i) any cash received plus the fair market value of any other
consideration received and (ii) the aggregate tax basis of the Media Stock or
Series D Preferred Stock that was sold or exchanged, determined as described
above. See "-- Tax Consequences of the Merger." Any gain or loss on the taxable
sale or exchange of the Media Stock or Series D Preferred Stock would be a
capital gain or loss, assuming that such Media Stock or Series D Preferred Stock
was held as a capital asset by the shareholder on the date of the sale or
exchange. The foregoing rules may not apply to the Series D Preferred Stock if
it was subject to the rules of Section 306 of the Code. See "-- Tax Consequences
of the Merger."
BACKUP WITHHOLDING. Rules similar to those discussed above under the
heading "-- Tax Consequences of the Merger -- Backup Withholding" will apply
with respect to dividends paid on or proceeds received from a sale or exchange
of Media Stock or Series D Preferred Stock, as the case may be.
PROPOSALS TO APPROVE AND ADOPT THE
CHARTER AMENDMENTS, ELECTION OF CONTINENTAL DIRECTORS
AND RATIFICATION OF APPOINTMENT OF ACCOUNTANTS
One of the purposes of the Special Meeting is to obtain the approval and
adoption of the Consideration Charter Amendment by Continental's Stockholders.
The Continental Board approved the Consideration Charter Amendment at a meeting
held on February 27, 1996 and found that it was in the best interests of
Continental and its stockholders. The Continental Restated Certificate currently
requires that holders of Class A Common Stock and holders of Class B Common
Stock receive identical consideration in the event of a merger of Continental
with a third party. The continuing tax-free status of the recent transactions
involving the merger of Providence Journal with and into Continental cannot,
however, be ensured unless the former Providence Journal stockholders, who
currently hold approximately 77% of the Class A Common Stock, are precluded from
receiving any of the cash consideration to be paid in connection with the
Merger. It is accordingly a condition to the consummation of the Merger that the
Consideration Charter Amendment, which will entitle holders of Class A Common
Stock to receive only Media Stock and Series D Preferred Stock in the Merger, be
approved by the requisite holders of the Continental Voting Stock. In the event
the Consideration Charter Amendment is not adopted by the requisite vote of
Continental's stockholders at the Special Meeting, Continental is required to
call another meeting of its stockholders to seek such adoption. See "The Merger
Agreement -- Certain Covenants -- Meetings of Continental Stockholders." In such
event, certain holders of Class B Common Stock have agreed to convert a certain
number of their shares of Class B Common Stock into Class A Common Stock and
vote such shares of Class A Common Stock in favor of adoption of the
Consideration Charter Amendment. See "Ancillary Agreements -- Stockholders'
Agreement." A copy of the Consideration Charter Amendment is attached as Exhibit
A to Annex I to this Proxy Statement.
Another purpose of the Special Meeting is to obtain approval and adoption of
the Conversion Charter Amendment by Continental's stockholders. The Continental
Board approved the Conversion Charter Amendment on October 1, 1996 and found
that it was in the best interests of Continental and its stockholders. The
Continental Restated Certificate currently prohibits holders of shares of Class
B Common Stock from transferring any such shares to any person other than
Permitted Transferees. Any purported transfer of shares of Class B Common Stock
to other than a Permitted Transferee would, under the current Continental
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Restated Certificate, result in such shares being automatically converted into
shares of Class A Common Stock. In addition, the Continental Restated
Certificate currently permits holders of shares of Class B Common Stock to
convert any or all of their shares into shares of Class A Common Stock at any
time. Pursuant to the Merger Agreement, holders of Class B Common Stock will
receive, in the aggregate, at least $1 billion, and up to $1.5 billion, in cash.
If the Conversion Charter Amendment is not adopted, holders of Class B Common
Stock could avoid receiving any cash consideration in connection with the Merger
by converting their shares of Class B Common Stock into shares of Class A Common
Stock prior to the Effective Time, thereby resulting in a disproportionate
amount of the cash consideration being received by the remaining holders of
Class B Common Stock (including those holders of Class B Common Stock who are
prohibited under the terms of the Stockholders' Agreement from converting their
shares of Class B Common Stock unless, following any such conversions, there are
a sufficient number of shares of Class B Common Stock outstanding at the
Effective Time to receive the Cash Consideration Amount). The Conversion Charter
Amendment will provide that, so long as the Merger Agreement remains in effect
and from and after the adoption of the Conversion Charter Amendment at the
Special Meeting, (i) any holder of shares of Class B Common Stock may transfer
such shares to any transferee of such holder, regardless of whether such
transferee is a Permitted Transferee, and any such transfer will not result in
the conversion of such shares into shares of Class A Common Stock, and (ii) only
a person who was a Deemed Record Holder of Record Date Shares on the Record Date
or who is a Permitted Transferee of such holder to which such holder has
transferred any such shares on or after the Record Date may convert any such
Record Date Shares into shares of Class A Common Stock, and any such conversion
shall only be permissible if the aggregate number of such Record Date Shares so
converted by such holder and any such Permitted Transferee of such holder does
not exceed, at the time any such conversion is requested by such holder or any
such Permitted Transferee, the Permitted Percentage of such holder's Record Date
Shares, provided that such restriction on conversion shall not apply to
conversions in connection with the enforcement by a secured party of its rights
in and to Record Date Shares pursuant to a BONA FIDE pledge of such shares to
secure obligations.
For illustrative purposes only, if on the Charter Amendment Adoption Date
(i) the Outstanding Class B Shares were equal to the number of shares of Class B
Common Stock outstanding on the Record Date (after giving effect to the
conversion of all outstanding shares of Continental Preferred Stock but
excluding Restricted Continental Common Stock) (i.e., 135,373,598 shares in
aggregate) and (ii) as of the Charter Amendment Adoption Date U S WEST had
elected, or still retained the right to elect, to pay the maximum cash amount of
$1.5 billion in the Merger, the Permitted Percentage would be 63%. Applying this
Permitted Percentage, a record holder of Record Date Shares as of the Record
Date and any Permitted Transferee of such holder to which such holder had
transferred any such shares on or after the Record Date could together
voluntarily convert up to 63% of such Record Date Shares into shares of Class A
Common Stock after the Charter Amendment Adoption Date and prior to the
Effective Time. See "Background of the Merger -- Recommendation of the
Continental Board; Continental's Reasons for the Merger -- Charter Amendments."
If the Conversion Charter Amendment is adopted by the requisite vote of
Continental's stockholders at the Special Meeting but the Consideration Charter
Amendment is not so adopted at the Special Meeting, the Conversion Charter
Amendment will not be effected until the Consideration Charter Amendment is
adopted and effected.
Another purpose of the Special Meeting is to consider the election of four
persons to serve a three-year term as Class A Directors in accordance with the
Continental Restated Certificate and the Continental By-Laws. It is proposed
that proxies for the Special Meeting which do not specify the contrary will be
voted to elect Henry F. McCance, Roy F. Coppedge III, Michael J. Ritter and
Robert B. Luick as the Class A Directors. Messrs. McCance, Coppedge, Ritter and
Luick are presently Class A Directors. If some unexpected occurrence should make
necessary, in the judgment of the Continental Board, the substitution of some
other person for any of the nominees, it is the intention of the persons named
in the proxy for the Special Meeting to vote for the election of such other
person as may be designated by the Continental Board. Each of the Class A
Directors elected at the Special Meeting shall serve until the 1999 Annual
Meeting and until his successor is elected and qualified. Upon consummation of
the Merger, the separate corporate existence of Continental will cease and the
current directors of U S WEST or Sub, as the case may be, will continue as
directors of the surviving corporation thereafter. Accordingly, directors of
Continental, including directors elected at the Special Meeting, will cease to
be directors at the Effective Time.
76
<PAGE>
Finally, at the Special Meeting the Continental stockholders will be asked
to ratify the selection by the Continental Board of Deloitte & Touche LLP as
Continental's independent public accountants for the current fiscal year ending
December 31, 1996. The firm has been the accountants for Continental since 1974.
Although Continental is not required to submit the ratification and approval of
the selection of its accountants to a vote of stockholders, the Continental
Board believes it is a sound policy and in the best interests of the
stockholders to do so. Representatives of Deloitte & Touche LLP are not expected
to be present at the Special Meeting.
If the Merger is not consummated, the 1997 Annual Meeting of Continental is
expected to be held on or about May 15, 1997. Stockholder proposals must be
received by Continental on or before January 15, 1997 to be considered for
inclusion in the proxy statement and presented at the 1997 Annual Meeting of
Continental.
THE CONTINENTAL BOARD RECOMMENDS A VOTE FOR THE APPROVAL AND ADOPTION OF THE
CHARTER AMENDMENTS, THE ELECTION OF DIRECTORS AND THE RATIFICATION OF
APPOINTMENT OF ACCOUNTANTS.
77
<PAGE>
THE COMPANIES
U S WEST
U S WEST is a diversified global communications company engaged in the
telecommunications, cable, wireless communications and directory and information
services businesses. U S WEST conducts its businesses through two groups: the
Media Group and the Communications Group.
The Media Group is comprised of (i) cable and telecommunications network
businesses outside the Communications Group Region and internationally, (ii)
domestic and international wireless communications network businesses and (iii)
domestic and international directory and information services businesses,
including telephone directory businesses.
The Media Group's cable and telecommunications businesses include MediaOne,
U S WEST's cable systems in the Atlanta, Georgia metropolitan area, U S WEST's
interest in TWE, and international cable and telecommunications investments,
including U S WEST's interest in Telewest Communications plc, the largest
provider of combined cable and telecommunications services in the United
Kingdom, and cable and telecommunications properties in the Netherlands, the
Czech Republic, Malaysia, Indonesia and Belgium.
The Media Group, through NewVector, provides domestic wireless
communications services, including cellular services, to a rapidly growing
customer base. U S WEST and AirTouch have entered into Phase I of a cellular
joint venture pursuant to which their domestic cellular properties will receive
centralized services from a wireless management company on a contract basis.
Upon consumption of Phase II of the joint venture, the domestic cellular
properties of U S WEST and AirTouch will be combined to form the U S
WEST/AirTouch Joint Venture, which will be the third largest cellular company in
the United States. In addition, U S WEST and AirTouch, in partnership with Bell
Atlantic Corporation and NYNEX Corporation, have formed Primeco, which
successfully bid on 11 PCS licenses in March 1995, and have agreed to coordinate
the operation of their PCS and cellular businesses. The Media Group's
international wireless businesses include Mercury One 2 One, a joint venture in
the United Kingdom which provides the world's first PCS service, as well as
wireless businesses in Hungary, the Czech and Slovak Republics, Russia,
Malaysia, India and Poland.
The Media Group's directory and information services businesses develop and
package content and information services, including telephone directories,
database marketing and other interactive services in domestic and international
markets. The Media Group's telephone directories businesses publish more than
300 White and Yellow Pages directories in 14 western and mid-western states and
nearly 200 directories in the United Kingdom and Poland. The Media Group also
holds a 50 percent interest in Listel, Brazil's largest publisher of telephone
directories.
Following consummation of the Merger, the businesses of Continental and its
subsidiaries will be attributed by the U S WEST Board to the Media Group.
The Communications Group, through U S WEST Communications, provides
telecommunications services to more than 25 million residential and business
customers in the Communications Group Region, which is comprised of the states
of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico,
North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Such services
include local telephone services, exchange access services (which connect
customers to the facilities of carriers, including long-distance providers and
wireless operators), and certain long-distance services within geographic areas
in the Communications Group Region. The Communications Group also provides other
products and services, including custom call features, voice messaging, caller
identification, high speed data applications, customer premises equipment and
certain communications services to business customers and governmental agencies
both inside and outside the Communications Group Region.
U S WEST has two classes of common stock: the Media Stock and the
Communications Stock. The Media Stock is intended to reflect separately the
performance of the Communications Group. For a description of the terms of the
Media Stock and Communications Stock, see "Description of U S WEST
78
<PAGE>
Capital Stock." Holders of Media Stock and Communications Stock are holders of
common stock of U S WEST and are subject to the risks associated with an
investment in a single company and all of U S WEST's businesses, assets and
liabilities. See "Risk Factors."
U S WEST from time to time engages in preliminary discussions regarding
acquisitions, dispositions and other similar transactions. Any such transaction
could involve, among other things, the transfer of certain assets, businesses or
interests, the issuance of equity and/or the incurrence or assumption of
indebtedness. The consummation of any such transaction could have a material
impact upon the financial condition and results of operations of U S WEST and
the Media Group. There is no assurance that any such discussions will result in
the consummation of any such transaction.
Additional information with respect to the businesses of U S WEST and the
Media Group is included in the periodic reports filed by U S WEST with the
Commission pursuant to the Exchange Act. See "Available Information" and
"Incorporation of Certain Documents by Reference."
CONTINENTAL
Continental is a leading provider of broadband communications services. As
of June 30, 1996, giving effect to a pending acquisition, Continental's systems
and those of its U.S. affiliates passed approximately 7.4 million homes and
provided service to approximately 4.3 million basic subscribers, making
Continental the third-largest cable television system operator in the United
States. In addition, Continental has pursued investments in sectors that are
complementary to its core business, including (i) international broadband
communications; (ii) telecommunications and technology industries, including
competitive-access telephony and DBS service; and (iii) programming services.
For additional information with respect to the business of Continental, see
"Annex V -- Description of Continental -- Business."
79
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
OF U S WEST AND THE MEDIA GROUP
The following unaudited pro forma combined statements of operations of U S
WEST and the Media Group for the year ended December 31, 1995 give effect to (i)
the Merger, (ii) U S WEST's planned refinancing of Continental's revolving debt
facilities following consummation of the Merger through the issuance of U S WEST
commercial paper (the "U S WEST Refinancing"), (iii) the pending acquisition by
Continental of the remaining 62.1% interest in Meredith/New Heritage Strategic
Partners, L.P. (the "MN/H Buyout"), (iv) the acquisition by Continental of
Cablevision of Chicago, Columbia Cable of Michigan, Consolidated Cablevision of
California, the cable television business of Providence Journal Company and the
remaining 66.2% interest in N-COM Limited Partnership II, (v) the sale by
Continental of its 8.30% Senior Notes Due 2006 and the application of the net
proceeds therefrom, (vi) the redemption by TCG of a portion of the shares of
Common Stock of TCG owned by Continental and the reclassification of
Continental's remaining interest in TCG (the "TCG Transaction") and (vii) the
consummation of the U S WEST/ AirTouch Joint Venture, as though each transaction
had occurred as of January 1, 1995. The following unaudited pro forma condensed
combined statements of operations of U S WEST and the Media Group for the six
months ended June 30, 1996 give effect to (i) the Merger, (ii) the U S WEST
Refinancing, (iii) the MN/H Buyout, (iv) the TCG Transaction and (v) the
consummation of the U S WEST/AirTouch Joint Venture, as though each transaction
had occurred as of January 1, 1996. The following unaudited pro forma condensed
combined balance sheets of U S WEST and the Media Group at June 30, 1996 give
effect to (i) the Merger, (ii) the U S WEST Refinancing, (iii) the MN/H Buyout,
(iv) the TCG Transaction and (v) the consummation of the U S WEST/AirTouch Joint
Venture, as though each transaction had occurred on June 30, 1996.
The pro forma adjustments are based on available information and certain
assumptions that U S WEST's management believes are reasonable and are described
in the notes accompanying the unaudited pro forma condensed combined balance
sheets and the unaudited pro forma condensed combined statements of operations.
The unaudited pro forma financial information does not purport to represent what
U S WEST or the Media Group's financial position or results of operations would
actually have been had the transactions actually occurred at such dates or to
project U S WEST or the Media Group's financial position or results of
operations at or for any future date or period. In the opinion of U S WEST's
management, all adjustments necessary to present fairly such unaudited pro forma
financial information have been made.
The unaudited pro forma financial statements should be read in conjunction
with the historical financial statements of U S WEST and the Media Group,
including the notes thereto, which are incorporated by reference herein, and
with the historical and pro forma financial statements of Continental, including
the notes thereto, which are included elsewhere in this Proxy Statement. See
"Incorporation of Certain Documents by Reference" and "Annex V -- Description of
Continental -- Unaudited Pro Forma Condensed Consolidated Financial Information"
and "Consolidated Financial Statements."
THE MERGER
U S WEST will account for the Merger by the purchase method of accounting.
Accordingly, U S WEST's cost to acquire Continental of approximately $11.1
billion (as of June 30, 1996) will be allocated to the assets acquired and
liabilities assumed according to their respective fair values. The $7.6 billion
pro forma excess of the purchase price over the net tangible assets acquired at
June 30, 1996, and goodwill related to a deferred income tax liability of $3.1
billion, will be amortized over 25 years, except for intangible assets allocated
to Continental's equity method investments, which will be amortized over 15
years. Amortization related to Continental's equity method investments will be
recorded as a component of equity income (loss) in unconsolidated ventures. The
intangible assets acquired consist principally of the cable television
franchises of Continental and goodwill.
The final allocation of the purchase price is dependent upon certain
valuations and other studies that have not progressed to a stage where there is
sufficient information to make such an allocation in the accompanying unaudited
pro forma condensed combined financial statements. Accordingly, the purchase
price allocation adjustments made in connection with the development of the
unaudited pro forma condensed combined financial statements are preliminary and
have been made solely for the purpose of developing such unaudited pro forma
condensed combined financial statements.
80
<PAGE>
The impact on U S WEST's financial position from the disposition of
Continental's properties located in the Communications Group Region as required
by federal rules on cross-ownership by telephone companies of cable companies is
not expected to be material to the pro forma financial statements included
herein and, accordingly, has not been reflected in the unaudited pro forma
condensed combined financial statements. Certain reclassifications have been
made to the Continental historical consolidated financial statements and pro
forma amounts to reflect such financial statements on a basis consistent with
the unaudited pro forma condensed combined financial statements of U S WEST and
the Media Group after giving effect to the Merger.
U S WEST/AIRTOUCH JOINT VENTURE
In July 1994, U S WEST signed an agreement with AirTouch to combine their
domestic cellular properties into a joint venture in a multi-phased transaction.
During Phase I, which commenced on November 1, 1995, the partners are operating
their cellular properties separately. A wireless management company has been
formed and is providing centralized services to both companies on a contract
basis. In Phase II, the partners will combine their domestic properties into a
joint venture, subject to obtaining certain authorizations. The parties are
seeking to obtain regulatory and other approvals precedent to entering into
Phase II. The recent passage of the 1996 Telecommunications Act has removed
significant regulatory barriers to completion of Phase II.
U S WEST's domestic cellular assets and related liabilities will be
contributed to the U S WEST/ AirTouch Joint Venture at historical cost after
which the equity method of accounting will be applied. The equity method of
accounting requires recognition of U S WEST's share of the financial condition
and operating results of the U S WEST/AirTouch Joint Venture on one line on the
balance sheet and statement of operations. The assumed ownership interests for U
S WEST and AirTouch approximate 26 percent and 74 percent, respectively,
pursuant to the partnership agreement. The actual interests of U S WEST and
AirTouch in the capital, income (loss) and cash flows of the joint venture will
depend on a number of factors, the outcome of which cannot be reliably
estimated. These factors include, among other things, the timing of the actual
closing of Phase II and the ability of the parties to contribute certain of
their domestic cellular interests to the joint venture. Accordingly, U S WEST
cannot predict the actual interest it will have upon the closing of Phase II in
the capital, income (loss) or cash flow of the U S WEST/AirTouch Joint Venture.
The closing of Phase II is conditioned upon the satisfaction of certain
conditions, including the ability of AirTouch and U S WEST to contribute at
least 60 percent of their respective domestic cellular interests to the joint
venture. U S WEST anticipates that Phase II will close in the fourth quarter of
1996 or early 1997.
Some of the cellular interests of AirTouch and U S WEST are subject to
consent provisions in connection with certain transactions. In addition, other
partnership interests may, under certain circumstances, be subject to rights of
first refusal provisions in favor of third parties. The foregoing provisions may
or may not preclude certain properties from being contributed to the U S
WEST/AirTouch Joint Venture. To the extent any such properties have not been
contributed to the U S WEST/AirTouch Joint Venture at the time of Phase II
closing, U S WEST and AirTouch are obligated throughout the life of the U S
WEST/ AirTouch Joint Venture to continue to use reasonable efforts to effect
such contribution. U S WEST and AirTouch have agreed that, in the event that
either is unable to contribute all of its domestic cellular interests to the U S
WEST/AirTouch Joint Venture, the parties will restructure, among other things,
the allocation of profits and losses and the distribution of cash and property
of the U S WEST/AirTouch Joint Venture or, to the extent such a restructuring is
not feasible, to otherwise compensate each party to achieve the same economic
result each party would have obtained if all of the parties' domestic cellular
properties had been contributed to the joint venture at the Phase II closing. As
a result, U S WEST cannot predict the actual interest it will have in the U S
WEST/AirTouch Joint Venture upon Phase II closing. The following pro forma
information reflects the assumption that all domestic cellular properties are
contributed to the U S WEST/ AirTouch Joint Venture. U S WEST believes this
assumption is reasonable because of the continuing obligations of U S WEST and
AirTouch to affect the contribution of their respective domestic cellular assets
to the U S WEST/AirTouch Joint Venture. In addition, management believes the
effect on U S WEST's financial position and results of operations if certain
domestic cellular properties are not contributed to the U S WEST/AirTouch Joint
Venture would not be material.
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<PAGE>
U S WEST, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
U S WEST U S WEST/
U S WEST PRO FORMA AIRTOUCH JOINT
U S WEST CONTINENTAL ADJUSTMENTS FOR THE VENTURE
HISTORICAL PRO FORMA FOR THE MERGER MERGER ADJUSTMENTS
----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Sales and other revenues............................ $ 11,746 $ 1,782(A) $ 13,528 $ (882)(N)
Employee-related expenses........................... 4,071 492(A) 4,563 (152)(N)
Other operating expenses............................ 2,323 549(A) 2,872 (445)(N)
Taxes other than income taxes....................... 416 15(A) 431 (17)(N)
Depreciation and amortization....................... 2,291 451(A) $ 350(B) 3,092 (121)(N)
----------- ------ ----- ----------- -----
Total operating expenses............................ 9,101 1,507 350 10,958 (735)
----------- ------ ----- ----------- -----
Income (loss) from operations....................... 2,645 275 (350) 2,570 (147)
Other income (expense):
Interest expense.................................. (527) (444)(A) (10)(C) (981) 1(N)
Equity (losses) income in unconsolidated
ventures......................................... (207) (53)(A) (42)(D) (302) 146(N)
13(O)
Gains on merger of joint venture interest and
sales of other assets............................ 293 24(A) 317
Guaranteed minority interest expense.............. (14) (14)
Other income (expense) net........................ (36) 7(A) (29) 17(N)
----------- ------ ----- ----------- -----
Income (loss) before income taxes and extraordinary
items.............................................. 2,154 (191) (402) 1,561 30
Provision (benefit) for income taxes................ 825 (59)(A) (115)(E) 651 12(P)
----------- ------ ----- ----------- -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............ 1,329 (132) (287) 910 18
Dividend and preferences on preferred stock......... (3) (40)(A) (8)(F) (51)
----------- ------ ----- ----------- -----
Income (loss) before extraordinary items available
for common stock................................... $ 1,326 $ (172) $ (295) $ 859(G) $ 18
----------- ------ ----- ----------- -----
----------- ------ ----- ----------- -----
INCOME BEFORE EXTRAORDINARY ITEM PER SHARE OF
COMMUNICATIONS STOCK............................... $ 2.52 $ 2.52
----------- -----------
----------- -----------
AVERAGE SHARES OF COMMUNICATIONS STOCK OUTSTANDING
(MILLIONS)......................................... 470.72 470.72
----------- -----------
----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER SHARE OF
MEDIA STOCK........................................ $ 0.30 $ (0.52)(G)
----------- -----------
----------- -----------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)......................................... 470.55 627.69(G)
----------- -----------
----------- -----------
<CAPTION>
U S WEST
PRO FORMA
---------------
<S> <C>
Sales and other revenues............................ $ 12,646
Employee-related expenses........................... 4,411
Other operating expenses............................ 2,427
Taxes other than income taxes....................... 414
Depreciation and amortization....................... 2,971
-------
Total operating expenses............................ 10,223
-------
Income (loss) from operations....................... 2,423
Other income (expense):
Interest expense.................................. (980)
Equity (losses) income in unconsolidated
ventures.........................................
(143)
Gains on merger of joint venture interest and
sales of other assets............................ 317
Guaranteed minority interest expense.............. (14)
Other income (expense) net........................ (12)
-------
Income (loss) before income taxes and extraordinary
items.............................................. 1,591
Provision (benefit) for income taxes................ 663
-------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS............ 928
Dividend and preferences on preferred stock......... (51)
-------
Income (loss) before extraordinary items available
for common stock................................... $ 877
-------
-------
INCOME BEFORE EXTRAORDINARY ITEM PER SHARE OF
COMMUNICATIONS STOCK............................... $ 2.52
-------
-------
AVERAGE SHARES OF COMMUNICATIONS STOCK OUTSTANDING
(MILLIONS)......................................... 470.72
-------
-------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER SHARE OF
MEDIA STOCK........................................ $ (0.49)
-------
-------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)......................................... 627.69
-------
-------
</TABLE>
82
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U S WEST, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
U S WEST U S WEST/
U S WEST PRO FORMA AIRTOUCH JOINT
U S WEST CONTINENTAL ADJUSTMENTS FOR THE VENTURE
HISTORICAL PRO FORMA FOR THE MERGER MERGER ADJUSTMENTS
----------- -------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Sales and other revenues........................ $ 6,174 $ 970(A) $ 7,144 $ (521)(N)
Employee-related expenses....................... 2,141 244(A) 2,385 (92)(N)
Other operating expenses........................ 1,200 324(A) 1,524 (239)(N)
Taxes other than income taxes................... 218 10(A) 228 (11)(N)
Depreciation and amortization................... 1,172 237(A) $ 164(B) 1,573 (70)(N)
----------- ----- ----- ----------- -----
Total operating expenses........................ 4,731 815 164 5,710 (412)
----------- ----- ----- ----------- -----
Income (loss) from operations................... 1,443 155 (164) 1,434 (109)
Other income (expense):
Interest expense.............................. (271) (237)(A) (5)(C) (513) 1(N)
Equity (losses) income in unconsolidated
ventures..................................... (143) (48)(A) (21)(D) (212) 99(N)
7(O)
Gains on sales of rural telephone exchanges... 49 49
Guaranteed minority interest expense.......... (24) (24)
Other income (expense) -- net................. (46) (6)(A) (52) 13(N)
----------- ----- ----- ----------- -----
Income (loss) before income taxes and cumulative
effect of change in accounting principle....... 1,008 (136) (190) 682 11
Provision (benefit) for income taxes............ 398 (38)(A) (53)(E) 307 4(P)
----------- ----- ----- ----------- -----
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........................ 610 (98) (137) 375 7
Dividend and preferences on preferred stock..... (2) (21)(A) (3)(F) (26)
----------- ----- ----- ----------- -----
Income (loss) before cumulative effect of change
in accounting principle available for common
stock.......................................... $ 608 $ (119) $ (140) $ 349(G) $ 7
----------- ----- ----- ----------- -----
----------- ----- ----- ----------- -----
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER SHARE OF
COMMUNICATIONS STOCK........................... $ 1.30 $ 1.30
----------- -----------
----------- -----------
AVERAGE SHARES OF COMMUNICATIONS STOCK
OUTSTANDING (MILLIONS)......................... 475.9 475.9
----------- -----------
----------- -----------
LOSS PER SHARE OF MEDIA STOCK................... $ (0.02) $ (0.43)(G)
----------- -----------
----------- -----------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)..................................... 473.30 630.44(G)
----------- -----------
----------- -----------
<CAPTION>
U S WEST
PRO FORMA
---------------
<S> <C>
Sales and other revenues........................ $ 6,623
Employee-related expenses....................... 2,293
Other operating expenses........................ 1,285
Taxes other than income taxes................... 217
Depreciation and amortization................... 1,503
-------
Total operating expenses........................ 5,298
-------
Income (loss) from operations................... 1,325
Other income (expense):
Interest expense.............................. (512)
Equity (losses) income in unconsolidated
ventures.....................................
(106)
Gains on sales of rural telephone exchanges... 49
Guaranteed minority interest expense.......... (24)
Other income (expense) -- net................. (39)
-------
Income (loss) before income taxes and cumulative
effect of change in accounting principle....... 693
Provision (benefit) for income taxes............ 311
-------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE........................ 382
Dividend and preferences on preferred stock..... (26)
-------
Income (loss) before cumulative effect of change
in accounting principle available for common
stock.......................................... $ 356
-------
-------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER SHARE OF
COMMUNICATIONS STOCK........................... $ 1.30
-------
-------
AVERAGE SHARES OF COMMUNICATIONS STOCK
OUTSTANDING (MILLIONS)......................... 475.9
-------
-------
LOSS PER SHARE OF MEDIA STOCK................... $ (0.42)
-------
-------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)..................................... 630.44
-------
-------
</TABLE>
83
<PAGE>
U S WEST, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 1996
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
U S WEST U S WEST/
U S WEST PRO FORMA AIRTOUCH JOINT
U S WEST CONTINENTAL ADJUSTMENTS FOR THE VENTURE
HISTORICAL PRO FORMA FOR THE MERGER MERGER ADJUSTMENTS
----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Total current assets.............................. $ 2,835 $ 143(A) $ 2,978 $ (170)(Q)
Property, plant and equipment -- net.............. 14,989 2,419(A) 17,408 (824)(Q)
Investment in Time Warner Entertainment........... 2,497 2,497
Investments in other unconsolidated ventures...... 1,365 480(A) $ 653(H) 2,498 1,053(Q)
Intangible assets -- net.......................... 1,761 1,989(A) 7,957(H) 11,707 (433)(Q)
Other assets...................................... 1,842 601(A) 2,443 (9)(Q)
----------- ------------- ------ ----------- ------
Total assets...................................... $ 25,289 $ 5,632 $ 8,610 $ 39,531 $ (383)
----------- ------------- ------ ----------- ------
----------- ------------- ------ ----------- ------
LIABILITIES AND EQUITY
Total current liabilities......................... $ 4,679 $ 459(A) $ 1,024(I) $ 6,162 $ (278)(Q)
Long-term debt.................................... 7,360 5,662(A) 339(J) 13,361
Deferred taxes, credits and other................. 4,382 397(A) 2,731(K) 7,510 (105)(Q)
Redeemable preferred securities................... 651 651
Redeemable common stock........................... 270(A) (270)(L)
Total equity...................................... 8,217 (1,156)(A) 4,786(M) 11,847
----------- ------------- ------ ----------- ------
Total liabilities and equity...................... $ 25,289 $ 5,632 $ 8,610 $ 39,531 $ (383)
----------- ------------- ------ ----------- ------
----------- ------------- ------ ----------- ------
<CAPTION>
U S WEST
PRO FORMA
-----------
<S> <C>
ASSETS
Total current assets.............................. $ 2,808
Property, plant and equipment -- net.............. 16,584
Investment in Time Warner Entertainment........... 2,497
Investments in other unconsolidated ventures...... 3,551
Intangible assets -- net.......................... 11,274
Other assets...................................... 2,434
-----------
Total assets...................................... $ 39,148
-----------
-----------
LIABILITIES AND EQUITY
Total current liabilities......................... $ 5,884
Long-term debt.................................... 13,361
Deferred taxes, credits and other................. 7,405
Redeemable preferred securities................... 651
Redeemable common stock...........................
Total equity...................................... 11,847
-----------
Total liabilities and equity...................... $ 39,148
-----------
-----------
</TABLE>
84
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U S WEST MEDIA GROUP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MEDIA GROUP U S WEST/
MEDIA GROUP PRO FORMA AIRTOUCH JOINT
MEDIA GROUP CONTINENTAL ADJUSTMENTS FOR THE VENTURE
HISTORICAL PRO FORMA FOR THE MERGER MERGER ADJUSTMENTS
----------- ------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Sales and other revenues
Directory and information services.............. $ 1,180 $ 1,180
Wireless communications......................... 941 941 $ (941)(N)
Cable and telecommunications.................... 215 $ 1,782(A) 1,997
Other........................................... 38 38 2(N)
----------- ------ ----------- -----
Total sales and other revenues.................... 2,374 1,782 4,156 (939)
Cost of sales and other revenues.................. 772 631(A) 1,403 (244)(N)
Selling, general and administrative expenses...... 886 425(A) 1,311 (427)(N)
Depreciation and amortization..................... 249 451(A) $ 350(B) 1,050 (121)(N)
----------- ------ ----- ----------- -----
Total operating expenses.......................... 1,907 1,507 350 3,764 (792)
----------- ------ ----- ----------- -----
Income (loss) from operations..................... 467 275 (350) 392 (147)
Other income (expense):
Interest expense................................ (100) (444)(A) (10)(C) (554) 1(N)
Equity (losses) income in unconsolidated
ventures....................................... (207) (53)(A) (42)(D) (302) 146(N)
13(O)
Gains on merger of joint venture interest and
sales of other assets.......................... 157 24(A) 181
Guaranteed minority interest expense............ (14) (14)
Other income (expense) -- net................... 5 7(A) 12 17(N)
----------- ------ ----- ----------- -----
Income (loss) before income taxes and
extraordinary item............................... 308 (191) (402) (285) 30
Provision (benefit) for income taxes.............. 163 (59)(A) (115)(E) (11) 12(P)
----------- ------ ----- ----------- -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........... 145 (132) (287) (274) 18
Dividend and preferences on preferred stock....... (3) (40)(A) (8)(F) (51)
----------- ------ ----- ----------- -----
Income (loss) before extraordinary item available
for Media Stock.................................. $ 142 $ (172) $ (295) $ (325)(G) $ 18
----------- ------ ----- ----------- -----
----------- ------ ----- ----------- -----
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER SHARE
OF MEDIA STOCK................................... $ 0.30 $ (0.52)(G)
----------- -----------
----------- -----------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)....................................... 470.55 627.69(G)
----------- -----------
----------- -----------
<CAPTION>
MEDIA GROUP
PRO FORMA
-----------
<S> <C>
Sales and other revenues
Directory and information services.............. $ 1,180
Wireless communications......................... --
Cable and telecommunications.................... 1,997
Other........................................... 40
-----------
Total sales and other revenues.................... 3,217
Cost of sales and other revenues.................. 1,159
Selling, general and administrative expenses...... 884
Depreciation and amortization..................... 929
-----------
Total operating expenses.......................... 2,972
-----------
Income (loss) from operations..................... 245
Other income (expense):
Interest expense................................ (553)
Equity (losses) income in unconsolidated
ventures.......................................
(143)
Gains on merger of joint venture interest and
sales of other assets.......................... 181
Guaranteed minority interest expense............ (14)
Other income (expense) -- net................... 29
-----------
Income (loss) before income taxes and
extraordinary item............................... (255)
Provision (benefit) for income taxes.............. 1
-----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM........... (256)
Dividend and preferences on preferred stock....... (51)
-----------
Income (loss) before extraordinary item available
for Media Stock.................................. $ (307)
-----------
-----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM PER SHARE
OF MEDIA STOCK................................... $ (0.49)
-----------
-----------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)....................................... 627.69
-----------
-----------
</TABLE>
85
<PAGE>
U S WEST MEDIA GROUP
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1996
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MEDIA GROUP U S WEST/
MEDIA GROUP PRO FORMA AIRTOUCH JOINT
MEDIA GROUP CONTINENTAL ADJUSTMENTS FOR THE VENTURE
HISTORICAL PRO FORMA FOR THE MERGER MERGER ADJUSTMENTS
----------- -------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Sales and other revenues
Directory and information services............ $ 592 $ 592
Wireless communications....................... 554 554 $ (554)(N)
Cable and telecommunications.................. 116 $ 970(A) 1,086
Other......................................... 9 9
----------- ----- ----------- -----
Total sales and other revenues.................. 1,271 970 2,241 (554)
Cost of sales and other revenues................ 405 341(A) 746 (139)(N)
Selling, general and administrative expenses.... 456 237(A) 693 (236)(N)
Depreciation and amortization................... 137 237(A) $ 164(B) 538 (70)(N)
----------- ----- ----- ----------- -----
Total operating expenses........................ 998 815 164 1,977 (445)
----------- ----- ----- ----------- -----
Income (loss) from operations................... 273 155 (164) 264 (109)
Other income (expense):
Interest expense.............................. (50) (237)(A) (5)(C) (292) 1(N)
Equity (losses) income in unconsolidated
ventures..................................... (143) (48)(A) (21)(D) (212) 99(N)
7(O)
Guaranteed minority interest expense.......... (24) (24)
Other income (expense) -- net................. (34) (6)(A) (40) 13(N)
----------- ----- ----- ----------- -----
Income (loss) before income taxes............... 22 (136) (190) (304) 11
Provision (benefit) for income taxes............ 30 (38)(A) (53)(E) (61) 4(P)
----------- ----- ----- ----------- -----
NET INCOME (LOSS)............................... (8) (98) (137) (243) 7
Dividend and preferences on preferred stock..... (2) (21)(A) (3)(F) (26)
----------- ----- ----- ----------- -----
Income (loss) available for Media Stock......... $ (10) $ (119) $ (140) $ (269)(G) $ 7
----------- ----- ----- ----------- -----
----------- ----- ----- ----------- -----
LOSS PER SHARE OF MEDIA STOCK................... $ (0.02) $ (0.43)(G)
----------- -----------
----------- -----------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)..................................... 473.30 630.44(G)
----------- -----------
----------- -----------
<CAPTION>
MEDIA GROUP PRO
FORMA
---------------
<S> <C>
Sales and other revenues
Directory and information services............ $ 592
Wireless communications....................... --
Cable and telecommunications.................. 1,086
Other......................................... 9
-------
Total sales and other revenues.................. 1,687
Cost of sales and other revenues................ 607
Selling, general and administrative expenses.... 457
Depreciation and amortization................... 468
-------
Total operating expenses........................ 1,532
-------
Income (loss) from operations................... 155
Other income (expense):
Interest expense.............................. (291)
Equity (losses) income in unconsolidated
ventures.....................................
(106)
Guaranteed minority interest expense.......... (24)
Other income (expense) -- net................. (27)
-------
Income (loss) before income taxes............... (293)
Provision (benefit) for income taxes............ (57)
-------
NET INCOME (LOSS)............................... (236)
Dividend and preferences on preferred stock..... (26)
-------
Income (loss) available for Media Stock......... $ (262)
-------
-------
LOSS PER SHARE OF MEDIA STOCK................... $ (0.42)
-------
-------
AVERAGE SHARES OF MEDIA STOCK OUTSTANDING
(MILLIONS)..................................... 630.44
-------
-------
</TABLE>
86
<PAGE>
U S WEST MEDIA GROUP
PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 1996
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
MEDIA GROUP U S WEST/
MEDIA MEDIA GROUP PRO FORMA AIRTOUCH JOINT
GROUP CONTINENTAL ADJUSTMENTS FOR THE VENTURE
HISTORICAL PRO FORMA FOR THE MERGER MERGER ADJUSTMENTS
----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Total current assets............................ $ 817 $ 143(A) $ 960 $ (177)(Q)
Property, plant and equipment -- net............ 1,261 2,419(A) 3,680 (824)(Q)
Investment in Time Warner Entertainment......... 2,497 2,497
Investments in other unconsolidated ventures.... 1,365 480(A) $ 653(H) 2,498 1,053(Q)
Intangible assets -- net........................ 1,761 1,989(A) 7,957(H) 11,707 (433)(Q)
Other assets.................................... 981 601(A) 1,582 (9)(Q)
----------- ------------- ------ ----------- ------
Total assets.................................... $ 8,682 $ 5,632 $ 8,610 $ 22,924 $ (390)
----------- ------------- ------ ----------- ------
----------- ------------- ------ ----------- ------
LIABILITIES AND EQUITY
Total current liabilities....................... $ 1,261 $ 459(A) $ 1,024(I) $ 2,744 $ (285)(Q)
Long-term debt.................................. 1,689 5,662(A) 339(J) 7,690
Deferred taxes, credits and other............... 599 397(A) 2,731(K) 3,727 (105)(Q)
Redeemable preferred securities................. 651 651
Redeemable common stock......................... 270(A) (270)(L)
Total equity.................................... 4,482 (1,156)(A) 4,786(M) 8,112
----------- ------------- ------ ----------- ------
Total liabilities and equity.................... $ 8,682 $ 5,632 $ 8,610 $ 22,924 $ (390)
----------- ------------- ------ ----------- ------
----------- ------------- ------ ----------- ------
<CAPTION>
MEDIA GROUP
PRO FORMA
-------------
<S> <C>
ASSETS
Total current assets............................ $ 783
Property, plant and equipment -- net............ 2,856
Investment in Time Warner Entertainment......... 2,497
Investments in other unconsolidated ventures.... 3,551
Intangible assets -- net........................ 11,274
Other assets.................................... 1,573
-------------
Total assets.................................... $ 22,534
-------------
-------------
LIABILITIES AND EQUITY
Total current liabilities....................... $ 2,459
Long-term debt.................................. 7,690
Deferred taxes, credits and other............... 3,622
Redeemable preferred securities................. 651
Redeemable common stock.........................
Total equity.................................... 8,112
-------------
Total liabilities and equity.................... $ 22,534
-------------
-------------
</TABLE>
87
<PAGE>
U S WEST, INC. AND THE U S WEST MEDIA GROUP
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THE MERGER
(A) See "Description of Continental -- Unaudited Pro Forma Condensed
Consolidated Financial Statements." Certain reclassifications have been made
to the Continental pro forma amounts to reflect such financial statements on
a basis consistent with the unaudited pro forma condensed combined financial
statements of U S WEST and the Media Group after giving effect to the
Merger.
(B) Reflects incremental amortization expense for the excess of the purchase
price over net tangible assets acquired (excluding intangible assets related
to Continental's equity method investments), in addition to adjustments to
reflect depreciation of tangible cable assets over 6 years. The excess of
the purchase price over the net tangible cable assets acquired is being
amortized over 25 years.
(C) Represents assumed interest expense of $57 million annually ($28 million for
six months) on the issuance of $1 billion of U S WEST commercial paper to
fund the cash portion of the the Merger. Such interest expense was
calculated at U S WEST's approximate commercial paper borrowing rate of 5.65
percent at June 30, 1996. A 1/8 percentage point change in the assumed
financing rate would change interest expense by $1.25 million. Also reflects
a reduction in interest expense of $47 million annually ($23 million for six
months) related to the planned refinancing of Continental's revolving debt
facilities with the issuance of $2.929 billion of U S WEST commercial paper.
Such interest expense was calculated using an assumed interest savings of
1.60 percent based on the difference between the U S WEST commercial paper
rate and the Continental rate on its revolving debt facilities. A 1/8
percentage point change in the assumed rate on the refinancing would change
interest expense by $3.7 million. U S WEST may elect to pay up to an
additional $500 million in cash, financed through the issuance of commercial
paper, which would reduce the number of shares of Media Stock issued. If U S
WEST elects to pay an additional $500 million in cash, interest expense on
the pro forma condensed combined statements of operations would increase $28
million annually, assuming an interest rate of 5.65 percent. A 1/8
percentage point change in the assumed financing rate would change interest
expense by $625 thousand.
(D) Reflects incremental amortization for the excess of the purchase price over
the net tangible cable assets acquired related to Continental's equity
method investments being amortized over 15 years.
(E) Reflects the estimated income tax effect of the pro forma adjustments.
(F) Dividends associated with the issuance of $927 million of Series D Preferred
Stock at fair value ($1 billion in liquidation value) less Continental's
historical accretion of preferred stock preferences. It is assumed that the
Series D Preferred Stock would have an estimated annual dividend of $48
million (based on a Base Dividend Rate of 4.375%) and it is assumed that the
Adjustment Amount is equal to zero. See "The Merger Agreement -- Conversion
of Continental Common Stock -- Form and Value of Consideration to be
Received in the Merger" and "Description of U S WEST Capital Stock -- Series
D Preferred Stock -- Dividends -- Determination of Dividend Rate" and "--
Redemption and Exchange -- Determination of Redemption Price and Exchange
Rate."
(G) Media Stock pro forma loss per share assumes the issuance of approximately
157.14 million shares at a price of $17.20 per share on January 1, 1995. The
share price is computed based on the average of the closing sales prices for
the Media Stock for each trading day in the five-day period beginning on
October 3, 1996 and ending on October 9, 1996. U S WEST, at its option, may
elect to pay up to an additional $500 million in cash, financed through the
issuance of commercial paper. If U S WEST elects to pay an additional $500
million in cash, interest expense on the pro forma condensed combined
statement of operations would increase $28 million annually, assuming an
interest rate of 5.65 percent. The additional interest expense combined with
23.8 million fewer shares of Media Stock issued would result in an increase
of $17 million in the net loss ($4.25 million per quarter) and an increase
of $.05 in the Media Stock loss per share ($.01 per quarter).
88
<PAGE>
(H) Represents the allocation of the purchase price to intangible assets
acquired. The purchase price and the excess of the purchase price over the
net tangible assets acquired at June 30, 1996, are as follows (in millions):
<TABLE>
<S> <C>
Purchase Price:
Media Stock issued............................................ $ 2,703
Series D Preferred Stock issued at fair value................. 927
Cash paid through issuance of commercial paper................ 1,000
Acquisition costs............................................. 20
---------
Total consideration........................................... 4,650
Debt and other liabilities assumed at fair value.............. 6,492
---------
Purchase price, excluding deferred income tax gross up........ $ 11,142
---------
---------
Excess of Purchase Price over Net Tangible Assets Acquired:
Purchase price................................................ $ 11,142
Net tangible assets acquired (including acquisitions)......... 3,590
---------
Excess of purchase price over net tangible assets acquired.... 7,552
Deferred income tax gross up.................................. 3,100
---------
Total intangible assets acquired.............................. $ 10,652
---------
---------
Allocation of intangible assets:
Identifiable intangible assets, primarily cable television
franchises................................................. $ 6,504
Goodwill.................................................... 3,442
Investments in other unconsolidated ventures................ 706
</TABLE>
The value of the Media Stock issued is based upon approximately 157.14
million shares at a price of $17.20 per share (the average of the closing
sales prices for the Media Stock for each trading day in the five-day period
beginning on October 3, 1996 and ending on October 9, 1996).
(I) Represents the issuance of $1.0 billion in commercial paper to finance the
cash portion of the Merger consideration, $20 million in closing costs
related to the Merger and $4 million in recognition of pension and executive
retirement plan obligations at Continental. U S WEST, at its option, may
elect to pay up to an additional $500 million in cash which would reduce the
number of shares of Media Stock issued. If U S WEST elects to pay an
additional $500 million in cash, the pro forma condensed combined balance
sheet would reflect an additional $500 million of short-term debt and $409
million less of equity. The $409 million reduction in equity is based upon
23.8 million fewer shares of Media Stock being issued at a price of $17.20
per share (the average of the closing sales prices for the Media Stock for
each trading day in the five-day period beginning on October 3, 1996 and
ending on October 9, 1996).
(J) Represents the adjustment to record Continental's debt and interest rate
derivatives at fair value as of June 30, 1996.
(K) Represents an estimated deferred income tax liability of $3.1 billion
associated with the Continental purchase price allocation inclusive of
Continental's historical deferred income taxes of $369 million.
(L) Represents the elimination of Continental's redeemable common stock.
(M) Represents the issuance of approximately $2.703 billion in Media Stock and
approximately $927 million of Series D Preferred Stock at fair value ($1.0
billion in liquidation value) as consideration in the Merger, and
elimination of Continental stockholders' deficiency of $1.156 billion. U S
WEST, at its option, may elect to pay up to an additional $500 million in
cash, financed through the issuance of commercial paper, which would reduce
the number of shares of Media Stock issued. If U S WEST elects to pay an
additional $500 million in cash, the pro forma condensed combined balance
sheet would reflect a $500 million increase in short term debt and $409
million less of equity. The $409 million reduction in equity is based upon
23.8 million fewer shares of Media Stock being issued at a price of $17.20
per share (the average of the closing sales prices for the Media Stock for
each trading day in the five-day period beginning on October 3, 1996 and
ending on October 9, 1996).
89
<PAGE>
U S WEST/AIRTOUCH JOINT VENTURE
(N) To deconsolidate U S WEST's domestic cellular revenues and expenses and to
reflect, on the equity method of accounting, U S WEST's assumed 26 percent
interest in the combined pro forma earnings of the U S WEST/AirTouch Joint
Venture.
(O) To record amortization to income of the implied negative goodwill arising
from the difference in the pro forma net book value of assets contributed to
the U S WEST/AirTouch Joint Venture and U S WEST's assumed share (26
percent) of the total U S WEST/AirTouch Joint Venture assets. The implied
negative goodwill is amortized over 40 years. The implied negative goodwill
is determined as follows (in millions):
<TABLE>
<CAPTION>
JUNE 30,
1996
-----------
<S> <C>
Net book value of assets contributed by
U S WEST.................................................................... $ 1,053
Net book value of assets contributed by AirTouch............................. 4,967
-----------
Combined net book values contributed......................................... 6,020
U S WEST's share at 26 percent............................................... 1,565
Net book value of contribution............................................... 1,053
-----------
Implied negative goodwill.................................................... $ 512
-----------
-----------
Annual amortization.......................................................... $ 13
-----------
-----------
Six month amortization....................................................... $ 7
-----------
-----------
</TABLE>
(P) To record the income tax effects of the pro forma adjustments.
(Q) To deconsolidate and reflect on the equity method of accounting U S WEST's
domestic cellular assets and liabilities and reflect their contribution to
the U S WEST/AirTouch Joint Venture at historical cost.
90
<PAGE>
MARKET PRICES AND DIVIDEND DATA
On November 1, 1995, U S WEST implemented the Recapitalization, pursuant to
which each outstanding share of Old Common Stock was converted into one share of
Communications Stock and one share of Media Stock. On October 31, 1995, the Old
Common Stock ceased trading and, on November 1, 1995, the Communications Stock
and the Media Stock commenced trading. The following table sets forth the high
and low sales prices on the Composite Tape and the dividends paid per share of
the Old Common Stock and the Media Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW DIVIDENDS PAID
--------- --------- ---------------
SALE PRICES
--------------------
<S> <C> <C> <C>
OLD COMMON STOCK
1994
First Quarter................................................................. $ 46.250 $ 38.500 $ 0.535
Second Quarter................................................................ 43.750 38.250 0.535
Third Quarter................................................................. 43.125 38.250 0.535
Fourth Quarter................................................................ 38.875 34.625 0.535
1995
First Quarter................................................................. $ 41.375 $ 35.125 $ 0.535
Second Quarter................................................................ 42.875 39.125 0.535
Third Quarter................................................................. 48.375 40.875 0.535
Fourth Quarter (through October 31, 1995)..................................... 48.375 45.625 --
MEDIA STOCK
1995
Fourth Quarter (from November 1, 1995)........................................ $ 20.00 $ 17.375 --
1996
First Quarter................................................................. $ 23.00 $ 18.875 --
Second Quarter................................................................ 21.00 16.875 --
Third Quarter................................................................. 18.875 14.375 --
Fourth Quarter (through October 8, 1996)...................................... 17.875 16.000 --
</TABLE>
On February 26, 1996, the trading day prior to the announcement of the
Merger, the closing sales prices of the Communications Stock and the Media
Stock, as reported on the Composite Tape, were $33.875 and $22.125,
respectively. On October 8, 1996, the closing sales prices of the Communications
Stock and the Media Stock, as reported on the Composite Tape, were $31.375 and
$17.625, respectively. As of October 8, 1996, there were 479,227,782 shares of
Communications Stock and 473,997,461 shares of Media Stock outstanding and
734,755 holders of record of Communications Stock and 716,052 holders of record
of Media Stock.
The U S WEST Board does not currently pay dividends on the Media Stock. The
U S WEST Board currently intends to retain future earnings, if any, for the
development of the Media Group's businesses and does not anticipate paying cash
dividends on the Media Stock in the foreseeable future. Future determinations by
the U S WEST Board to pay dividends on the Media Stock would be based primarily
upon the respective financial condition, results of operations and business
requirements of the Media Group and U S WEST as a whole. Under the terms of the
Media Stock, dividends, if any, would be payable in the sole discretion of the U
S WEST Board out of the lesser of (i) the funds of U S WEST legally available
therefor and (ii) the Media Group Available Dividend Amount. See "Description of
U S WEST Capital Stock -- Communications Stock and Media Stock -- Dividends."
No established public trading market exists for the Class A Common Stock or
the Class B Common Stock and, accordingly, no market price information is
available with respect thereto. Continental has not paid cash dividends on the
Class A Common Stock or the Class B Common Stock. As of September 20, 1996,
there were 38,994,507 shares of Class A Common Stock and 109,424,371 shares of
Class B Common Stock outstanding and 630 holders of record of Class A Common
Stock and 351 holders of record of Class B Common Stock.
91
<PAGE>
DESCRIPTION OF U S WEST CAPITAL STOCK
The following is a description of the terms of the Communications Stock, the
Media Stock, the Series D Preferred Stock and certain preferred stock purchase
rights with respect to the Communications Stock and the Media Stock. This
description does not purport to be complete and is qualified in its entirety by
reference to the U S WEST Restated Certificate, the Certificate of Designation
relating to the Series D Preferred Stock (the "Series D Certificate") and the
Amended and Restated Rights Agreement, dated as of October 31, 1995 (the
"Restated Rights Agreement"), between U S WEST and State Street Bank and Trust
Company, as Rights Agent, each of which has been filed as an exhibit to the
Registration Statement. The definitions of certain capitalized terms used in the
following description are set forth below under "-- Certain Definitions."
GENERAL
Pursuant to the U S WEST Restated Certificate, U S WEST is authorized to
issue 4,200,000,000 shares of capital stock, consisting of (i) 2,000,000,000
shares of Communications Stock, (ii) 2,000,000,000 shares of Media Stock and
(iii) 200,000,000 shares of Preferred Stock, par value $1.00 per share
("Preferred Stock"), of which 10,000,000 shares are designated as Series A
Junior Participating Cumulative Preferred Stock, par value $1.00 per share
("Series A Preferred Stock"), 10,000,000 shares are designated as Series B
Junior Participating Cumulative Preferred Stock, par value $1.00 per share
("Series B Preferred Stock"), and 50,000 shares are designated as Series C
Cumulative Redeemable Preferred Stock, par value $1.00 per share ("Series C
Preferred Stock"). Immediately prior to the Effective Time, U S WEST will
designate 20,000,000 shares of Preferred Stock as Series D Preferred Stock.
The authorized but unissued shares of Communications Stock, Media Stock and
Preferred Stock are available for issuance by U S WEST from time to time, as
determined by the U S WEST Board, for any proper corporate purpose, which could
include raising capital for use by either Group, payment of dividends, providing
compensation or benefits to employees or acquiring other companies or
businesses. The issuance of such shares would not be subject to approval by the
stockholders of U S WEST unless deemed advisable by the U S WEST Board or
required by applicable law, regulation or stock exchange listing requirements.
COMMUNICATIONS STOCK AND MEDIA STOCK
DIVIDENDS. Dividends on the Communications Stock and the Media Stock are
limited to legally available funds of U S WEST under applicable law and subject
to the prior payment of dividends on outstanding shares of Preferred Stock.
Dividends on the Communications Stock and the Media Stock are further
limited to an amount not in excess of the Communications Group Available
Dividend Amount and the Media Group Available Dividend Amount, respectively. The
Available Dividend Amount with respect to a Group is intended to be similar to
the amount that would be legally available for the payment of dividends on the
stock of such Group under Delaware law if such Group were a separate company.
The "Communications Group Available Dividend Amount," on any date, means the
excess, if any, of (i) the amount equal to the fair market value of the total
assets attributed to the Communications Group less the total amount of the
liabilities attributed to the Communications Group (provided that preferred
stock shall not be treated as a liability), in each case as of such date and
determined on a basis consistent with that applied in determining the
Communications Group Net Earnings (Loss) over (ii) the aggregate par value of,
or any greater amount determined to be capital in respect of, all outstanding
shares of Communications Stock and each class or series of Preferred Stock
attributed to the Communications Group. No series of Preferred Stock has been
attributed to the Communications Group.
The "Media Group Available Dividend Amount," on any date, means the excess,
if any, of (i) the product of (x) the Outstanding Media Fraction as of such date
multiplied by (y) an amount equal to the fair market value of the total assets
attributed to the Media Group less the total amount of the liabilities
attributed to the Media Group (provided that preferred stock shall not be
treated as a liability), in each case as of such date and determined on a basis
consistent with that applied in determining the Media Group Net Earnings (Loss)
over (ii) the aggregate par value of, or any greater amount determined to be
capital in respect of, all outstanding shares of Media Stock and each class or
series of Preferred Stock attributed to the Media Group. The Series C Preferred
Stock has been
92
<PAGE>
attributed to the Media Group. In addition, the Series D Preferred Stock will be
attributed to the Media Group following the Effective Time. As used herein,
"Available Dividend Amount" refers to the Communications Group Available
Dividend Amount and/or the Media Group Available Dividend Amount, as the context
requires.
"Communications Group Net Earnings (Loss)," for any period through any date,
shall mean the net income or loss of the Communications Group for such period
(or in respect of fiscal periods of U S WEST commencing prior to November 1,
1995, the pro forma net income or loss of the Communications Group for such
period as if November 1, 1995 had been the first day of such period) determined
in accordance with generally accepted accounting principles in effect at such
time, reflecting income and expense of U S WEST attributed to the Communications
Group on a basis substantially consistent with attributions of income and
expense made in the calculation of Media Group Net Earnings (Loss), including,
without limitation, corporate administrative costs, net interest and other
financial costs and income taxes.
"Media Group Net Earnings (Loss)," for any period through any date, shall
mean the net income or loss of the Media Group for such period (or in respect of
the fiscal periods of U S WEST commencing prior to November 1, 1995, the pro
forma net income or loss of the Media Group for such period as if November 1,
1995 had been the first day of such period) determined in accordance with
generally accepted accounting principles in effect at such time, reflecting
income and expense of U S WEST attributed to the Media Group on a basis
substantially consistent with attributions of income and expense made in the
calculation of the Communications Group Net Earnings (Loss), including, without
limitation, corporate administrative costs, net interest and other financial
costs and income taxes.
At June 30, 1996, based on their respective financial statements, the funds
of U S WEST legally available for the payment of dividends under Delaware law
would have been at least $8.207 billion, the Communications Group Available
Dividend Amount would have been at least $3.730 billion and the Media Group
Available Dividend Amount would have been at least $4.477 billion. There can be
no assurance that there will continue to be an Available Dividend Amount with
respect to either Group.
Delaware law limits the amount of distributions on capital stock to the
legally available funds of U S WEST, which are determined on the basis of all of
U S WEST, and not just the respective Groups. Consequently, the amount of
legally available funds reflects the amount of any net losses of any Group and
any distributions on, and repurchases of, Communications Stock, Media Stock or
Preferred Stock. Dividend payments on the Communications Stock or on the Media
Stock could be precluded because of the unavailability of legally available
funds under Delaware law, even though the Available Dividend Amount test with
respect to the relevant Group is met.
Subject to the prior payment of dividends on outstanding shares of Preferred
Stock and the foregoing limitations, the U S WEST Board could, in its sole
discretion, declare and pay dividends exclusively on Communications Stock,
exclusively on Media Stock or on both such classes, in equal or unequal amounts,
notwithstanding the relative amounts of the Communications Group Available
Dividend Amount and the Media Group Available Dividend Amount, the amount of
prior dividends declared on each class, the respective voting or liquidation
rights of each class or any other factor.
CONVERSION AND REDEMPTION
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF U S WEST COMMON STOCK. Upon
the sale, transfer, assignment or other disposition (whether by merger,
consolidation, sale or contribution of stock or otherwise), in one transaction
or a series of related transactions (a "Disposition"), by U S WEST of all or
substantially all of the properties and assets attributed to any Group to one or
more persons or entities (other than (w) the Disposition by U S WEST of all or
substantially all of U S WEST's properties and assets in one transaction or a
series of related transactions in connection with the liquidation, dissolution
or winding up of U S WEST and the distribution of assets to stockholders, (x) on
a pro rata basis to the holders of all outstanding shares of the class of U S
WEST Common Stock relating to such Group and, in the case of a Disposition of
the properties and assets attributed to the Media Group, U S WEST for the
benefit of the Communications Group with respect to the Inter-Group
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Interest, if any, (y) to any person or entity controlled by U S WEST (as
determined by the U S WEST Board), or (z) in connection with a Related Business
Transaction), U S WEST is required, on or prior to the 85th trading day
following the consummation of such Disposition, to either:
(1) provided that there are funds of U S WEST legally available therefor:
(i) subject to the limitations described above in the second paragraph
under "-- Dividends," declare and pay a dividend in cash and/or securities
(other than U S WEST Common Stock) or other property to the holders of
outstanding shares of the class of U S WEST Common Stock relating to the
Group subject to such Disposition having a Fair Value as of the date of such
consummation equal in the aggregate to (A) in the case of a Disposition of
the properties and assets attributed to the Communications Group, the Fair
Value of the Net Proceeds of such Disposition and (B) in the case of a
Disposition of the properties and assets attributed to the Media Group, the
product of the Outstanding Media Fraction as of the record date for
determining holders entitled to receive such dividend multiplied by the Fair
Value of the Net Proceeds of such Disposition; or
(ii) (A) if such Disposition involves all (not merely substantially all)
of the properties and assets attributed to such Group, redeem all
outstanding shares of U S WEST Common Stock relating to the Group subject to
such Disposition in exchange for cash and/or securities (other than U S WEST
Common Stock) or other property having a Fair Value as of the date of such
consummation in the aggregate equal to (I) in the case of a Disposition of
the properties and assets attributed to the Communications Group, the Fair
Value of the Net Proceeds of such Disposition and (II) in the case of a
Disposition of the properties and assets attributed to the Media Group, the
product of the Outstanding Media Fraction as of such redemption date
multiplied by the Fair Value of the Net Proceeds of such Disposition; or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets attributed to such Group, redeem such number of
whole shares of the class of U S WEST Common Stock relating to the Group
subject to such Disposition (but in any event not more than the number of
shares of such class of U S WEST Common Stock outstanding) that has an
aggregate average Market Value, during the ten-trading day period beginning
on the 16th trading day immediately succeeding such consummation, closest to
(I) in the case of a Disposition of the properties and assets attributed to
the Communications Group, the Fair Value of the Net Proceeds of such
Disposition as of the date of such consummation or (II) in the case of a
Disposition of the properties and assets attributed to the Media Group, the
product of the Outstanding Media Fraction as of the date such shares are
selected for redemption multiplied by the Fair Value of the Net Proceeds of
such Disposition as of the date of such consummation, in consideration for
cash and/or securities (other than U S WEST Common Stock) or other property
having a Fair Value in the aggregate equal to such Fair Value of the Net
Proceeds or such product, as applicable;
provided, however, that U S WEST may only redeem shares of a class of U S WEST
Common Stock pursuant to this paragraph (ii) if the amount to be paid in
redemption of such shares is less than or equal to the sum of, as of the
redemption date, (a) the Available Dividend Amount with respect to such class of
U S WEST Common Stock and (b) the amount determined to be capital in respect of
such shares in accordance with applicable corporation law; or
(2) convert each outstanding share of the class of U S WEST Common Stock
relating to the Group subject to such Disposition into a number of fully
paid and nonassessable shares of the class of U S WEST Common Stock relating
to the other Group (or, if the U S WEST Common Stock relating to the other
Group is not Publicly Traded at such time and shares of another class or
series of common stock of U S WEST (other than the class of U S WEST Common
Stock relating to the Group subject to such Disposition) are then Publicly
Traded, of such other class or series of common stock as has the largest
Market Capitalization as of the close of business on the trading day
immediately preceding the date of the notice of such conversion mailed to
holders), equal to 110% of the ratio (calculated to the nearest five decimal
places) of the average Market Value of one share of U S WEST Common Stock
relating to the Group subject to such Disposition to the average Market
Value of one share of U S WEST Common Stock relating to the other Group (or
such other class or series of U S WEST Common Stock, as the case may be),
during the ten-trading day period beginning on the 16th trading day
following such consummation.
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The U S WEST Board may, within one year after a dividend or redemption
described above in this section, convert each outstanding share of the class of
U S WEST Common Stock relating to the Group subject to such Disposition into a
number of fully paid and nonassessable shares of the class of U S WEST Common
Stock relating to the other Group (or, if the U S WEST Common Stock relating to
the other Group is not Publicly Traded at such time and shares of another class
or series of common stock of U S WEST (other than the class of U S WEST Common
Stock relating to the Group subject to such Disposition) are then Publicly
Traded, of such other class or series of common stock as has the largest Market
Capitalization as of the close of business on the trading day immediately
preceding the date of the notice of such conversion mailed to holders), equal to
110% of the Market Value Ratio of the Communications Stock to the Media Stock or
the Market Value Ratio of the Media Stock to the Communications Stock, as the
case may be, as of the fifth trading day prior to the date notice of such
conversion is mailed to such holders. Any such exchange would dilute the
interest in U S WEST of holders of the class of U S WEST Common Stock relating
to the Group not subject to Disposition and would preclude holders of either
class of U S WEST Common Stock from retaining their investment in a security
reflecting separately the business of their respective Group. In determining
whether to effect any such conversion following such a dividend or partial
redemption, the U S WEST Board, in its sole discretion and consistent with its
fiduciary duties to all the stockholders, in addition to other matters, would
likely consider whether the remaining properties and assets attributed to the
Group subject to the Disposition continue to constitute a viable business. Other
considerations could include the number of shares of the class of U S WEST
Common Stock relating to such Group remaining issued and outstanding, the per
share market price of such U S WEST Common Stock and the cost of maintaining
stockholder accounts.
For these purposes, "substantially all of the properties and assets"
attributed to any Group means a portion of such properties and assets that
represents at least 80% of the then Fair Value of the properties and assets
attributed to such Group.
A "Related Business Transaction" means any disposition of all or
substantially all of the properties and assets attributed to any Group in a
transaction or series of related transactions that result in U S WEST receiving
in consideration of such properties and assets primarily equity securities
(including, without limitation, capital stock, debt securities convertible into
or exchangeable for equity securities or interests in a general or limited
partnership or limited liability company, without regard to the voting power or
other management or governance rights associated therewith) of any entity which
(i) acquires such properties or assets or succeeds (by merger, formation of a
joint venture or otherwise) to the business conducted with such properties or
assets or controls such acquiror or successor and (ii) is primarily engaged or
proposes to engage primarily in one or more businesses similar or complementary
to the businesses conducted by such Group prior to such Disposition, as
determined by the U S WEST Board. The purpose of the Related Business
Transaction exception is to enable U S WEST to technically "dispose" of
properties or assets of a Group to other entities engaged or proposing to engage
in businesses similar or complementary to those of such Group without resulting
in a dividend on, or a conversion or redemption of, the class of U S WEST Common
Stock relating to such Group.
The "Net Proceeds" of a Disposition of any of the properties and assets
attributed to any Group means, as of any date, an amount, if any, equal to what
remains of the gross proceeds of such Disposition after any payment of, or
reasonable provision for, (a) any taxes payable by U S WEST in respect of such
Disposition or in respect of any resulting dividend or redemption (or which
would have been payable but for the utilization of tax benefits attributable to
the other Group), (b) any transaction costs, including, without limitation, any
legal, investment banking and accounting fees and expenses and (c) any
liabilities (contingent or otherwise) attributed to such Group, including,
without limitation, any liabilities for deferred taxes or any indemnity or
guarantee obligations of U S WEST incurred in connection with the Disposition or
otherwise and any liabilities for future purchase price adjustments and any
preferential amounts plus any accumulated and unpaid dividends in respect of the
Preferred Stock attributed to such Group. U S WEST may elect to pay the dividend
or redemption price referred to in clause (i) or (ii) above either in the same
form as the proceeds of the Disposition were received or in any other
combination of cash or securities or other property that the U S WEST Board
determines will have an aggregate market value of not less than the amount of
the Fair Value of the Net Proceeds.
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At the time of any dividend made as a result of a Disposition of the
properties and assets attributed to the Media Group, the financial statements of
the Communications Group will be credited, and the financial statements of the
Media Group will be charged, with an amount equal to the product of (i) the Fair
Value of such dividend multiplied by (ii) a fraction, the numerator of which is
the Inter-Group Interest Fraction on the record date for such dividend and the
denominator of which is the Outstanding Media Fraction on the record date for
such dividend.
CONVERSION AT OPTION OF U S WEST. At any time following November 1, 2004,
the U S WEST Board may convert each outstanding share of Communications Stock
into a number of fully paid and nonassessable shares of Media Stock (or, if
Media Stock is not Publicly Traded at such time and shares of another class or
series of common stock of U S WEST (other than Communications Stock) are then
Publicly Traded, of such other class or series of common stock as has the
largest Market Capitalization as of the close of business on the trading day
immediately preceding the date of the notice of such conversion mailed to
holders), equal to 100% of the Market Value Ratio of the Communications Stock to
the Media Stock as of the fifth trading day prior to the date notice of such
conversion is mailed to such holders.
The U S WEST Board may at any time convert each outstanding share of Media
Stock into a number of fully paid and nonassessable shares of Communications
Stock (or, if Communications Stock is not Publicly Traded at such time and
shares of another class or series of common stock of U S WEST (other than Media
Stock) are then Publicly Traded, of such other class or series of common stock
as has the largest Market Capitalization as of the close of business on the
trading day immediately preceding the date of the notice of such conversion
mailed to holders), equal to the applicable percentage set forth below, on the
conversion date, of the Market Value Ratio of the Media Stock to the
Communications Stock as of the fifth trading day prior to the date of notice of
such conversion:
<TABLE>
<CAPTION>
PERCENTAGE OF
12 MONTH PERIOD PRIOR TO NOVEMBER 1 MARKET VALUE RATIO
- -------------------------------------------------------------------------------- -------------------
<S> <C>
2000............................................................................ 115%
2001............................................................................ 112%
2002............................................................................ 109%
2003............................................................................ 106%
2004............................................................................ 103%
thereafter...................................................................... 100%
</TABLE>
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. At any time at which all of
the assets and liabilities attributed to the Communications Group (and no other
assets or liabilities of U S WEST or any subsidiary thereof) are held directly
or indirectly by one or more wholly owned subsidiaries of U S WEST (the
"Communications Group Subsidiaries"), the U S WEST Board may, provided that
there are funds of U S WEST legally available therefor, redeem all of the
outstanding shares of Communications Stock for all of the outstanding shares of
the common stock of the Communications Group Subsidiaries, on a pro rata basis.
At any time at which all of the assets and liabilities attributed to the
Media Group (and no other assets or liabilities of U S WEST or any subsidiary
thereof) are held directly or indirectly by one or more wholly-owned
subsidiaries of U S WEST (the "Media Group Subsidiaries"), the U S WEST Board
may, provided that there are funds of U S WEST legally available therefor,
redeem all of the outstanding shares of Media Stock for a number of outstanding
shares of common stock of the Media Group Subsidiaries equal to the product of
the Outstanding Media Fraction multiplied by the number of all of the
outstanding shares of the Media Group Subsidiaries, on a pro rata basis. U S
WEST will retain the balance of the outstanding shares of the common stock of
the Media Group Subsidiaries in lieu of the Inter-Group Interest of the
Communications Group in the Media Group, if any.
EFFECTS ON CONVERTIBLE SECURITIES. The following provisions with respect to
Convertible Securities only apply to the extent that the terms of such
Convertible Securities do not provide for adjustments in the event of a
conversion or redemption described above. These provisions will not apply to the
Series D Preferred Stock.
After any conversion date or redemption date on which all outstanding shares
of any class of U S WEST Common Stock were converted or redeemed, any share of
such class of U S WEST Common Stock that is to be issued on conversion, exchange
or exercise of any Convertible Securities will, immediately upon such
conversion,
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exchange or exercise and without any notice or any other action on the part of,
U S WEST, the U S WEST Board or the holder of such Convertible Security:
(i) in the event the shares of such class of U S WEST Common Stock
outstanding on such conversion date were converted into shares of the class
of U S WEST Common Stock relating to the other Group (or another class or
series of common stock of U S WEST) pursuant to the provisions described
under "-- Mandatory Dividend, Redemption or Conversion of U S WEST Common
Stock" or "-- Conversion at Option of U S WEST," be converted into the
amount of cash and/or the number of shares of the kind of capital stock
and/or other securities or property of U S WEST that the number of shares of
such class of U S WEST Common Stock that were to be issued upon such
conversion, exchange or exercise would have received had such shares been
outstanding on such conversion date; or
(ii) in the event the shares of such class of U S WEST Common Stock
outstanding on such redemption date were redeemed pursuant to the provisions
described under "-- Mandatory Dividend, Redemption or Conversion of U S WEST
Common Stock" or redeemed for common stock of the Communications Group
Subsidiaries or Media Group Subsidiaries, as applicable, pursuant to the
provisions described under "-- Redemption in Exchange for Stock of
Subsidiary," be redeemed, to the extent of funds of U S WEST legally
available therefor, for $.01 per share in cash for each share of such class
of U S WEST Common Stock that otherwise would be issued upon such
conversion, exchange or exercise.
GENERAL CONVERSION AND REDEMPTION PROVISIONS. Not later than the 10th
trading day following the consummation of a Disposition referred to above under
"-- Mandatory Dividend, Redemption or Conversion of U S WEST Common Stock," U S
WEST will announce publicly by press release (i) the Net Proceeds of such
Disposition, (ii) the number of shares outstanding of the class of U S WEST
Common Stock relating to the Group subject to such Disposition, (iii) the number
of shares of such U S WEST Common Stock into or for which Convertible Securities
are then convertible, exchangeable or exercisable and the conversion, exchange
or exercise price thereof and (iv) in the case of a Disposition of the
properties and assets attributed to the Media Group, the Outstanding Media
Fraction on the date of such notice. Not earlier than the 26th trading day and
not later than the 30th trading day following the consummation of such
Disposition, U S WEST will announce publicly by press release which of the
actions specified in clause (i), (ii) or (iii) of the first paragraph under "--
Mandatory Dividend, Redemption or Conversion of U S WEST Common Stock" it has
irrevocably determined to take.
If U S WEST determines to pay a dividend as described in clause (1)(i) of
such paragraph, U S WEST is required, not later than the 30th trading day
following the consummation of such Disposition, to cause to be given to each
holder of shares of the class of U S WEST Common Stock relating to the Group
subject to such Disposition and to each holder of Convertible Securities
convertible into or exchangeable or exercisable for shares of such U S WEST
Common Stock (unless alternate provision for notice to the holders of such
Convertible Securities is made pursuant to the terms of such Convertible
Securities), a notice setting forth (i) the record date for determining holders
entitled to receive such dividend, which shall be not earlier than the 40th
trading day and not later than the 50th trading day following the consummation
of such Disposition, (ii) the anticipated payment date of such dividend (which
will not be more than 85 trading days following the consummation of such
Disposition), (iii) type of property to be paid as such dividend in respect of
outstanding shares of such U S WEST Common Stock, (iv) the Net Proceeds of such
Disposition, (v) in the case of a Disposition of properties and assets
attributed to the Media Group, the Outstanding Media Fraction on the date of
such notice, (vi) the number of outstanding shares of such U S WEST Common Stock
and the number of shares of such U S WEST Common Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof and (vii) in
the case of notice to be given to holders of Convertible Securities, a statement
to the effect that a holder of such Convertible Securities will be entitled to
receive such dividend only if such holder properly converts, exchanges or
exercises them on or prior to the record date referred to in clause (i) of this
sentence. Such notice will be sent by first-class mail, postage prepaid, to each
such holder at such holder's address as the same appears on the transfer books
of U S WEST.
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If U S WEST determines to undertake a redemption pursuant to clause
(1)(ii)(A) of the first paragraph under "-- Mandatory Dividend, Redemption or
Conversion of U S WEST Common Stock," U S WEST is required, not earlier than the
35th trading day and not later than the 45th trading day prior to the redemption
date, to cause to be given to each holder of shares of such class of U S WEST
Common Stock, and to each holder of Convertible Securities convertible into or
exchangeable or exercisable for shares of such class of U S WEST Common Stock
(unless alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such Convertible Securities) a
notice setting forth (1) a statement that all shares of such U S WEST Common
Stock outstanding on the redemption date will be redeemed, (2) the redemption
date (which will not be more than 85 trading days following the consummation of
such Disposition), (3) the type of property in which the redemption price for
the shares to be redeemed is to be paid, (4) the Net Proceeds of such
Disposition, (5) in the case of a Disposition of the properties and assets
attributed to the Media Group, the Outstanding Media Fraction on the date of
such notice, (6) the place or places where certificates for shares of such U S
WEST Common Stock, properly endorsed or assigned for transfer (unless U S WEST
waives such requirement) are to be surrendered for delivery of cash and/or
securities or other property, (7) the number of outstanding shares of such class
of U S WEST Common Stock and the number of shares of such class of U S WEST
Common Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, (8) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to participate in such redemption only
if such holder properly converts, exchanges or exercises such Convertible
Securities on or prior to the redemption date referred to in clause (2) of this
sentence and a statement as to what, if anything, such holder will be entitled
to receive pursuant to the terms of such Convertible Securities or, if
applicable, the provisions described under "-- Effects on Convertible
Securities" if such holder thereafter converts, exchanges or exercises such
Convertible Securities and (9) a statement to the effect that, except as
otherwise provided below, dividends on such shares of such U S WEST Common Stock
shall cease to be paid as of such redemption date. Such notice will be sent by
first-class mail, postage prepaid to each such holder at such holder's address
as the same appears on the transfer books of U S WEST.
If U S WEST determines to undertake a redemption pursuant to clause
(1)(ii)(B) of the first paragraph under "-- Mandatory Dividend, Redemption or
Conversion of U S WEST Common Stock," U S WEST is required, not later than the
30th trading day following consummation of the Disposition referred to in such
paragraph, to cause to be given to each holder of shares of the class of U S
WEST Common Stock relating to the Group subject to such Disposition, and to each
holder of Convertible Securities that are convertible into or exchangeable or
exercisable for shares of such U S WEST Common Stock (unless alternate provision
for such notice to the holders of such Convertible Securities is made pursuant
to the terms of such Convertible Securities), a notice setting forth (i) a date,
not earlier than the 40th trading day and not later than the 50th trading day
following the consummation of such Disposition in respect of which such
redemption is to be made, on which shares of such class of U S WEST Common Stock
will be selected for redemption, (ii) the anticipated redemption date (which
will not be more than 85 trading days following the consummation of such
Disposition), (iii) the type of property in which the redemption price for the
shares to be redeemed is to be paid, (iv) the Net Proceeds of such Disposition,
(v) in the case of a Disposition of properties and assets attributed to the
Media Group, the Outstanding Media Fraction, (vi) the number of outstanding
shares of such U S WEST Common Stock and the number of shares of such U S WEST
Common Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, (vii) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to participate in such selection for
redemption only if such holder properly converts, exchanges or exercises them on
or prior to the date referred to in clause (i) of this sentence and a statement
as to what, if anything, such holder will be entitled to receive pursuant to the
terms of such Convertible Securities or, if applicable, the provisions described
under "Effects on Convertible Securities" if such holder thereafter converts,
exchanges or exercises such Convertible Securities and (viii) a statement that U
S WEST will not be required to register a transfer of any shares of such class
of U S WEST Common Stock for a period of 15 trading days next preceding the date
referred to in clause (i) of this sentence. Promptly, but not earlier than 40
trading days nor
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more than 50 trading days following the consummation of such Disposition, U S
WEST is required to cause to be given to each holder of shares of such U S WEST
Common Stock to be so redeemed a notice setting forth (1) the number of shares
of such U S WEST Common Stock held by such holder to be redeemed, (2) a
statement that such shares of such U S WEST Common Stock will be redeemed, (3)
the redemption date, (4) the kind and per share amount of cash and/or securities
or other property to be received by such holder with respect to each share of
such U S WEST Common Stock to be redeemed, including details as to the
calculation thereof, (5) the place or places where certificates for shares of
such U S WEST Common Stock, properly endorsed or assigned for transfer (unless U
S WEST waives such requirement) are to be surrendered for delivery of such cash
and/or securities or other property, (6) if applicable, a statement to the
effect that the shares being redeemed may no longer be transferred on the
transfer books of U S WEST after the redemption date and (7) a statement to the
effect that, except as otherwise provided below, dividends on such shares of
such U S WEST Common Stock will cease to be paid as of such redemption date.
Such notices will be sent by first-class mail, postage prepaid to each such
holder, at such holder's address as the same appears on the transfer books of U
S WEST.
If less than all of the outstanding shares of such U S WEST Common Stock are
to be redeemed as described above under "-- Mandatory Dividend, Redemption or
Conversion of U S WEST Common Stock," such shares will be redeemed by U S WEST
pro rata among the holders of outstanding shares of such U S WEST Common Stock
or by such other method as may be determined by the U S WEST Board to be
equitable.
In the event of any conversion as described above under "-- Conversion at
Option of U S WEST" or "-- Mandatory Dividend, Redemption or Conversion of U S
WEST Common Stock," U S WEST will cause to be given to each holder of shares of
the class of U S WEST Common Stock to be so converted and to each holder of
Convertible Securities that are convertible into or exchangeable or exercisable
for shares of such U S WEST Common Stock (unless alternate provision for such
notice to the holders of such Convertible Securities is made pursuant to the
terms of such Convertible Securities), a notice setting forth (i) a statement
that all outstanding shares of such U S WEST Common Stock will be converted,
(ii) the conversion date (which, in the case of a conversion after a
Disposition, will not be more than 85 trading days following the consummation of
such Disposition), (iii) the per share number of shares of Communications Stock
or Media Stock or another class or series of common stock of U S WEST, as the
case may be, to be received with respect to each share of such U S WEST Common
Stock, including details as to the calculation thereof, (iv) the place or places
where certificates for shares of such U S WEST Common Stock, properly endorsed
or assigned for transfer (unless U S WEST waives such requirement) are to be
surrendered for delivery of certificates for shares of such U S WEST Common
Stock, (v) the number of outstanding shares of such U S WEST Common Stock and
the number of shares of such U S WEST Common Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, (vi) a statement to the effect
that, except as otherwise provided below, dividends on such shares of such U S
WEST Common Stock will cease to be paid as of such conversion date and (vii) in
the case of notice to be given to holders of Convertible Securities, a statement
to the effect that a holder of such Convertible Securities will be entitled to
receive shares of such U S WEST Common Stock upon such conversion only if such
holder properly converts, exchanges or exercises such Convertible Securities on
or prior to the conversion date referred to in clause (ii) of this sentence and
a statement as to what, if anything, such holder will be entitled to receive
pursuant to the terms of such Convertible Securities or, if applicable, the
provision described under "-- Effects on Convertible Securities" if such holder
thereafter converts, exchanges or exercises such Convertible Securities. Such
notice will be sent by first-class mail, postage prepaid, to such holder at such
holder's address as the same appears on the transfer books of U S WEST.
If U S WEST determines to redeem shares of a class of U S WEST Common Stock
as described above under "-- Redemption in Exchange for Stock of Subsidiary," U
S WEST will cause to be given to each holder of shares of such U S WEST Common
Stock and to each holder of Convertible Securities convertible into or
exchangeable or exercisable for shares of such U S WEST Common Stock (unless
alternate provision for such notice to the holders of such Convertible
Securities is made pursuant to the terms of such
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Convertible Securities), a notice setting forth (i) a statement that all shares
of such U S WEST Common Stock outstanding on the redemption date will be
redeemed in exchange for shares of common stock of the Communications Group
Subsidiaries or Media Group Subsidiaries, as the case may be, (ii) the
redemption date, (iii) if Media Stock is being redeemed, the Outstanding Media
Fraction on the date of such notice, (iv) the place or places where certificates
for shares of such U S WEST Common Stock properly endorsed or assigned for
transfer (unless U S WEST waives such requirement) are to be surrendered for
delivery of certificates for shares of the Communications Group Subsidiaries or
the Media Group Subsidiaries, as the case may be, (v) a statement to the effect
that, except as otherwise provided below, dividends on such shares of such U S
WEST Common Stock will cease to be paid as of such redemption date, (vi) the
outstanding number of shares of such U S WEST Common Stock and the number of
shares of such U S WEST Common Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof and (vii) in the case of notice to be given
to holders of Convertible Securities, a statement to the effect that a holder of
such Convertible Securities will be entitled to receive shares of common stock
of the Communications Group Subsidiaries or the Media Group Subsidiaries, as the
case may be, only if such holder properly converts, exchanges or exercises such
Convertible Securities on or prior to the date referred to in clause (ii) of
this sentence and a statement as to what, if anything, such holder will be
entitled to receive pursuant to the terms of such Convertible Securities or, if
applicable, the provision described under "-- Effects on Convertible Securities"
if such holder thereafter converts, exchanges or exercises such Convertible
Securities. Such notice will be sent by first-class mail, postage prepaid, not
less than 30 trading days nor more than 45 trading days prior to the redemption
date, to each such holder at such holder's address as the same appears on the
transfer books of U S WEST.
Neither the failure to mail any notice described above to any particular
holder of shares of any class of U S WEST Common Stock or of any Convertible
Securities nor any defect therein would affect the sufficiency thereof with
respect to any other holder of outstanding shares of such U S WEST Common Stock
or of outstanding Convertible Securities, or the validity of any such conversion
or redemption.
U S WEST will not be required to issue or deliver fractional shares of any
class of capital stock or any fractional securities to any holder of any class
of U S WEST Common Stock upon any conversion, redemption, dividend or other
distribution described above. If more than one share of such U S WEST Common
Stock is held at the same time by the same holder, U S WEST may aggregate the
number of shares of any class of capital stock that is issuable or the amount of
securities that is distributable to such holder upon any such conversion,
redemption, dividend or other distribution (including any fractions of shares or
securities). If the number of shares of any class of capital stock or the amount
of securities remaining to be issued or distributed to any holder of such U S
WEST Common Stock is a fraction, U S WEST will, if such fraction is not issued
or distributed to such holder, pay a cash adjustment in respect of such fraction
in an amount equal to the Fair Value of such fraction on the fifth trading day
prior to the date such payment is to be made (without interest).
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of such U S WEST Common Stock; provided, however, that
if such shares are converted or redeemed by U S WEST after the record date for
determining holders of such U S WEST Common Stock entitled to any dividend or
distribution thereon, such dividend or distribution will be payable to the
holders of such shares at the close of business on such record date
notwithstanding such conversion or redemption, in each case without interest.
From and after any conversion or redemption of shares of any class of U S
WEST Common Stock, all rights of a holder of shares of such U S WEST Common
Stock that were converted or redeemed will cease, except for the right, upon
surrender of the certificates representing such shares of such U S WEST Common
Stock, to receive certificates representing shares of the kind and amount of
capital stock, cash and/or other securities or property for which such shares
were converted or redeemed, together with any fractional payment or rights to
dividends as provided above, in each case without interest.
U S WEST will pay any and all documentary, stamp or similar issue or
transfer taxes that may be payable in respect of the issue or delivery of any
shares of capital stock and/or other securities on conversion
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or redemption of shares of any class of U S WEST Common Stock pursuant hereto. U
S WEST will not, however, be required to pay any tax that may be payable in
respect of any transfer involved in the issue or delivery of any shares of
capital stock and/or other securities in a name other than that in which the
shares of such U S WEST Common Stock so converted or redeemed were registered,
and no such issue or delivery would be made unless and until the person
requesting such issue paid to U S WEST the amount of any such tax, or
established to the satisfaction of U S WEST that such tax had been paid.
VOTING RIGHTS. Holders of all classes of U S WEST Common Stock, and any
series of Preferred Stock outstanding at the time of a vote submitted to
stockholders and entitled to vote together with the holders of U S WEST Common
Stock, vote together as a single class on all matters as to which common
stockholders generally are entitled to vote other than a matter with respect to
which the U S WEST Common Stock or any class thereof or the Preferred Stock or
any series thereof would be entitled to vote as a separate class. On any matters
as to which both classes of U S WEST Common Stock vote together as a single
class, (i) each outstanding share of Communications Stock has one vote and (ii)
each outstanding share of Media Stock, a number of votes (including a fractional
vote) equal to the quotient (calculated to the nearest three decimal places), as
of the tenth trading day prior to the record date for determining stockholders
entitled to vote on such matter, of (A) the sum of (1) four times the average
Market Value of the Media Stock over the five-trading day period ending on such
tenth trading day, (2) three times the average Market Value of the Media Stock
over the next preceding five-trading day period, (3) two times the average
Market Value of the Media Stock over the next preceding five-trading day period
and (4) the average Market Value of the Media Stock over the next preceding
five-trading day period, divided by (B) the sum of (1) four times the average
Market Value of the Communications Stock over the five-trading day period ending
on such tenth trading day, (2) three times the average Market Value of the
Communications Stock over the next preceding five-trading day period, (3) two
times the average Market Value of the Communications Stock over the next
preceding five-trading day period and (4) the average Market Value of the
Communications Stock over the next preceding five-trading day period. If shares
of only one class of U S WEST Common Stock are outstanding, each share of that
class shall be entitled to one vote. If any class of U S WEST Common Stock is
entitled to vote as a separate class with respect to any matter, each share of
that class shall be entitled to one vote in the separate vote on such matter.
Based on the foregoing formula, at U S WEST's 1996 Annual Meeting of
stockholders held on June 7, 1996, each share of Communications Stock had one
vote and each share of Media Stock had 0.64 of a vote on all matters submitted
to stockholders. Based upon the number of shares of Communications Stock and
Media Stock outstanding as of the record date for determining stockholders
entitled to vote at such meeting, the shares of Communications Stock and Media
Stock represented 61% and 39%, respectively, of the total voting power of the U
S WEST Common Stock. Assuming approximately 160,000,000 shares of Media Stock
are issued in the Merger (based upon a Cash Consideration Amount equal to $1
billion), if such shares had been outstanding on such record date and no shares
of Series D Preferred Stock issued in the Merger had been converted into shares
of Media Stock, the shares of Communications Stock and Media Stock would have
represented 54% and 46%, respectively, of the total voting power of the U S WEST
Common Stock.
U S WEST sets forth the number of outstanding shares of Communications Stock
and Media Stock in its Annual and Quarterly Reports filed pursuant to the
Exchange Act, and discloses in any proxy statement for a stockholder meeting the
number of outstanding shares and per share voting rights of the Communications
Stock and the Media Stock.
The relative voting rights of the Communications Stock and the Media Stock
could fluctuate as described above so that a holder's voting rights would more
closely reflect the Market Value of such holder's equity investment in U S WEST.
Fluctuations in the relative voting rights of the Communications Stock and the
Media Stock could influence an investor interested in acquiring and maintaining
a fixed percentage of the voting power of U S WEST, to acquire such percentage
of both classes of U S WEST Common Stock, and would limit the ability of
investors in one class to acquire for the same consideration relatively more or
less votes per share than investors in the other class.
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Holders of Communications Stock or Media Stock do not have any rights to
vote separately as a class on any matter coming before stockholders of U S WEST,
except for certain limited class voting rights provided under Delaware law
described below. In addition to the approval of the holders of a majority of the
voting power of all shares of U S WEST Common Stock voting together as a single
class, the approval of a majority of the outstanding shares of the
Communications Stock or the Media Stock, voting as a separate class, would be
required under Delaware law to approve any amendment to the U S WEST Restated
Certificate that would change the par value of the shares of the class or alter
or change the powers, preferences or special rights of the shares of such class
so as to affect them adversely. As permitted by the DGCL, the U S WEST Restated
Certificate will provide that an amendment to such certificate that increases or
decreases the number of authorized shares of Communications Stock or Media Stock
will only require the approval of the holders of a majority of the voting power
of all shares of U S WEST Common Stock, voting together as a single class, and
will not require the approval of the holders of the class of U S WEST Common
Stock affected by such amendment, voting as a separate class. Consequently,
because most matters brought to a stockholder vote would only require the
approval of a majority of the voting power of the Communications Stock and Media
Stock, voting together as a single class, if the holders of either class of U S
WEST Common Stock would have more than the number of votes required to approve
any such matter, the holders of that class would be in a position to control the
outcome of the vote on such matter. See "Risk Factors -- Risk Factors Related to
the Media Stock -- Limited Separate Stockholder Rights; No Additional Rights
with Respect to the Groups; Effects on Voting Power."
LIQUIDATION. In the event of a dissolution or liquidation and winding up of
U S WEST, whether voluntary or involuntary, after payment or provision for
payment of the debts and other liabilities of U S WEST and full preferential
amounts (including any accumulated and unpaid dividends) to which holders of
Preferred Stock are entitled (regardless of the Group to which such shares of
Preferred Stock were attributed), the holders of Communications Stock and Media
Stock will be entitled to receive the net assets, if any, of U S WEST remaining
for distribution to holders of U S WEST Common Stock on a per share basis in
proportion to the Liquidation Units per share of each class. Each share of
Communications Stock will have one Liquidation Unit and each share of Media
Stock will have .80 of a Liquidation Unit. Thus, the liquidation rights of the
holders of the respective classes may not bear any relationship to the relative
market values or the relative voting rights of the two classes. No holder of
Communications Stock has any special right to receive specific assets
attributable to the Communications Group and no holder of Media Stock has any
special right to receive specific assets attributable to the Media Group in the
case of a dissolution or liquidation and winding-up of U S WEST.
If U S WEST subdivides (by stock split or otherwise) or combines (by reverse
stock split or otherwise) the outstanding shares of either Communications Stock
or Media Stock or declares a dividend or other distribution of shares of
Communications Stock or Media Stock to holders of such class of U S WEST Common
Stock, the number of Liquidation Units of the Communications Stock or the number
of Liquidation Units of the Media Stock, as applicable, will be appropriately
adjusted as determined by the U S WEST Board so as to avoid any dilution in
aggregate liquidation rights of either class of U S WEST Common Stock. For
example, in case U S WEST were to effect a two-for-one split of the
Communications Stock, the Communications Stock would be entitled to 0.5 of a
Liquidation Unit per share in order to avoid dilution in the aggregate
liquidation rights of holders of Media Stock.
Neither the merger or consolidation of U S WEST into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with U S WEST, nor any sale, transfer or lease of all or any part of the assets
of U S WEST, will be deemed to be a dissolution, liquidation or winding-up for
purposes of the liquidation provisions set forth above.
DETERMINATIONS BY THE U S WEST BOARD. Any determinations made in good faith
by the U S WEST Board under any provision described under "-- Communications
Stock and Media Stock," and any determinations with respect to any Group or the
rights of holders of shares of either class of U S WEST Common Stock, shall be
final and binding on all stockholders of U S WEST, subject to the rights of
stockholders under applicable Delaware law and under the federal securities
laws.
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OTHER RIGHTS. Neither the holders of the Communications Stock nor the
holders of the Media Stock have any preemptive rights or any rights to convert
their shares into any other securities of U S WEST.
FUTURE INTER-GROUP INTEREST. The number of shares of Media Stock represent
100% of the equity value of U S WEST attributable to the Media Group and will
represent 100% of the equity value of U S WEST attributable to the Media Group
following consummation of the Merger. Under management policies adopted by the U
S WEST Board, however, the U S WEST Board could, in its sole discretion,
determine from time to time to contribute, as additional equity, cash or other
property of the Communications Group to the Media Group or purchase shares of
Media Stock in the open market with cash or other property of the Communications
Group. In such event, the Communications Group would hold an interest (an
"Inter-Group Interest"), representing an interest in the equity value of U S
WEST attributable to the Media Group. The U S WEST Board will determine, in its
sole discretion, to make any such contribution or purchase after consideration
of a number of factors, including, among others, the financing needs and
objectives of the Media Group, the investment objectives of the Communications
Group, the relative levels of internally generated cash flow of each Group, the
long-term business prospects for each Group, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions. An Inter-Group Interest, because it represents an
interest between two business groups within U S WEST, would not constitute
outstanding shares of U S WEST Common Stock and, accordingly, would not be
represented by shares of Media Stock and would not be voted on any matter by the
Communications Group, including any matter requiring the vote of the holders of
Media Stock as a separate class. However, the Market Value attributable to the
Inter-Group Interest should be reflected in the Market Value of the
Communications Stock, which in turn would affect the aggregate voting power
represented by the Communications Stock on any matter in which holders of
Communications Stock and Media Stock vote together as a single class.
The "Outstanding Media Fraction" means the percentage interest in the Media
Group represented at any time by the outstanding shares of Media Stock and the
"Inter-Group Interest Fraction" means the remaining percentage interest in the
Media Group that is attributed to the Communications Group. The sum of the
Inter-Group Interest Fraction and the Outstanding Media Fraction will always
equal 100%. The "Number of Shares Issuable with Respect to the Inter-Group
Interest" means the number of shares of Media Stock that could be sold or
otherwise issued by U S WEST for the account of the Communications Group in
respect of the Inter-Group Interest.
If there is an Inter-Group Interest and additional shares of Media Stock are
subsequently issued from time to time by U S WEST, the U S WEST Board would
determine (i) the number of shares of such Media Stock issued for the account of
the Communications Group with respect to the Inter-Group Interest, the net
proceeds of which will be reflected entirely in the financial statements of the
Communications Group, and (ii) the number of shares of such Media Stock issued
for the account of the Media Group as an additional equity interest in the Media
Group, the net proceeds of which will be reflected entirely in the financial
statements of the Media Group. As additional shares of Media Stock are issued
for the account of the Communications Group, the Inter-Group Interest Fraction
and the Number of Shares Issuable with Respect to the Inter-Group Interest would
decrease and the Outstanding Media Fraction would increase accordingly. At the
time all shares of Media Stock issuable with respect to the Inter-Group Interest
are issued, the Number of Shares Issuable with Respect to the Inter-Group
Interest would be zero and shares of Media Stock could no longer be issued for
the account of the Communications Group. If additional shares of Media Stock are
issued for the account of the Media Group, the Number of Shares Issuable with
Respect to the Inter-Group Interest would not decrease but the Inter-Group
Interest Fraction would nonetheless decrease and the Outstanding Media Fraction
would increase accordingly.
If there is an Inter-Group Interest and the U S WEST Board determines to
issue shares of Media Stock as a distribution on the Communications Stock, such
distribution would be treated as a distribution of shares issuable with respect
to the Inter-Group Interest, and as a result, the Number of Shares Issuable with
Respect to the Inter-Group Interest would decrease by the number of shares of
Media Stock distributed to the holders of Communications Stock, resulting in a
proportionate decrease in the Inter-Group Interest Fraction and a corresponding
increase in the Outstanding Media Fraction.
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If there is an Inter-Group Interest and U S WEST repurchases shares of Media
Stock with cash or property of the Communications Group, the Number of Shares
Issuable with Respect to the Inter-Group Interest and the Inter-Group Interest
Fraction would increase and the Outstanding Media Fraction would decrease
accordingly. If the repurchase of shares of Media Stock were attributed to the
Media Group, the Number of Shares Issuable with Respect to the Inter-Group
Interest would not increase but the Inter-Group Interest Fraction would
nonetheless increase and the Outstanding Media Fraction would decrease
accordingly.
The foregoing determinations with respect to the allocation of issuances of
shares of Media Stock between the Groups and the choice of which Group's funds
are to be used to repurchase shares of Media Stock will be made by the U S WEST
Board, in its discretion, after consideration of a number of factors, including,
among others, the relative levels of internally generated cash flow of each
Group, the long-term business prospects for each Group, and the availability and
cost of alternative financing sources.
The financial statements of the Communications Group will be credited, and
the financial statements of the Media Group will be charged with, an amount
equal to the product of (i) the Fair Value of any dividend or other distribution
paid or distributed in respect of the outstanding shares of Media Stock
(including any dividend of Net Proceeds from a Disposition), times (ii) a
fraction, the numerator of which is the Inter-Group Interest Fraction on the
record date for such dividend or distribution and the denominator of which is
the Outstanding Media Fraction on the record date for such dividend or
distribution.
SERIES D PREFERRED STOCK
DIVIDENDS
PAYMENT OF DIVIDENDS. Holders of Series D Preferred Stock will be entitled
to receive dividends, as and when declared by the U S WEST Board out of funds
legally available under applicable law. The dividend rate will be determined
prior to the Effective Time pursuant to the procedures described below under "--
Determination of Dividend Rate." Dividends will be payable in cash on or about
the first day of February, May, August and November in each year, beginning on
the first such date that is more than 15 days after the Effective Time, as fixed
by the U S WEST Board, or such other dates as are fixed by the U S WEST Board
(each a "Dividend Payment Date"), to the holders of record of Series D Preferred
Stock at the close of business on or about the 15th day of the month preceding
such first day of February, May, August or November, as the case may be, as
fixed by the U S WEST Board, or such other dates as are fixed by the U S WEST
Board (each a "Dividend Record Date"). Such dividends will accrue on each share
cumulatively on a daily basis, whether or not there are unrestricted funds
legally available for the payment of such dividends and whether or not earned or
declared, from and after the day immediately succeeding the Effective Time and
any such dividends that become payable for any partial dividend period shall be
computed on the basis of the actual days elapsed in such period. All dividends
that accrue in accordance with the foregoing provisions will be cumulative from
and after the day immediately succeeding the Effective Time. The per share
dividend amount payable to each holder of record of Series D Preferred Stock on
any Dividend Payment Date will be rounded to the nearest cent. Holders of Series
D Preferred Stock will also be entitled to receive any dividends declared by the
U S WEST Board out of funds legally available under applicable law as described
under "-- Conversion -- Determination and Adjustment of Conversion Rate."
DETERMINATION OF DIVIDEND RATE. The annual dividend rate (the "Dividend
Rate") on the Series D Preferred Stock will be determined prior to the Effective
Time in the following manner. The Dividend Rate will be equal to 4.375% (the
"Base Dividend Rate"), unless the Adjustment Amount is greater than or equal to
seven basis points in absolute terms, in which case the Dividend Rate will equal
the Base Dividend Rate plus the Adjustment Amount (whether positive or
negative), rounded to the nearest multiple of 0.125%. Holders of Series D
Preferred Stock will receive a per share dividend on each Dividend Payment Date,
as and when declared by the U S WEST Board out of funds legally available under
applicable law, equal to the quotient of (i) the product of the Dividend Rate
multiplied by the Liquidation Value divided by (ii) 4. Notwithstanding the
foregoing, U S WEST has the right, in its sole discretion, to increase the Base
Dividend Rate from 4.375% to 6.00% and to increase the Conversion Rate as
described under "-- Conversion -- Determination and Adjustment of Conversion
Rate."
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"Adjustment Amount" will equal the product of (x) the sum of (1) the Change
In Weighted Average Yield plus (2) the Change In Credit Spread multiplied by (y)
the Discount Factor.
"Change In Weighted Average Yield" will equal the sum (whether positive or
negative) of (i) the change (whether positive or negative) since February 27,
1996 in basis points in 3-year Treasury yields X 0.25 plus (ii) the change
(whether positive or negative) since February 27, 1996 in basis points in 5-year
Treasury yields X 0.25 plus (iii) the change (whether positive or negative)
since February 27, 1996 in basis points in 10-year Treasury yields X 0.25 plus
(iv) the change (whether positive or negative) since February 27, 1996 in basis
points in 20-year Treasury yields X 0.25, in each case, based upon the average
market closing levels of such Treasury securities for the 10 trading days ending
5 trading days prior to the Effective Time.
"Change In Credit Spread" will equal (whether positive or negative) (i) the
average credit spread measured in basis points on U S WEST Financing I's 7.96%
Trust Originated Preferred Securities (based upon the closing market price
expressed as a stripped current yield) over the 30-year Treasury "pricing bond"
for the 10 trading days ending 5 trading days prior to the Effective Time minus
(ii) 159.5 basis points.
"Discount Factor" will equal 0.55.
To illustrate the foregoing, assuming that the Base Dividend Rate is 4.375%
and that the Effective Time were to occur as of October 8, 1996, the Change in
Weighted Average Yield would equal 73.4 basis points, the Change in Credit
Spread would equal -48.3 basis points and the Adjustment Amount would equal 13.8
basis points ((73.4 basis points + -48.3 basis points) X 0.55). Because the
Adjustment Amount would be greater than seven basis points in absolute terms,
the Dividend Rate would equal the Base Dividend Rate plus the Adjustment Amount
(4.375% + .138%), rounded to the nearest multiple of 0.125%, or 4.500%. Based on
such Dividend Rate, holders of Series D Preferred Stock would be entitled to
receive a per share dividend on each Dividend Payment Date equal to $.5625
(((4.500%) X (50))/4).
The dividend per share of Series D Preferred Stock will also be
appropriately adjusted from time to time to reflect any split or combination of
shares of Series D Preferred Stock.
CERTAIN LIMITATIONS. Except for mandatory redemptions by U S WEST of the
Series D Preferred Stock as described under "Redemption and Exchange --
Mandatory Redemption and Exchange" and "Special Mandatory Redemption," unless
all dividends on the outstanding shares of Series D Preferred Stock and any
Parity Stock that have accrued through any prior Dividend Payment Date have been
paid, or declared and funds set apart for payment thereof, no dividend or other
distribution (payable other than in shares of Junior Stock) will be paid by U S
WEST to the holders of Junior Stock or Parity Stock, and no shares of Series D
Preferred Stock, Parity Stock or Junior Stock will be purchased, redeemed or
otherwise acquired by U S WEST or any of its subsidiaries (except by conversion
into or exchange for Junior Stock), nor will any monies be paid or made
available for a purchase, redemption or sinking fund for the purchase or
redemption of any shares of Series D Preferred Stock, Junior Stock or Parity
Stock. When dividends are not paid in full upon shares of Series D Preferred
Stock and any Parity Stock, all dividends declared upon shares of Series D
Preferred Stock and all Parity Stock will be declared by U S WEST pro rata so
that the amount of dividends declared per share on Series D Preferred Stock and
all such Parity Stock will in all cases bear to each other the same ratio that
accrued dividends per share on the shares of Series D Preferred Stock and all
such Parity Stock bear to each other. No interest, or sum of money in lieu of
interest, will be payable in respect of any dividend payment or payments on
Series D Preferred Stock which may be in arrears.
RANKING. The Series D Preferred Stock will rank senior to the
Communications Stock, the Media Stock and any other Junior Stock issued by U S
WEST, and on a parity with the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock and any other Parity Stock issued by U S
WEST, with respect to the payment of dividends and upon the dissolution,
liquidation or winding up of U S WEST. See "-- Dividends" and
"-- Liquidation." While any shares of Series D Preferred Stock are outstanding,
U S WEST may not authorize any class or series of Senior Stock without the prior
affirmative vote of at least a majority of the then outstanding shares of Series
D Preferred Stock, voting as a separate class. See "-- Voting Rights."
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REDEMPTION AND EXCHANGE
DETERMINATION OF REDEMPTION PRICE AND EXCHANGE RATE. In the event of any
redemption or exchange by U S WEST of shares of Series D Preferred Stock, the
"Redemption Price" will equal, for each share of Series D Preferred Stock called
for redemption, the sum of (x) the Liquidation Value plus (y) an amount equal to
the accrued and unpaid dividends on such share of Series D Preferred Stock to
the redemption date and the "Exchange Rate" will equal, for each share of Series
D Preferred Stock called for exchange, a number of shares of Media Stock (or
such other class or series of common stock into which shares of Series D
Preferred Stock are then convertible) equal to the quotient of (x) the sum of
(I) the Liquidation Value plus (II) the amount of accrued and unpaid dividends
on such share of Series D Preferred Stock to the redemption date divided by (y)
the product of (I) .95 multiplied by (II) the Current Market Price on the
exchange date.
OPTIONAL REDEMPTION AND EXCHANGE. U S WEST may, subject to the payment of
all dividends that shall have accrued on outstanding shares or Series D
Preferred Stock, at its sole option, at any time or from time to time on and
after the third anniversary of the Effective Time and prior to the fifth
anniversary of the Effective Time, exchange shares of Media Stock (or such other
class or series of common stock into which shares of Series D Preferred Stock
are then convertible) for all or any part of the outstanding shares of Series D
Preferred Stock at the Exchange Rate; provided, however, that such an exchange
may only be effected if the Closing Price is greater than the product of (x) the
Conversion Price multiplied by (y) 1.35, on 20 of the 30 trading days
immediately prior to the date of the notice delivered to holders of the shares
of Series D Preferred Stock to be exchanged.
U S WEST may, at its sole option, subject to the payment of all dividends
that shall have accrued on outstanding shares of Series D Preferred Stock, at
any time or from time to time on and after the fifth anniversary of the
Effective Time, at its election either: (i) redeem, out of funds legally
available therefor, all or any part of the outstanding shares of Series D
Preferred Stock at the Redemption Price; (ii) exchange shares of Media Stock (or
such other class or series of common stock into which shares of Series D
Preferred Stock are then convertible) for all or any part of the outstanding
shares of Series D Preferred Stock at the Exchange Rate; or (iii) effect a
combination of the options described in the foregoing clauses (i) and (ii).
MANDATORY REDEMPTION AND EXCHANGE. U S WEST is required, on the twentieth
anniversary of the Effective Time, at its election either to: (i) redeem, out of
funds legally available therefor, all of the outstanding shares of Series D
Preferred Stock at the Redemption Price; (ii) exchange shares of Media Stock (or
such other class or series of common stock into which shares of Series D
Preferred Stock are then convertible) for all of the outstanding shares of
Series D Preferred Stock at the Exchange Rate; or (iii) effect a combination of
the options described in the foregoing clauses (i) and (ii).
If notice of an optional redemption or exchange has been given, in the event
that a Redemption Recission Event occurs following the date of such notice but
at or prior to the redemption date, U S WEST may, at its option, rescind such
redemption or exchange. See "-- Recission of Optional Redemption and Exchange."
SPECIAL MANDATORY REDEMPTION. If (a) U S WEST redeems all of the
outstanding shares of Media Stock in exchange for shares of common stock of the
Media Group Subsidiaries as described under "-- Communications Stock and Media
Stock -- Conversion and Redemption -- Redemption in Exchange for Stock of
Subsidiary" (the "Media Group Subsidiary Redemption"), (b) following a
Disposition of all or substantially all of the properties and assets attributed
to the Media Group, U S WEST either (i) pays a dividend on the Media Stock in an
amount equal to the product of the Outstanding Media Fraction multiplied by the
Fair Value of the Net Proceeds of such Disposition as described under "--
Communications Stock and Media Stock -- Conversion and Redemption--Mandatory
Dividend, Redemption or Conversion of U S WEST Common Stock" (the "Media Group
Disposition Dividend") or (ii) redeems shares of Media Stock for an amount equal
to the product of the Outstanding Media Fraction multiplied by the Fair Value of
the Net Proceeds of such Disposition as described under "-- Communications Stock
and Media Stock -- Conversion and Redemption -- Mandatory Dividend, Redemption
or Conversion or U S WEST Common Stock" (the "Media Group Disposition
Redemption") or (c) U S WEST pays a dividend on (the "Media Group Special
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Dividend"), or U S WEST or any of its subsidiaries consummates a tender offer or
exchange offer for, shares of Media Stock and the aggregate amount of such
dividend or the consideration paid in such tender offer or exchange offer is an
amount equal to the Fair Value of all or substantially all of the properties and
assets attributed to the Media Group (the "Media Group Tender or Exchange Offer"
and, together with the Media Group Subsidiary Redemption, Media Group
Disposition Dividend, Media Group Disposition Redemption and Media Group Special
Dividend, the "Media Group Special Events"), then U S WEST is required to
redeem, out of funds legally available therefor, all of the outstanding shares
of Series D Preferred Stock at the Redemption Price. The redemption date for
shares of Series D Preferred Stock to be redeemed pursuant to this paragraph
will be (i) in the case of a Media Group Subsidiary Redemption or Media Group
Disposition Redemption, the date of such redemption, (ii) in the case of a Media
Group Disposition Dividend or Media Group Special Dividend, the date of payment
of such dividend and (iii) in the case of a Media Group Tender or Exchange
Offer, the date of consummation of such tender or exchange offer. Any redemption
pursuant to this paragraph will be conditioned upon the actual redemption of, or
payment of the applicable dividend on, the Media Stock or the consummation of
the tender offer or exchange offer, as applicable.
If (a) U S WEST converts all of the outstanding shares of Media Stock into
shares of Communications Stock (or, if the Communications Stock is not Publicly
Traded at such time and shares of any other class or series of common stock of U
S WEST (other than Media Stock) are then Publicly Traded, of such other class or
series of common stock as has the largest Market Capitalization) as provided
under "-- Communications Stock and Media Stock -- Conversion and Redemption" and
(b) at any time following such conversion (i) an event substantially similar to
any Media Group Special Event occurs in respect to the Communications Stock (or
such other class or series of common stock) and (ii) at the time of such event
shares of another class or series of common stock of U S WEST (other then
Communications Stock or such other class or series of common stock) are then
Publicly Traded, then U S WEST will redeem, out of funds legally available
therefore, all of the outstanding shares of Series D Preferred Stock at the
Redemption Price. The redemption date for, and the conditions to, any such
redemption will be determined in a manner consistent with the redemption date
and conditions described in the preceding paragraph for a redemption resulting
from a substantially similar Media Group Special Event.
RESCISSION OF OPTIONAL REDEMPTION AND EXCHANGE. If notice of a redemption
or exchange described under "-- Optional Redemption and Exchange" has been given
by U S WEST to holders of Series D Preferred Stock, in the event that a
Redemption Rescission Event occurs following the date of such notice but at or
prior to the redemption/exchange date, U S WEST may, at its sole option, at any
time prior to the earlier of (i) the close of business on a date five trading
days following such Redemption Rescission Event and (ii) the redemption/
exchange date, rescind such redemption or exchange by making a public
announcement of such rescission (the date of such public announcement being the
"Rescission Date"). From and after the making of such announcement, U S WEST
will have no obligation to effect such redemption or exchange or to pay the
Redemption Price or Exchange Rate and all rights of holders of shares of Series
D Preferred Stock will be restored as if notice of redemption or exchange had
not been given. If U S WEST so elects to rescind a redemption or exchange of
shares of Series D Preferred Stock, any holder of shares of Series D Preferred
Stock that surrendered shares for conversion as described under "-- Conversion"
following the day on which notice of the redemption or exchange was given but
prior to the later of (a) the close of business on the trading day next
succeeding the date on which public announcement of the rescission of such
redemption or exchange was made and (b) the date which is three trading days
following the mailing of the notice of rescission (a "Converting Holder") may
rescind the conversion of such shares surrendered for conversion.
U S WEST is required to give notice of any such rescission by first-class
mail, postage prepaid, mailed as promptly as practicable, but in no event later
than the close of business on a date five trading days following the Rescission
Date to each record holder of shares of Series D Preferred Stock at the close of
business on the Rescission Date and to any Converting Holder. Each notice of
rescission will (1) state that such redemption or exchange has been rescinded,
(2) state that any Converting Holder will be entitled to rescind the conversion
of shares of Series D Preferred Stock surrendered for conversion following the
day on which notice of such redemption or exchange was given but on or prior to
the later of (I) the close of business on the trading day
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next succeeding the date on which public announcement of the rescission of such
redemption or exchange is made and (II) the date which is three trading days
following the mailing of U S WEST's notice of rescission, (2) be accompanied by
a form prescribed by U S WEST to be used by any Converting Holder rescinding the
conversion of shares so surrendered for conversion (and instructions for the
completion and delivery of such form, including instructions with respect to
payments that may be required to accompany such delivery) and (3) state that
such form must be properly completed and received by U S WEST no later than the
close of business on a date 15 trading days following the date of the mailing of
such notice of rescission. Upon receipt by U S WEST of any such form properly
completed by a Converting Holder together with any required deliveries or
payments, U S WEST will instruct the transfer agent or agents for shares of
Media Stock and shares of Series D Preferred Stock to reissue certificates
representing shares of Series D Preferred Stock to such Converting Holder (which
shares of Series D Preferred Stock will, notwithstanding their surrender for
conversion, be deemed to have been outstanding at all times). U S WEST will, as
promptly as practicable, and in no event more than five trading days, following
the receipt of any such properly completed form, together with any required
deliveries or payments, pay to the Converting Holder or as otherwise directed by
such Converting Holder any dividend or other payment made on such shares of
Series D Preferred Stock during the period from the time such shares shall have
been surrendered for conversion to the rescission of such conversion.
GENERAL REDEMPTION AND EXCHANGE PROVISIONS. If U S WEST determines to
redeem and/or exchange shares of Series D Preferred Stock pursuant to the
provisions described under "-- Optional Redemption and Exchange" or "--
Mandatory Redemption and Exchange," U S WEST is required, not later than the
15th trading day nor earlier than the 60th trading day prior to the redemption
date, to cause notice to be filed with the transfer agent or agents for the
Series D Preferred Stock and to be given to each record holder of the shares to
be redeemed and/or exchanged, setting forth: (1) the redemption/exchange date;
(2) in the case of a redemption or exchange described under "-- Mandatory
Redemption and Exchange," that all shares of Series D Preferred Stock
outstanding on the redemption/exchange date are to be redeemed and/or exchanged;
(3) in the case of a redemption or exchange described under "-- Optional
Redemption and Exchange," the total number of shares of Series D Preferred Stock
to be redeemed and/or exchanged and, if fewer than all the shares held by such
holder are to be redeemed and/or exchanged, the aggregate number of such
holder's shares which will be redeemed and/or exchanged; (4) the Redemption
Price and/or the manner in which the Exchange Rate will be calculated prior to
the redemption date; (5) that, if applicable, U S WEST will determine on or
prior to the second trading day preceding the redemption/exchange date the
percentage of such holder's shares to be redeemed and the percentage of such
holder's shares to be exchanged; (6) that shares of Series D Preferred Stock
called for redemption or exchange may be converted at any time prior to the
redemption date; (7) the applicable Conversion Price; (8) the place or places
where certificates for such shares are to be surrendered for payment of the
Redemption Price and/or the Exchange Rate, as the case may be; and (9) that
dividends on the shares to be redeemed and/or exchanged will cease to accrue on
the redemption/exchange date. Promptly, following the redemption/exchange date,
U S WEST is required to cause notice to be filed with the transfer agent or
agents for the Series D Preferred Stock and to be given to each record holder of
the shares to be redeemed and/or exchanged setting forth the percentage of such
holder's shares which U S WEST has elected to redeem and the percentage of such
holder's shares which U S WEST has elected to exchange.
If U S WEST determines to effect a Media Group Subsidiary Redemption, U S
WEST is required, not later than the 30th trading day and not earlier than the
45th trading day prior to the redemption date, to cause notice to be filed with
the transfer agent or agents for the Series D Preferred Stock and to be given to
each record holder of Series D Preferred Stock, setting forth: (1) the
redemption date (which will be the same as the date specified in clause (8)
below); (2) that all shares of Series D Preferred Stock outstanding on the
redemption date will be redeemed; (3) the Redemption Price; (4) that the
redemption of the shares of Series D Preferred Stock will be conditioned upon
the consummation of the Media Group Subsidiary Redemption; (5) the place or
places where certificates for shares of Series D Preferred Stock, properly
endorsed or assigned for transfer (unless U S WEST waives such requirement), are
to be surrendered for payment of the Redemption Price; (6) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (7) a
statement that all shares of Media Stock outstanding on the date of the Media
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Group Subsidiary Redemption will be redeemed in exchange for shares of common
stock of the Media Group Subsidiaries; (8) the date of such Media Group
Subsidiary Redemption; (9) the Outstanding Media Fraction on the date of such
notice; (10) the place or places where certificates for shares of Media Stock,
properly endorsed or assigned for transfer (unless U S WEST waives such
requirement), are to be surrendered for delivery of certificates for shares of
the Media Group Subsidiaries; (11) that, subject to certain exceptions,
dividends on the Media Stock will cease to be paid as of the redemption date;
(12) the number of shares of Media Stock outstanding and the number of shares of
Media Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, including the number of outstanding shares of Series D
Preferred Stock and the Conversion Price; and (13) that a holder of shares of
Series D Preferred Stock will be entitled to receive shares of common stock of
the Media Group Subsidiaries upon the Media Group Subsidiary Redemption in lieu
of the Redemption Price only if such holder converts such shares of Series D
Preferred Stock on or prior to the redemption date.
If U S WEST determines to effect a Media Group Disposition Dividend, U S
WEST is required, not later than the 30th trading day following the consummation
of the Disposition by U S WEST of all or substantially all of the properties and
assets attributed to the Media Group, to cause notice to be filed with the
transfer agent or agents for the Series D Preferred Stock and to be given to
each record holder of shares of Series D Preferred Stock, setting forth: (1) the
anticipated redemption date (which will be the same as the date specified in
clause (8) below); (2) that all shares of Series D Preferred Stock outstanding
on the redemption date will be redeemed; (3) the Redemption Price; (4) that the
redemption of the shares of Series D Preferred Stock will be conditioned upon
the payment of the Media Group Disposition Dividend; (5) the place or places
where certificates for shares of Series D Preferred Stock, properly endorsed or
assigned for transfer (unless U S WEST waives such requirement), are to be
surrendered for payment of the Redemption Price; (6) that dividends on the
shares to be redeemed will cease to accrue on the redemption date; (7) the
record date for determining holders of Media Stock entitled to receive the Media
Group Disposition Dividend, which will be not earlier than the 40th trading day
and not later than the 50th trading day following the consummation of such
Disposition; (8) the anticipated date of payment of the Media Group Disposition
Dividend (which will not be more than 85 trading days following the consummation
of such Disposition); (9) the type of property to be paid as such dividend in
respect of the outstanding shares of Media Stock; (10) the Net Proceeds of such
Disposition; (11) the Outstanding Media Fraction on the date of such notice;
(12) the number of outstanding shares of Media Stock and the number of shares of
Media Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, including the number of outstanding shares of Series D
Preferred Stock and the Conversion Price in effect at such time; and (13) that a
holder of shares of Series D Preferred Stock will be entitled to receive such
dividend in lieu of the Redemption Price only if such holder properly converts
such shares on or prior to the record date referred to in clause (7) of this
sentence and that shares of Series D Preferred Stock will not be convertible
after such record date.
If U S WEST determines to effect a Media Group Disposition Redemption
following a Disposition of all (not merely substantially all) of the properties
and assets attributed to the Media Group, U S WEST is required, not later than
the 35th trading day and not earlier than the 45th trading day prior to the
redemption date, to cause notice to be filed with the transfer agent or agents
for the Series D Preferred Stock and to be given to each record holder of shares
of Series D Preferred Stock, setting forth: (1) the redemption date (which will
be the same as the date specified in clause (8) below); (2) that all shares of
Series D Preferred Stock outstanding on the redemption date will be redeemed;
(3) the Redemption Price; (4) that the redemption of shares of Series D
Preferred Stock will be conditioned upon the consummation of the Media Group
Disposition Redemption; (5) the place or places where certificates for shares of
Series D Preferred Stock, properly endorsed or assigned for transfer (unless U S
WEST waives such requirement), are to be surrendered for payment of the
Redemption Price; (6) that dividends on the shares to be redeemed will cease to
accrue on the redemption date; (7) that all shares of Media Stock outstanding on
the date of such Media Group Disposition Redemption will be redeemed; (8) the
date of such Media Group Disposition Redemption (which will not be more than 85
trading days following the consummation of such Disposition); (9) the type of
property in which the redemption price for the shares of Media Stock to be
redeemed is to be
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paid; (10) the Net Proceeds of such Disposition; (11) the Outstanding Media
Fraction on the date of such notice; (12) the place or places where certificates
for shares of Media Stock, properly endorsed or assigned for transfer (unless U
S WEST waives such requirement), are to be surrendered for delivery of cash
and/or securities or other property; (13) the number of outstanding shares of
Media Stock and the number of shares of Media Stock into or for which such
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of Series D Preferred Stock and the Conversion
Price in effect at such time; (14) that a holder of shares of Series D Preferred
Stock will be entitled to participate in the Media Group Disposition Redemption
in lieu of participating in the redemption of the shares of Series D Preferred
Stock only if such holder properly converts such shares of Series D Preferred
Stock on or prior to the redemption date; and (15) that, subject to certain
exceptions, dividends on shares of Media Stock shall cease to be paid as of the
redemption date.
If U S WEST determines to effect a Media Group Disposition Redemption
following a Disposition of substantially all (but not all) of the properties and
assets attributed to the Media Group, U S WEST is required, not later than the
30th trading day following the consummation of such Disposition, to cause notice
to be filed with the transfer agent or agents for the Series D Preferred Stock
and to be given to each record holder of shares of Series D Preferred Stock,
setting forth: (1) the anticipated redemption date (which shall be the same as
the date specified in clause (8) below); (2) that all shares of Series D
Preferred Stock outstanding on the redemption date will be redeemed; (3) the
Redemption Price; (4) that the redemption of shares of Series D Preferred Stock
will be conditioned upon the consummation of the Media Group Disposition
Redemption; (5) the place or places where certificates for shares of Series D
Preferred Stock, properly endorsed or assigned for transfer (unless U S WEST
waives such requirement), are to be surrendered for payment of the Redemption
Price; (6) that dividends on the shares to be redeemed will cease to accrue on
the redemption date; (7) a date not earlier than the 40th trading day and not
later than the 50th trading day following the consummation of such Disposition
on which shares of Media Stock will be selected for redemption pursuant to such
Media Group Disposition Redemption; (8) the anticipated date of such Media Group
Disposition Redemption (which will not be more than 85 trading days following
the consummation of such Disposition); (9) the type of property in which the
redemption price for the shares of Media Stock to be redeemed is to be paid;
(10) the Net Proceeds of such Disposition; (11) the Outstanding Media Fraction
on the date of such notice; (12) the number of shares of Media Stock outstanding
and the number of shares of Media Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, including the number of
outstanding shares of Series D Preferred Stock and the Conversion Price in
effect at such time; (13) that a holder of shares of Series D Preferred Stock
will be eligible to participate in such selection for redemption pursuant to
such Media Group Disposition Redemption in lieu of participating in the
redemption of shares of Series D Preferred Stock only if such holder properly
converts such shares of Series D Preferred Stock on or prior to the date
referred to in clause (7) of this sentence and that shares of Series D Preferred
Stock will not be convertible after such date; and (14) a statement that U S
WEST will not be required to register a transfer of any shares of Media Stock
for a period of 15 trading days next preceding the date referred to in clause
(7) of this sentence.
If U S WEST determines to effect a Media Group Special Dividend, U S WEST is
required, not later than the 45th trading day and not earlier than the 60th
Trading day prior to the date of payment of such dividend, to cause notice to be
filed with the transfer agent or agent for the Series D Preferred Stock and to
be given to each record holder of shares of Series D Preferred Stock, setting
forth: (1) the anticipated redemption date (which will be the same as the date
specified in clause (8) below); (2) that all shares of Series D Preferred Stock
outstanding on the redemption date will be redeemed; (3) the Redemption Price;
(4) that the redemption of the shares of Series D Preferred Stock will be
conditioned upon the payment of the Media Group Special Dividend; (5) the place
or places where certificates for shares of Series D Preferred Stock, properly
endorsed or assigned for transfer (unless U S WEST waives such requirement), are
to be surrendered for payment of the Redemption Price; (6) that dividends on the
shares to be redeemed will cease to accrue on the redemption date; (7) the
record date for determining holders of Media Stock entitled to receive the Media
Group Special Dividend, which will be not earlier than the 20th trading day
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prior to the date of payment of such dividend; (8) the anticipated date of
payment of the Media Group Special Dividend; (9) the type of property to be paid
as such dividend in respect of the outstanding shares of Media Stock; (10) the
Outstanding Media Fraction on the date of such notice; (11) the number of
outstanding shares of Media Stock and the number of shares of Media Stock into
or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, including the number of outstanding shares of Series D Preferred Stock
and the Conversion Price in effect at such time; and (12) that a holder of
shares of Series D Preferred Stock will be entitled to receive such dividend in
lieu of the Redemption Price only if such holder properly converts such shares
on or prior to the record date referred to in clause (7) of this sentence and
that shares of Series D Preferred Stock will not be convertible after such
record date.
If U S WEST or any of its subsidiaries determines to effect a Media Group
Tender or Exchange Offer, U S WEST is required, on the date of the public
announcement of such tender offer or exchange offer by U S WEST or any of its
subsidiaries but in any event not later than the 35th trading day prior to such
redemption, to cause notice to be filed with the transfer agent or agent for the
Series D Preferred Stock and to be given to each record holder of shares of
Series D Preferred Stock, setting forth: (1) the anticipated redemption date
(which shall be the same as the date specified in clause (7) below); (2) that
all shares of Series D Preferred Stock outstanding on the redemption date will
be redeemed; (3) the Redemption Price; (4) that the redemption of shares of
Series D Preferred Stock will be conditioned upon the consummation of the Media
Group Tender or Exchange Offer; (5) the place or places where certificates for
shares of Series D Preferred Stock, properly endorsed or assigned for transfer
(unless U S WEST waives such requirement), are to be surrendered for payment of
the Redemption Price; (6) that dividends on the shares to be redeemed will cease
to accrue on the redemption date; (7) the anticipated date of consummation of
such Media Group Tender or Exchange Offer; (8) the type of consideration to be
paid by U S WEST or its subsidiary in such Media Group Tender Offer or Exchange
Offer for shares of Media Stock; (9) the date on which such Media Group Tender
or Exchange Offer commenced, the date on which such Media Group Tender or
Exchange Offer is scheduled to expire unless extended and any other material
terms thereof (or the material terms of any amendment thereto); (10) the
Outstanding Media Fraction on the date of such notice; (11) the number of
outstanding shares of Media Stock and the number of shares of Media Stock into
or for which such outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, including the number of outstanding shares of Series D Preferred Stock
and the Conversion Price in effect at such time; and (12) that a holder of
shares of Series D Preferred Stock will be entitled to participate in the Media
Group Tender or Exchange Offer in lieu of participating in the redemption of the
shares of Series D Preferred Stock only if such holder properly converts such
shares of Series D Preferred Stock on or prior to the redemption date and then
complies with the terms and conditions of the Media Group Tender or Exchange
Offer and that such holder will be permitted to tender or exchange shares of
Media Stock upon conversion of shares of Series D Preferred Stock by notice of
guaranteed delivery so long as physical certificates are tendered as soon as
practicable after physical receipt thereof.
In the event U S WEST redeems shares of Series D Preferred Stock in the
circumstances described in the last paragraph under "-- Special Mandatory
Redemption and Exchange," notice of such redemption will be given by U S WEST at
a time, and such notice will contain information, comparable to the time or
information, as the case may be, specified above with respect to a notice of a
redemption resulting from a substantially similar Media Group Special Event.
If notice of redemption or exchange is given by U S WEST as set forth above,
from and after the redemption/exchange date, dividends on the shares of Series D
Preferred Stock so called for redemption or exchange will cease to accrue, such
shares will no longer be deemed to be outstanding, and all rights of the holders
thereof as stockholders of U S WEST with respect to shares so called for
redemption or exchange (except, in the case of a redemption, the right to
receive from U S WEST the Redemption Price without interest and, in the case of
an exchange, the right to receive from U S WEST the Exchange Rate without
interest) will cease (including any right to receive dividends otherwise payable
on any Dividend Payment Date that would have occurred after the
redemption/exchange date).
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U S WEST may, but will not be required to, in connection with any exchange
of shares of Series D Preferred Stock, issue a fraction of a share of Media
Stock (or such other class or series of common stock into which shares of Series
D Preferred Stock are then convertible), and if U S WEST determines not to issue
any such fraction, U S WEST will make a cash payment (rounded to the nearest
cent) equal to such fraction multiplied by the Closing Price of the Media Stock
(or such other class or series of common stock) on the last trading day prior to
the redemption date.
In the event that fewer than all of the outstanding shares of Series D
Preferred Stock are to be redeemed and/or exchanged as described under "--
Optional Redemption and Exchange," the aggregate number of shares of Series D
Preferred Stock held by each holder which will be redeemed and/or exchanged will
be determined by U S WEST by lot or pro rata or by any other method as may be
determined by the U S WEST Board in its sole discretion to be equitable.
CONVERSION
RIGHT TO CONVERT; TERMINATION OF CONVERSION RIGHTS. Each holder of a share
of Series D Preferred Stock will have the right at any time to convert such
share into a number of shares of Media Stock equal to the Conversion Rate (as
determined as set forth under "-- Determination and Adjustment of Conversion
Rate").
The right of a holder of a share of Series D Preferred Stock called for
redemption or exchange as described under "-- Redemption and Exchange" to
convert such share into Media Stock will terminate at the close of business on
the redemption date unless U S WEST defaults in the payment of the Redemption
Price or Exchange Rate or, in the case of a redemption or exchange described
under "-- Redemption and Exchange -- Optional Redemption and Exchange," U S WEST
exercises its right to rescind such redemption or exchange as described under
"-- Redemption and Exchange -- Rescission," in which case such right of
conversion will not terminate at the close of business on such date.
The right of a holder of a share of Series D Preferred Stock called for
redemption: (i) in connection with a Media Group Subsidiary Redemption, a Media
Group Tender or Exchange Offer or a Media Group Disposition Redemption involving
a Disposition of all (not merely substantially all) of the properties and assets
attributed to the Media Group, to convert such share into Media Stock will
terminate at the close of business on the redemption date; (ii) in connection
with a Media Group Disposition Dividend or Media Group Special Dividend, to
convert such share into Media Stock will terminate at the close of business on
the record date for determining holders entitled to receive such dividend; and
(iii) in connection with a Media Group Disposition Redemption involving a
Disposition of substantially all (but not all) of the properties and assets
attributed to the Media Group, to convert such share into Media Stock will
terminate at the close of business on the date on which shares of Media Stock
are selected to be redeemed in such Media Group Disposition Redemption, unless,
in any of the foregoing cases, U S WEST defaults in the payment of the
Redemption Price or the conditions to such redemption are not satisfied, in
which event such right of conversion will not terminate at the close of business
on such date.
In the event U S WEST converts all of the outstanding shares of Media Stock
into shares of Communications Stock (or, if the Communications Stock is not
Publicly Traded at such time and shares of any other class or series of common
stock of U S WEST (other than Media Stock) are then Publicly Traded, of such
other class or series of common stock as has the largest Market Capitalization),
the right of a holder of a share of Series D Preferred Stock called for
redemption as described in the last paragraph under "-- Redemption and Exchange
- -- Special Mandatory Redemption and Exchange" in connection with an event
substantially similar to a Media Group Special Event to convert such share into
Communications Stock (or such other class or series of common stock) will
terminate on a date comparable to the date specified in the preceding paragraph
with respect to a Media Group Special Event substantially similar to such event.
DETERMINATION AND ADJUSTMENT OF CONVERSION RATE. The Conversion Rate will
equal 1.905 ((i) $50 divided by (ii) the product of 1.25 multiplied by the
Calculation Price), provided, however, that U S WEST has the right, in its sole
discretion, to set the Conversion Rate equal 1.701 ( (i) $50 divided by (ii) the
product of 1.40 multiplied by the Calculation Price) and to increase the Base
Dividend Rate as described under
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"-- Dividends -- Determination of Dividend Rate." The "Conversion Price" at any
time means the Liquidation Value divided by the Conversion Rate in effect at
such time (rounded to the nearest one hundredth of a cent)). The Conversion
Price will equal (i) $26.25 if U S WEST does not elect to reduce the Conversion
Rate to 1.701 as described above or (ii) $29.40 if U S WEST elects to reduce the
Conversion Rate to 1.701 as described above.
The Conversion Rate will be subject to adjustment if U S WEST (i) pays a
dividend or makes a distribution in shares of Media Stock, (ii) combines the
outstanding shares of Media Stock into a smaller number of shares, (iii)
subdivides or reclassifies the outstanding shares of Media Stock, (iv) issues
rights, warrants or options to all holders of Media Stock entitling them (for a
period not exceeding 45 days) to subscribe for or purchase shares of Media Stock
at a price per share less than the Current Market Price (determined as of the
record date for the determination of stockholders entitled to receive such
rights, warrants or options) or (v) pays a dividend or makes a distribution to
all holders of outstanding shares of Media Stock, of capital stock, cash,
evidences of indebtedness or other assets of U S WEST (but excluding (x) any
cash dividends or distributions (other than Extraordinary Cash Distributions)
and (y) dividends or distributions referred to in clauses (i), (ii) or (iii)).
In case of an event described in clause (i), (ii) or (iii) above, the
Conversion Rate in effect immediately before such action will be adjusted so
that immediately following such event the holders of Series D Preferred Stock
will be entitled to receive upon conversion the kind and amount of shares of
capital stock of U S WEST which they would have owned or been entitled to
receive upon or by reason of such event if such shares of Series D Preferred
Stock had been converted immediately before the record date (or, if no record
date, the effective date) for such event. Any such adjustment will become
effective immediately after the opening of business on the day next following
the record date in the case of a dividend or distribution and will become
effective immediately after the opening of business on the day next following
the effective date in the case of a subdivision, combination or
reclassification. If holders of Media Stock are entitled to elect the kind or
amount of securities receivable in connection with any event described in clause
(i), (ii) or (iii) above, each holder of Series D Preferred Stock will be deemed
to have failed to exercise any such right of election (provided that if the kind
or amount of securities receivable upon such dividend, distribution,
subdivision, combination or reclassification is not the same for each
nonelecting share, then the kind and amount of securities receivable upon such
dividend, distribution, subdivision, combination or reclassification for each
nonelecting share will be deemed to be the kind and amount so receivable per
share by a plurality of the nonelecting shares).
In case of an event described in clause (iv) above, the Conversion Rate will
be adjusted by multiplying the Conversion Rate in effect immediately prior to
the opening of business on the record date for the determination of stockholders
entitled to receive the rights, warrants or options to be issued by a fraction,
the numerator of which will be the number of shares of Media Stock outstanding
on such record date plus the maximum number of additional shares of Media Stock
offered for subscription pursuant to such rights, warrants or options, and the
denominator of which will be the number of shares of Media Stock outstanding on
such record date plus the maximum number of additional shares of Media Stock
which the aggregate offering price of the maximum number of shares of Media
Stock so offered for subscription or purchase pursuant to such rights, warrants
or options would purchase at the Current Market Price as of such record date
(determined by multiplying such maximum number of shares by the exercise price
of such rights, warrants or options (plus any other consideration received by U
S WEST upon the issuance or exercise of such rights, warrants or options) and
dividing the product so obtained by such Current Market Price). Such adjustment
will become effective at the opening of business on the day next following the
record date for the determination of stockholders entitled to receive such
rights, warrants or options. To the extent that shares of Media Stock are not
delivered after the expiration of such rights, warrants or options, the
Conversion Rate will be readjusted to the Conversion Rate which would then be in
effect had the adjustments made upon the record date for the determination of
stockholders entitled to receive such rights, warrants or options been made upon
the basis of delivery of only the number of shares of Media Stock actually
delivered and the amount actually paid therefor. In determining whether any
rights, warrants or options entitle the holders to subscribe for or purchase
shares of Media Stock at a price per share less than such Current
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Market Price, there will be taken into account any consideration received by U S
WEST upon issuance and upon exercise of such rights, warrants or options. The
value of such consideration, if other than cash, will be determined by the good
faith business judgment of the U S WEST Board, whose determination shall be
conclusive.
In case of an event described in clause (v) above, the Conversion Rate will
be adjusted by multiplying the Conversion Rate in effect immediately prior to
the opening of business on the record date for the determination of stockholders
entitled to receive the dividend or distribution by a fraction, the numerator of
which will be the Current Market Price as of such record date, and the
denominator of which will be such Current Market Price less either (i) the fair
market value (as determined by the good faith business judgment of the U S WEST
Board, whose determination shall be conclusive), as of such record date, of the
portion of the capital stock, assets or evidences of indebtedness to be so
distributed applicable to one share of Media Stock or (ii) if applicable, the
amount of the Extraordinary Cash Distribution to be distributed per share of
Media Stock. Such adjustment will become effective at the opening of business on
the day next following the record date for the determination of stockholders
entitled to receive such dividend or distribution.
In lieu of making an adjustment to the Conversion Rate described in clause
(i), (iv) or (v) above for a dividend or distribution or an issue of rights,
warrants or options, U S WEST may distribute out of funds legally available
therefor to the holders of shares of Series D Preferred Stock, or reserve for
distribution out of funds legally available therefor with each share of Media
Stock delivered to a person converting a share of Series D Preferred Stock, such
dividend or distribution or such rights, warrants or options; provided, however,
that in the case of such a reservation, on the date, if any, on which a person
converting a share of Series D Preferred Stock would no longer be entitled to
receive such dividend or distribution or receive or exercise such rights,
warrants or options, such dividend or distribution will be deemed to have
occurred, or such rights, warrants or options will be deemed to have issued, and
the Conversion Rate will be adjusted as provided above (with such termination
date being the relevant date of determination for purposes of determining the
Current Market Price).
U S WEST will be entitled to make such additional increases in the
Conversion Rate, in addition to the adjustments described above, as will be
determined by the U S WEST Board to be necessary in order that any dividend or
distribution in Media Stock, any subdivision, reclassification or combination of
shares of Media Stock or any issuance of rights or warrants referred to above,
will not be taxable to the holders of Media Stock for United States Federal
income tax purposes. Subject to the foregoing, no adjustment will be made to the
Conversion Rate with respect to any share of Series D Preferred Stock that is
converted prior to the time an adjustment otherwise would be made.
To the extent permitted by applicable law, U S WEST may from time to time
increase the Conversion Rate by any amount for any period of time if the period
is at least 20 trading days, the increase is irrevocable during such period and
the U S WEST Board has made a determination that such increase would be in the
best interests of U S WEST, which determination will be conclusive.
If any adjustment to the Conversion Rate is required to be made effective as
of or immediately following a record date, U S WEST may elect to defer (but only
for five trading days following the occurrence of the event requiring such
adjustment) issuing to the holder of any shares of Series D Preferred Stock
converted after such record date (i) the shares of Media Stock and other capital
stock of U S WEST issuable upon such conversion over and above the shares of
Media Stock and other capital stock of U S WEST issuable upon such conversion on
the basis of the Conversion Rate prior to adjustment and (ii) paying to such
holder any amount in cash in lieu of any fraction thereof; provided, however,
that U S WEST will deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares upon
the occurrence of the event requiring such adjustment.
All calculations made in connection with an adjustment to the Conversion
Rate will be made to the nearest cent, one-hundredth of a share or, in the case
of the Conversion Rate, one hundred-thousandth. U S WEST will not be required to
make any adjustment of the Conversion Rate unless such adjustment would require
an increase or decrease of at least 1.0% of such Conversion Rate. Any lesser
adjustment will be carried forward and will be made at the time of and together
with the next subsequent adjustment which,
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together with any adjustment or adjustments so carried forward, amounts to an
increase or decrease of at least 1.0% in such rate. Any adjustments will be made
successively whenever an event requiring such an adjustment occurs.
If U S WEST takes a record of the holders of Media Stock for the purpose of
entitling them to receive a dividend or other distribution, and thereafter and
before the distribution to stockholders thereof legally abandons its plan to pay
or deliver such dividend or distribution, then thereafter no adjustment in the
Conversion Rate then in effect will be required by reason of the taking of such
record.
In case of any consolidation or merger to which U S WEST is a party, other
than a merger or consolidation in which U S WEST is the surviving or continuing
corporation and which does not result in any reclassification of, or change
(other than a change in par value or from par value to no par value or from no
par value to par value, or as a result of a subdivision or combination) in,
outstanding shares of Media Stock (or such other class or series of common stock
into which shares of Series D Preferred Stock are then convertible) or any sale
or conveyance of all or substantially all of the property and assets of U S
WEST, then lawful provision will be made as part of the terms of such
transaction whereby the holder of each share of Series D Preferred Stock which
is not converted into the right to receive stock or other securities and
property in connection with such transaction will have the right thereafter,
during the period such share shall be convertible, to convert such share into
the kind and amount of shares of stock or other securities and property
receivable upon such consolidation, merger, sale or conveyance by a holder of
the number of shares of Media Stock (or such other class or series of common
stock into which shares of Series D Preferred Stock are then convertible) into
which such shares of Series D Preferred Stock could have been converted
immediately prior to such consolidation, merger, sale or conveyance, subject to
adjustment which shall be as nearly equivalent as may be practicable to the
adjustments described above. If holders of Media Stock (or such other class or
series of common stock into which shares of Series D Preferred Stock are then
convertible) are entitled to elect the kind or amount of securities or other
property receivable upon such consolidation, merger, sale or conveyance, all
adjustments made pursuant to this paragraph will be based upon (i) the election,
if any, made in writing to the Secretary of U S WEST by the record holder of the
largest number of shares of Series D Preferred Stock prior to the earlier of (x)
the last date on which a holder of Media Stock (or such other class or series of
common stock) may make such an election and (y) the date which is five trading
days prior to the record date for determining the holders of Media Stock (or
such other class or series of common stock) entitled to participate in the
transaction (or if no such record date is established, the effective date of
such transaction) or (ii) if no such election is timely made, an assumption that
each holder of Series D Preferred Stock failed to exercise such rights of
election (provided that if the kind or amount of securities or other property
receivable upon such consolidation, merger, sale or conveyance is not the same
for each nonelecting share, then the kind and amount of securities or other
property receivable upon such consolidation, merger, sale or conveyance for each
nonelecting share shall be deemed to be the kind and amount so receivable per
share by a plurality of the nonelecting shares). Concurrently with the mailing
to holders of Media Stock (or such other class or series of common stock) of any
document pursuant to which such holders may make an election regarding the kind
or amount of securities or other property that will be receivable by such holder
in any transaction described above, U S WEST will mail a copy thereof to the
holders of shares of the Series D Preferred Stock. U S WEST will not enter into
any of the transactions referred to above unless, prior to the consummation
thereof, effective provision shall be made in a certificate or articles of
incorporation or other constituent document or written instrument of U S WEST or
the entity surviving the consolidation or merger, if other than U S WEST, or the
entity acquiring U S WEST's assets, unless, in either case, such entity is a
direct or indirect subsidiary of another entity, in which case such provision
shall be made in the certificate or articles of incorporation or other
constituent document or written instrument of such other entity (any such entity
or other entity being the "Surviving Entity") so as to assume the obligation to
deliver to each holder of shares of Series D Preferred Stock such stock or other
securities and property and otherwise give effect to the provisions set forth in
this paragraph. The foregoing provisions will apply similarly to successive
consolidations, mergers, sales or conveyances.
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In case all of the outstanding shares of Media Stock (or such other class or
series of common stock into which shares of Series D Preferred Stock are then
convertible) are converted into or exchanged for shares of another class or
series of common stock of U S WEST, each share of Series D Preferred Stock will
thereafter be convertible into or exchangeable for the number of shares of such
other class or series of common stock receivable upon such conversion or
exchange by a holder of that number of shares or fraction thereof of Media Stock
(or such other class or series of common stock into which shares of Series D
Preferred Stock are then convertible) into which one share of Series D Preferred
Stock was convertible immediately prior to such conversion or exchange. From and
after any such conversion or exchange, Conversion Rate adjustments as nearly
equivalent as may be practicable to the adjustments described above which, prior
to such exchange, were made in respect of Media Stock (or such other class or
series of common stock into which shares of Series D Preferred Stock are then
convertible) will instead be made in respect of shares of such other class or
series of common stock. Except as provided above, no adjustments will be made in
the Conversion Rate if distributions or other transactions occur with respect to
the Communications Stock or any other class or series of common stock of U S
WEST.
GENERAL CONVERSION PROVISIONS. Whenever the Conversion Rate is adjusted as
provided above, U S WEST or the Surviving Entity, as the case may be, is
required to place on file with the transfer agent or agents for the Series D
Preferred Stock a statement signed by a duly authorized officer of U S WEST or
the Surviving Entity, as the case may be, stating the adjusted Conversion Rate.
Such statements shall set forth in reasonable detail such facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Promptly after the adjustment of the Conversion Rate, U S WEST or the Surviving
Entity, as the case may be, is required to mail a notice thereof to each holder
of shares of Series D Preferred Stock. Whenever the Conversion Rate is increased
pursuant to the procedures described in the ninth paragraph under the heading
"-- Determination and Adjustment of Conversion Rate," such notice will be mailed
to each holder of shares of Series D Preferred Stock as promptly as possible
after U S WEST determines to effect such increase and, in any event, at least 15
trading days prior to the date such increased Conversion Rate takes effect, and
such notice will state such increased Conversion Rate and the period during
which it will be in effect. Where appropriate, the notice required by this
paragraph may be given in advance and included as part of either of the notices
described below.
If (i) U S WEST takes any action that would require an adjustment of the
Conversion Rate; (ii) there shall be any consolidation or merger to which U S
WEST is a party and for which approval of any stockholders of U S WEST is
required, or the sale or transfer of all or substantially all of the assets of U
S WEST; or (iii) there shall occur the voluntary or involuntary liquidation,
dissolution or winding up of U S WEST, then U S WEST is required, as promptly as
possible, but at least 10 trading days prior to the record date or other date
set for definitive action if there is no record date, to cause to be filed with
the transfer agent or agents for the Series D Preferred Stock and to be given to
each record holder of Series D Preferred Stock, a notice describing the action
or event, including the record date for, and the anticipated effective date of,
such action or event.
If U S WEST intends to convert all of the outstanding shares of Media Stock
into shares of Communications Stock (or, if the Communications Stock is not
Publicly Traded at such time and shares of any other class or series of common
stock of U S WEST (other than Media Stock) are then Publicly Traded, of such
other class or series of common stock as has the largest Market Capitalization)
(as described under "-- Communications Stock and Media Stock -- Conversion and
Redemption"), then U S WEST is required, not later than the 35th trading day and
not earlier than the 45th trading day prior to the date of such conversion, to
cause notice to be filed with the transfer agent or agents for the Series D
Preferred Stock and to be given to each record holder of shares of Series D
Preferred Stock, setting forth: (1) a statement that all outstanding shares of
Media Stock will be converted; (2) the date of such conversion; (3) the per
share number of shares of Communications Stock (or such other class or series of
common stock) to be received with respect to each share of Media Stock,
including details as to the calculation thereof; (4) the place or places where
certificates for shares of Media Stock, properly endorsed or assigned for
transfer (unless U S WEST waives such requirement), are to be surrendered for
delivery of certificates for shares of Communications Stock (or such other class
or series of common stock); (5) the number of shares of Media Stock outstanding
and the number
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of shares of Media Stock into or for which outstanding Convertible Securities
are then convertible, exchangeable or exercisable and the conversion, exchange
or exercise price thereof, including the number of outstanding shares of Series
D Preferred Stock and the Conversion Price; (6) a statement to the effect that,
subject to certain exceptions, dividends on shares of Media Stock shall cease to
be paid as of the date of such conversion; (7) that a holder of shares of Series
D Preferred Stock will be entitled to receive shares of Communications Stock (or
such other class or series of common stock) pursuant to such conversion if such
holder converts shares of Series D Preferred Stock on or prior to the date of
such conversion; and (8) a statement as to what such holder will be entitled to
receive if such holder thereafter properly converts shares of Series D Preferred
Stock. In addition, from and after any such conversion of Media Stock, if (x) a
class or series of common stock of U S WEST exists in addition to the class or
series of common stock into which the Media Stock was converted and (y) U S WEST
intends to convert the class or series of common stock into which the Media
Stock was converted into another such class or series of common stock of U S
WEST, U S WEST will give notice comparable to the notice described in the
preceding sentence of its intention to effect such a conversion.
If any shares of Series D Preferred Stock are surrendered for conversion
subsequent to the Dividend Record Date preceding a Dividend Payment Date but on
or prior to such Dividend Payment Date (except shares called for redemption or
exchange on a redemption date between such Dividend Record Date and Dividend
Payment Date and with respect to which such redemption or exchange has not been
rescinded), the registered holder of such shares at the close of business on
such Dividend Record Date will be entitled to receive the dividend, if any,
payable on such shares on such Dividend Payment Date notwithstanding the
conversion thereof. Except as provided in this paragraph, no adjustments in
respect of payments of dividends on shares surrendered for conversion or any
dividend on the Media Stock issued upon conversion will be made upon the
conversion of any shares of Series D Preferred Stock.
U S WEST may, but will not be required to, in connection with any conversion
of shares of Series D Preferred Stock, issue a fraction of a share of Media
Stock, and if U S WEST determines not to issue any such fraction, U S WEST will
make a cash payment (rounded to the nearest cent) equal to such fraction
multiplied by the Closing Price of the Media Stock on the last trading day prior
to the date of conversion.
Any holder of shares of Series D Preferred Stock electing to convert such
shares into Media Stock is required to surrender the certificate or certificates
for such shares at the office of the transfer agent or agents for the Series D
Preferred Stock during regular business hours, duly endorsed to U S WEST or in
blank, or accompanied by instruments of transfer to U S WEST or in blank, or in
form satisfactory to U S WEST, and is required to give written notice to U S
WEST at such office that such holder elects to convert such shares. Conversion
will be deemed to have been made immediately prior to the close of business as
of the date that certificates for the shares of Series D Preferred Stock to be
converted, and the written notice described above, are received by the transfer
agent or agents for the Series D Preferred Stock. The person entitled to receive
the Media Stock issuable upon such conversion will be treated for all purposes
as the record holder of such Media Stock as of the close of business on the
conversion date and such conversion will be at the Conversion Rate in effect on
such date.
U S WEST will not be required to deliver certificates for shares of Media
Stock while the stock transfer books for Media Stock or for Series D Preferred
Stock are duly closed for any purpose (but not for a period in excess of two
trading days) or during any period commencing at a Redemption Rescission Event
and ending at either (i) the time and date at which U S WEST's right of
rescission expires if U S WEST has not exercised such right or (ii) the close of
business on the day 15 trading days following the date of the mailing of a
notice of rescission if U S WEST has exercised such right of rescission, but
certificates for shares of Media Stock will be delivered as soon as practicable
after the opening of such books or the expiration of such period.
U S WEST will pay any and all issue, stamp, documentation, transfer or other
taxes that may be payable in respect of any issue or delivery of shares of Media
Stock (or such other class or series of common stock into which shares of Series
D Preferred Stock are then convertible) on conversion of shares of Series D
Preferred Stock. U S WEST will not, however, be required to pay any tax which is
payable in respect of any
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transfer involved in the issue or delivery of Media Stock (or such other class
or series of common stock) in a name other than that in which the shares of
Series D Preferred Stock so converted were registered, and no such issue or
delivery will be made unless and until the person requesting such issue has paid
to U S WEST the amount of such tax, or has established, to the satisfaction of U
S WEST, that such tax has been paid.
VOTING RIGHTS. Holders of shares of Series D Preferred Stock will have no
voting rights except as otherwise required by law or as set forth below. When
and if holders of Series D Preferred Stock are entitled to vote, each holder
will be entitled to a number of votes per share of Series D Preferred Stock
equal to the Liquidation Value.
So long as any shares of Series D Preferred Stock remain outstanding, unless
a greater percentage is required by law, U S WEST will not, without the
affirmative vote of the holders of shares of Series D Preferred Stock
representing at least a majority of the shares of Series D Preferred Stock then
outstanding (i) authorize any Senior Stock or reclassify any Junior Stock or
Parity Stock as Senior Stock or (ii) amend, alter or repeal any of the
provisions of the Series D Certificate or the U S WEST Restated Certificate, so
as in any such case to materially and adversely affect the voting powers,
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions of the shares of Series
D Preferred Stock; provided, however, that an amendment which effects a split of
Series D Preferred Stock or which effects a combination of the shares of Series
D Preferred Stock into a fewer number of shares will not be deemed to have any
such material adverse effect.
No vote or consent of holders of shares of Series D Preferred Stock will be
required for (i) the creation of any indebtedness of any kind of U S WEST, (ii)
the authorization or issuance of any class of Junior Stock (including any class
or series of common stock of U S WEST) or Parity Stock, (iii) the authorization,
designation or issuance of additional shares of Series D Preferred Stock or (iv)
subject to the preceding paragraph, the authorization or issuance of any other
shares of Preferred Stock.
If and whenever at any time or times dividends payable on shares of Series D
Preferred Stock are in arrears and unpaid in an aggregate amount equal to or
exceeding the amount of dividends payable thereon for six quarterly dividend
periods, then the number of directors constituting the U S WEST Board will be
automatically increased by two and the holders of shares of Series D Preferred
Stock, together with the holders of any shares of any Parity Stock as to which
in each case dividends are in arrears and unpaid in an aggregate amount equal to
or exceeding the amount of dividends payable thereon for six quarterly dividend
periods, will have the exclusive right, voting separately as a class with such
other series, to elect two directors of U S WEST. Such voting right will
terminate at such time as all dividends in arrears on the shares of Series D
Preferred Stock are paid in full and all dividends payable on the shares of
Series D Preferred Stock on four subsequent consecutive Dividend Payment Dates
are paid in full on such dates or funds are set aside for the payment thereof.
LIQUIDATION. Upon the dissolution, liquidation or winding up of U S WEST,
whether voluntary or involuntary, the holders of the shares of Series D
Preferred Stock will be entitled to receive out of the assets of U S WEST
available for distribution to stockholders, in preference to the holders of, and
before any payment or distribution is made on, Junior Stock, an amount equal to
$50.00 per share (the "Liquidation Value"), plus an amount equal to all accrued
and unpaid dividends to the date of final distribution. The Liquidation Value
will be subject to adjustment from time to time to appropriately give effect to
any split or combination of the shares of Series D Preferred Stock.
Neither the sale, exchange or other conveyance (for cash, shares of stock,
securities or other consideration) of all or substantially all the properties
and assets of U S WEST nor the merger or consolidation of U S WEST into or with
any other corporation, or the merger or consolidation of any other corporation
into or with U S WEST, will be deemed to be a dissolution, liquidation or
winding up.
In the event the assets of U S WEST available for distribution to the
holders of shares of Series D Preferred Stock upon any dissolution, liquidation
or winding up of U S WEST, whether voluntary or involuntary, are insufficient to
pay in full all amounts to which such holders are entitled pursuant to the
foregoing provisions, no distribution will be made on account of any shares of
any Parity Stock upon such
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dissolution, liquidation or winding up unless proportionate distributive amounts
are paid on account of the shares of Series D Preferred Stock, ratably, in
proportion to the full distributable amounts for which holders of all Parity
Stock are entitled upon such dissolution, liquidation or winding up.
MISCELLANEOUS. With respect to any notice to a holder of shares of Series D
Preferred Stock required to be provided hereunder, neither failure to mail such
notice, nor any defect therein or in the mailing thereof, will affect the
sufficiency of the notice or the validity of the proceedings referred to in such
notice or affect the legality or validity of any distribution, right, warrant,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any such action.
Subject to applicable law, any determinations made in the exercise of the
good faith business judgment of the U S WEST Board under any provision of the
Series D Certificate will be final and binding on all stockholders of U S WEST,
including the holders of shares of Series D Preferred Stock.
RESTATED RIGHTS AGREEMENT
Pursuant to the Restated Rights Agreement, a U S WEST Communications Group
Right (a "Communications Right") is attached to each outstanding share of
Communications Stock and a Communications Right will be attached to each share
of Communications Stock which may be issued by U S WEST from time to time and a
U S WEST Media Group Right (a "Media Right") is attached to each outstanding
share of Media Stock and a Media Right will be attached to each share of Media
Stock which may be issued by U S WEST from time to time, including the shares of
Media Stock to be issued by U S WEST in the Merger or upon conversion of the
Series D Preferred Stock. The Communications Rights and the Media Rights are
collectively referred to herein as the "Rights."
The Restated Rights Agreement provides that, prior to the earlier of (i) the
tenth business day (the "Ownership Trigger Date") after the first public
disclosure that a person or group (including any affiliate or associate of such
person or group) (an "Acquiring Person") has acquired, or obtained the right to
acquire, beneficial ownership of U S WEST Common Stock representing 20% or more
of the total voting rights of the outstanding shares of U S WEST Common Stock or
(ii) the tenth business day after the commencement of, or announcement of the
intent of any person or group to commence, a tender or exchange offer for shares
of U S WEST Common Stock representing 30% or more of the total voting rights of
all outstanding shares of U S WEST Common Stock (the earlier of such dates being
called the "Distribution Date"), Communications Rights and Media Rights will be
evidenced by the certificates representing shares of Communications Stock and
Media Stock, respectively, then outstanding, and no separate Rights certificates
will be distributed. Therefore, until the Distribution Date, the Communications
Rights will be transferred with and only with the Communications Stock and the
Media Rights will be transferred with and only with the Media Stock. For
purposes of the Restated Rights Agreement, the total voting rights of the U S
WEST Common Stock will be determined based upon the respective voting rights of
holders of outstanding shares of Communications Stock and Media Stock in effect
at the time of any such determination. See "-- Communications Stock and Media
Stock -- Voting Rights."
Upon the close of business on the Distribution Date, the Rights will
separate from the U S WEST Common Stock, certificates representing the Rights
will be issued and the Rights will become exercisable as described below. The
Rights will expire on April 6, 1999 (the "Expiration Date"), unless earlier
redeemed by U S WEST as described below.
Following the Distribution Date, registered holders of Rights will be
entitled to purchase from U S WEST (i) in the case of a Communications Right,
one one-hundredth (1/100th) of a share of Series A Preferred Stock at a purchase
price of $100, subject to adjustment (the "Series A Purchase Price"), and (ii)
in the case of a Media Right, one one-hundredth (1/100th) of a share of Series B
Preferred Stock at a purchase price of $80, subject to adjustment (the "Series B
Purchase Price").
Following the Ownership Trigger Date, the Rights will "flip-in" and (a) each
Communications Right will entitle its holder to purchase, at the Series A
Purchase Price, a number of shares of Communications Stock with a market value
equal to twice the Series A Purchase Price and (b) each Media Right will entitle
its holder to purchase, at the Series B Purchase Price, a number of shares of
Media Stock with a market value equal to twice the Series B Purchase Price.
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In the event, following the Ownership Trigger Date, (a) U S WEST merges or
consolidates with another entity in which U S WEST is not the surviving
corporation or in which shares of the outstanding U S WEST Common Stock are
changed into or exchanged for stock or assets of another person or (b) 50% or
more of U S WEST's consolidated assets or earning power are sold (other than
transactions in the ordinary course of business) (the date of any such event
being an "Acquisition Trigger Date"), the Rights will "flip-over" and each
Communications Right and each Media Right will entitle its holder to purchase,
for the Series A Purchase Price and Series B Purchase Price, respectively, a
number of shares of common stock of such corporation or purchaser with a market
value equal to twice the applicable Purchase Price.
Until a Right is exercised, the holder thereof, as such, will have no rights
as a stockholder of U S WEST, including, without limitation, the right to vote
or to receive dividends. After an Ownership Trigger Date or an Acquisition
Trigger Date, any Rights that are or were beneficially owned by an Acquiring
Person (or any affiliate or associate of an Acquiring Person) will be null and
void and any holder of such Rights (whether or not such holder is an Acquiring
Person or an affiliate or associate thereof) will thereafter have no right to
exercise such Rights.
At any time prior to the earliest of (i) the Ownership Trigger Date, (ii)
the first Acquisition Trigger Date or (iii) the Expiration Date, if any person
notifies U S WEST of such person's intention to make a cash tender offer for all
the outstanding shares of U S WEST Common Stock and complies with certain
requirements set forth in the Restated Rights Agreement, including the delivery
of evidence that all necessary financing therefor is firmly committed or
otherwise available and an undertaking to pay the reasonable costs of any
meeting of shareholders called in connection therewith, then the independent
directors of U S WEST are required, within 15 business days, at their option, to
either (1) engage a nationally recognized investment banking firm to render an
opinion as to whether the tender offer purchase price is fair and adequate to U
S WEST's stockholders from a financial point of view, which opinion must be
delivered to the U S WEST Board within 20 business days following such
engagement, or (2) call a meeting of stockholders at the earliest practicable
date to vote upon such tender offer. If (a) the tender offer purchase price is
determined by such investment banking firm to be fair and adequate to the
stockholders from a financial point of view or (b) the tender offer is approved
by a majority of the shares voted at such meeting of stockholders and
beneficially owned by persons other than the offeror, then (i) neither the
commencement of, nor the announcement of an intention to make, such tender offer
will be taken into account in determining whether the Distribution Date has or
has not occurred and (ii) the shares of U S WEST Common Stock acquired pursuant
to such tender offer will not be taken into account in determining whether a
person has become an Acquiring Person; provided, however, that a majority of the
independent directors of U S WEST may suspend the operation of the foregoing
clauses (i) and (ii) for a period of time not to exceed 180 days if they
determine that such action is in the best interests of other stockholders of U S
WEST.
At any time prior to the earliest of (i) the Ownership Trigger Date, (ii)
the first Acquisition Trigger Date or (iii) the Expiration Date, the U S WEST
Board may, at its option, redeem all, but not less than all, of the then
outstanding Rights at a redemption price of $.005 per Right (the "Redemption
Price"). On the date specified by the U S WEST Board for the redemption of the
Rights (the "Rights Redemption Date"), the right to exercise the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price.
Until the earliest of (i) the Ownership Trigger Date, (ii) the first
Acquisition Trigger Date, (iii) the Rights Redemption Date or (iv) the
Expiration Date, the U S WEST Board may, without the approval of any holders of
Rights, supplement or amend any provision of the Restated Rights Agreement in
any manner, whether or not such supplement or amendment is adverse to any
holders of Rights. At any time after the earlier of the Ownership Trigger Date
or the first Acquisition Trigger Date but prior to the earlier of the Redemption
Date or the Expiration Date, the U S WEST Board may, without the approval of any
holders of Rights, supplement or amend any provision of the Restated Rights
Agreement in any manner so long as the interests of the holders of Rights are
not materially and adversely affected thereby.
ANTI-TAKEOVER CONSIDERATIONS
The DGCL, the U S WEST Restated Certificate and the Bylaws of U S WEST (the
"U S WEST Bylaws") contain provisions which could serve to discourage or make
more difficult a change in control of
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U S WEST without the support of the U S WEST Board or without meeting various
other conditions. A summary of such provisions is set forth below. For a further
discussion of the rights of stockholders of U S WEST, as well as a summary of
the current rights of stockholders of Continental, see "Comparison of Rights of
Stockholders of U S WEST and Continental."
The U S WEST Restated Certificate provides for the issuance of Preferred
Stock, at the discretion of the U S WEST Board, from time to time, in one or
more series, without further action by the stockholders of U S WEST, unless
approval of the stockholders is deemed advisable by the U S WEST Board or
required by applicable law, regulation or stock exchange listing requirements.
In addition, the authorized but unissued shares of Communications Stock or Media
Stock are available for issuance from time to time at the discretion of the U S
WEST Board without the approval of the stockholders of U S WEST, unless such
approval is deemed advisable by the U S WEST Board or required by applicable
law, regulation or stock exchange listing requirements. One of the effects of
the existence of authorized, unissued and unreserved U S WEST Common Stock and
Preferred Stock could be to enable the U S WEST Board to issue shares to persons
friendly to current management, which could render more difficult or discourage
an attempt to obtain control of U S WEST by means of a merger, tender offer,
proxy contest or otherwise, and thereby protect the continuity of U S WEST's
management. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of U S WEST.
The U S WEST Restated Certificate provides for a classified board of
directors under which one-third of the total number of directors are elected
each year and prohibits the removal of directors unless such removal is approved
by the holders of 80% of the total voting power of the Communications Stock and
the Media Stock. In addition, pursuant to the U S WEST Restated Certificate,
only the Chairman of the U S WEST Board or the U S WEST Board, and not the
stockholders of U S WEST, are permitted to call a special meeting of
stockholders, and no actions will be considered at such special meeting other
than those specified in the notice thereof.
The U S WEST Restated Certificate contains a "fair price provision" pursuant
to which the affirmative vote of the holders 80% of the total voting power of
the Communications Stock and the Media Stock is required to approve certain
business combinations involving U S WEST and certain significant stockholders.
In addition, Section 203 of the DGCL will prohibit U S WEST from engaging in
certain transactions with an "interested stockholder." See "Comparison of Rights
of Stockholders of U S WEST and Continental -- Other Stockholder Rights --
Business Combinations Following a Change in Control."
The U S WEST Bylaws establish an advance notice procedure for stockholders
to bring business before an annual or special meeting of stockholders of U S
WEST. The U S WEST Bylaws provide that a stockholder may present a proposal for
action at an annual meeting of stockholders only if such stockholder delivers a
written notice of the proposal, together with certain specified information
relating to such stockholder's stock ownership and identity, to the Secretary of
U S WEST at least 60 days before the annual meeting. In addition, the U S WEST
Bylaws provide that a stockholder may nominate individuals for election to the U
S WEST Board at any annual meeting or special meeting of stockholders at which
directors are to be elected by delivering written notice, containing certain
specified information with respect to the nominee and nominating stockholder, to
the Secretary of U S WEST at least 60 days before the annual meeting or within
15 days following the announcement of the date of the special meeting.
The Restated Rights Agreement permits disinterested stockholders to acquire
additional shares of U S WEST or of an acquiring company at a substantial
discount in the event of certain described changes in control. See "-- Restated
Rights Agreement."
Certain provisions described above may have the effect of delaying
stockholder actions with respect to certain business combinations. As such, the
provisions could have the effect of discouraging open market purchases of the
Communications Stock and the Media Stock because they may be considered
disadvantageous by a stockholder who desires to participate in a business
combination. However, in the event the U S WEST Board receives an unsolicited
offer to purchase all or a portion of the businesses of a Group, the U S WEST
Board would consider such offer in accordance with its fiduciary duties.
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CERTAIN DEFINITIONS
"CLOSING PRICE" means the last reported sale price of the Media Stock (or
such other class or series of common stock into which shares of Series D
Preferred Stock are then convertible), regular way, as shown on the Composite
Tape of the NYSE, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices on the NYSE, or, if the Media Stock (or such
other class or series of common stock) is not listed or admitted to trading on
the NYSE, on the principal national securities exchange on which such stock is
listed or admitted to trading, or, if it is not listed or admitted to trading on
any national securities exchange, the last reported sale price of the Media
Stock (or such other class or series of common stock), or, in case no such sale
takes place on such day, the average of the closing bid and asked prices, in
either case as reported by the Nasdaq National Market.
"CONVERTIBLE SECURITIES" at any time means any securities of U S WEST or any
of its subsidiaries (other than shares of U S WEST Common Stock), including
warrants and options, outstanding at such time that by their terms are
convertible into or exchangeable or exercisable for or evidence the right to
acquire any shares of any class of U S WEST Common Stock, whether convertible,
exchangeable or exercisable at such time or a later time or only upon the
occurrence of certain events, but in respect of antidilution provisions of such
securities only upon the effectiveness thereof.
"CURRENT MARKET PRICE," on any applicable record date, Conversion date or
redemption date, means the average of the daily Closing Prices per share of
Media Stock (or such other class or series of common stock into which shares of
Series D Preferred Stock are then convertible) for the ten (10) consecutive
trading days ending on the third trading day immediately preceding such record
date, conversion date or redemption date.
"EXTRAORDINARY CASH DISTRIBUTIONS" means, with respect to any consecutive
12-month period, all cash dividends and cash distributions on the outstanding
shares of Media Stock during such period (other than cash dividends or cash
distributions for which a prior adjustment to the Conversion Rate was previously
made) to the extent such cash dividends and cash distributions exceed, on a per
share of Media Stock basis, 10% of the average daily Closing Price over such
period.
"FAIR VALUE" means, in the case of equity securities or debt securities of a
class that has previously been Publicly Traded for a period of at least 15
months, the Market Value thereof (if such value, as so defined, can be
determined) or, in the case of an equity security or debt security that has not
been Publicly Traded for at least such period, the fair value per share of stock
or per other unit of such other security, on a fully distributed basis, as
determined by an independent investment banking firm experienced in the
valuation of securities selected in good faith judgment by the U S WEST Board,
or if no such investment banking firm is, as determined in the good faith
judgment of the U S WEST Board, available to make such determination, in good
faith by the U S WEST Board, provided, however, that in the case of property
other than securities, the "Fair Value" thereof will be determined in good faith
by the U S WEST Board based upon such appraisals or valuation reports of such
independent experts as the U S WEST Board in good faith determines to be
appropriate in accordance with good business practice.
"JUNIOR STOCK" means the Media Stock, the Communications Stock and the
shares of any other class or series of stock of U S WEST which, by the terms of
the U S WEST Restated Certificate or of the instrument by which the U S WEST
Board fixes the relative rights, preferences and limitations thereof, is junior
to the Series D Stock in respect of the right to receive dividends or to
participate in any distribution of assets other than by way of dividends.
"MARKET CAPITALIZATION" of any class or series of common stock on any date
means the product of (i) the Market Value of one share of such class of common
stock on such date and (ii) the number of shares of such class of common stock
outstanding on such date.
"MARKET VALUE" of a share of any class or series of capital stock of U S
WEST on any day means the average of the high and low reported sales prices
regular way of a share of such class or series on such trading day or, in case
no such reported sale takes place on such trading day, the average of the
reported closing bid and asked prices regular way of a share of such class or
series on such trading day, in either case as reported
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on the NYSE Composite Tape or, if the shares of such class or series are not
listed or admitted to trading on the NYSE on such trading day, on the principal
national securities exchange in the United States on which the shares of such
class or series are listed or admitted to trading or, if not listed or admitted
to trading on any national securities exchange on such trading day, on the
Nasdaq National Market or, if the shares of such class or series not listed or
admitted to trading on any national securities exchange or quoted in the Nasdaq
National Market on such trading day, the average of the closing bid and asked
prices of a share of such class or series in the over-the-counter market on such
trading day as furnished by any NYSE member firm selected from time to time by U
S WEST or, if such closing bid and asked prices are not made available by any
such NYSE member firm on such trading day, the Fair Value of a share of such
class or series; provided, however, that, for purposes of determining the market
value of a share of any class or series or capital stock for any period, (i) the
"Market Value" of a share of capital stock on any day prior to any "ex-dividend"
date or any similar date occurring during such period for any dividend or
distribution (other than any dividend or distribution contemplated by clause
(ii)(B) of this sentence) paid or to be paid with respect to such capital stock
will be reduced by the Fair Value of the per share amount of such dividend or
distribution and (ii) the "Market Value" of any share of capital stock on any
day prior to (A) the effective date of any subdivision (by stock split or
otherwise) or combination (by reverse stock split or otherwise) of outstanding
shares of such class of capital stock occurring during such period or (B) any
"ex-dividend" date or any similar date occurring during such period for any
dividend or distribution with respect to such capital stock to be made in shares
of such class or series of capital stock or Convertible Securities that are
convertible, exchangeable or exercisable for such class or series of capital
stock will be appropriately adjusted, as determined by the U S WEST Board, to
reflect such subdivision, combination, dividend or distribution.
"MARKET VALUE RATIO OF THE COMMUNICATIONS STOCK TO THE MEDIA STOCK" as of
any date means a fraction expressed as a decimal (rounded to the nearest five
decimal places), the numerator of which is the sum of (A) four times the average
Market Value of one share of Communications Stock over the period of five
consecutive trading days ending on such date, (B) three times the average Market
Value of one share of Communications Stock over the period of five consecutive
trading days ending on the fifth trading day prior to such date, (C) two times
the average Market Value of one share of Communications Stock over the period of
five consecutive trading days ending on the tenth trading day prior to such date
and (D) the average Market Value of one share of Communications Stock over the
period of five consecutive trading days ending on the fifteenth trading day
prior to such date, and the denominator of which is the sum of (A) four times
the average Market Value of one share of Media Stock (or such other class or
series of common stock into which the Media Stock is to be converted) over the
period of five consecutive trading days ending on such date, (B) three times the
average Market Value of one share of Media Stock (or such other common stock)
over the period of five consecutive trading days ending on the fifth trading day
prior to such date, (C) two times the average Market Value of one share of Media
Stock (or such other common stock) over the period of five consecutive trading
days ending on the tenth trading day prior to such date and (D) the average
Market Value of one share of Media Stock (or such other common stock) over the
period of five consecutive trading days ending on the fifteenth trading day
prior to such date.
"MARKET VALUE RATIO OF THE MEDIA STOCK TO THE COMMUNICATIONS STOCK" as of
any date means a fraction expressed as a decimal (rounded to the nearest five
decimal places), the numerator of which is the sum of (A) four times the average
Market Value of one share of Media Stock over the period of five consecutive
trading days ending on such date, (B) three times the average Market Value of
one share of Media Stock over the period of five consecutive trading days ending
on such date, (C) two times the average Market Value of one share of Media Stock
over the period of five consecutive trading days ending on the tenth trading day
prior to such date and (D) the average Market Value of one share of Media Stock
(or such other common stock) over the period of five consecutive trading days
ending on the fifteenth trading day prior to such date and the denominator of
which is the sum of (A) four times the average Market Value of one share of
Communications Stock (or such other class or series of common stock into which
the Communications Stock is to be converted) over the period of five consecutive
trading days ending on the fifth trading day prior to such date, (B) three times
the average Market Value of one share of Communications Stock (or such other
common stock) over the period of five consecutive trading days ending on the
fifth trading day prior to such date, (C) two times the average Market Value of
one share of Communications Stock (or such other
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common stock) over the period of five consecutive trading days ending on the
tenth trading day prior to such date and (D) the average Market Value of one
share of Communications Stock (or such other common stock) over the period of
five consecutive trading days ending on the fifteenth trading day prior to such
date.
"PARITY STOCK" means the Series A Preferred Stock, the Series B Preferred
Stock, the Series C Preferred Stock and the shares of any other class or series
of stock of U S WEST (other than Junior Stock) which, by the terms of the U S
WEST Restated Certificate or of the instrument by which the U S WEST Board fixes
the relative rights, preferences and limitations thereof, is, in the event that
the stated dividends thereon are not paid in full, entitled to share ratably
with the Series D Preferred Stock in the payment of dividends, including
accumulations, if any, in accordance with the sums which would be payable on
such shares if all dividends were declared and paid in full, or shall, in the
event that the amounts payable thereon on liquidation are not paid in full, be
entitled to share ratably with the Series D Preferred Stock in any distribution
of assets other than by way of dividends in accordance with the sums which would
be payable in such distribution if all sums payable were discharged in full.
"PUBLICLY TRADED" with respect to any security means (i) registered under
Section 12 of the Exchange Act (or any successor provision of law), and (ii)
listed for trading on the NYSE or the American Stock Exchange (or any national
securities exchange registered under Section 7 of the Exchange Act (or any
successor provision of law), that is the successor to either such exchange) or
quoted in the Nasdaq National Market (or any successor system).
"REDEMPTION RESCISSION EVENT" means the occurrence of (a) any general
suspension of trading in, or limitation on prices for, securities on the
principal national securities exchange on which shares of Media Stock (or such
other class or series of common stock into which shares of Series D Preferred
Stock are then convertible) are registered and listed for trading (or, if shares
of Media Stock (or such other class or series of common stock) are not
registered and listed for trading on any such exchange, in the over-the-counter
market) for more than six-and-one-half (6 1/2) consecutive trading hours, (b)
any decline in either the Dow Jones Industrial Average or the S&P 500 (or any
successor index published by Dow Jones & Company, Inc. or Standard & Poor's
Corporation) by either (i) an amount in excess of 10%, measured from the close
of business on any trading day to the close of business on the next succeeding
trading day during the period commencing on the trading day preceding the day
notice of any redemption or exchange of shares of Series D Preferred Stock is
given (or, if such notice is given after the close of business on a trading day,
commencing on such trading day) and ending at the redemption date or (ii) an
amount in excess of 15% (or, if the time and date fixed for redemption or
exchange is more than 15 days following the date on which notice of redemption
or exchange is given, 20%), measured from the close of business on the trading
day preceding the day notice of such redemption or exchange is given (or, if
such notice is given after the close of business on a trading day, from such
trading day) to the close of business on any trading day on or prior to the
redemption date, (c) a declaration of a banking moratorium or any suspension of
payments in respect of banks by federal or state authorities in the United
States or (d) the commencement of a war or armed hostilities or other national
or international calamity directly or indirectly involving the United States
which in the reasonable judgment of U S WEST could have a material adverse
effect on the market for the Media Stock (or such other class or series of
common stock into which shares of Series D Preferred Stock are then
convertible).
"SENIOR STOCK" means the shares of any class or series of stock of U S WEST
which, by the terms of the U S WEST Restated Certificate or of the instrument by
which the U S WEST Board fixes the relative rights, preferences and limitations
thereof, is senior to the Series D Preferred Stock in respect of the right to
receive dividends or to participate in any distribution of assets other than by
way of dividends.
STOCK TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company is the registrar and transfer agent for
the Communications Stock and the Media Stock and will be the registrar and
transfer agent for the Series D Preferred Stock.
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U S WEST MANAGEMENT AND ACCOUNTING POLICIES
MANAGEMENT POLICIES
U S WEST follows certain policies with respect to the businesses of the
Communications Group and the Media Group, including the following:
INTER-GROUP BUSINESS TRANSACTIONS. Because of the nature of the businesses
of the Communications Group and the Media Group, business transactions between
the two Groups take place on a regular basis. Such transactions may include (i)
agreements by one Group to provide certain products and services for use by the
other Group, including for use over the other Group's networks, (ii) technology
transfers and sharing agreements between the two Groups, (iii) transfers of
assets between the Groups and (iv) joint venture agreements between the two
Groups to develop new products and services for use by the businesses of both
Groups. Except as described below and subject to the interests of U S WEST as a
whole, all transactions between the Communications Group and the Media Group are
intended, to the extent practicable, to be on terms consistent with those that
would be applicable to arm's-length dealings, taking into account a number of
factors, including quality, availability and pricing.
Notwithstanding the policy that all transactions between the Communications
Group and the Media Group be consistent with arm's-length terms, transactions
between U S WEST Communications and the Media Group are subject to certain FCC
affiliate transaction accounting rules. Pursuant to such rules, transactions
involving the provision of goods and services between the Media Group and U S
WEST Communications must be recorded on U S WEST Communications' regulated
books, which are used by the PUCs to determine rates, at tariffed rates,
prevailing company price or fully distributed cost. In addition, such rules
require that assets transferred must be recorded at either net book value or
fair market value.
U S WEST Communications provides certain customer lists and billing and
collection and other services to U S WEST Marketing Resources Group, Inc.
("Marketing Resources"), a business attributed to the Media Group, for use in
the directory publications and other businesses of Marketing Resources. Such
data and services (other than billing and collection services) are provided to
Marketing Resources on the same terms and conditions on which such data and
services are provided to unaffiliated third parties. Marketing Resources
provides certain services to U S WEST Communications, including the publication
and delivery of directories with listings of U S WEST Communications' customers,
at no charge to U S WEST Communications. Marketing Resources believes that any
incremental cost incurred to publish and deliver white page directories which
include listings of U S WEST Communications' customers is offset by the
enhancement in value to its directories provided by such listings.
Transactions involving the transfer of technology between the Communications
Group and the Media Group are subject to U S WEST's Technology Fair Compensation
Policy. Pursuant to this policy, if one Group funds the research and development
of technology (whether within U S WEST or not), such Group will receive fair
compensation if the other Group either uses the technology or sells the
technology to a third party. Fair compensation will be determined by
representatives of the two Groups and will be reviewed for reasonableness by the
Fair Compensation Review Committee, which is comprised of an equal number of
representatives of the businesses of the Communications Group and the Media
Group.
INTER-GROUP FINANCING TRANSACTIONS. U S WEST does not, and does not intend
in the future, to transfer funds between the Groups, except for certain
short-term ordinary course advances of funds at market rates associated with U S
WEST's centralized cash management. The U S WEST Board may, however, in its sole
discretion, determine to transfer funds between Groups either as a loan, which
would be made on an arm's-length basis, or as an equity contribution. See
"Description of U S WEST Capital Stock -- Communications Stock and Media Stock
- -- Future Inter-Group Interest." Any such determination to transfer funds
between Groups would be made by the U S WEST Board or at the direction of the U
S WEST Board in the exercise of its business judgment based upon all relevant
circumstances, including the financing and investing needs and objectives of
each Group, the availability, cost and time associated with alternative
financing sources, investment opportunities, prevailing interest rates and
general economic conditions. See "-- Accounting Matters and Policies --
Financing Activities."
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CORPORATE OPPORTUNITIES. To the extent a business opportunity arises which
could be undertaken by either Group, the opportunity will be allocated by the U
S WEST Board in its good faith business judgment or in accordance with
procedures adopted by the U S WEST Board from time to time to ensure that
decisions will be made in the best interests of U S WEST and its stockholders.
Any such allocation may involve the consideration of a number of factors,
including whether the business opportunity is principally within the existing
scope of a Group's business, whether the business opportunity is principally
within a geographic area served by a Group and whether a Group, because of its
managerial or operational expertise, would be better positioned to undertake the
business opportunity.
In certain situations, existing contractual restrictions will require the
allocation of certain business opportunities to a specific Group. For example,
pursuant to an agreement between U S WEST and AirTouch, subject to certain
exceptions, U S WEST may generally only offer wireless services through the U S
WEST/AirTouch Joint Venture, which is attributed to the Media Group, except that
such agreement permits the Communications Group to offer certain limited
wireless services in the Communications Group Region within specified PCS
frequencies. In addition, pursuant to the TWE partnership agreement, U S WEST,
subject to certain exceptions, may only engage in programming, filmed
entertainment and out-of-region cable through TWE, which is attributed to the
Media Group.
These policies may be modified or rescinded without the approval of U S
WEST's stockholders, although U S WEST has no present intention to do so. Any
determination by the U S WEST Board to modify or rescind such policies, or to
adopt additional policies, including any such determination that would have
disparate impacts upon the respective holders of Communications Stock and Media
Stock, would be made by the U S WEST Board in its good faith business judgment
of U S WEST's best interests. Circumstances resulting in such a modification,
rescission or additional policies may include the development of new products,
the entering into of new businesses or ventures, renegotiations of existing
ventures or changes in the competitive environment. In making such
determination, the U S WEST Board may also consider regulatory requirements,
including those imposed on U S WEST Communications by the PUCs and the FCC. See
"Risk Factors -- Risk Factors Related to the Media Stock -- Potential Diverging
Interests."
ACCOUNTING MATTERS AND POLICIES
U S WEST prepares financial statements in accordance with generally accepted
accounting principles, consistently applied, for each of the Groups, and these
financial statements, taken together, will comprise all of the accounts included
in the corresponding consolidated financial statements of U S WEST. The
financial statements of each of the Groups will principally reflect the
financial position, results of operations and cash flows of the businesses
included therein. Consistent with the U S WEST Restated Certificate and relevant
policies, the Media Group's financial statements also include allocated portions
of U S WEST's corporate assets and liabilities (including contingent
liabilities) that are not separately identified with the operations of the
Communications Group.
Notwithstanding any allocation of assets or liabilities for dividend
purposes or the purpose of preparing Group financial statements, holders of
Communications Stock or Media Stock will continue to be subject to risks
associated with an investment in a single company and all of U S WEST's
businesses, assets and liabilities. See "Risk Factors -- Risk Factors Related to
the Media Stock -- Stockholders of One Company; Financial Impacts on One Group
Could Affect the Other."
Currently, cash management, tax sharing and allocation of principal
corporate activities between the Communications Group and the Media Group are
based upon policies that management of U S WEST believes to be reasonable. These
policies are reflected in the combined financial statements of the
Communications Group and Media Group, as follows:
FINANCING ACTIVITIES. Financing activities for the Communications Group and
the Media Group, including the investment of surplus cash, the issuance,
repayment and repurchase of short-term and long-term debt, and the issuance and
repurchase of preferred stock, are managed by U S WEST on a centralized basis.
Notwithstanding such centralized management, financing activities for U S WEST
Communications are separately identified and accounted for in U S WEST's records
and U S WEST Communications conducts its own borrowing activities. All debt
incurred and investments made by U S WEST and its subsidiaries are
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specifically allocated to and reflected on the financial statements of the Media
Group except that debt incurred and investments made by U S WEST and its
subsidiaries on behalf of the business attributed to the Communications Group,
other than U S WEST Communications, and all debt incurred and investments made
by U S WEST Communications would be specifically allocated to and reflected on
the financial statements of the Communications Group. Debt incurred by U S WEST
or a subsidiary on behalf of a Group would be charged to such Group at the
borrowing rate of U S WEST or such subsidiary.
U S WEST does not, and in the future does not intend, to transfer funds
between the Groups, except for certain short-term ordinary course advances of
funds at market rates associated with U S WEST's centralized cash management.
Such short-term transfers of funds are accounted for as short-term loans between
the Groups bearing interest at the market rate at which management determines
the borrowing Group could obtain funds on a short-term basis. If the U S WEST
Board, in its sole discretion, determines that a transfer of funds between the
Groups should be accounted for as a long-term loan, the U S WEST Board would
establish the terms on which such loan would be made, including the interest
rate, amortization schedule, maturity and redemption terms. Such terms would
generally reflect the then prevailing terms upon which management determines
such Group could borrow funds on a similar basis. The financial statements of
the lending Group will be credited, and the financial statements of the
borrowing Group will be charged, with the amount of any such loan, as well as
with periodic interest accruing thereon. The U S WEST Board may determine that a
transfer of funds from the Communications Group to the Media Group should be
accounted for as an equity contribution, in which case an Inter-Group Interest
(determined by the U S WEST Board based on the then current Market Value of
shares of Media Stock) will either be created or increased, as applicable.
Similarly, if an Inter-Group Interest exists, the U S WEST Board may determine
that a transfer of funds from the Media Group to the Communications Group should
be accounted for as a reduction in the Inter-Group Interest. See "Description of
U S WEST Capital Stock -- Communications Stock and Media Stock -- Future
Inter-Group Interest."
EQUITY ISSUANCES. All financial impacts of issuances of additional shares
of Communications Stock and of securities convertible into Communications Stock
and, if and to the extent the Communications Group holds an Inter-Group Interest
in the Media Group, of additional shares of Media Stock which are attributed to
the Communications Group, will be reflected in their entirety in the financial
statements of the Communications Group. All financial impacts of issuances of
additional shares of Media Stock and of securities convertible into Media Stock,
the proceeds of which are attributed to the Media Group, including the issuance
of shares of Media Stock and Series D Preferred Stock pursuant to the Merger,
will be reflected in their entirety in the financial statements of the Media
Group. See "Description of U S WEST Capital Stock -- Communications Stock and
Media Stock -- Future Inter-Group Interest."
TAXES. Federal, state and local income taxes which are determined on a
consolidated or combined basis will be allocated to each Group in accordance
with tax sharing agreements between U S WEST and the entities within the Groups.
Consolidated or combined state income tax provisions and related tax payments or
refunds will be allocated between the Groups based on their respective
contributions to consolidated or combined state taxable incomes. Consolidated
federal income tax provisions and related tax payments or refunds will be
allocated between the Groups based on the aggregate of the taxes allocated among
the entities within each Group. The allocations will generally reflect each
Group's contribution (positive or negative) to consolidated federal taxable
income and consolidated federal tax credits. A Group will be compensated only at
such time as, and to the extent that, its tax attributes are utilized by U S
WEST in a combined or consolidated income tax filing. Federal and state tax
refunds and carryforwards or carrybacks of tax attributes will generally be
allocated to the Group to which such tax attributes relate. The Media Group
includes entities which operate in states where U S WEST does not file
consolidated or combined state income tax returns. Separate state income tax
returns are filed by these entities in accordance with the respective states'
laws and regulations.
ADMINISTRATIVE COSTS. Certain costs relating to U S WEST's general and
administrative services (including certain executive management, legal,
accounting and auditing, tax, treasury, strategic planning and
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<PAGE>
public policy services) are directly assigned to each Group based upon actual
utilization or allocated based upon each Group's operating expenses, number of
employees, external revenues, average capital and/or average equity. U S WEST
charges each Group for such services at fully distributed cost.
The above policies and agreements could be modified or rescinded by the U S
WEST Board, in its sole discretion, without approval of U S WEST's stockholders,
although there is no present intention to do so. The U S WEST Board could also
adopt additional policies depending upon the circumstances. Any determination of
the U S WEST Board to modify or rescind such policies, to adopt additional
policies, including any such decision that could have disparate effects upon
holders of a class of U S WEST Common Stock, would be made by the U S WEST Board
based on its good faith business judgment that such decision is in the best
interests of U S WEST and all U S WEST's stockholders. In making such
determination, the U S WEST Board may also consider regulatory requirements,
including those imposed on U S WEST Communications by the PUCs and the FCC. See
"-- Management Policies." In addition, generally accepted accounting principles
require that changes in accounting policy must be preferable (in accordance with
such principles) to the policy previously in place.
COMPARISON OF RIGHTS OF STOCKHOLDERS OF U S WEST AND CONTINENTAL
At the Effective Time, stockholders of Continental will become stockholders
of U S WEST. Set forth below is a comparison of the terms of the Continental
Common Stock (without giving effect to the Charter Amendments) and the terms of
the Communications Stock and the Media Stock, as well as a summary of other
material differences between the rights of holders of Continental Common Stock
and the rights of holders of Communications Stock and Media Stock. This summary
does not purport to be complete and is qualified in its entirety by reference to
the Continental Restated Certificate, Continental's Bylaws (the "Continental
Bylaws"), the U S WEST Restated Certificate, the U S WEST Bylaws and the more
detailed description of the Communications Stock and the Media Stock contained
herein. See "Description of U S WEST Capital Stock -- Communications Stock and
Media Stock."
TERMS OF COMMON STOCK
<TABLE>
<CAPTION>
CONTINENTAL
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------------- --------------------------------- ---------------------------------
<S> <C> <C> <C>
Business: All businesses of Continental. The Communications Group is com- The Media Group is comprised of
prised of businesses which (i) cable and telecommunications
provide regulated communications network businesses outside of the
services to customers in the Communications Group Region and
Communications Group Region, internationally, (ii) domestic
including local telephone and international wireless
services, exchange access ser- communications network businesses
vices and certain long distance and (iii) domestic and
services, as well as other international directory and
products and services, including information services businesses.
custom calling features, voice Following the Effective Time, the
messaging and high speed data businesses of Continental and its
applications. subsidiaries will be attributed
to the Media Group.
Listing: None. The NYSE and the PSE under the The NYSE and the PSE under the
symbol "USW." symbol "UMG."
Dividends: Continental currently does not U S WEST currently pays dividends U S WEST currently does not pay
pay dividends on the Continental on the Communications Stock at a dividends on the Media Stock.
Common Stock. quarterly rate of $0.535 per
share.
Dividends on the Continental Com- Dividends on the Communications Dividends on the Media Stock will
mon Stock may be paid in the Stock are paid at the discretion be paid in the future at the
discretion of the Continental of the U S WEST Board based discretion of the U S WEST Board
Board based primarily upon the primarily upon the financial based primarily upon the
financial condition, results of condition, results of operations financial condition, results of
operations and business and business requirements of the operations and business
requirements of Continental. Communications Group and U S WEST requirements of the Media Group
Dividends, if any, are payable as a whole. Dividends are payable and U S WEST as a whole.
out of the funds of Continental out of the lesser of (i) the Dividends, if any, are payable
legally available for the payment funds of U S WEST legally out of the lesser of (i) the
of dividends, subject to available for the payment of funds of U S WEST legally
restrictions available for the
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------------- --------------------------------- ---------------------------------
contained in financing dividends and (ii) the Communica- payment of dividends and (ii) the
agreements. tions Group Available Dividend Media Group Available Dividend
Amount. Amount.
<S> <C> <C> <C>
The Continental Board is required The U S WEST Board, subject to The U S WEST Board, subject to
to pay dividends, if any, on the the limitations set forth above, the limitations set forth above,
Class A Common Stock and Class B may, in its sole discretion, may, in its sole discretion,
Common Stock in equal amounts. declare and pay dividends declare and pay dividends
exclusively on the Communications exclusively on the Media Stock,
Stock, exclusively on the Media exclusively on the Communications
Stock or on both such classes, in Stock or on both such classes, in
equal or unequal amounts, equal or unequal amounts,
notwithstanding the relative notwithstanding the relative
amounts of the Communications amounts of the Media Group
Group Available Dividend Amount Available Dividend Amount and the
and the Media Group Available Communications Group Available
Dividend Amount, the amount of Dividend Amount, the amount of
prior dividends declared on each prior dividends declared on each
class, the respective voting or class, the respective voting or
liquidation rights of each class liquidation rights of each class
or any other factor. or any other factor.
Voting Rights: Except as otherwise required by Except as otherwise described Except as otherwise described
the DGCL, holders of the Class A herein, the holders of herein, the holders of Media
Common Stock and Class B Common Communications Stock and Media Stock and Communications Stock
Stock vote together as a single Stock vote together as a single vote together as a single class.
class. The Class A Common Stock class. The Communications Stock Each share of Media Stock has a
has one vote per share and the has one vote per share. variable number of votes equal to
Class B Common Stock has ten the ratio of the time-weighted
votes per share. Each share of average Market Value of one share
Continental Preferred Stock of Media Stock to the
entitles the holder to vote on time-weighted average Market
all matters voted on by the Value of one share of
holders of Continental Common Communications Stock, calculated
Stock into which such Continental over the 20-trading day period
Preferred Stock is convertible ending ten trading days prior to
and to 250 votes per share. the record date, and may have
more than, less than or exactly
one vote per share. At the 1996
annual meeting of stockholders of
U S WEST, each share of Media
Stock was entitled to 0.640 of a
vote.
Because each share of Media Stock Because each share of Media Stock
has a variable number of votes has a variable number of votes,
based upon a ratio of the time- the relative voting power per
weighted average Market Value of share of Media Stock and
one share of Media Stock to the Communications Stock will
time-weighted average Market fluctuate. Market Value could be
Value of one share of influenced by many factors,
Communications Stock, the including the results of
relative voting power per share operations of U S WEST and each
of Communications Stock and Media of the Groups, the regulatory
Stock will fluctuate. Market environment, trading volume,
Value could be influenced by many share issuances and repurchases
factors, including the results of and general economic and market
operations of U S WEST and each conditions.
of the Groups, the regulatory
environment, trading volume,
share issuances and repurchases
and general economic and market
conditions.
Preemptive The holders of Continental Com- The holders of Communications The holders of Media Stock do not
Rights: mon Stock do not have any preemp- Stock do not have any preemptive have any preemptive rights.
tive rights. rights.
Rights on None. If U S WEST disposes of all or If U S WEST disposes of all or
Disposition: substantially all of the substantially all of the
properties and assets attributed properties and assets attributed
to the Communications Group to the Media Group (i.e., 80% or
(i.e., 80% or more on a current more on a current market value
market value basis), basis), other
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------------- --------------------------------- ---------------------------------
other than in a transaction in than in a transaction in which U
which U S WEST receives primarily S WEST receives primarily equity
equity securities of an entity securities of an entity engaged
engaged or proposing to engage or proposing to engage primarily
primarily in a business similar in a business similar or
or complementary to the business complementary to the business of
of the Communications Group, U S the Media Group, U S WEST must
WEST must either (i) distribute either (i) distribute to holders
to holders of Communications of Media Stock an amount in cash
Stock an amount in cash and/or and/or securities or other
securities or other property property equal to their pro-
equal to the Fair Value of the portionate interest in the Fair
Net Proceeds of such disposition, Value of the Net Proceeds of such
either by special dividend or by disposition, either by special
redemption of all or part of the dividend or by redemption of all
outstanding shares of or part of the outstanding shares
Communications Stock, or (ii) of Media Stock, or (ii) convert
convert each share of Communi- each share of Media Stock into a
cations Stock into a number of number of shares of
shares of Media Stock equal to Communications Stock equal to
110% of the ratio of the average 110% of the ratio of the average
Market Value of one share of Com- Market Value of one share of
munications Stock to the average Media Stock to the average Market
Market Value of one share of Value of one share of
Media Stock, calculated over the Communications Stock, calculated
ten-trading day period beginning over the ten- trading day period
on the 16th trading day after beginning on the 16th trading day
consummation of the disposition after consummation of the
transaction. disposition transaction.
<S> <C> <C> <C>
U S WEST may, at any time prior U S WEST may, at any time prior
to the first anniversary of a to the first anniversary of a
dividend on, or partial dividend on, or partial
redemption of, shares of redemption of, shares of Media
Communications Stock following a Stock following a disposition of
disposition of all or all or substantially all of the
substantially all of the properties and assets attributed
properties and assets attributed to the Media Group, convert each
to the Communications Group, remaining outstanding share of
convert each remaining out- Media Stock into a number of
standing share of Communications shares of Communications Stock
Stock into a number of shares of equal to 110% of the ratio of the
Media Stock equal to 110% of the time- weighted average Market
ratio of the time-weighted Value of one share of Media Stock
average Market Value of one share to the time-weighted average
of Communications Stock to the Market Value of one share of
time-weighted average Market Communications Stock, calculated
Value of one share of Media over the 20-trading day period
Stock, calculated over the ending five trading days prior to
20-trading day period ending five the date of the notice of such
trading days prior to the date of conversion.
the notice of such conversion.
Conversion: Shares of Class B Common Stock At any time following November 1, U S WEST may, at any time,
will automatically convert into 2004, U S WEST may convert each convert each share of Media Stock
shares of Class A Common Stock share of Communications Stock into a number of shares of Commu-
upon any transfer of such shares into a number of shares of Media nications Stock equal to 115% of
of Class B Common Stock, unless Stock equal to 100% of the ratio the ratio of the time-weighted
the transferee is an affiliate of of the time-weighted average average Market Value of one share
the holder, such as a family Market Value of one share of of Media Stock to the
member, a family trust or other Communications Stock to the time-weighted average Market
trust controlled by the holder of time-weighted average Market Value of one share of
Class B Common Stock or other Value of one share of Media Communications Stock, calculated
entity controlled or owned by the Stock, calculated over the over the 20-trading day period
holder of Class B Common Stock. 20-trading day period ending five ending five trading days prior to
trading days prior to the date of the date of notice of such
notice of such conversion. conversion, until November 1,
2000 and thereafter declining
annually to 100% on November 1,
2004.
A holder of shares of Class B The ratio of the Market Value of The ratio of the Market Value of
Common Stock may at any time, at one share of Communications Stock one share of Media Stock to one
such holder's election, convert to one share of Media Stock could share of Communications Stock
such
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CONTINENTAL
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------------- --------------------------------- ---------------------------------
shares into shares of Class A be influenced by many factors, could be influenced by many
Common Stock. including the results of factors, including the results of
operations of U S WEST and each operations of U S WEST and each
of the Groups, the regulatory of the Groups, the regulatory
environment, trading volume, environment, trading volume,
share issuances and repurchases share issuances and repurchases
and general economic and market and general economic and market
conditions. conditions.
<S> <C> <C> <C>
Each share of Class B Common
Stock will be converted into a
share of Class A Common Stock if
(i) the number of outstanding
shares of Class B Common Stock
falls below 7 1/2% of the
aggregate number of outstanding
shares of Class A Common Stock
and Class B Common Stock, or (ii)
the Continental Board and the
holders of a majority of the
outstanding shares of Class B
Common Stock approve such
conversion.
Redemption in None. U S WEST may redeem the Com- U S WEST may redeem the Media
Exchange for munications Stock for all of the Stock for a number of shares of
Stock of shares of the common stock of one one or more wholly owned
Subsidiary: or more wholly owned subsidiaries subsidiaries of U S WEST that
of U S WEST that hold all of the hold all of the assets and
assets and liabilities attributed liabilities attributed to the
to the Communications Group. Media Group equal to the pro-
portionate interest in the Media
Group represented by the Media
Stock.
Redemption in Continental has the right to None. None.
Connection with redeem any or all shares of
Regulatory Continental Common Stock in
Qualification: exchange for the fair market
value of such stock to the extent
necessary to prevent the loss or
to secure the reinstatement of
any license or franchise from any
governmental agency held by
Continental, which license or
franchise is conditioned upon
some or all of the holders of
Continental's stock possessing
prescribed qualifications.
Liquidation: In the event of a liquidation of In the event of the liquidation In the event of the liquidation
Continental, holders of of U S WEST, holders of of U S WEST, holders of Media
Continental Common Stock will be Communications Stock will be Stock will be entitled to a
entitled to receive the net entitled to a portion of the portion of the assets remaining
assets of Continental, if any, assets remaining for distribution for distribution to holders of U
remaining for distribution to to holders of U S WEST Common S WEST Common Stock on a per
holders of Continental Common Stock on a per share basis in share basis in proportion to the
Stock. proportion to the Liquidation Liquidation Units per share of
Units per share of Com- Media Stock. Each share of Media
munications Stock. Each share of Stock will have .80 of a
Communications Stock will have Liquidation Unit, subject to
one Liquidation Unit, subject to adjustment if shares of Media
adjustment if shares of Stock are subdivided, combined or
Communications Stock are distributed as a dividend.
subdivided, combined or
distributed as a dividend.
</TABLE>
OTHER STOCKHOLDER RIGHTS
AMENDMENTS TO THE CERTIFICATE OF INCORPORATION. Under the Continental
Restated Certificate, amendments to the Continental Restated Certificate must be
approved by the Continental Board and must then be adopted by the holders of a
majority of the voting power of the Continental Voting Stock, except that
amendments to the provisions relating to (i) the number, rights and powers of
any class of stock; (ii) the composition of the Continental Board; (iii) release
of directors' liability; (iv) indemnification of directors,
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<PAGE>
officers, employees and agents; (v) restrictions on Continental's stock to
ensure compliance with governmental regulations; and (vi) amendments to the
foregoing provisions require adoption by the holders of 66 2/3% of the voting
power of the outstanding shares of stock of Continental entitled to vote
thereon.
Under the U S WEST Restated Certificate, amendments to the U S WEST Restated
Certificate must be approved by the U S WEST Board and must then be adopted by
the holders of a majority of the voting power of the outstanding shares of stock
entitled to vote thereon, except that amendments of the provisions relating to
(i) certain business combinations; (ii) amendments to the U S WEST Bylaws; (iii)
the composition of the U S WEST Board; (iv) the removal of directors; (v)
stockholder actions and meetings; and (vi) amendments to the foregoing
provisions, require adoption by the holders of 80% of the voting power of the
outstanding shares of stock entitled to vote thereon.
AMENDMENTS TO BYLAWS. The Continental Restated Certificate and the
Continental Bylaws provide that bylaws may be adopted, amended, altered, changed
or repealed by either the affirmative vote of the holders of 66 2/3% of the
outstanding shares of stock entitled to vote generally in the election of
directors or by the affirmative vote of a majority of the entire Continental
Board.
The U S WEST Restated Certificate and the U S WEST Bylaws provide that
bylaws may be adopted, amended, or repealed by either the affirmative vote of
the holders of 80% of the voting power of the outstanding shares of stock
entitled to vote thereon or by the affirmative vote of two-thirds of the members
of the U S WEST Board.
DIRECTORS. Under the Continental Bylaws, the number of directors is
determined by the Continental Board from time to time, but can not be less than
three. The Continental Bylaws also provide for a classified board, which is
divided into three classes, with each class being as nearly equal in number as
possible. The term of the classes are staggered so that at each annual meeting
of stockholders of Continental, one class of directors is elected for a
three-year term, or until their resignation, removal or retirement, if earlier.
The U S WEST Restated Certificate and U S WEST Bylaws provide that the
number of directors shall not be less than six nor more than seventeen. Under
the U S WEST Restated Certificate and the U S WEST Bylaws, U S WEST has a
classified Board of Directors which is substantially similar to that of
Continental.
REMOVAL OF DIRECTORS. Pursuant to the DGCL, members of a classified board
may be removed only for cause and only if such removal is approved by a majority
of the shares then entitled to vote in the election of Directors. Under the U S
WEST Restated Certificate, directors may be removed only for cause and only if
such removal is approved by the holders of 80% of the voting power of the
outstanding shares of stock entitled to vote thereon.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Under the Continental Restated
Certificate and the Continental Bylaws, vacancies in the Continental Board and
newly created directorships may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director. If there
are no directors in office, any officer or stockholder may call a special
meeting of stockholders in accordance with the Continental Restated Certificate
and Continental Bylaws, at which meeting such vacancies shall be filled.
Under the U S WEST Restated Certificate and the U S WEST Bylaws, vacancies
and newly created directorships resulting from any increase in the number of
directors, including an increase effected by the U S WEST Board, will be filled
by a majority of the directors then in office, even if less than a quorum, or by
the sole remaining director. Neither the U S WEST Restated Certificate nor the U
S WEST Bylaws contemplate a situation in which there would be no directors in
office. If such a situation were to arise, then pursuant to the DGCL, either the
Chairman of the U S WEST Board may call a special meeting of stockholders to
elect directors or a stockholder or officer of U S WEST may apply to the
Delaware Court of Chancery for a decree summarily ordering an election.
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<PAGE>
SPECIAL MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT. Under the
Continental Bylaws, special meetings of the stockholders may be called for any
purpose or purposes by the Chairman or Vice Chairman of the Continental Board or
by the Continental Board, and shall be called by the President or Secretary of
Continental at the request in writing of the stockholders holding of record a
majority in interest of the voting power of the shares of stock of Continental
issued and outstanding and entitled to vote. Any action required or permitted by
law or the Continental Restated Certificate to be taken at any meeting of
stockholders may be taken without a meeting, without prior notice, and without a
vote, if a written consent, setting forth the action so taken, is signed by the
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present or present by
proxy and voted.
The U S WEST Restated Certificate and the U S WEST Bylaws provide that
special meetings of stockholders of U S WEST may be called only by the Chairman
of the U S WEST Board or by the U S WEST Board. No actions will be considered at
a special meeting other than those specified in the notice thereof.
Additionally, under the U S WEST Restated Certificate, stockholder action is
permitted only at an annual or special meeting of stockholders and not by
written consent.
STOCKHOLDER PROPOSALS AND NOMINATIONS. The Continental Bylaws do not
contain specific requirements which must be met in order for a stockholder to
present a proposal for action at an annual meeting of stockholders or to
nominate an individual for election to the Continental Board.
The U S WEST Bylaws provide that a stockholder may present a proposal for
action at an annual meeting of stockholders of U S WEST only if the stockholder
submitting such proposal has delivered a written notice of the proposal,
together with certain specified information relating to such stockholder's stock
ownership and identity, to the Secretary of U S WEST at least 60 days before the
annual meeting. In addition, the U S WEST Bylaws provide that a stockholder may
nominate individuals for election to the U S WEST Board at any annual meeting or
special meeting of stockholders at which directors are to be elected by
delivering written notice, containing certain specified information with respect
to the nominee and nominating stockholder, to the Secretary of U S WEST at least
60 days before the annual meeting or within 15 days following the announcement
of the date of the special meeting.
BUSINESS COMBINATIONS FOLLOWING A CHANGE IN CONTROL. The U S WEST Restated
Certificate contains a "fair price provision" which requires the affirmative
vote of the holders of 80% of the voting power of the outstanding shares of U S
WEST Common Stock to approve certain business combinations (including certain
mergers, security issuances, recapitalizations, and the sale, lease or transfer
of a substantial part of U S WEST's assets) involving U S WEST or a subsidiary
and an owner of ten percent or more of the voting power of the outstanding
shares of U S WEST Common Stock (a "related person"), unless either (i) such
business combination is approved by a majority of the directors who are
unaffiliated with the related person and who were directors prior to the time
such owner became a related person or (ii) the shareholders receive a "fair
price" (as defined therein) for their holdings and other procedural requirements
are met. Neither the Continental Restated Certificate nor the Continental Bylaws
contain a similar provision. In addition, both U S WEST and Continental, as
Delaware corporations, are subject to Section 203 of the DGCL, which governs
business combinations with interested stockholders.
RIGHTS OF DISSENTING STOCKHOLDERS
Each holder of Continental Voting Stock has the right to dissent from the
Merger and demand and perfect appraisal rights in accordance with the conditions
established by Section 262. All of the stockholders whose shares of Continental
Voting Stock are subject to the Stockholders' Agreement have waived their
appraisal rights with respect to such shares of Continental Voting Stock.
SECTION 262 IS REPRINTED IN ITS ENTIRETY AS ANNEX IV TO THIS PROXY
STATEMENT. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
ANNEX IV. THIS DISCUSSION AND ANNEX IV SHOULD BE REVIEWED CAREFULLY BY ANY
HOLDER
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<PAGE>
WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE
RIGHT TO DO SO, AS FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH HEREIN OR
THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
A holder of record of Continental Voting Stock as of the Record Date who
makes the demand described below with respect to such shares, who continuously
is the record holder of such shares through the Effective Time, who otherwise
complies with the statutory requirements of Section 262 and who neither votes in
favor of the Merger Agreement nor consents thereto in writing may be entitled to
an appraisal by the Delaware Court of Chancery (the "Delaware Court") of the
fair value of his or her shares of stock. All references in this summary of
appraisal rights to a "stockholder" is to the record holder or holders of shares
of Continental Voting Stock. Except as set forth herein, stockholders of
Continental will not be entitled to appraisal rights in connection with the
Merger.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the Special Meeting, not less than 20 days prior
to the meeting, each constituent corporation must notify each of the holders of
its stock for which appraisal rights are available that such appraisal rights
are available and include in each such notice a copy of Section 262. This Proxy
Statement shall constitute such notice to the record holders of Continental
Voting Stock.
Holders of Continental Voting Stock who desire to exercise their appraisal
rights must not vote in favor of the Merger Agreement or the Merger and must
deliver a separate written demand for appraisal to Continental prior to the vote
by the stockholders of Continental on the Merger Agreement and the Merger. A
stockholder who signs and returns a proxy without expressly directing by
checking the applicable boxes on the reverse side of the proxy card enclosed
herewith that his or her shares of Continental Voting Stock be voted against the
Merger Agreement, or that an abstention be registered with respect to his or her
shares of Continental Voting Stock in connection with the proposal, will
effectively have thereby waived his or her appraisal rights as to those shares
of Continental Voting Stock because, in the absence of express contrary
instructions, such shares of Continental Voting Stock will be voted in favor of
the Merger Agreement. See "The Special Meeting -- Solicitation and Voting of
Proxies." Accordingly, a stockholder who desires to perfect appraisal rights
with respect to any of his or her shares of Continental Voting Stock must, as
one of the procedural steps involved in such perfection, either (i) refrain from
executing and returning the enclosed proxy card and from voting in person in
favor of such proposal to approve the Merger Agreement or (ii) check either the
"Against" or the "Abstain" box next to such proposal on such card or
affirmatively vote in person against the proposal or register in person an
abstention with respect thereto. A demand for appraisal must be executed by or
on behalf of the stockholder of record and must reasonably inform Continental of
the identity of the stockholder of record and that such record stockholder
intends thereby to demand appraisal of his or her shares of Continental Voting
Stock. A person having a beneficial interest in shares of Continental Voting
Stock that are held of record in the name of another person, such as a broker,
fiduciary or other nominee, must act promptly to cause the record holder to
follow the steps summarized herein properly and in a timely manner to perfect
whatever appraisal rights are available. If the shares of Continental Voting
Stock are owned of record by a person other than the beneficial owner, including
a broker, fiduciary (such as a trustee, guardian or custodian) or other nominee,
such demand must be executed by or for the record owner. If the shares of
Continental Voting Stock are owned of record by more than one person, as in a
joint tenancy or tenancy in common, such demand must be executed by or for all
joint owners. An authorized agent, including an agent for two or more joint
owners, may execute the demand for appraisal for a stockholder of record;
however, the agent must identify the record owner and expressly disclose the
fact that, in exercising the demand, such person is acting as agent for the
record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds
shares of Continental Voting Stock as a nominee for others, may exercise
appraisal rights with respect to the shares held for all or less than all
beneficial owners of shares as to which such person is the record owner. In such
case, the written demand must set forth the number of shares covered by such
demand. Where the number of shares is not expressly stated, the demand will be
presumed to cover all shares of Continental Voting Stock outstanding in the name
of such record owner.
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A stockholder who elects to exercise appraisal rights, if available, should
mail or deliver his or her written demand to: Continental Cablevision, Inc., The
Pilot House, Lewis Wharf, Boston, Massachusetts, 02110, Attention: P. Eric
Krauss, Vice President, Treasurer and Corporate Controller.
The written demand for appraisal should specify the stockholder's name and
mailing address, the number of shares of Continental Voting Stock owned, and
that the stockholder is thereby demanding appraisal of his or her shares. A
proxy or vote against the Merger Agreement will not by itself constitute such a
demand. Within ten days after the Effective Time, the surviving corporation must
provide notice of the Effective Time to all stockholders who have complied with
Section 262.
Within 120 days after the Effective Time, either the surviving corporation
or any stockholder who has complied with the required conditions of Section 262
may file a petition in the Delaware Court, with a copy served on the surviving
corporation in the case of a petition filed by a stockholder, demanding a
determination of the fair value of the shares of all dissenting stockholders.
Accordingly, Continental stockholders who desire to have their shares appraised
should initiate any petitions necessary for the perfection of their appraisal
rights within the time periods and in the manner prescribed in Section 262. If
appraisal rights are available, within 120 days after the Effective Time, any
stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from the
surviving corporation a statement setting forth the aggregate number of shares
of Continental Voting Stock not voting in favor of the Merger Agreement and with
respect to which demands for appraisal were received by Continental and the
number of holders of such shares. Such statement must be mailed within 10 days
after the written request therefor has been received by the surviving
corporation.
If a petition for an appraisal is timely filed and assuming appraisal rights
are available, at the hearing on such petition, the Delaware Court will
determine which stockholders, if any, are entitled to appraisal rights. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Delaware Court may dismiss the proceedings as to such
stockholder. Where proceedings are not dismissed, the Delaware Court will
appraise the shares of Continental Voting Stock owned by such stockholders,
determining the fair value of such shares exclusive of any element of value
arising from the accomplishment or expectation of the Merger, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. In determining fair value, the Delaware Court is to take into
account all relevant factors. In WEINBERGER V. UOP INC., the Delaware Supreme
Court discussed the factors that could be considered in determining fair value
in an appraisal proceeding, stating that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered, and that "fair price
obviously requires consideration of all relevant factors involving the value of
a company." The Delaware Supreme Court stated that in making this determination
of fair value the court must consider market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other facts
ascertainable as of the date of the merger that throw light on future prospects
of the merged corporation. In WEINBERGER, the Delaware Supreme Court stated that
"elements of future value, including the nature of the enterprise, which are
known or susceptible of proof as of the date of the merger and not the product
of speculation, may be considered." Section 262, however, provides that fair
value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
The cost of the appraisal proceeding may be determined by the Delaware Court
and taxed against the parties as the Delaware Court deems equitable in the
circumstances. Upon application of a dissenting stockholder of Continental, the
Delaware Court may order that all or a portion of the expenses incurred by any
dissenting stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, be charged pro rata against the value of all shares of stock entitled
to appraisal.
135
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Any holder of shares of Continental Voting Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the Effective Time, be
entitled to vote for any purpose any shares subject to such demand or to receive
payment of dividends or other distributions on such shares, except for dividends
or distributions payable to stockholders of record at a date prior to the
Effective Time.
If no petition for appraisal is filed with the Delaware Court within 120
days after the Effective Time, stockholders' rights to appraisal shall cease.
Any stockholder may withdraw such stockholder's demand for appraisal by
delivering to the surviving corporation a written withdrawal of his or her
demand for appraisal and acceptance of the Merger, except that (i) any such
attempt to withdraw made more than 60 days after the Effective Time will require
written approval of the surviving corporation and (ii) no appraisal proceeding
in the Delaware Court will be dismissed as to any stockholder without the
approval of the Delaware Court, which may be conditioned upon such terms as the
Delaware Court deems just.
LEGAL MATTERS
The validity of the Media Stock and the Series D Preferred Stock to be
issued in connection with the Merger and certain tax matters related to the
Merger will be passed upon by Weil, Gotshal & Manges LLP, New York, New York.
Certain legal and tax matters relating to the Merger will be passed upon by
Sullivan & Worcester LLP, Boston, Massachusetts. Partners and of counsel
attorneys of Sullivan & Worcester LLP own 606,500 shares of Continental Common
Stock. Robert B. Luick, Secretary and a Director of Continental, is of counsel
to, and W. Lee H. Dunham, an Assistant Secretary of Continental and Secretary
and a Director of substantially all of Continental's subsidiaries, and Patrick
K. Miehe, an Assistant Secretary of Continental and substantially all of its
subsidiaries, are partners of Sullivan & Worcester LLP.
EXPERTS
The consolidated financial statements and the consolidated financial
statement schedule of U S WEST and the combined financial statements of the
Communications Group and the Media Group as of December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 included in U
S WEST's Annual Report on Form 10-K for the year ended December 31, 1995 are
incorporated herein by reference in reliance on the reports of Coopers & Lybrand
L.L.P., independent certified public accountants, given upon the authority of
that firm as experts in accounting and auditing.
The portions of this Proxy Statement under the captions "Annex V --
Description of Continental -- Business -- Competition" and "-- Legislation and
Regulation" have been reviewed by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
P.C., Washington, D.C. and the statements therein have been included herein in
reliance upon their opinion.
The consolidated financial statements of Continental Cablevision, Inc. and
its subsidiaries as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 included herein have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to a change in the method of accounting for
income taxes and investments in 1993 and 1994, respectively) and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The combined financial statements of the cable television businesses of
Providence Journal as of December 31, 1993 and 1994 and for each of the years in
the three-year period ended December 31, 1994 have been included herein in
reliance upon the reports of KPMG Peat Marwick LLP and Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and upon the
authority of said firms as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP refers to a change in accounting for income taxes in 1992.
136
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The consolidated financial statements of King Videocable Company as of
December 31, 1993 and 1994 and for the period February 25, 1992 to December 31,
1992 and for each of the two years ended December 31, 1994 (not included herein)
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein and is included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The financial statements as of December 31, 1993 and 1994 and for each of
the two years ended December 31, 1994 of Columbia Cable of Michigan (a division
of Columbia Associates, L.P.) included herein have been audited by Arthur
Andersen LLP, independent auditors, as stated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Cablevision of Chicago (a limited partnership)
as of December 31, 1993 and 1994 and for each of the two years ended December
31, 1994 included herein have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their report appearing herein and upon the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements as of June 30, 1996, and for the year
then ended of Meredith/New Heritage Strategic Partners L.P. and subsidiary
included herein have been audited by KPMG Peat Marwick LLP, independent
auditors, as stated in their report appearing herein and upon the authority of
said firm as experts in accounting and auditing.
137
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
AMONG
U S WEST, INC.,
CONTINENTAL MERGER CORPORATION
AND
CONTINENTAL CABLEVISION, INC.
CONFORMED COMPOSITE
DATED AS OF FEBRUARY 27, 1996,
AS AMENDED AND RESTATED AS OF JUNE 27, 1996
AND AS FURTHER AMENDED AS OF OCTOBER 7, 1996
<PAGE>
TABLE OF CONTENTS
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ARTICLE I
DEFINITIONS
1.1 Definitions....................................................................................... I-1
1.2 Terms Defined Elsewhere in the Agreement.......................................................... I-7
1.3 Other Definitional Provisions..................................................................... I-9
ARTICLE II
THE MERGER
2.1 The Merger........................................................................................ I-9
2.2 Closing........................................................................................... I-9
2.3 Effective Time.................................................................................... I-10
2.4 Effects of the Merger............................................................................. I-10
2.5 Directors; Certificate of Incorporation; Bylaws................................................... I-10
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
3.1 Effect on Capital Stock........................................................................... I-10
3.2 Company Common Stock Elections; Exchange Fund..................................................... I-12
3.3 Proration......................................................................................... I-14
3.4 Dividends, Fractional Shares, Etc................................................................. I-14
3.5 Restricted Stock.................................................................................. I-16
3.6 Dissenting Shares................................................................................. I-16
3.7 Share Price Adjustment............................................................................ I-16
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
4.1 Organization and Authority of the Company......................................................... I-17
4.2 Capitalization.................................................................................... I-17
4.3 No Conflicts...................................................................................... I-18
4.4 Vote Required..................................................................................... I-18
4.5 Board Recommendation; Opinion of Financial Advisor................................................ I-19
4.6 Consents.......................................................................................... I-19
4.7 Compliance; No Defaults........................................................................... I-20
4.8 SEC Documents; Undisclosed Liabilities............................................................ I-20
4.9 Litigation........................................................................................ I-20
4.10 Taxes............................................................................................. I-21
4.11 Employee Benefits................................................................................. I-22
4.12 Cable Television Franchises....................................................................... I-23
4.13 Environmental Matters............................................................................. I-26
4.14 Labor............................................................................................. I-26
4.15 Absence of Changes or Events...................................................................... I-27
4.16 Unlawful Payments and Contributions............................................................... I-28
4.17 Brokers and Intermediaries........................................................................ I-28
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
5.1 Organization and Authority........................................................................ I-28
5.2 Capitalization.................................................................................... I-29
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5.3 No Conflicts...................................................................................... I-29
5.4 Stockholder Vote.................................................................................. I-30
5.5 Consents.......................................................................................... I-30
5.6 Compliance; No Defaults........................................................................... I-30
5.7 Acquiror SEC Documents; Undisclosed Liabilities................................................... I-30
5.8 Litigation........................................................................................ I-31
5.9 Absence of Changes or Events...................................................................... I-31
5.10 Brokers and Intermediaries........................................................................ I-31
5.11 Ownership of Company Capital Stock................................................................ I-31
5.12 Operations of Company Sub......................................................................... I-31
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 Conduct of Business of the Company................................................................ I-32
6.2 Conduct of Business of Acquiror and Company Sub................................................... I-34
6.3 Access to Information............................................................................. I-35
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 Preparation of Form S-4 and the Proxy Statement; Stockholders' Meeting; Charter Amendments........ I-36
7.2 Letter of the Company's Accountants............................................................... I-37
7.3 Letter of Acquiror's Accountants.................................................................. I-37
7.4 Reasonable Best Efforts........................................................................... I-38
7.5 Franchise and License Consents.................................................................... I-38
7.6 Antitrust Notification............................................................................ I-39
7.7 Certain Actions................................................................................... I-39
7.8 Supplemental Disclosure........................................................................... I-39
7.9 Announcements..................................................................................... I-40
7.10 No Solicitation................................................................................... I-40
7.11 Indemnification; Directors' and Officers Insurance................................................ I-41
7.12 NYSE Listing...................................................................................... I-41
7.13 Affiliates........................................................................................ I-41
7.14 Employee Benefits................................................................................. I-42
7.15 Registration Rights Agreement..................................................................... I-42
7.16 Tax Treatment..................................................................................... I-42
7.17 Series D Preferred Stock.......................................................................... I-42
7.18 Company Indebtedness.............................................................................. I-43
7.19 Authorization of Issuance of Merger Consideration................................................. I-43
7.20 Attribution....................................................................................... I-43
7.21 Further Assurances................................................................................ I-43
7.22 Internal Revenue Service Ruling................................................................... I-43
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 Conditions to Each Party's Obligation to Effect the Merger........................................ I-43
8.2 Conditions to Obligations of Acquiror and Company Subclient....................................... I-44
8.3 Conditions to Obligations of the Company.......................................................... I-45
ARTICLE IX
TERMINATION AND AMENDMENT
9.1 Termination....................................................................................... I-46
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9.2 Effect of Termination............................................................................. I-48
9.3 Fees and Expenses................................................................................. I-48
9.4 Certain Purchase Obligations...................................................................... I-48
9.5 Amendment......................................................................................... I-48
9.6 Extension; Waiver................................................................................. I-48
ARTICLE X
GENERAL PROVISIONS
10.1 Frustration of the Closing Conditions............................................................. I-48
10.2 Effectiveness of Representations, Warranties and Agreements....................................... I-49
10.3 Expenses.......................................................................................... I-49
10.4 Applicable Law.................................................................................... I-49
10.5 Notices........................................................................................... I-49
10.6 Entire Agreement.................................................................................. I-50
10.7 Headings; References.............................................................................. I-50
10.8 Counterparts...................................................................................... I-50
10.9 Parties in Interest; Assignment................................................................... I-50
10.10 Severability; Enforcement......................................................................... I-50
10.11 Specific Performance.............................................................................. I-51
10.12 Jurisdiction...................................................................................... I-51
</TABLE>
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EXHIBITS
Exhibit A Form of Charter Amendments
Exhibit B Form of Registration Rights Agreement for Media Stock and Series D
Preferred Stock [Intentionally Omitted.]
Exhibit C Form of Certificate of Designation for Series D Convertible Preferred
Stock [Intentionally Omitted.]
Exhibit D Form of Affiliate Letter [Intentionally Omitted.]
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 27, 1996, as amended and
restated as of June 27, 1996 and as further amended as of October 7, 1996, among
U S WEST, INC., a Delaware corporation ("Acquiror"), CONTINENTAL MERGER
CORPORATION, a Delaware corporation and direct wholly owned subsidiary of
Acquiror ("Company Sub"), and CONTINENTAL CABLEVISION, INC., a Delaware
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, Acquiror and the Company have entered into an Agreement and Plan of
Merger, dated as of February 27, 1996 (the "Original Agreement"), providing for
the merger of the Company with and into Acquiror (the "Direct Merger");
WHEREAS, Acquiror and the Company desire to amend and restate the Original
Agreement in its entirety to permit an alternate merger structure providing for
the merger of the Company into Company Sub (the "Subsidiary Merger") and to make
certain other amendments to the Original Agreement, and Company Sub desires to
become a party thereto;
WHEREAS, the board of directors of the Company has determined that the
Direct Merger and the Subsidiary Merger would be fair to and in the best
interests of its stockholders, and such board of directors has approved this
Agreement and the transactions contemplated hereby and has recommended the
adoption by the stockholders of the Company of this Agreement and the amendments
to Section F of Article FOURTH (the "Conversion Charter Amendment") and Section
H of Article FOURTH (the "Consideration Charter Amendment" and, together with
the Conversion Charter Amendment, the "Charter Amendments"), substantially in
the form contained in Exhibit A hereto, of the Company's Restated Certificate of
Incorporation to be effected prior to the consummation of the Direct Merger or
the Subsidiary Merger;
WHEREAS, the board of directors of Acquiror has determined that the Direct
Merger and the Subsidiary Merger, and the board of directors of Company Sub has
determined that the Subsidiary Merger, would be fair to and in the best
interests of their respective stockholders, and such boards of directors have
approved this Agreement and the transactions contemplated hereby;
WHEREAS, concurrently with the execution of the Original Agreement and in
order to induce Acquiror to enter into the Original Agreement, certain
stockholders of the Company executed and delivered an agreement pursuant to
which, among other things, such Stockholders granted to Acquiror their proxy to
vote all of the votes entitled to be cast by such stockholders in favor of the
adoption of this Agreement and the Consideration Charter Amendment, which
agreement is being amended in connection with the execution and delivery of this
Agreement (as so amended, the "Stockholders' Agreement");
WHEREAS, for Federal income tax purposes, it is intended that the Direct
Merger and the Subsidiary Merger shall each qualify as a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended,
and the rules and regulations promulgated thereunder (the "Code"); and
WHEREAS, Acquiror, Company Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
transactions contemplated hereby and also to prescribe various conditions to the
transactions contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements herein contained, the parties hereto agree
as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement, the following terms shall
have the meanings set forth below:
"ACQUIROR REGION" shall mean Arizona, Colorado, Idaho, Iowa, Minnesota,
Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah,
Washington and Wyoming.
I-1
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"AFFILIATE" shall mean, with respect to any Person, any other Person
directly or indirectly controlling, controlled by or under common control
with such other Person.
"BASIC CABLE SERVICE" shall mean as to each System the tier of video
programming service defined in 47 C.F.R. Section76.901(a).
"BOARD OF DIRECTORS" shall mean the board of directors of the Company.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday or other
day on which commercial banks in New York City are authorized or required by
law to close.
"CABLE ACT" shall mean the Cable Communications Policy Act of 1984, as
amended by the Cable Television Consumer Protection and Competition Act of
1992 and the Telecommunications Act of 1996.
"CABLE PROGRAMMING SERVICE" shall mean as to each System those video
programming services defined in 47 C.F.R. Section76.901(b).
"CALCULATION PRICE" shall mean $21.00.
"CASH CONSIDERATION AMOUNT" shall equal $1 billion; PROVIDED, HOWEVER,
that the board of directors of Acquiror shall have the right, in its sole
discretion, to increase the Cash Consideration Amount to a maximum of $1.5
billion so long as notice of such change is given to the Company no later
than one Business Day prior to the Effective Time; PROVIDED, FURTHER, that
the board of directors of Acquiror shall have the right to increase the Cash
Consideration Amount above $1.5 billion in an amount equal to (x) the number
of shares of Company Common Stock issued or to be issued in connection with
any acquisition by the Company approved by Acquiror pursuant to Section 6.1
hereof multiplied by (y) the Share Price; and PROVIDED, FURTHER, that the
Cash Consideration Amount may be reduced pursuant to Section 7.7(c).
"CATV" shall mean any method, presently existing, for the transmission
and/or exhibition (whether by microwave, fiber optics or coaxial cable) of
broadband video signals other than by means of DBS, MMDS, broadcast
television and in-home video players (and which is based on the expectation
of payment by the recipient), and shall include without limitation cable
television (basic and premium) and pay-per-view television.
"CHARTER AMENDMENTS" shall have the meaning set forth in the third
recital to this Agreement.
"CLASS A PREFERRED CONSIDERATION AMOUNT" shall mean the product of (x)
the Class A Preferred Percentage multiplied by (y) the Share Price
multiplied by (z) the number of shares of Class A Common Stock outstanding
immediately prior to the Effective Time on a fully diluted basis but
excluding any and all unvested and outstanding shares of Restricted Company
Common Stock.
"CLASS A PREFERRED CONVERSION NUMBER" shall mean the quotient of (x) the
product of (A) the Class A Preferred Percentage multiplied by (B) the Share
Price divided by (y) the Liquidation Value (rounded to the nearest
hundredth, or if there shall not be a nearest hundredth, to the next lowest
hundredth).
"CLASS A PREFERRED PERCENTAGE" shall mean the difference between (x) one
and (y) the Common Percentage.
"CLASS B AGGREGATE CONSIDERATION AMOUNT" shall mean the sum of the Cash
Consideration Amount plus the Class B Preferred Consideration Amount plus
the Class B Common Consideration Amount.
"CLASS B COMMON CONSIDERATION AMOUNT" shall mean the product of (x) the
Class B Percentage multiplied by (y) the Common Consideration Net Amount.
"CLASS B COMMON PERCENTAGE" shall mean the quotient (rounded to the
nearest hundredth, or if there shall not be a nearest hundredth, to the next
lowest hundredth) of (x) the Class B Common Consideration Amount divided by
(y) the sum of the Class B Common Consideration Amount and the Class B
Preferred Consideration Amount.
I-2
<PAGE>
"CLASS B COMMON STOCK ELECTION CONVERSION NUMBER" shall mean the
quotient of (x) the product of (A) the Class B Common Percentage multiplied
by (B) the Share Price divided by (y) the Calculation Price (rounded to the
nearest hundredth, or if there shall not be a nearest hundredth, to the next
lowest hundredth).
"CLASS B PERCENTAGE" shall mean the quotient (rounded to the nearest
hundredth, or if there shall not be a nearest hundredth, to the next lowest
hundredth) of (i) the number of shares of Class B Common Stock outstanding
immediately prior to the Effective Time on a fully diluted basis, including
giving effect to the conversion of all outstanding shares of Company
Preferred Stock but excluding any and all unvested and outstanding shares of
Restricted Company Common Stock, divided by (ii) the number of shares of
Company Common Stock outstanding immediately prior to the Effective Time on
a fully diluted basis, including giving effect to the conversion of all
outstanding shares of Company Preferred Stock but excluding any and all
unvested and outstanding shares of Restricted Company Common Stock.
"CLASS B PREFERRED CONSIDERATION AMOUNT" shall mean the difference
between (x) the Preferred Consideration Amount and (y) the Class A Preferred
Consideration Amount.
"CLASS B PREFERRED CONVERSION NUMBER" shall mean the quotient of (x) the
product of (A) the Class B Preferred Percentage multiplied by (B) the Share
Price divided by (y) the Liquidation Value (rounded to the nearest
hundredth, or if there shall not be a nearest hundredth, to the next lowest
hundredth).
"CLASS B PREFERRED PERCENTAGE" shall mean the quotient (rounded to the
nearest hundredth, or if there shall not be a nearest hundredth, to the next
highest hundredth) of (x) the Class B Preferred Consideration Amount divided
by (y) the sum of the Class B Common Consideration Amount and the Class B
Preferred Consideration Amount.
"CODE" shall have the meaning set forth in the sixth recital to this
Agreement.
"COMMON CONSIDERATION AMOUNT" shall equal the excess of (x) the
Transaction Value over (y) the sum of the Preferred Consideration Amount and
the Cash Consideration Amount.
"COMMON CONSIDERATION NET AMOUNT" shall equal the difference between (x)
the Common Consideration Amount and (y) the RSPA Amount.
"COMMON PERCENTAGE" shall mean the quotient (rounded to the nearest
hundredth, or if there shall not be a nearest hundredth, to the next lowest
hundredth) of (x) the Common Consideration Net Amount divided by (y) the
Transaction Value.
"COMMUNICATIONS ACT" shall mean the Communications Act of 1934, as
amended, 47 U.S.C. SectionSection151, et seq., as amended by the
Telecommunications Act of 1996.
"CONSIDERATION CHARTER AMENDMENT" shall have the meaning set forth in
the third recital to this Agreement.
"CONVERSION CHARTER AMENDMENT" shall have the meaning set forth in the
third recital to this Agreement.
"CONVERSION NUMBER" shall mean the quotient of (x) the product of (A)
the Common Percentage multiplied by (B) the Share Price divided by (y) the
Calculation Price (rounded to the nearest hundredth, or if there shall not
be a nearest hundredth, to the next lowest hundredth).
"COPYRIGHT OFFICE" shall mean the United States Copyright Office of the
Library of Congress or any successor agency that shall hold principal
responsibility for administering the cable television compulsory license for
retransmission of broadcast signals established pursuant to Section 111 of
the Copyright Act, 17 U.S.C. SectionSection111.
"DBS" shall mean a system providing direct-to-home in the broadcast
satellite services authorized by the FCC.
I-3
<PAGE>
"DGCL" shall mean the Delaware General Corporation Law.
"DIRECT MERGER" shall have the meaning set forth in the first recital to
this Agreement.
"DOJ" shall mean the Department of Justice.
"ENCUMBRANCES" shall mean any and all mortgages, security interests,
liens, claims, pledges, restrictions, leases, title exceptions, charges or
other encumbrances.
"ENVIRONMENTAL CLAIM" means any notice of violation, action, claim,
Environmental Lien, demand, abatement or other Order or direction
(conditional or otherwise) by any Governmental Authority or any other Person
for personal injury (including sickness, disease or death), tangible or
intangible property damage, damage to the environment, pollution,
contamination or other adverse effects on the environment, or for fines,
penalties or restrictions resulting from or based upon (i) the existence of
an Environmental Release (including, without limitation, sudden or
non-sudden accidental or non-accidental Environmental Releases) of, or
exposure to, any Hazardous Material, noxious odor or illegal audible noise
in, into or onto the environment (including, without limitation, the air,
soil, surface water or groundwater) at, in, by, from or related to any
property owned, operated or leased by the Company or its Subsidiaries or any
activities or operations thereof; (ii) the transportation, storage,
treatment or disposal of Hazardous Materials in connection with any property
owned, operated or leased by the Company or its Subsidiaries or their
operations or facilities; or (iii) the violation, or alleged violation, of
any Environmental Law or Environmental Permit of or from any Governmental
Authority relating to environmental matters connected with any property
owned, leased or operated by the Company or any of its Subsidiaries.
"ENVIRONMENTAL COSTS AND LIABILITIES" means any and all losses,
liabilities, obligations, damages, fines, penalties, judgments, actions,
claims, costs and expenses (including, without limitation, fees,
disbursements and expenses of legal counsel, experts, engineers and
consultants and the costs of investigation and feasibility studies and
Remedial Action) arising from or under any Environmental Law or contract,
agreement or similar arrangement with any Governmental Authority or other
Person required under any Environmental Law.
"ENVIRONMENTAL LAW" means any Federal, state, local, or foreign law
(including common law), statute, code, ordinance, rule, regulation or other
legally enforceable requirement relating to the environment, natural
resources, or public or employee health and safety as it relates to exposure
to Hazardous Materials and includes, but is not limited to, the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Section9601 ET SEQ., the Hazardous Materials Transportation Act, 49
SectionU.S.C. 1801 ET SEQ., the Resource Conservation and Recovery Act, 42
U.S.C. Section6901 ET SEQ., the Clean Water Act, 33 U.S.C. Section1251 ET
SEQ., the Clean Air Act, 33 U.S.C. Section2601 ET SEQ., the Toxic Substances
Control Act, 15 U.S.C. Section2601 ET SEQ., the Federal Insecticide,
Fungicide, and Rodenticide Act, 7 U.S.C. Section136 ET SEQ., the Oil
Pollution Act of 1990, 33 U.S.C Section2701 ET SEQ. and the relevant
portions of the Occupational Safety and Health Act, 29 U.S.C. Section651 ET
SEQ., as such laws have been amended or supplemented as of the date hereof,
and the regulations promulgated pursuant thereto, and all analogous state or
local statutes as of the date hereof.
"ENVIRONMENTAL LIEN" means any lien arising under Environmental Laws.
"ENVIRONMENTAL PERMIT" means any permit, approval, authorization,
license, variance, registration or permission required under any applicable
Environmental Law.
"ENVIRONMENTAL RELEASE" means any release, spill, emission, leaking,
pumping, pouring, dumping, emptying, injection, deposit, disposal,
discharge, dispersal, leaching, or migration on or into the indoor or
outdoor environment or into or out of any property not authorized under any
Environmental Permit and requiring notification under any applicable
Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, and the applicable regulations promulgated thereunder.
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"ERISA AFFILIATE" shall mean any corporation or trade or business
(whether or not incorporated) which are or have ever been treated as a
single employer with or which are or have been under common control with the
Company within the meaning of Section 414(b), (c), (m) or (o) of the Code.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"FCC" shall mean the Federal Communications Commission.
"FINAL ORDER" shall mean an action or actions by any Governmental
Authority or the FCC which has not been reversed, stayed, enjoined, set
aside, annulled or suspended, and as to the FCC with respect to which the
time for filing any request, petition or appeal of such action has expired
and the time for the FCC to set aside its action on its own motion has
passed, and as to any Franchise Consent, when the Franchise Consent has been
or is deemed to be approved as provided in Section 617 of the Cable Act.
"FTC" shall mean the Federal Trade Commission.
"GAAP" shall mean generally accepted accounting principles in effect in
the United States of America as of the date of the applicable determination.
"GOVERNMENTAL AUTHORITY" shall mean any foreign, Federal, state,
municipal or other governmental department, commission, board, bureau,
agency or instrumentality.
"HAZARDOUS MATERIAL" means any substance, material or waste which is
regulated by any Governmental Authority in jurisdictions in which the
Company operates, including, without limitation, any material, substance or
waste which is defined as a "hazardous waste," "hazardous material,"
"hazardous substance," "extremely hazardous waste," "restricted hazardous
waste," "contaminant," "toxic waste" or "toxic substance" under any
provision of Environmental Law, which includes, but is not limited to,
petroleum, petroleum products, asbestos, and polychlorinated biphenyls.
"HOMES PASSED" shall mean the number of homes to which CATV service is
currently available from the Company or the Subsidiaries, whether or not a
given household subscribes to such service.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
"INDEBTEDNESS" shall mean, with respect to any Person, any indebtedness,
secured or unsecured, (i) in respect of borrowed money (whether or not the
recourse of the lender is to the whole of the assets of such Person or only
to a portion thereof), and evidenced by bonds, notes, debentures or similar
instruments or letters of credit, to the extent of the face value thereof
(or, in the case of evidence of indebtedness issued at a discount, the
current accredit value thereof) or (ii) representing the balance deferred
and unpaid of the purchase price of property or services (other than
accounts payable in the ordinary course of business) and shall also include,
to the extent not otherwise included, (A) any capitalized lease obligations
and (B) the face value of guaranties of items of other Persons which would
be included within this definition for such other Persons (whether or not
such items would appear upon the balance sheet of the guarantor). No item
constituting Indebtedness under any of the definitions set forth above shall
be counted twice by virtue of the fact that it constitutes "Indebtedness"
under more than one of such definitions.
"IRS" means the United States Internal Revenue Service.
"KNOWLEDGE OF THE COMPANY" and "TO THE COMPANY'S KNOWLEDGE" shall mean
the actual knowledge of the executive officers (as identified in the Company
SEC Documents), the Senior Vice President-Corporate & Legal Affairs and the
regional Senior Vice Presidents, in each case of the Company after
reasonable investigation and due inquiry.
"LEGAL PROCEEDINGS" means any judicial, administrative or arbitral
actions, suits, proceedings (public or private) or governmental proceedings.
"MATERIAL ADVERSE EFFECT" shall mean, (i) with respect to the Company,
any change or effect that is or is reasonably likely to be materially
adverse to the business, results of operations, properties, assets,
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liabilities or condition (financial or otherwise) of the Company and its
Subsidiaries taken as whole and (ii) with respect to Acquiror, any change or
effect that is or is reasonably likely to be materially adverse to the
business, results of operations, properties, assets, liabilities or
condition (financial or otherwise) of either (x) the Media Group or (y)
Acquiror and its Subsidiaries taken as a whole; PROVIDED, HOWEVER, that
Material Adverse Effect shall in each instance exclude any change or effect
due to general economic or industry wide conditions.
"MEDIA GROUP" shall have the meaning set forth in Section 2.6.15 of
Article V of the Restated Certificate of Incorporation of Acquiror as in
effect as of the date hereof.
"MMDS" shall mean a system operating in the Multichannel Multipoint
Distribution Services authorized by the FCC.
"NYSE" shall mean the New York Stock Exchange, Inc.
"ORIGINAL AGREEMENT" shall have the meaning set forth in the first
recital to this Agreement.
"PERSON" shall mean an individual, corporation, partnership, trust or
unincorporated organization or a government or any agency or political
subdivision thereof.
"PREFERRED CONSIDERATION AMOUNT" shall equal $1 billion.
"RECENTLY ACQUIRED SYSTEMS" shall mean the Systems acquired by the
Company or its Subsidiaries from Providence Journal Company, Cablevision of
Chicago, Columbia of Michigan, Consolidated Cablevision of California and
N-COM Limited Partnership II since August 1, 1995.
"REGISTRATION RIGHTS AGREEMENT" shall mean the registration rights
agreement, substantially in the form of Exhibit B hereto, to be entered into
by Acquiror, Amos B. Hostetter, Jr. and the Amos B. Hostetter, Jr. 1989
Trust.
"REMEDIAL ACTION" means all actions required under any applicable
Environmental Law or otherwise undertaken by any Governmental Authority,
including, without limitation, any capital expenditures, required or
undertaken to (i) clean up, remove, treat, or in any other way address any
Hazardous Material; (ii) prevent the Environmental Release or threat of
Environmental Release, or minimize the further Environmental Release of any
Hazardous Material so it does not migrate or endanger or threaten to
endanger public health or welfare or the indoor or outdoor environment;
(iii) perform pre-remedial studies and investigations or post-remedial
monitoring and care; or (iv) bring facilities on any property owned,
operated or leased by the Company or its Subsidiaries and the facilities
located and operations conducted thereon into compliance with all applicable
Environmental Laws and Environmental Permits.
"RSPA AMOUNT" shall mean the product of (x) the number of shares of
Restricted Company Common Stock that are unvested and outstanding
immediately prior to the Effective Time multiplied by (y) the Share Price.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and
the rules and regulations promulgated thereunder.
"SHARE PRICE" shall mean $30, decreased by the Per Share Adjustment
Amount, if any, plus the Additional Amount, if any, in accordance with the
terms of Section 3.7.
"STOCKHOLDERS' AGREEMENT" shall have the meaning set forth in the fifth
recital to this Agreement.
"SUBPART N OF THE FCC RULES" shall refer to the Subpart N of Part 76 of
the FCC's rules (47 C.F.R. SectionSection76.900 through 76.985), entitled
"Cable Rate Regulation," added by order in Docket 92-266, adopted by the FCC
on April 1, 1993, as such Subpart may be amended from time to time
thereafter, as such rules were in effect on any particular date, and shall
include successor provisions if recodified or otherwise modified.
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"SUBSCRIBER" shall mean a member of the general public who receives
video programming services distributed by a System and does not further
distribute it; PROVIDED, HOWEVER, that the number of Subscribers in a
multi-unit dwelling or commercial structure that obtains service on a "bulk
rate" basis shall be determined by dividing the bulk rate charge by the rate
for individual households subscribing to the same level of service as the
multi-unit structure (e.g., if the basic subscription rate for individual
households is $10 and the multi-unit dwelling or commercial structure paid a
bulk fee of $100 for the same level of service, then that multi-unit
dwelling or structure shall be counted as having 10 Subscribers).
"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, more than 50% 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, (ii) each
partnership in which such Person or another Subsidiary of such Person is the
sole general partner or sole managing partner and (iii) each limited
liability company in which such Person or another Subsidiary of such Persons
is the managing member or otherwise controls.
"SUBSIDIARY MERGER" shall have the meaning set forth in the second
recital to this Agreement.
"SURVIVING CORPORATION" shall have the meaning set forth in Section 2.1.
"SYSTEMS" shall mean the cable television systems listed in Section
4.12(a) of the Company Disclosure Letter.
"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.
"THIRD PARTY" shall mean a party or parties unaffiliated with either the
Company or Acquiror.
"TRANSACTION DOCUMENTS" shall mean the Stockholders' Agreement and the
Registration Rights Agreement.
"TRANSACTION VALUE" shall equal the product of (x) the Share Price
multiplied by (y) the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time on a fully diluted basis, including
giving effect to the conversion of all outstanding shares of Company
Preferred Stock but excluding any and all unvested and outstanding shares of
Restricted Company Common Stock.
"WARN" shall mean the Worker Adjustment and Retraining Notification Act
and any similar state or local "plant closing" law.
1.2 TERMS DEFINED ELSEWHERE IN THE AGREEMENT. For purposes of this
Agreement, the following terms have the meanings set forth in the sections
indicated:
<TABLE>
<CAPTION>
TERM SECTION
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Acceleration Event......................................................................... 7.14(c)
Acquiror Certificates...................................................................... 3.2(b)
Acquiror Consents.......................................................................... 5.5
Acquiror Disclosure Letter................................................................. 5.2(b)
Acquiror SEC Documents..................................................................... 5.7(a)
Acquisition Proposal....................................................................... 7.10(d)
Additional Amount.......................................................................... 3.7
Additional Payment......................................................................... 7.14(c)
Additional Stockholders' Meeting........................................................... 7.1(d)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Allocation Determination................................................................... 3.2(d)
Applicable Laws............................................................................ 4.7(a)
Articles................................................................................... 10.7
Benefit Plans.............................................................................. 4.11(a)
Cash Cap................................................................................... 3.3(b)
Cash Election.............................................................................. 3.1(c)(ii)
Certificate of Merger...................................................................... 2.3
Certificates............................................................................... 3.2(b)
Class A Common Stock....................................................................... 3.1(c)(i)
Class A Merger Consideration............................................................... 3.1(c)(i)
Class B Common Stock....................................................................... 3.1(c)(ii)
Class B Cash Consideration................................................................. 3.1(c)(ii)
Class B Merger Consideration............................................................... 3.1(c)(ii)
Class B Stock Consideration................................................................ 3.1(c)(ii)
Class B Stock Election..................................................................... 3.2(a)
Closing.................................................................................... 2.2
Closing Date............................................................................... 2.2
Communications Stock....................................................................... 5.2(a)
Company Capital Stock...................................................................... 4.2(a)
Company Certificate........................................................................ 3.1(c)(iii)
Company Common Stock....................................................................... 3.1
Company Consents........................................................................... 4.6
Company Letter of Transmittal.............................................................. 3.2(c)
Company Disclosure Letter.................................................................. 4.1(c)
Company Preferred Stock.................................................................... 4.2(a)
Company Representatives.................................................................... 7.10(a)
Company SEC Documents...................................................................... 4.8(a)
Confidentiality Agreements................................................................. 6.3(c)
Copyright Act.............................................................................. 4.12(e)
Dissenting Shares.......................................................................... 3.6
Effective Time............................................................................. 2.3
Election Deadline.......................................................................... 3.2(d)
Election Form.............................................................................. 3.2(c)
Equity Appreciation Rights Plans........................................................... 4.11(i)
Excess Cash Amount......................................................................... 3.3(c)
Excise Tax................................................................................. 7.14(c)
Exchange Agent............................................................................. 3.2(b)
Exchange Fund.............................................................................. 3.2(b)
Exhibits................................................................................... 10.7
Foreign Benefit Plans...................................................................... 4.11(b)
Form S-4................................................................................... 5.5
Fractional Shares.......................................................................... 3.4(c)(i)
Franchise Consents......................................................................... 4.6
Franchises................................................................................. 4.12(a)
Gains Taxes................................................................................ 4.6
Incremental Excise Tax..................................................................... 7.14(c)
Indemnified Liabilities.................................................................... 7.11(b)
Indemnified Parties........................................................................ 7.11(b)
Initial Stockholders' Meeting.............................................................. 7.1(d)
Liquidation Value.......................................................................... 3.1(c)(i)
License Consents........................................................................... 4.6
Material Franchises........................................................................ 4.12(c)
Media Stock................................................................................ 3.1(c)(i)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Merger..................................................................................... 2.1
Non-Required Franchises.................................................................... 7.5(b)
Non-Required Systems....................................................................... 7.5(b)
Permits.................................................................................... 4.7(a)
Per Share Adjustment Amount................................................................ 7.7(c)
Prorated Cash Amount....................................................................... 3.3(b)
Proxy Statement............................................................................ 4.6
Requested Cash Amount...................................................................... 3.3(a)
Required Franchise Consents................................................................ 8.2(j)
Restricted Company Common Stock............................................................ 3.5
Rights Agreement........................................................................... 5.2(a)
RSPA....................................................................................... 3.5
Ruling..................................................................................... 2.1
Sections................................................................................... 10.7
Series D Preferred Stock................................................................... 3.1(c)(i)
Social Contract Amendment.................................................................. 4.6
Social Contract Consents................................................................... 4.6
Social Contract Order...................................................................... 4.6
Standard Election.......................................................................... 3.1(c)(ii)
Stock Election............................................................................. 3.1(c)(ii)
Stockholder Approvals...................................................................... 4.1(b)
Stockholders' Meeting...................................................................... 7.1(d)
Tax Returns................................................................................ 4.10(a)
Termination Date........................................................................... 9.1(d)
</TABLE>
1.3 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein", and
"hereunder" and words of similar import, when used in this Agreement, shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement.
(b) The terms defined in the singular shall have a comparable meaning when
used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
ARTICLE II
THE MERGER
2.1 THE MERGER. Upon the terms and subject to the conditions set forth in
this Agreement, and in accordance with the DGCL, the Company shall be merged
with and into Acquiror at the Effective Time (as defined in Section 2.3);
PROVIDED, HOWEVER, that if either (a) Acquiror, the Company and The Providence
Journal Company shall have received a ruling from the IRS satisfactory to each
of them (the "Ruling") by the later of (i) the fifth Business Day after the date
on which the last of the conditions set forth in Article VIII is fulfilled or
waived, other than conditions requiring deliveries at the Closing and the
condition set forth in Section 8.1(f) and (ii) November 15, 1996 or (b)
Acquiror, the Company and The Providence Journal Company are otherwise satisfied
that the receipt of the Ruling is not necessary, upon the terms and subject to
the conditions set forth in this Agreement and in accordance with the DGCL, the
Company shall be merged with and into Company Sub at the Effective Time. As used
herein, the "Merger" shall refer to the Subsidiary Merger or the Direct Merger,
as applicable. At the Effective Time, the separate corporate existence of the
Company shall cease, and Company Sub or Acquiror, as applicable, shall continue
as the surviving corporation (the "Surviving Corporation") and shall succeed to
and assume all of the rights, properties, liabilities and obligations of the
Company in accordance with the DGCL.
2.2 CLOSING. Unless this Agreement shall have been terminated and the
transactions herein contemplated shall have been abandoned pursuant to Section
9.1, the closing of the Merger (the "Closing") shall take place at 10:00 a.m.,
New York City time, the later of (i) the fifth Business Day after the date on
which
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the last of the conditions set forth in Article VIII is fulfilled or waived,
other than conditions requiring deliveries at the Closing and (ii) November 15,
1996 (the "Closing Date"), at the offices of Weil, Gotshal & Manges LLP, 767
Fifth Avenue, New York, New York 10153, unless another date, time or place is
agreed to in writing by the parties hereto.
2.3 EFFECTIVE TIME. Subject to the provisions of this Agreement, the
parties hereto shall cause the Merger to be consummated by filing a certificate
of merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware, as provided in the DGCL, as soon as practicable on or after the
Closing Date. The Merger shall become effective upon such filing or at such time
thereafter as is provided in the Certificate of Merger (the "Effective Time").
2.4 EFFECTS OF THE MERGER. The Merger shall have the effects set forth in
Section 259 of the DGCL.
2.5 DIRECTORS; CERTIFICATE OF INCORPORATION; BYLAWS. (a) If the Subsidiary
Merger is effected, the directors of Company Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation and the
officers of the Company immediately prior to the Effective Time shall be the
officers of the Surviving Corporation, until their successors have been duly
elected or appointed and qualified, or until their earlier death, resignation or
removal in accordance with the Surviving Corporation's Certificate of
Incorporation and Bylaws. If the Direct Merger is effected, the directors of
Acquiror and the officers of Acquiror immediately prior to the Effective Time
shall be the directors and officers of the Surviving Corporation until their
successors have been duly elected or appointed and qualified, or until their
earlier death, resignation or removal in accordance with the Surviving
Corporation's Certificate of Incorporation and Bylaws.
(b) If the Subsidiary Merger is effected, the Certificate of Incorporation
of Company Sub as in effect immediately prior to the Effective Time shall be
amended at the Effective Time so that Article I thereof reads in its entirety as
follows: "The name of the corporation is Continental Cablevision, Inc." and, as
so amended, such Certificate of Incorporation shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter duly amended in
accordance with the terms thereof and the DGCL. If the Direct Merger is
effected, the Restated Certificate of Incorporation of Acquiror as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter duly amended in
accordance with the terms thereof and the DGCL.
(c) If the Subsidiary Merger is effected, the Bylaws of Company Sub as in
effect immediately prior to the Effective Time shall be the bylaws of the
Surviving Corporation until thereafter amended as provided by Applicable Law,
the Certificate of Incorporation of the Surviving Corporation or such Bylaws. If
the Direct Merger is effected, the Bylaws of Acquiror as in effect immediately
prior to the Effective Time shall be the bylaws of the Surviving Corporation
until thereafter amended as provided by Applicable Law, the Certificate of
Incorporation of the Surviving Corporation or such Bylaws.
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; EXCHANGE OF 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 Company
Capital Stock (as defined in Section 4.2) or the holder of any shares of capital
stock of Company Sub or Acquiror, as applicable:
(a) CAPITAL STOCK OF COMPANY SUB OR ACQUIROR. If the Subsidiary Merger
is effected, each share of common stock, par value $.01 per share, of
Company Sub issued and outstanding immediately prior to the Effective Time
shall remain outstanding as one share of common stock, par value $.01 per
share, of the Surviving Corporation. If the Direct Merger is effected, each
share of each class of capital stock of Acquiror 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.
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(b) CANCELLATION OF TREASURY STOCK AND ACQUIROR-OWNED STOCK. Each
share of Company Capital Stock that is owned by the Company or any wholly
owned Subsidiary of the Company and each share of Company Capital Stock that
is owned by Acquiror or any wholly owned Subsidiary of Acquiror shall be
canceled and retired and shall cease to exist and no consideration shall be
delivered or deliverable in exchange therefor.
(c) CONVERSION OF COMPANY COMMON STOCK.
(i) Subject to Sections 3.5 and 3.6, at the Effective Time, each
issued and outstanding share (excluding shares cancelled pursuant to
Section 3.1(b)) of Class A Common Stock, par value $.01 per share, of the
Company ("Class A Common Stock") shall be converted into the right to
receive (x) a number of shares of U S WEST Media Group Common Stock, par
value $.01 per share, of Acquiror (the "Media Stock") equal to the
Conversion Number and (y) a number of shares of Series D Convertible
Preferred Stock, par value $1.00 per share, of Acquiror (the "Series D
Preferred Stock"), having the rights, preferences and terms set forth in
the Certificate of Designation attached as Exhibit C hereto, with a
liquidation value of $50 per share (the "Liquidation Value"), equal to
the Class A Preferred Conversion Number (collectively, the "Class A
Merger Consideration").
(ii) Subject to Sections 3.5 and 3.6, at the Effective Time each
issued and outstanding share (excluding shares cancelled pursuant to
Section 3.1(b)) of Class B Common Stock, par value $.01 per share, of the
Company ("Class B Common Stock" and, together with Class A Common Stock,
"Company Common Stock"), shall be converted into, at the election of the
holder thereof, one of the following (as adjusted pursuant to Section
3.3, the "Class B Merger Consideration"):
(x) except as otherwise provided in Section 3.3, for each such
share of Class B Common Stock with respect to which an election to
receive cash has been effectively made and not revoked, pursuant to
Sections 3.2(c), (d) and (e) (a "Cash Election"), the right to
receive an amount in cash from Acquiror, without interest, equal to
the Share Price (the "Class B Cash Consideration");
(y) except as otherwise provided in Section 3.3, for each such
share of Class B Common Stock with respect to which an election to
receive a combination of Media Stock and Series D Preferred Stock has
been effectively made and not revoked, pursuant to Sections 3.2(c),
(d) and (e) (a "Stock Election"), the right to receive (1) a number
of shares of Media Stock equal to the Class B Common Stock Election
Conversion Number and (2) a number of shares of Series D Preferred
Stock equal to the Class B Preferred Conversion Number (collectively,
the "Class B Stock Consideration"); or
(z) for each such share of Class B Common Stock with respect to
which an election to receive a combination of cash, Media Stock and
Series D Preferred Stock has been effectively made and not revoked,
pursuant to Sections 3.2(c), (d) and (e) (a "Standard Election"), the
right to receive (1) an amount in cash from Acquiror, without
interest, equal to the product of the Share Price and a fraction, the
numerator of which is equal to the Cash Consideration Amount and the
denominator of which is equal to the Class B Aggregate Consideration
Amount, (2) a number of shares of Media Stock equal to the Conversion
Number and (3) a number of shares of Series D Preferred Stock equal
to the product of (x) the Share Price multiplied by (y) a fraction,
the numerator of which is equal to the Class B Preferred
Consideration Amount and the denominator of which is equal to the
product of the Liquidation Value multiplied by the Class B Aggregate
Consideration Amount (collectively, the "Class B Standard
Consideration").
Each beneficial holder of shares of Class B Common Stock shall be
entitled to make only one election (either a Cash Election, a Stock
Election or a Standard Election) with respect to all of the shares of
Class B Common Stock beneficially owned by such holder.
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(iii) As a result of the Merger and without any action on the part of
the holder thereof, at the Effective Time all shares of Company Common
Stock shall cease to be outstanding and shall be cancelled and retired
and shall cease to exist, and each holder of shares of Company Common
Stock shall thereafter cease to have any rights with respect to such
shares of Company Common Stock, except the right to receive, without
interest, the Class A Merger Consideration or Class B Merger
Consideration, as applicable, and cash for fractional shares of Media
Stock or Series D Preferred Stock in accordance with Section 3.6(c) upon
the surrender of a certificate representing such shares of Company Common
Stock (a "Company Certificate"). The Media Stock and Series D Preferred
Stock comprising the Class A Merger Consideration and part of the Class B
Merger Consideration, when issued to the holders of Company Common Stock,
will be duly authorized, validly issued, fully paid, non-assessable and
not subject to preemptive rights created by statute, Acquiror's Restated
Certificate of Incorporation or Bylaws or any agreement to which Acquiror
is a party or by which Acquiror is bound.
(d) CERTAIN ADJUSTMENTS AND DETERMINATIONS. If, between the date of
this Agreement and the Effective Time, the outstanding shares of Media
Stock, Series D Preferred Stock or Company Common Stock shall have been
changed into a different number of shares or a different class, by reason of
any stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, the Conversion Number, Class B Common
Stock Election Conversion Number, Class A Preferred Conversion Number and
the Class B Preferred Conversion Number correspondingly shall be adjusted to
reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
3.2 COMPANY COMMON STOCK ELECTIONS; EXCHANGE FUND. (a) Each Person who, at
the Effective Time, is a record holder of shares of Class B Common Stock (other
than holders of shares of Class B Common Stock to be cancelled as set forth in
Section 3.1(b) or subject to Section 3.5 or 3.6) shall have the right to submit
an Election Form (as defined in Section 3.2(c)) specifying whether such Person
desires to have all, but not less than all, of such shares converted into the
right to receive either (i) the Class B Stock Consideration pursuant to the
Stock Election, (ii) the Class B Cash Consideration pursuant to the Cash
Election or (iii) the Class B Standard Consideration pursuant to the Standard
Election. Holders of record of shares of Class B Common Stock who hold such
shares as nominees, trustees or in other representative capacities (a
"Representative") may submit multiple Election Forms, provided that such
Representative certifies that each such Election Form covers all the shares of
Class B Common Stock held by such Representative for a particular beneficial
owner.
(b) Promptly after the Allocation Determination (as defined in Section
3.2(d)), (i) Acquiror shall deposit (or cause to be deposited) with a bank or
trust company to be designated by Acquiror and reasonably acceptable to the
Company (the "Exchange Agent"), for the benefit of the holders of shares of
Class B Common Stock, for exchange in accordance with this Article III, cash in
the amount sufficient to pay the aggregate Class B Cash Consideration and (ii)
Acquiror shall deposit (or cause to be deposited) with the Exchange Agent, for
the benefit of holders of shares of Company Common Stock, certificates
representing the shares of Media Stock and Series D Preferred Stock ("Acquiror
Certificates") for exchange in accordance with this Article III (the cash and
shares deposited pursuant to clauses (i) and (ii) being hereinafter referred to
as the "Exchange Fund"). The Media Stock and Series D Preferred Stock into which
Company Common Stock shall be converted pursuant to the Merger shall be deemed
to have been issued at the Effective Time.
(c) As soon as reasonably practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of Company Common Stock immediately
prior to the Effective Time (excluding any shares of Company Common Stock which
will be cancelled pursuant to Section 3.1(b) or which are subject to Section 3.5
or 3.6) (A) a letter of transmittal (the "Company Letter of Transmittal") (which
shall specify that delivery shall be effected, and risk of loss and title to the
Company Certificates shall pass, only upon delivery of such Company Certificates
to the Exchange Agent and shall be in such form and have such other provisions
as Acquiror shall specify) and (B) instructions for use in effecting the
surrender of the Company Certificates in exchange for the Class A Merger
Consideration or Class B Merger Consideration, as
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applicable, with respect to the shares of Company Common Stock formerly
represented thereby. The Exchange Agent shall also mail to holders of Class B
Common Stock, together with the items specified in the preceding sentence, an
election form (the "Election Form") providing for such holders to make, with
respect to all, but not less than all, of the shares of Class B Common Stock
held of record by each such holder (subject to the last sentence of Section
3.2(a)), either a Cash Election, a Stock Election or a Standard Election. The
Election Form shall include information as to the Share Price, the Cash
Consideration Amount, the number of shares of Media Stock and Series D Preferred
Stock to be received (subject to proration pursuant to Section 3.3) by a holder
of Class B Common Stock making a Stock Election and the number of shares of
Media Stock and Series D Preferred Stock and the amount of cash to be received
by a holder of Class B Common Stock making a Standard Election and shall state
the pricing terms of the Series D Preferred Stock. As of the Election Deadline
(as hereinafter defined) all holders of Class B Common Stock immediately prior
to the Effective Time that shall not have submitted to the Exchange Agent or
shall have properly revoked an effective, properly completed Election Form
without submitting a revised, properly completed Election Form shall be deemed
to have made a Standard Election.
(d) Any Cash Election, Stock Election or Standard Election (other than a
deemed Standard Election) shall have been validly made only if the Exchange
Agent shall have received by 5:00 p.m. New York, New York time on a date (the
"Election Deadline") to be mutually agreed upon by Acquiror and the Company
(which date shall not be later than the twentieth Business Day after the
Effective Time), an Election Form properly completed and executed (with the
signature or signatures thereof guaranteed to the extent required by the
Election Form) by such holder accompanied by such holder's Company Certificates,
or by an appropriate guarantee of delivery of such Company Certificates from a
member of any registered national securities exchange or of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company in
the United States as set forth in such Election Form. Any holder of Class B
Common Stock (other than a holder who has submitted an irrevocable election) who
has made an election by submitting an Election Form to the Exchange Agent may at
any time prior to the Election Deadline change such holder's election by
submitting a revised Election Form, properly completed and signed that is
received by the Exchange Agent prior to the Election Deadline. Any holder of
Class B Common Stock may at any time prior to the Election Deadline revoke such
holder's election by written notice to the Exchange Agent received by the Close
of business on the day prior to the Election Deadline. As soon as practicable
after the Election Deadline, the Exchange Agent shall determine the allocation
of the cash portion of the Class B Merger Consideration and the stock portion of
the Class B Merger Consideration and shall notify Acquiror of its determination
(the "Allocation Determination").
(e) Upon surrender of a Company Certificate for cancellation to the Exchange
Agent, together with the Company Letter of Transmittal, duly executed, and such
other documents as Acquiror or the Exchange Agent shall reasonably request, the
holder of such Company Certificate shall be entitled to receive promptly after
the Election Deadline in exchange therefor (A) a certified or bank cashier's
check in the amount equal to the cash, if any, which such holder has the right
to receive pursuant to the provisions of this Article III (including any cash in
lieu of fractional shares of Media Stock and Series D Preferred Stock pursuant
to Section 3.4(c)), and (B) Acquiror Certificates representing that number of
shares of Media Stock and Series D Preferred Stock, if any, which such holder
has the right to receive pursuant to this Article III (in each case less the
amount of any required withholding taxes, if any, determined in accordance with
Section 3.4(g)), and the Company Certificate so surrendered shall forthwith be
cancelled. Until surrendered as contemplated by this Section 3.2, each Company
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive the Class A Merger Consideration or Class B Merger
Consideration, as applicable, with respect to the shares of Company Common Stock
formerly represented thereby.
(f) Acquiror shall have the right to make reasonable rules, not inconsistent
with the terms of this Agreement, governing the validity of the Election Forms,
the manner and extent to which Cash Elections or Stock Elections are to be taken
into account in making the determinations prescribed by Section 3.3, the
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issuance and delivery of certificates for Media Stock and Series D Preferred
Stock into which shares of Class B Common Stock are converted in the Merger, and
the payment of cash for shares of Class B Common Stock converted into the right
to receive cash in the Merger.
3.3 PRORATION. (a) The aggregate amount of cash to be paid to holders of
Class B Common Stock shall not exceed the Cash Consideration Amount.
(b) In the event that the aggregate amount of cash represented by the Cash
Elections received by the Exchange Agent (the "Requested Cash Amount") exceeds
an amount equal to the excess of the Cash Consideration Amount over the
aggregate amount of cash represented by the Standard Elections (such difference,
the "Cash Cap"), each holder making a Cash Election shall receive, for each
share of Class B Common Stock for which a Cash Election has been made, (x) cash
in an amount equal to the product of the Class B Cash Consideration and a
fraction, the numerator of which is the Cash Cap and the denominator of which is
the Requested Cash Amount (such product, the "Prorated Cash Amount"), (y) a
number of shares of Media Stock equal to the product of the Class B Common
Percentage and a fraction, the numerator of which is equal to the Share Price
minus the Prorated Cash Amount and the denominator of which is equal to the
Calculation Price and (z) a number of shares of Series D Preferred Stock equal
to the product of the Class B Preferred Percentage and a fraction, the numerator
of which is equal to the Share Price minus the Prorated Cash Amount and the
denominator of which is equal to the Liquidation Value.
(c) In the event the Requested Cash Amount is less than the Cash Cap, each
holder making a Stock Election (other than as set forth in Section 3.5) shall
receive for each share of Class B Common Stock for which a Stock Election has
been made, (x) cash in an amount equal to the quotient of (1) the excess of the
Cash Cap over the Requested Cash Amount divided by (2) the number of shares of
Class B Common Stock for which such Stock Elections have been made or have been
deemed to have been made (such quotient, the "Excess Cash Amount"), (y) a number
of shares of Media Stock equal to the product of the Class B Common Percentage
and a fraction, the numerator of which is equal to the difference between the
Share Price and the Excess Cash Amount and the denominator of which is equal to
the Calculation Price and (z) a number of shares of Series D Preferred Stock
equal to the product of the Class B Preferred Percentage and a fraction, the
numerator of which is equal to the difference between the Share Price and the
Excess Cash Amount and the denominator of which is equal to the Liquidation
Value.
3.4 DIVIDENDS, FRACTIONAL SHARES, ETC. (a) Notwithstanding any other
provisions of this Agreement, no dividends or other distributions declared after
the Effective Time on Media Stock or Series D Preferred Stock shall be paid with
respect to any whole shares of Media Stock or Series D Preferred Stock
represented by a Company Certificate until such Company Certificate is
surrendered for exchange as provided herein. Subject to the effect of Applicable
Laws, following surrender of any such Company Certificate, there shall be paid
to the holder of the Acquiror Certificates 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 Effective Time theretofore payable
with respect to such whole shares of Media Stock and Series D Preferred 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 Effective Time but prior to
surrender and a payment date subsequent to surrender payable with respect to
such whole shares of Media Stock and Series D Preferred Stock, less the amount
of any withholding taxes which may be required thereon.
(b) At or after the Effective Time, there shall be no transfers on the stock
transfer books of the Company of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates representing any such shares are presented to the Surviving
Corporation, they shall be cancelled and exchanged for certificates for the
consideration, if any, deliverable in respect thereof pursuant to this Agreement
in accordance with the procedures set forth in this Article III. Company
Certificates surrendered for exchange by any Person constituting an "affiliate"
of the Company for purposes of Rule 145(c) under the Securities Act shall not be
exchanged until Acquiror has received a written agreement from such Person as
provided in Section 7.13.
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(c) (i) No certificates or scrip evidencing fractional shares of Media Stock
or Series D Preferred Stock shall be issued upon the surrender for exchange of
Company Certificates, and such fractional share interests will not entitle the
owner thereof to vote or to any rights of a stockholder of Acquiror. In lieu of
any such fractional shares, the Exchange Agent shall, on behalf of all holders
of fractional shares of Media Stock and Series D Preferred Stock, as soon as
practicable after the Effective Time, aggregate all such fractional interests
(collectively, the "Fractional Shares") and, at Acquiror's option, such
Fractional Shares shall be purchased by Acquiror or otherwise sold by the
Exchange Agent as agent for the holders of such Fractional Shares, in either
case at the then prevailing price on the NYSE, all in the manner provided
hereinafter. Until the net proceeds of such sale or sales have been distributed
to the holders of Fractional Shares, the Exchange Agent shall retain such
proceeds in trust for the benefit of such holders. Acquiror shall pay all
commissions, transfer taxes and other out-of-pocket transaction costs, including
expenses and compensation of the Exchange Agent, incurred in connection with
such sale of the Fractional Shares.
(ii) To the extent not purchased by Acquiror, the sale of the Fractional
Shares by the Exchange Agent shall be executed on the NYSE or through one or
more member firms of the NYSE and will be executed in round lots to the extent
practicable. In either case, the Exchange Agent will determine the portion, if
any, of the net proceeds of such sale to which each holder of Fractional Shares
is entitled, by multiplying the amount of the aggregate net proceeds of the sale
of the Fractional Shares, by a fraction, the numerator of which is the amount of
Fractional Shares to which such holder is entitled and the denominator of which
is the aggregate amount of Fractional Shares to which all holders of Fractional
Shares are entitled.
(iii) As soon as practicable after the determination of the amount of cash,
if any, to be paid to holders of Fractional Shares in lieu of such Fractional
Shares, the Exchange Agent shall mail such amounts, without interest, to such
holders; PROVIDED, HOWEVER, that no such amount will be paid to any holder of
such Fractional Shares prior to the surrender by such holder of the Company
Certificates formerly representing such holder's shares of Company Common Stock.
(d) Any portion of the Exchange Fund that remains undistributed to the
holders of Company Common Stock for six months after the Effective Time shall be
delivered to Acquiror, upon demand, and any holders of Company Common Stock who
have not theretofore complied with this Article III shall thereafter look only
to Acquiror for the Class A Merger Consideration or Class B Merger
Consideration, as applicable, net cash proceeds from the sale of Fractional
Shares and unpaid dividends and distributions on the Media Stock and Series D
Preferred Stock to which they are entitled. All interest accrued in respect of
the Exchange Fund shall inure to the benefit of and be paid to Acquiror.
(e) None of Acquiror, Company Sub, the Company or the Exchange Agent shall
be liable to any holder of shares of Company Common Stock for any cash, shares
of Media Stock or Series D Preferred Stock, net cash proceeds from the sale of
Fractional Shares or unpaid dividends or distributions with respect to Media
Stock or Series D Preferred Stock from the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Company Certificates shall not have been surrendered prior to seven years
after the Effective Time (or immediately prior to such earlier date on which any
cash, shares of Media Stock or Series D Preferred Stock, net cash proceeds from
the sale of Fractional Shares or unpaid dividends or distributions with respect
to Media Stock or Series D Preferred Stock in respect of such Company
Certificates would otherwise escheat to or become the property of any
Governmental Authority), any such cash, shares or unpaid dividends or
distributions in respect of such Company Certificates shall, to the extent
permitted by Applicable Laws, become the property of the Surviving Corporation;
PROVIDED, HOWEVER, that any holder of Company Common Stock shall thereafter have
the right to demand from Acquiror any such cash, shares or unpaid dividends or
distributions.
(f) In the event that any Company Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Company Certificate to be lost, stolen or destroyed and, if
required by Acquiror, the posting by such Person of a bond in such reasonable
amount as Acquiror may direct as indemnity against any claim that may be made
against it with respect to such Company Certificate, the Exchange Agent (or
Acquiror, as the case may be) will issue in exchange for such lost, stolen or
destroyed Company Certificate the Class A Merger Consideration or Class B Merger
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Consideration, as applicable, cash in lieu of fractional shares, and unpaid
dividends and distributions on shares of Media Stock and Series D Preferred
Stock deliverable in respect thereof pursuant to this Agreement.
(g) Acquiror shall be entitled to, or shall be entitled to cause the
Exchange Agent to, deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of shares of Company Common 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 Acquiror or the Exchange
Agent, as the case may be, such withheld amounts shall be treated for all
purposes of this Agreement as having been paid to the holder of the shares of
Company Common Stock in respect of which such deduction and withholding was made
by Acquiror.
3.5 RESTRICTED STOCK. To the extent any Company Common Stock that is
unvested and outstanding immediately prior to the Effective Time is subject to
the terms and conditions of a Restricted Stock Purchase Agreement ("RSPA")
between the Company and any current or former employee of the Company
("Restricted Company Common Stock"), then (i) notwithstanding Sections 3.1(c) or
3.3, at the Effective Time all such shares of Restricted Company Common Stock
shall be converted into the right to receive a number of shares of Media Stock
equal to the quotient of (x) the Share Price divided by (y) the Calculation
Price, (ii) the holder of such Restricted Company Common Stock shall not be
entitled to receive any cash or Series D Preferred Stock pursuant to Section 3.3
and (iii) any Media Stock received with respect to such Restricted Company
Common Stock shall be subject to the terms of such RSPA, as amended by an
Amendment to Restricted Stock Purchase Agreement substantially in the form set
forth in Section 3.5 of the Company Disclosure Letter.
3.6 DISSENTING SHARES. Notwithstanding any other provisions of this
Agreement to the contrary, shares of Company Common Stock that are outstanding
immediately prior to the Effective Time and that are held by stockholders who
shall have not voted in favor of the Merger or consented thereto in writing and
who shall have demanded properly in writing appraisal for such shares in
accordance with Section 262 of the DGCL (collectively, the "Dissenting Shares")
shall not be converted into or represent the right to receive the Class A Merger
Consideration or Class B Merger Consideration, as applicable. Such stockholders
shall be entitled to receive payment of the appraised value of such shares of
Company Common Stock held by them in accordance with the provisions of such
Section 262, except that all Dissenting Shares held by stockholders who shall
have failed to perfect or who effectively shall have withdrawn or lost their
rights to appraisal of such shares of Company Common Stock under such Section
262 shall thereupon be deemed to have been converted into and to have become
exchangeable, as of the Effective Time, for the right to receive, without any
interest thereon, the Class A Merger Consideration or Class B Merger
Consideration, as applicable, upon surrender in the manner provided in this
Article III, of the Company Certificate or Company Certificates that formerly
evidenced such shares of Class B Common Stock.
3.7 SHARE PRICE ADJUSTMENT. If the Closing shall not have occurred on or
prior to January 3, 1997, the Share Price shall be increased at a rate equal to
8% per annum from and including January 1, 1997 to and excluding the Closing
Date calculated on the basis of the actual number of days in the period (such
amount being the "Additional Amount"); PROVIDED, HOWEVER, that no such amount
shall be added to the Share Price if (i) the Closing has not occurred on or
prior to January 3, 1997 and the last of the conditions set forth in Article
VIII to be fulfilled is the condition set forth in Section 8.1(a), other than,
in each case as a result of any action taken or not taken by Acquiror or Company
Sub or (ii) the Company has taken any action that would result in any of the
conditions to the consummation of the Merger set forth herein not being
satisfied at such time; PROVIDED, FURTHER, that upon satisfaction of the
condition described in clause (i) above if such condition is the last condition
to be fulfilled, the Additional Amount shall be added to the Share Price and
shall be calculated commencing five Business Days after the date of such
satisfaction.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Acquiror as follows:
4.1 ORGANIZATION AND AUTHORITY OF THE COMPANY. (a) Each of the Company and
its Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization with all requisite power to enable it to own,
lease and operate its assets and properties and to conduct its business as
currently being conducted and is qualified and in good standing to do business
in each jurisdiction in which the nature of the business conducted by it or the
character or location of the properties owned or leased by it requires such
qualification, except to the extent the failure so to qualify would not have a
Material Adverse Effect with respect to the Company. Complete and correct copies
of the Restated Certificate of Incorporation and Bylaws, each as amended to
date, of the Company have been delivered to Acquiror. Such Restated Certificate
of Incorporation and Bylaws are in full force and effect.
(b) The Company has all requisite corporate power and authority to execute
and deliver this Agreement and the Transaction Documents to which it is a party
and to perform its obligations hereunder and thereunder and, subject to (i) the
adoption of this Agreement by the holders of a majority of the voting power of
the outstanding shares of Company Capital Stock, voting as a single class and
(ii) the adoption of the Consideration Charter Amendment by 66 2/3% of the
voting power of the outstanding shares of Company Capital Stock voting as a
single class and a majority of the voting power of each of the outstanding
shares of the Class A Common Stock and the Class B Common Stock voting as
separate classes (collectively, the "Stockholder Approvals"), to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and such Transaction Documents and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action on the part of the Company, subject, in the case of
this Agreement, the Merger and the Consideration Charter Amendment, to the
Stockholder Approvals. This Agreement and each Transaction Document to which the
Company is a party has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company, enforceable
against it in accordance with its terms, except (i) as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and (ii) as the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
(c) Section 4.1 of the letter from the Company, dated the date hereof,
addressed to Acquiror (the "Company Disclosure Letter") sets forth, as of the
date hereof, a true and complete list of all of the Company's Subsidiaries,
including the jurisdiction of incorporation or organization of each Subsidiary
and the percentage of each Subsidiary's outstanding capital stock or other
ownership interest owned by the Company or another Subsidiary of the Company or
by any other Person. All of the outstanding shares of capital stock of each
Subsidiary have been validly issued and are fully paid and nonassessable and,
except as set forth in Section 4.1 of the Company Disclosure Letter, are owned
by the Company or a Subsidiary, free and clear of all Encumbrances. Except as
set forth in Section 4.1 of the Company Disclosure Letter, the Company does not,
directly or indirectly, own any capital stock of or other equity interests in
any corporation, partnership or other Person and neither the Company nor any of
its Subsidiaries is a member of or participant in a partnership, joint venture
or similar Person.
4.2 CAPITALIZATION. (a) As of the date hereof, the authorized capital
stock of the Company consists of: (i) 425,000,000 shares of Class A Common
Stock, of which (A) 38,885,385 shares are issued and outstanding, all of which
are duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, the Company's Restated
Certificate of Incorporation or Bylaws or any agreement to which the Company is
a party or by which the Company is bound and (B) no shares are held in the
treasury of the Company; (ii) 200,000,000 shares of Class B Common Stock, of
which (A) 109,349,496
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shares are issued and outstanding, all of which are duly authorized, validly
issued, fully paid and nonassessable and not subject to preemptive rights
created by statute, the Company's Restated Certificate of Incorporation or
Bylaws or any agreement to which the Company is a party or by which the Company
is bound, (B) no shares are held in the treasury of the Company and (C)
28,571,450 shares are issuable upon conversion of Company Preferred Stock; and
(iii) 200,000,000 shares of Preferred Stock, par value $.01 per share, of the
Company, of which 1,142,858 shares have been designated Series A Participating
Convertible Preferred Stock (the "Company Preferred Stock" and, together with
the Company Common Stock, the "Company Capital Stock") and are issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute, the
Company's Certificate of Incorporation or Bylaws or any agreement to which the
Company is a party or by which the Company is bound.
(b) Other than as described in this Section 4.2, or as listed in Section
4.2(b) of the Company Disclosure Letter, no shares of the capital stock of the
Company are authorized, issued or outstanding, or reserved for any other
purpose, and there are no options, warrants or other rights (including
tag-along, right of first refusal, buy-sell, registration or similar rights),
agreements, arrangements or commitments of any character to which the Company,
any of its Subsidiaries or any Person in which the Company or its Subsidiaries
own any interest is a party relating to the issued or unissued capital stock of
the Company, any of its Subsidiaries or any such Person or obligating or which
could obligate the Company or any of its Subsidiaries to grant, issue or sell
any shares of capital stock of the Company, any of its Subsidiaries or any
Person in which the Company or its Subsidiaries own any interest, by sale,
lease, license or otherwise. Except as described in Section 4.2(b) of the
Company Disclosure Letter, the Company has no outstanding bonds, debentures,
notes or other obligations the holders of which have the right to vote or that
are convertible into or exercisable for securities having the right to vote with
the stockholders of the Company on any matter. Except as set forth in Section
4.2(b) of the Company Disclosure Letter, there are, to the Knowledge of the
Company, no voting trusts or other agreements or understandings with respect to
the voting of Company Capital Stock. Except as set forth on Section 4.2 of the
Company Disclosure Letter, none of the Company, its Subsidiaries or any Person
in which the Company or its Subsidiaries own any interest is a party to any
non-competition agreement or other agreement or arrangement which restrains,
limits or impedes the current or contemplated business or operations of the
Company or any of its Subsidiaries or would apply to Acquiror or any of its
Affiliates following the Effective Time.
4.3 NO CONFLICTS. Except as set forth in Section 4.3 of the Company
Disclosure Letter, subject to obtaining the Company Consents (as defined in
Section 4.6), the execution and delivery of this Agreement and each of the
Transaction Documents to which the Company is a party by the Company do not, and
the consummation of the transactions contemplated hereby and thereby and
compliance with the terms hereof and thereof will not, conflict with, or result
in any violation of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or to
increased, additional, accelerated or guaranteed rights or entitlements of any
Person under, or result in the creation of any Encumbrances upon any of the
properties or assets of the Company or its Subsidiaries under any provision of
(i) the Certificate of Incorporation, Bylaws or other organizational document of
the Company or any Subsidiary, (ii) any note, bond, mortgage, indenture or deed
of trust, deed to secure debt or any license, lease, contract, commitment,
permit, concession, franchise, agreement or other binding arrangement to which
the Company or any of its Subsidiaries is a party or by which any of them or
their respective properties or assets are bound, including any Franchise, (iii)
any judgment, order, writ, injunction or decree of any court, governmental body,
administrative agency or arbitrator applicable to the Company or any Subsidiary
or their respective properties or assets as of the date hereof or (iv) any law,
statute, rule, regulation or judicial or administrative decision applicable to
the Company or any Subsidiary, except in the case of clauses (ii) and (iv), such
conflicts, violations and defaults, termination, cancellation and acceleration
rights and entitlements and Encumbrances that in the aggregate would not hinder
or impair the consummation of the transactions contemplated hereby or have a
Material Adverse Effect with respect to the Company.
4.4 VOTE REQUIRED. The Stockholder Approvals are the only votes of the
holders of any class or series of Company Capital Stock necessary or required
(under Applicable Law or otherwise) to approve this Agreement and the
transactions contemplated hereby.
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4.5 BOARD RECOMMENDATION; OPINION OF FINANCIAL ADVISOR. (a) The Board of
Directors, at a meeting duly called and held, has by unanimous vote of those
directors present (who constituted 100% of the directors then in office) (i)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are fair to and in the best interests of the stockholders
of the Company and has approved the same, and (ii) resolved to recommend that
the holders of the shares of Company Capital Stock adopt this Agreement and the
transactions contemplated hereby, including the Merger.
(b) The Company has received the opinions of (i) Lazard Freres & Co. LLC,
dated February 27, 1996, to the effect that, as of the date hereof, the
consideration to be received by the holders of shares of Company Capital Stock
in the Merger is fair from a financial point of view to such holders and (ii)
Allen & Company Incorporated, dated February 27, 1996, to the effect that, as of
the date hereof, the consideration to be received by the holders of the Class A
Common Stock in the Merger is fair from a financial point of view to such
holders. A signed, true and complete copy of such opinions has been delivered to
Acquiror.
4.6 CONSENTS. Not later than 30 days after the date of this Agreement, the
Company shall furnish to Acquiror a list of each Franchise as to which notice
to, or the consent of, a Governmental Authority is required as a condition to
the transfer of control or the right to control the Franchise in connection with
the transactions contemplated hereby (all such notices and consents being
"Franchise Consents"). Section 4.6 of the Company Disclosure Letter lists each
FCC license held by the Company or any Subsidiary, other than private mobile
radio service licenses, as to which FCC consent is required prior to the
assignment or transfer of control of such license in connection with the
transactions contemplated hereby (all such notices and consents being "License
Consents"). Except for (i) the Franchise Consents and License Consents, (ii) as
set forth in Section 4.6 of the Company Disclosure Letter, (iii) compliance with
and filings under the HSR Act, (iv) the filing with the SEC of (A) a proxy
statement under the Exchange Act relating to the meeting (or meetings) of the
Company's stockholders to be held in connection with the Merger, the Charter
Amendments and the other transactions contemplated by this Agreement (the "Proxy
Statement"), (B) any registration statement required to be filed in connection
with any action taken by the Company pursuant to Section 7.7 and (C) such
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby, (v) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in which the
Company is qualified to do business, (vi) such filings and approvals as may be
required by any applicable state securities, "blue sky" or takeover laws, (vii)
such filings in connection with any state or local tax which is attributable to
the beneficial ownership of the Company's or its Subsidiaries' real property, if
any (collectively, "Gains Taxes"), and (viii) such filings as may be required
with the FCC or any Governmental Authority to obtain their consent to the
assumption by the Acquiror of the Social Contract (including all Systems and
communities encompassed thereby) between the Company and the FCC, as approved by
Memorandum Opinion and Order released August 3, 1995 (FCC 95-335) (the "Social
Contract Order") and as may be modified thereafter by a proposed Social Contract
Amendment that is substantially similar to that which the Company has provided
to Acquiror (the "Social Contract Amendment") (such notice and consent being the
"Social Contract Consents") (the items in clauses (i) through (vi) being
collectively referred to herein as "Company 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 the Company or any of its
Subsidiaries on or prior to the Closing Date in connection with (A) the
execution, delivery and performance of this Agreement or any of the Transaction
Documents to which the Company is a party, the consummation of the transactions
contemplated hereby and thereby or the taking by the Company of any other action
contemplated hereby or thereby, (B) the continuing validity and effectiveness of
(and prevention of any material default under or violation of the terms of) any
Franchise or any other material, license, permit or authorization or any
material contract, agreement or lease to which the Company or any Subsidiary is
a party or (C) the conduct by the Company or any of its Subsidiaries of their
respective businesses following the Closing as conducted on the date hereof,
which, if not obtained or made in connection with clauses (A), (B) and (C),
would have a Material Adverse Effect with respect to the Company.
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4.7 COMPLIANCE; NO DEFAULTS. (a) Except as set forth in Section 4.7 of the
Company Disclosure Letter, neither the Company nor any of its Subsidiaries is in
violation of, is, to the Knowledge of the Company, under investigation with
respect to any violation of, has been given notice or been charged with
violation of, or failed to comply with any statute, law, ordinance, rule, order
or regulation of any Governmental Authority applicable to its business or
operations ("Applicable Laws") (including but not limited to the Social Contract
Order, as amended), except for violations and failures to comply that would not
have a Material Adverse Effect with respect to the Company. Except as set forth
in Section 4.7 of the Company Disclosure Letter, the Company and its
Subsidiaries have all permits, licenses, variances, exemptions, orders and
approvals of all Governmental Authorities ("Permits") which are material to the
operation of the businesses of the Company and its Subsidiaries, taken as a
whole.
(b) Neither the Company nor any of its Subsidiaries is in default or
violation (and no event has occurred which, with notice or the lapse of time or
both, would constitute a default or violation) of any term, condition or
provision of (i) its Certificate of Incorporation, as amended, or Bylaws or
other comparable organizational document or (ii) any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which the
Company or any of its Subsidiaries is now a party or by which the Company or any
of its Subsidiaries or any of their respective properties or assets may be
bound, except in the case of clause (ii), for defaults or violations which in
the aggregate would not have a Material Adverse Effect with respect to the
Company.
4.8 SEC DOCUMENTS; UNDISCLOSED LIABILITIES. (a) The Company has made
available to Acquiror a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by the Company with
the SEC since January 1, 1993 (as such documents have since the time of their
filing been amended, the "Company SEC Documents"), which are all the documents
(other than preliminary proxy materials) that the Company was required to file
with the SEC since such date. As of their respective dates, the Company SEC
Documents (including any financial statements filed, to be filed or required to
have been filed as a part thereof) complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as applicable, and the
rules and regulations of the SEC thereunder applicable to such Company SEC
Documents, and none of the Company SEC Documents contained any untrue statement
of a material fact or omitted to state 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. The financial
statements of the Company included in the Company SEC Documents comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present (subject, in the case of the unaudited financial statements, to normal,
recurring audit adjustments, which were not individually or in the aggregate
material) the consolidated financial position of the Company 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 as disclosed in the Company SEC Documents or in Section 4.8 or
4.9 of the Company Disclosure Letter, as of the date hereof, the Company and its
Subsidiaries do not have any material indebtedness, obligations or liabilities
of any kind (whether accrued, absolute, contingent or otherwise, and whether due
or to become due or asserted or unasserted) required by GAAP to be reflected on
a consolidated balance sheet of the Company and its consolidated Subsidiaries or
in the notes, exhibits or schedules thereto.
4.9 LITIGATION. Except as set forth in the Company SEC Documents or in
Section 4.9 of the Company Disclosure Letter, there are no Legal Proceedings
against or affecting the Company or any of its Subsidiaries or their respective
properties or assets pending or, to the Knowledge of the Company, threatened
against the Company or any of its Subsidiaries, that individually or in the
aggregate could (i) have a Material Adverse Effect with respect to the Company
or (ii) as of the date hereof, prevent, materially hinder or delay the
consummation of the transactions contemplated by this Agreement or the
Transaction Documents or seek to limit the ownership or operation of the Company
by Acquiror. Except as set forth in Section 4.9 of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries is a party or subject to
or in
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default under any judgment, order, injunction or decree of any Governmental
Authority applicable to it or to its respective properties or assets, which
judgment, order, injunction, decree or default thereunder constitutes a Material
Adverse Effect with respect to the Company.
4.10 TAXES. (a) Except as set forth in Section 4.10(a) of the Company
Disclosure Letter, (i) all Federal, state, local and foreign Tax returns,
declarations and reports ("Tax Returns") required to be filed by or on behalf of
the Company or any of its Subsidiaries have been filed on a timely basis with
the appropriate Governmental Authorities in all jurisdictions in which such Tax
Returns are required to be filed (after giving effect to any valid extensions of
time in which to make such filings), except for Tax Returns as to which the
failure to file would not individually or in the aggregate have a Material
Adverse Effect with respect to the Company, and all such Tax Returns were true,
correct and complete in all material respects; (ii) all amounts due and payable
in respect of such Tax Returns (including interest and penalties) have been
fully and timely paid or are or will be adequately provided for in the
appropriate financial statements of the Company and its Subsidiaries, except for
amounts the failure to pay would not have a Material Adverse Effect with respect
to the Company; (iii) no waivers of statutes of limitations have been given or
requested with respect to the Company or any of its Subsidiaries in connection
with any Tax Returns covering the Company or any of its Subsidiaries with
respect to any income or franchise Taxes or other material Taxes payable by any
of them; and (iv) each of the Company and its Subsidiaries has duly and timely
withheld from salaries, wages and other compensation of its employees and paid
over to the appropriate taxing authorities all amounts required to be so
withheld and paid over for all periods not barred by applicable statutes of
limitations under all Applicable Laws, except for amounts as to which the
failure to withhold or pay would not have a Material Adverse Effect with respect
to the Company.
(b) Except as set forth in Section 4.10(b) of the Company Disclosure Letter,
all deficiencies asserted or assessments made in an amount in excess of $300,000
by the IRS or any other taxing authority of the Tax Returns of or covering the
Company or any of its Subsidiaries have been fully paid or are or will be
adequately provided for in the appropriate financial statements of the Company
and its Subsidiaries.
(c) Except as set forth in Section 4.10(c) of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries nor any other Person on behalf
of the Company or any of its Subsidiaries: (i) has filed a consent pursuant to
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as such term is defined in Section
341(f)(4) of the Code) owned by the Company or any of its Subsidiaries; (ii) has
executed or entered into a closing agreement pursuant to Section 7121 of the
Code or any predecessor provision thereof or any similar provision of state,
local or foreign law; or (iii) has agreed to or is required to make any
adjustments pursuant to Section 481(a) of the Code or any similar provision of
state, local or foreign law by reason of a change in accounting method initiated
by the Company or any of its Subsidiaries nor to the Knowledge of the Company
(which for purposes of this Section 4.10 shall include the tax director) has the
IRS proposed any such adjustment or change in accounting method, or has any
application pending with any taxing authority requesting permission for any
changes in accounting methods that relate to the business or operations of the
Company or any of its Subsidiaries.
(d) Except as set forth in Section 4.10(d) of the Company Disclosure Letter,
none of the assets of the Company and its Subsidiaries is property required to
be treated as being owned by another Person pursuant to the provisions of
Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect
immediately prior to the enactment of the Tax Reform Act of 1986 or is
"tax-exempt use property" within the meaning of Section 168(h)(l) of the Code.
(e) The Federal income Tax Returns of the Company and its Subsidiaries, any
of their predecessors or any affiliated group of which the Company or any of its
Subsidiaries is or was a member have been examined by the IRS, or the periods
covered by such Tax Returns have been closed by applicable statute of
limitations, for all periods through December 31, 1991, except to the extent
such Tax Returns may be examined for the purpose of determining loss or credit
carryforwards to a year not so closed. The state income or franchise Tax Returns
of the Company and its Subsidiaries, any of their predecessors or any
affiliated, combined or unitary group of which the Company or any of its
Subsidiaries is or was a member have been examined by the
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relevant taxing authorities, or the periods covered by such Tax Returns have
been closed by applicable statute of limitations, in each case through at least
December 31, 1991, except to the extent such Tax Returns may be examined for the
purpose of determining loss or credit carryforwards to a year not so closed.
(f) Except as set forth in Section 4.10(f) of the Company Disclosure Letter,
(i) no Tax audits or other administrative proceedings are pending with regard to
any Taxes for which the Company or any of its Subsidiaries may be liable and
(ii) no written notice of any such audit has been received by the Company or any
of its Subsidiaries.
(g) As of December 31, 1995, the Company had net operating loss
carryforwards for Federal income tax purposes of no less than $900 million.
(h) Except as set forth in Section 4.10(h) of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries is a party to or bound by any
agreement providing for the allocation or sharing of Taxes.
(i) Except as set forth in Section 4.10(i) of the Company Disclosure Letter,
since January 1, 1989 neither the Company nor any of its Subsidiaries has been a
member of, or was acquired from, any "affiliated group" (as defined in Section
1504 of the Code) other than (i) in a transaction in which the common parent of
such affiliated group was acquired or (ii) the affiliated group in which the
Company is the common parent.
(j) Except as set forth in Section 4.10(j) of the Company Disclosure Letter,
the performance of the transactions contemplated by this Agreement will not
(either alone or upon the occurrence of any additional or subsequent event)
result in any payment that would constitute an "excess parachute payment" within
the meaning of Section 280G of the Code.
(k) The Company and each of its Subsidiaries is not currently, has not been
within the last five years and does not anticipate becoming a "United States
real property holding corporation" within the meaning of Section 897(c) of the
Code.
4.11 EMPLOYEE BENEFITS. (a) Section 4.11(a) of the Company Disclosure
Letter lists all "employee benefit plans," as defined in Section 3(3) of ERISA,
and all other deferred compensation, bonus or other incentive compensation,
stock purchase or other Equity Appreciation Rights Plans, severance pay, salary
continuation for disability or other leave of absence, supplemental unemployment
benefits, lay-off or reduction in force, change in control or educational
assistance arrangements or policies for which the Company or any of its
Subsidiaries has any material obligation or liability (each a "Benefit Plan" and
collectively, the "Benefit Plans"), including, but not limited to, any
individual benefit arrangement, policy or practice with respect to any current
or former officer, employee or director of the Company or any of its
Subsidiaries.
(b) Section 4.11(b) of the Company Disclosure Letter lists, separately for
each foreign country, all Benefit Plans covering employees of the Company and
its Subsidiaries who are employed outside of the United States ("Foreign Benefit
Plans").
(c) The Company and its Subsidiaries have delivered to Acquiror correct and
complete copies of all Benefit Plans, and, where applicable, each of the
following documents with respect to such plans: (i) any amendments, (ii) any
related trust documents, (iii) the two most recently filed IRS Forms 5500 with
all attachments thereto, (iv) the last IRS determination letter, (v) the most
recent summary plan descriptions and summaries of material modifications, (vi)
the last actuarial valuation report and (vii) written communications to
employees to the extent the substance of the Benefit Plans described therein
differs materially from the other documentation furnished under this Section.
(d) Except as disclosed in Section 4.11(d) of the Company Disclosure Letter,
none of the Benefit Plans is subject to Title IV of ERISA or Section 412 of the
Code, and the Company and its ERISA Affiliates from time to time have not within
the preceding six years had any obligation to make any contribution to a
retirement plan subject to Title IV of ERISA or incurred any liability
(contingent or otherwise) under Title IV of ERISA and neither the Company, its
Subsidiaries nor any of its ERISA Affiliates has any actual or potential
obligation or liability to any multiemployer plan (as defined in Section
4001(a)(3) of ERISA).
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(e) Each Benefit Plan, including any associated trust, intended to qualify
under Section 401 of the Code does so qualify.
(f) Except as disclosed on Section 4.11(f) of the Company Disclosure Letter
and except as would not have a Material Adverse Effect with respect to the
Company, the Benefit Plans have been maintained and administered in accordance
with their terms and with the provisions of ERISA, the Code and other Applicable
Laws.
(g) There are no pending or, to the Company's Knowledge, overtly threatened
actions, claims or lawsuits that have been asserted or instituted against any of
the Benefit Plans, the assets of any of the trusts under such plans or the plan
sponsor, plan administrator or fiduciary of any of the Benefit Plans with
respect to the operation of such plans (other than routine benefit claims) that
individually or in the aggregate could have a Material Adverse Effect with
respect to the Company.
(h) The Company and its Subsidiaries do not provide, and are not obligated
to provide, retiree life insurance or retiree health benefits to any current or
former employee after his or her termination of employment with the Company or
any Subsidiary, except as may be required under Section 4980B of the Code and
Part 6 of Subtitle B of Title I of ERISA or as disclosed in Section 4.11(h) of
the Company Disclosure Letter.
(i) Except as disclosed in Section 4.11(i) of the Company Disclosure Letter
and except with respect to payments under the Equity Appreciation Rights Plans
that will be paid or satisfied by the Company on or prior to Closing of all
estimated payments, neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment becoming due to any employee (current or former) of the Company or any
Subsidiary, (ii) increase any benefits otherwise payable under any Benefit Plan
or (iii) result in the acceleration of the time of payment or the vesting of any
benefits under any Benefit Plan. The Company has also delivered to Acquiror a
schedule of all estimated payments to be made under each Equity Appreciation
Rights Plan on or prior to the Closing. "Equity Appreciation Rights Plans" are
all plans or arrangements maintained by the Company or any of its Subsidiaries
that provide for a benefit based upon the issuance of stock, restricted stock,
stock options, phantom stock or other equity appreciation rights or incentive
awards, determined by the book, fair market or formula value of a share of stock
of the Company.
(j) Except as disclosed in Section 4.11(j) of the Company Disclosure Letter,
(i) no employee of the Company or any Subsidiary will be entitled to any
severance payments upon the sale of the Company or any Subsidiary, or any
divisions or business units thereof, absent an employee's actual loss of
employment and (ii) none of the executives of the Company or any Subsidiary are
eligible to receive any payment under any severance pay, stay bonus or other
retention plan, program or arrangement of the Company or any of its
Subsidiaries.
(k) Except as disclosed in Schedule 4.11(k) of the Company Disclosure
Letter, the projected benefit obligation of the Company or any Subsidiary (as
calculated using actuarial assumptions used to calculate liabilities under FAS
87 with respect to post-employment benefits accrued) under each Benefit Plan
that is a defined benefit pension plan is fully funded by assets of such plan or
by an adequate reserve on the applicable balance sheet of the Company or any
Subsidiary.
4.12 CABLE TELEVISION FRANCHISES. (a) Section 4.12 of the Company
Disclosure Letter sets forth a list of the Systems, and as to each such System,
(i) the geographic area and FCC community unit(s) served, (ii) the name of the
legal entity that owns such System and holds the applicable franchise, as well
as the identity, ownership interest and relationship to the Company, if any, of
each owner of any interest in such legal entity, (iii) as of December 31, 1995,
the number of Homes Passed and Subscribers served by such System, and (iv) the
names and addresses of the Governmental Authorities issuing the franchises
and/or implementing such ordinances. By no later than 30 days after the date of
this Agreement, the Company shall furnish to Acquiror a complete and accurate
list and copy of all of the franchise agreements and similar governing
agreements, instruments, resolutions, statutes and/or CATV-franchise-related
ordinances that are used, necessary or required in order to operate, or to which
the Company or its Subsidiaries are subject by
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reason of their operation of, the Systems (individually as to each System, its
"Franchise" and collectively, the "Franchises"), and, as of December 31, 1995,
the number of Homes Passed and Subscribers served by the Systems by Franchise.
The Systems listed in Section 4.12 of the Company Disclosure Letter represent
all of the "cable television systems", as defined in Section 602(7) of the Cable
Act, owned and operated by the Company and its Subsidiaries in the United
States. The Franchises and any related regulatory ordinances contain all
material commitments, obligations and rights of the Company and its Subsidiaries
with respect to each of the Governmental Authorities granting such Franchises,
in connection with the construction, ownership and operation of the Systems. The
Franchises enable the Company and its Subsidiaries to operate, and, subject to
obtaining the Franchise Consents and License Consents, immediately following the
Closing will enable the Surviving Corporation and its Subsidiaries to continue
to operate all of the Systems as and where they are presently operated. To the
Knowledge of the Company, each Franchise is valid under all Federal, state and
local laws and is validly held by the Company or its Subsidiaries, as the case
may be. The Company and its Subsidiaries have complied with the material terms
and conditions of the Franchises and the same will not be subject to revocation
or nonrenewal as a result of the execution and delivery of this Agreement or the
Transaction Documents, or the consummation of the transactions contemplated
hereby and thereby, subject to obtaining the Franchise Consents and License
Consents. Except as set forth in Section 4.12 of the Company Disclosure Letter,
there are no lawsuits, revocation proceedings or disputes pending with respect
to any of the Franchises or Systems that would material affect the right of the
Company or any Subsidiary to operate a System, and no Governmental Authority or
other Person has notified the Company or any of its Subsidiaries in writing of
its intention to conduct or initiate the same. Neither the Company nor any of
its Subsidiaries has received any written notice that any such Franchise is
under consideration to be revoked nor, except for Franchises that are subject to
renewal negotiations, to be modified in any material respect.
(b) Except as set forth in Section 4.12 of the Company Disclosure Letter, no
Person other than certain municipalities (a list of which will be provided no
later than 30 days after the date of this Agreement) has any right to acquire
any interest in any of the Systems, or to designate any other person or entity
to acquire any interest in any of the Systems (including, without limitation,
any right of first refusal or similar right to purchase any interest in the
Systems), which right has not been validly, properly and irrevocably (except for
the right to revoke such waiver only if this Agreement is terminated pursuant to
Article IX hereof) waived by the party entitled to assert such right.
(c) Section 4.12 of the Company Disclosure Letter lists the date on which
each Franchise will expire or has expired. Except as set forth in Section 4.12
of the Company Disclosure Letter, there are not now pending any proceedings of
any Governmental Authority with respect to any proposal for renewal of any
Franchise. There exists no fact or circumstance that makes it likely that any
Franchise will not be renewed or extended on commercially reasonable terms.
Except where the Company or its Subsidiaries are proceeding under informal
renewal procedures as provided for by the Cable Act, the Company and its
Subsidiaries have timely filed with the appropriate Governmental Authority all
appropriate requests for renewal within 30 to 36 months under the Cable Act.
Section 4.12 of the Company Disclosure Letter sets forth those Franchises
serving 25,000 or more Subscribers ("Material Franchises") where the Company or
a Subsidiary has not filed a written renewal notice pursuant to 626(a)(1) of the
Cable Act. Except as set forth in Section 4.12 of the Company Disclosure Letter,
as to any Franchise that has expired prior to the date hereof, the Company is
currently operating such Franchise under duly authorized extensions, and the
Company has no reason to believe that such extensions will not be renewed until
such time as the Franchise itself has been renewed for an additional term.
(d) To the Company's Knowledge, the Systems and all related businesses of
the Company and its Subsidiaries are, and have been, operated in compliance with
the Communications Act and all regulations of the FCC established pursuant
thereto, and the Company and its Subsidiaries have submitted to the FCC all
filings that are required under the rules, orders and regulations of the FCC or
other Governmental Authorities with jurisdiction. Except as set forth in Section
4.12 of the Company Disclosure Letter, the operation of the Systems has been,
and is, in compliance with the rules and regulations of the FCC or other
Governmental Authorities with jurisdiction and the Company and its Subsidiaries
have not received any
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written notice from the FCC or other Governmental Authorities with jurisdiction
with respect to any material violation of its rules and regulations or from any
other Governmental Authorities with jurisdiction with respect to any material
violation of any Franchise.
(e) To the Company's Knowledge, for each relevant semi-annual reporting
period, the Company has timely filed with the United States Copyright Office all
required Statements of Account in true and correct form in all material
respects, and has paid when due all required copyright royalty fee payments in
the correct amount, relating to the Systems' carriage of television broadcast
signals and appropriately classifying the applicable tiers on which the Systems
carry television broadcast signals. To the Company's Knowledge, carriage of all
broadcast signals is in compliance with the Copyright Act of 1976, as amended
(the "Copyright Act") and the rules and regulations of the Copyright Office and
is eligible for the compulsory license under Section 111 of the Copyright Act.
Except as set forth in Section 4.12 of the Company Disclosure Letter, neither
the Company nor any of its Subsidiaries has received any inquiry from the
Copyright Office or any Third Party challenging or questioning the information
submitted in any Statement of Account or the amount of any royalty payment, for
which the Company has not provided adequate reserves in its reasonable business
judgment, nor are the Company or its Subsidiaries aware of any basis for such
inquiry. Except as set forth in Section 4.12 of the Company Disclosure Letter,
to the Company's Knowledge, no claim or copyright infringement has been made
against the Company or any of its Subsidiaries that has not been settled, nor is
any such claim pending or threatened.
(f) Other than as set forth in Section 4.12 of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries is subject to any FCC
proceeding challenging the rights of the Company or its Subsidiaries to carry or
not carry any signal, nor has the Company or any of its Subsidiaries received
any written notice or demand to carry or not carry any signal, the carriage or
non-carriage of which could have a material adverse effect on any System.
(g) The Systems (other than the Recently Acquired Systems) are, and have
been, operated in material compliance with the Social Contract Order and the
Company and its Subsidiaries have submitted to the FCC and any relevant
Governmental Authority all forms, notices and other written material required
thereunder for implementation of the Social Contract. Each such filing has been
prepared and filed in compliance with the Social Contract Order and is complete
and accurate in all material respects. Neither the Company nor any Subsidiary
has received written notice from the FCC as to any non-compliance with the
Social Contract Order. The Company shall use its reasonable best efforts to seek
amendment of the Social Contract Order to bring the Recently Acquired Systems
under terms substantially the same as those contained in the proposed Social
Contract Amendment.
(h) Section 4.12 of the Company Disclosure Letter lists each of the
Governmental Authorities that (i) has been certified by the FCC pursuant to 47
C.F.R. Section 76.910 to regulate Basic Cable Service and associated equipment
of a System or (ii) has petitioned the FCC to regulate the rates for Basic Cable
Service and associated equipment pursuant to 47 C.F.R. Section 76.913; Section
4.12 of the Company Disclosure Letter also lists each complaint filed against
Cable Programming Service rates on FCC Form 329 that has not been settled by the
Social Contract Order. Of those listed, the Form 329 complaints pertaining to
the Recently Acquired Systems would be settled by the proposed Social Contract
Amendment.
(i) To the extent that the Company's and/or its Subsidiaries' rates have not
been settled pursuant to the Social Contract or would not be settled by the
proposed Social Contract Amendment, the Company and/ or its Subsidiaries are in
compliance in all material respects with FCC rate requirements.
(j) Except as set forth in Section 4.12 of the Company Disclosure Letter,
neither the Company nor any of its Subsidiaries (x) is under any investigation
by the FCC or any Governmental Authority with respect to any of its rates for
Basic Cable Service or any Cable Programming Service (including but not limited
to rates for associated equipment) or (y) is a party to any proceeding before
the FCC or any other Governmental Authority the collective outcome of which
could result in the Company or any of its Subsidiaries being ordered to make
refunds to Subscribers in excess of $2,000,000 (exclusive of potential Social
Contract Amendment refunds) or reduce the rates currently charged to Subscribers
when netted against any increases to which the Company is entitled.
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(k) Section 4.12 of the Company Disclosure Letter lists each System, and the
Franchise(s) by which it is authorized, that is subject to effective competition
(as that term is defined in Section 623(l)(1) of the Cable Act) and the basis
for the Company's determination that the System operating under that Franchise
is subject to effective competition.
4.13 ENVIRONMENTAL MATTERS. Except as set forth in Section 4.13 of the
Company Disclosure Letter:
(i) the operations of the Company and its Subsidiaries are in material
compliance with all applicable Environmental Laws;
(ii) to the Company's Knowledge, all real property owned, operated or
leased by the Company and its Subsidiaries are free from contamination by
any Hazardous Material that is reasonably likely to result in Environmental
Costs and Liabilities to the Company in excess of $2,000,000;
(iii) to the Knowledge of the Company, the Company and its Subsidiaries
have obtained and currently maintain all material Environmental Permits
necessary for their operations and are in material compliance with such
Environmental Permits;
(iv) except to the extent such matters are the subject matter of other
representations and warranties of the Company contained herein, there are no
Legal Proceedings or Environmental Claims pending, or to the Knowledge of
the Company, threatened against the Company or its Subsidiaries alleging the
violation of any Environmental Law or asserting claims regarding
Environmental Costs and Liabilities under any Environmental Law;
(v) neither the Company nor its Subsidiaries nor to the Knowledge of the
Company, any predecessor of the Company or its Subsidiaries or any owner of
premises leased or operated by the Company or its Subsidiaries with respect
to such property, has filed any formal notice under Federal, state, local or
foreign law indicating past or present generation treatment, storage, or
disposal of or reporting a Release of Hazardous Material into the
environment; and
(vi) to the Knowledge of the Company, there is not now, nor has there
been in the past, on, in or under any real property owned, leased or
operated by the Company or its Subsidiaries (A) any underground storage
tanks, above-ground storage tanks, dikes or impoundments, (B) any friable
asbestos-containing materials or (C) any polychlorinated biphenyls which, in
each case, is material to the operation of its business at such real
property.
4.14 LABOR. (a) Except as set forth in Section 4.14(a)(1) of the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries is a party to
any labor or collective bargaining agreement and there are no labor or
collective bargaining agreements that govern the terms and conditions of
employment with the Company or its Subsidiaries with respect to employees of the
Company or its Subsidiaries. Section 4.14(a)(2) of the Company Disclosure Letter
lists all employment, management, consulting, management retention or other
personal service, or compensation agreements or arrangements covering one or
more non-employees (including severance, termination or change-of-control
arrangements) and all material employment, management, consulting, management
retention or other personal service, or compensation agreements or arrangements
covering one or more employees (including severance, termination or change-
of-control arrangements) in each case, entered into by the Company or any of its
Subsidiaries and a copy of each such agreement has been delivered to Acquiror.
(b) Except as set forth in Section 4.14(b) of the Company Disclosure Letter,
no employees of the Company or any of its Subsidiaries are represented by any
labor organization; no labor organization or group of employees of the Company
or any of its Subsidiaries has made a pending demand against the Company or any
Subsidiary for recognition, and there are no representation proceedings or
petitions seeking a representation proceeding presently pending against or, to
the knowledge of the Company, threatened to be brought or filed against the
Company or any Subsidiary, with the National Labor Relations Board or other
labor relations tribunal; there is no organizing activity involving the Company
or any of the Subsidiaries pending or, to the Knowledge of the Company,
threatened by any labor organization or group of employees of the Company or any
its Subsidiaries.
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(c) There are no (i) strikes, work stoppages, slowdowns, lockouts or
arbitrations (in the case of arbitrations which if adversely decided would
reasonably be expected to involve the payment of damages of more than $500,000)
or (ii) material grievances or other material labor disputes pending or, to the
Knowledge of the Company, threatened against or involving the Company or any of
its Subsidiaries. There are no unfair labor practice charges, grievances or
complaints pending or, to the Knowledge of the Company, threatened by or on
behalf of any employee or group of employees of the Company or any of its
Subsidiaries that individually or in the aggregate involve more than $500,000.
(d) Except as set forth in Section 4.14(d) of the Company Disclosure Letter,
there are no material complaints, charges or claims against the Company and its
Subsidiaries pending or, to the Knowledge of the Company, threatened to be
brought or filed with any Governmental Authority or in which an employee or
former employee of the Company or any of its Subsidiaries is a party or a
complainant based on, arising out of, in connection with, or otherwise relating
to the employment or termination of employment by the Company or a Subsidiary of
any individual, including any claim for workers' compensation or under the
Occupational Safety and Health Act of 1970, as amended. In the aggregate, the
complaints and charges set forth in Section 4.14(d) of the Company Disclosure
Letter would not have, singly or in the aggregate, a Material Adverse Effect
with respect to the Company even if each were resolved adversely to the Company
and its Subsidiaries.
(e) Hours worked by and payments made to employees of the Company and its
Subsidiaries have not been in material violation of the Federal Fair Labor
Standards Act or any other Applicable Law dealing with such matters.
(f) The Company and its Subsidiaries are in material compliance with all
Applicable Laws relating to the FCC-Equal Employment Opportunity Commission
standards and employment or termination of employment of labor (including, but
not limited to, leased workers and independent contractors), including all such
Applicable Laws and WARN relating to wages, hours, collective bargaining,
employment discrimination, civil rights, safety and health, workers'
compensation, pay equity and the collection and payment of withholding and/or
social security taxes and similar Taxes.
4.15 ABSENCE OF CHANGES OR EVENTS. Except as set forth in Section 4.15 of
the Company Disclosure Letter or disclosed in the Company SEC Documents, since
the date of the most recent audited financial statements included in the Company
SEC Documents, the Company and its Subsidiaries have operated their respective
businesses only in the ordinary and usual course and in substantially the same
manner as previously conducted and there has not been:
(i) any damage, destruction or loss with respect to the properties or
assets of the Company or its Subsidiaries whether covered by insurance or
not, which has had or would have, individually or in the aggregate, a
Material Adverse Effect with respect to the Company;
(ii) any change, occurrence or circumstance that had a Material Adverse
Effect with respect to the Company;
(iii) any change in the accounting principles, methods, practices or
procedures followed by the Company in connection with the business of the
Company or any change in the depreciation or amortization policies or rates
theretofore adopted by the Company in connection with the business of the
Company and its Subsidiaries;
(iv) any declaration or payment of any dividends, or other distributions
in respect of the outstanding shares of Capital Stock of the Company or any
of its Subsidiaries (other than dividends declared or paid by wholly-owned
Subsidiaries);
(v) any split, combination or reclassification of the Company's capital
stock or any issuance of shares of capital stock of the Company or any
Subsidiary or any other change in the authorized capitalization of the
Company or any Subsidiary, except as contemplated by this Agreement;
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(vi) any repurchase or redemption by the Company of shares of its
capital stock or any issuance by the Company of any other securities in
exchange or in substitution for shares of its capital stock except pursuant
to employee benefit plans, programs or arrangements in existence on the date
hereof, in the ordinary course of business consistent with past practice; or
(vii) any grant or award of any options, warrants, conversion rights or
other rights to acquire any shares of capital stock of the Company or any
Subsidiary, except as contemplated by this Agreement or except pursuant to
employee benefit plans, programs or arrangements in existence on the date
hereof, in the ordinary course of business consistent with past practice.
4.16 UNLAWFUL PAYMENTS AND CONTRIBUTIONS. Neither the Company nor, to the
Knowledge of the Company, any of its directors, officers or any of its other
employees or agents has (a) used any Company funds for any unlawful
contribution, endorsement, gift, entertainment or other unlawful expense
relating to political activity; (b) made any direct or indirect unlawful payment
to any government official or employee from Company funds; (c) violated or is in
violation of any provision of the Foreign Corrupt Practices Act of 1977, as
amended, in connection with the Company's and its Subsidiaries' business; or (d)
made any bribe, rebate, payoff, influence payment, kickback or other unlawful
payment to any Person or entity with respect to matters pertaining to the
Company.
4.17 BROKERS AND INTERMEDIARIES. Neither the Company nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finder's fees in connection
with the transactions contemplated by this Agreement and the Transaction
Documents, except that the Company has retained Lazard Freres & Co. LLC and
Allen & Company Incorporated as its financial advisors, whose respective fees
and expenses shall be paid by the Company. The Company has delivered to Acquiror
a copy of the retention agreements related thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
OF ACQUIROR AND COMPANY SUB
Acquiror and Company Sub represent and warrant to the Company that (provided
that the representations and warranties set forth herein with respect to Company
Sub shall be made as of June 27, 1996):
5.1 ORGANIZATION AND AUTHORITY. (a) Each of Acquiror, Company Sub, and
Acquiror's other Subsidiaries is a corporation or partnership duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization with all requisite power to enable it to own,
lease and operate its assets and properties and to conduct its business as
currently being conducted and is qualified and in good standing to do business
in each jurisdiction in which the nature of the business conducted by it or the
character or location of the properties owned or leased by it requires such
qualification, except to the extent the failure so to qualify would not have a
Material Adverse Effect with respect to Acquiror. Complete and correct copies of
the Certificates of Incorporation and Bylaws, each as amended to date, of
Acquiror and Company Sub have been delivered to the Company. Such Certificates
of Incorporation and Bylaws are in full force and effect.
(b) Acquiror and Company Sub have all requisite corporate power and
authority to execute and deliver this Agreement and the Transaction Documents to
which it is a party and to perform its obligations hereunder and thereunder and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and such Transaction Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all requisite corporate action on the part of Acquiror and Company
Sub. This Agreement and each Transaction Document to which it is a party has
been duly executed and delivered by Acquiror and Company Sub and constitutes the
legal, valid and binding obligation of each such party, enforceable against it
in accordance with its terms, except (i) as such enforceability may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws
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affecting creditors' rights generally and (ii) as the remedy of specific
performance and injunctive and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court before which any
proceeding therefor may be brought.
5.2 CAPITALIZATION. (a) As of the date hereof, the authorized capital
stock of Acquiror consists of (i) 2,000,000,000 shares of U S WEST
Communications Group Common Stock, par value $.01 per share ("Communications
Stock"), of which 475,604,443 shares were issued and outstanding as of February
23, 1996, all of which are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute,
Acquiror's Restated Certificate of Incorporation or any agreement to which
Acquiror is a party or by which Acquiror is bound, (ii) 2,000,000,000 shares of
Media Stock, of which 473,225,728 shares were issued and outstanding as of
February 23, 1996, all of which are duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights created by statute,
Acquiror's Restated Certificate of Incorporation or any agreement to which
Acquiror is a party or by which Acquiror is bound, and (iii) 200,000,000 shares
of Preferred Stock, par value $1.00 per share, of which (A) 10,000,000 shares
have been designated as Series A Junior Participating Cumulative Preferred
Stock, none of which are issued and outstanding and all of which are reserved
for issuance in connection with rights to purchase Communications Stock pursuant
to the Amended and Restated Rights Agreement, dated as of October 31, 1995 (the
"Rights Agreement"), by and between Acquiror and State Street Bank and Trust
Company, as rights agent, (B) 10,000,000 shares have been designated as Series B
Junior Participating Cumulative Preferred Stock, none of which are issued and
outstanding and all of which are reserved for issuance in connection with rights
to purchase Media Stock pursuant to the Rights Agreement, and (C) 50,000 shares
have been designated as Series C Cumulative Redeemable Preferred Stock and are
issued and outstanding, all of which are duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights created by statute,
Acquiror's Restated Certificate of Incorporation or Bylaws or any agreement to
which Acquiror is a party or by which Acquiror is bound. As of the date hereof,
the Number of Shares Issuable with Respect to the InterGroup Interest (as
defined in Section 2.6.19 of Article V of Acquiror's Restated Certificate of
Incorporation) is zero. The authorized capital stock of Company Sub consists of
100 shares of common stock, par value $.01 per share, all of which have been
validly issued, are fully paid and nonassessable and are owned by Acquiror, free
and clear of any Encumbrance.
(b) Other than as described in this Section 5.2, in the Acquiror SEC
Documents or in Section 5.2 of the Letter from Acquiror, dated the date hereof,
addressed to the Company (the "Acquiror Disclosure Letter"), no shares of the
capital stock of Acquiror or Company Sub 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 Acquiror or Company Sub is a party relating to the
issued or unissued capital stock of Acquiror or Company Sub or any obligation of
Acquiror or Company Sub to grant, issue or sell any shares of capital stock of
Acquiror or Company Sub by sale, lease, license or otherwise. Except as
disclosed in the Acquiror SEC Documents or in Section 5.2 of the Acquiror
Disclosure Letter, neither Acquiror nor Company Sub 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 Acquiror or Company Sub on any matter.
Except as set forth in Section 5.2 of the Acquiror Disclosure Letter there are
no voting trusts or other agreements or understandings with respect to the
voting of the capital stock of Acquiror or Company Sub.
5.3 NO CONFLICTS. Subject to obtaining the Acquiror Consents (as defined
in Section 5.5), the execution and delivery by Acquiror and Company Sub of this
Agreement and each of the Transaction Documents to which it is a party do not,
and the consummation of the transactions contemplated hereby and thereby and
compliance with the terms hereof and thereof will not, conflict with, or result
in any violation of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or to loss of a material benefit under, or to the
increased, additional, accelerated or guaranteed rights or entitlements of any
Person under, or result in the creation of any Encumbrances upon any of the
properties or assets of Acquiror or Company Sub under, any provision of (i) the
Certificate of Incorporation and Bylaws of Acquiror or Company Sub, (ii) any
note, bond, mortgage, indenture or deed of trust, deed to secure debt or any
license, lease, contract, commitment, permit,
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concession, franchise, agreement or other binding arrangement to which Acquiror
or Company Sub is a party or by which any of their respective properties or
assets may be bound or subject, (iii) any judgment, order, writ, injunction or
decree of any court, governmental body, administrative agency or arbitrator
applicable to Acquiror or Company Sub or their respective properties or assets,
or (iv) any law, statute, rule, regulation or judicial or administrative
decision applicable to Acquiror or Company Sub; except in the case of clauses
(ii) and (iv), such conflicts, violations and defaults, termination,
cancellation and acceleration rights and entitlements and Encumbrances that in
the aggregate would not hinder or impair the consummation of the transactions
contemplated hereby or have a Material Adverse Effect with respect to Acquiror.
5.4 STOCKHOLDER VOTE. At such time as all conditions to the Merger have
otherwise been satisfied, no vote of the holders of any class or series of
Acquiror's or Company Sub's capital stock not theretofore obtained will be
necessary or required (under Applicable Law or otherwise) to approve this
Agreement and the transactions contemplated hereby.
5.5 CONSENTS. Except for (i) as set forth in Section 5.5 of the Acquiror
Disclosure Letter, (ii) compliance with and filings under the HSR Act, (iii) the
filing with the SEC by Acquiror of a registration statement on Form S-4
registering under the Securities Act the shares of Media Stock and Series D
Preferred Stock to be issued in the Merger (the "Form S-4"), the filing with the
SEC by Acquiror of a registration statement on Form 8-A registering under the
Exchange Act the Series D Preferred Stock and such reports under the Exchange
Act as may be required in connection with this Agreement and the transactions
contemplated hereby, (iv) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware and appropriate documents with the
relevant authorities of other states in which the Company is qualified to do
business, (v) such filings and approvals as may be required by any applicable
state securities, "blue sky" or takeover laws, (vi) such filings in connection
with Gains Taxes, (vii) the filing by Acquiror of a Certificate of Designation
with respect to the Series D Preferred Stock (as contemplated by Section 7.17)
with the Secretary of State of the State of Delaware immediately prior to the
Effective Time (the items in clauses (i) through (vii) being collectively
referred to herein as "Acquiror 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 Acquiror or Company Sub in connection
with the execution, delivery and performance of this Agreement or any of the
other agreements contemplated hereby to which it is a party or the consummation
of the transactions contemplated hereby and thereby or the taking by Acquiror or
Company Sub of any other action contemplated hereby or thereby, which, if not
obtained or made, would have a Material Adverse Effect with respect to Acquiror.
5.6 COMPLIANCE; NO DEFAULTS. (a) Except as set forth in Section 5.6 of the
Acquiror Disclosure Letter, neither Acquiror nor any of its Subsidiaries is in
violation of, is, to the knowledge of Acquiror, under investigation with respect
to any violation of, has been given notice or been charged with violation of, or
failed to comply with any Applicable Laws, except for violations and failures to
comply that would not have a Material Adverse Effect with respect to Acquiror.
Except as set forth in Section 5.6 of the Acquiror Disclosure Letter, Acquiror
and its Subsidiaries have all Permits which are material to the operation of the
businesses of Acquiror and its Subsidiaries.
(b) Neither Acquiror nor any of its Subsidiaries is in default or violation
(and no event has occurred which, with notice or the lapse of time or both,
would constitute a default or violation) of any term, condition or provision of
(i) its Certificate of Incorporation or Bylaws or other comparable
organizational document or (ii) any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which Acquiror or any of its
Subsidiaries is now a party or by which Acquiror or any of its Subsidiaries or
any of their respective properties or assets may be bound, except in the case of
clause (ii), for defaults or violations which in the aggregate would not have a
Material Adverse Effect with respect to Acquiror.
5.7 ACQUIROR SEC DOCUMENTS; UNDISCLOSED LIABILITIES. (a) Acquiror has
filed all required reports, schedules, registration statements and definitive
proxy statements with the SEC since January 1, 1993 (as such documents have
since the time of their filing been amended, the "Acquiror SEC Documents"). As
of their respective dates, the Acquiror SEC Documents (including any financial
statements filed, to be filed or
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required to have been filed as a part thereof) complied in all material respects
with the requirements of the Securities Act or the Exchange Act, as applicable,
and the rules and regulations of the SEC thereunder applicable to such Acquiror
SEC Documents, and none of the Acquiror SEC Documents contained any untrue
statement of a material fact or omitted to state 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. The financial
statements of Acquiror included in the Acquiror SEC Documents comply as to form
in all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present (subject, in the case of the unaudited financial statements, to normal,
recurring audit adjustments, which were not individually or in the aggregate
material) the consolidated financial position of Acquiror 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 as disclosed in the Acquiror SEC Documents or in Section 5.7 of
the Acquiror Disclosure Letter, as of the date hereof, Acquiror and its
Subsidiaries do not have any material indebtedness, obligations or liabilities
of any kind (whether accrued, absolute, contingent or otherwise, and whether due
or to become due or asserted or unasserted) required by GAAP to be reflected on
a consolidated balance sheet of Acquiror and its consolidated Subsidiaries or in
the notes, exhibits or schedules thereto.
5.8 LITIGATION. Except as set forth in the Acquiror SEC Documents or in
Section 5.8 of the Acquiror Disclosure Letter, there are no Legal Proceedings
against or affecting Acquiror or any of its Subsidiaries or their respective
properties or assets pending or, to the knowledge of Acquiror, threatened, that
individually or in the aggregate could (i) have a Material Adverse Effect with
respect to Acquiror or (ii) prevent, hinder or materially delay the consummation
of the transactions contemplated by this Agreement or the Transaction Documents.
Except as set forth in Section 5.8 of the Acquiror Disclosure Letter, neither
Acquiror nor any of its Subsidiaries is a party or subject to or in default
under any judgment, order, injunction or decree of any Governmental Authority
applicable to it or to its respective properties or assets, which judgment,
order, injunction, decree or default thereunder constitutes a Material Adverse
Effect with respect to Acquiror.
5.9 ABSENCE OF CHANGES OR EVENTS. Except as disclosed in the Acquiror SEC
Documents, since the date of the most recent audited financial statements
included in the Acquiror SEC Documents, Acquiror and its Subsidiaries have
conducted their business operations only in the ordinary course and there has
not occurred (i) any change, occurrence or circumstance that had any Material
Adverse Effect with respect to Acquiror or (ii) other events or conditions of
any character that, individually or in the aggregate, have or would reasonably
be expected to have, a Material Adverse Effect with respect to Acquiror or on
the ability of Acquiror or Company Sub to perform their respective material
obligations under this Agreement and the Transaction Documents to which it is a
party.
5.10 BROKERS AND INTERMEDIARIES. Neither Acquiror or Company Sub nor any
of their respective officers, directors or employees has employed any broker or
finder or incurred any liability for any brokerage fees, commissions or finders'
fees in connection with the transactions contemplated by this Agreement and the
Transaction Documents, except that Acquiror has retained Lehman Brothers Inc.,
as its financial advisor, whose fees and expenses shall be paid by Acquiror.
5.11 OWNERSHIP OF COMPANY CAPITAL STOCK. Neither Acquiror nor any of its
Subsidiaries owns, directly or indirectly, any shares of Company Capital Stock.
5.12 OPERATIONS OF COMPANY SUB. Company Sub was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement and has
not engaged in any business activities or conducted any operations other than in
connection with the transactions contemplated by this Agreement.
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ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as otherwise expressly
permitted by the terms of this Agreement, from the date hereof to the Effective
Time, the Company shall, and shall cause its Subsidiaries to, carry on their
respective businesses in the ordinary course in substantially the same manner as
presently conducted (including with respect to advertising, promotions and
capital expenditures) and in compliance in all material respects with Applicable
Laws, use their reasonable best efforts consistent with past practices to keep
available the services of the present employees of the Company and its
Subsidiaries and to preserve their relationships with customers, suppliers and
others with whom the Company and its Subsidiaries deal to the end that their
goodwill and ongoing businesses shall not be materially impaired in any material
respect at the Closing Date. The Company shall not, and shall cause its
Subsidiaries not to, take any action that would, or that is reasonably likely
to, result in any of the representations and warranties of the Company set forth
in Article IV being untrue in any material respect as of the date made or in any
of the conditions to the consummation of the Merger set forth herein not being
satisfied. In addition, and without limiting the generality of the foregoing,
except as otherwise expressly permitted by the terms of this Agreement or as set
forth in Section 6.1 of the Company Disclosure Letter, during the period from
the date hereof to the Effective Time, the Company shall not (and shall cause
its Subsidiaries not to), without the written consent of Acquiror, which
decision regarding consents shall be made promptly (in light of its
circumstances) after receipt of notice seeking such consent:
(i) except for the Charter Amendments, amend its Certificate of
Incorporation, Bylaws or other comparable organizational documents;
(ii) subject to Sections 7.7 and 7.14(b), redeem or otherwise acquire
any shares of its capital stock, or issue any capital stock or any option,
warrant or right relating thereto or any securities convertible into or
exchangeable for any shares of its capital stock, or split, combine or
reclassify any of its capital stock or issue any securities in exchange or
in substitution for shares of its capital stock;
(iii) subject to Section 7.14(b), (A) grant or agree to grant to any
employee any increase in wages or bonus, severance, profit sharing,
retirement, deferred compensation, insurance or other compensation or
benefits, or establish any new compensation or benefit plans or
arrangements, or amend or agree to amend any existing Benefit Plans or
Equity Appreciation Rights Plans, except as may be required under existing
agreements or in the ordinary course of business consistent with past
practices or (B) enter into any new RSPA or amend the terms of any existing
RSPA or accelerate the vesting of any shares of Class B Common Stock issued
thereunder;
(iv) merge, amalgamate or consolidate with any other entity in any
transaction in which the Company is not the surviving corporation (other
than mergers between Subsidiaries of the Company), sell all or substantially
all of its business or assets, or acquire all or substantially all of the
business or assets of any other Person;
(v) enter into or amend any employment, consulting, severance or similar
agreement with any individual, except with respect to severance gifts or
payments of a nominal nature to persons holding non-officer/executive level
positions in the ordinary course of business consistent with past practice;
(vi) subject to Section 7.7, declare, set aside or make any dividends,
payments or distributions in cash, securities or property to the
stockholders of the Company, whether or not upon or in respect of any share
of Company Capital Stock;
(vii) incur or assume any Indebtedness other than as specifically set
forth in Section 6.1(vii) of the Company Disclosure Letter;
(viii) voluntarily grant any material Encumbrance on any of its material
assets, other than Encumbrances that are incurred in the ordinary course of
business;
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(ix) make any change in any method of accounting or accounting practice
or policy, except as required by Applicable Laws or by GAAP;
(x) make or incur any capital expenditures that are not set forth in
Section 6.1(x) of the Company Disclosure Letter or that, individually, are
in excess of $25 million or, in the aggregate, in excess of $50 million;
(xi) subject to Section 7.7, sell, lease, swap or otherwise dispose of
any assets, other than (A) sales, leases, swaps or other dispositions of
such assets not having a fair market value in excess of $15 million
individually or $30 million in the aggregate (so long as the Company
provides notice to Acquiror of any sale, lease, swap or other disposition of
any asset having a fair market value of greater than $5 million) or (B)
swaps of Systems or assets of Systems in order to facilitate the clustering
of Systems or dispose of Systems located in the Acquiror Region; PROVIDED,
HOWEVER, that (1) such swaps shall not in the aggregate involve more than
500,000 Subscribers of the Company or its Subsidiaries, (2) any cable
television systems acquired by the Company or any of its Subsidiaries in any
such swap shall not be located in the Acquiror Region, (3) any cable
television systems acquired by the Company in any such swap shall not be in
a franchise area where there is a substantial overbuild with any other CATV
system owned by the Company, Acquiror or any of their respective Affiliates,
(4) the aggregate amount of cash paid by the Company or any of its
Subsidiaries in any such swap shall not exceed $50 million in the aggregate,
(5) any such swap shall require the approval of Acquiror, which approval
shall not be unreasonably withheld and Acquiror shall be reasonably
satisfied that the Company has received substantially equivalent value
including cash or other assets and (6) to the extent that the Company or any
Subsidiary must apply for the consent of the Governmental Authority as a
condition to the transfer of control or assignment of any Franchise
associated with any such swap, such application shall include an application
to the Governmental Authority, and relevant information relating to the
proposed transaction, requesting contemporaneous approval for the
anticipated acquisition of the Company or its Subsidiary by Acquiror or
Company Sub as contemplated herein and the transfer of control of said
Franchise to the Surviving Corporation in accordance with the terms hereof;
and PROVIDED, FURTHER, that any consent required from a Governmental
Authority as a condition to consummating such swap shall be deemed a
Required Franchise Consent;
(xii) acquire or agree to acquire by merging or consolidating with, or by
purchasing all or a substantial portion of the assets of or equity in, or by
any other manner, any business of any Person or acquire or agree to acquire
any assets (other than supplies, raw materials and inventory in the ordinary
course, capital expenditures permitted by clause (x) above and asset swaps
permitted by clause (xi) above);
(xiii) abandon, avoid, dispose, surrender, fail to file for timely
renewal, terminate or amend in any materially adverse manner the terms of
any material Franchises, any FCC license that would have a material adverse
effect on the operation of a System or the Social Contract Order, except as
amended by virtue of the proposed Social Contract Amendment, or, with
respect to any Material Franchise, fail to file for renewal pursuant to
Section 626(a) of the Cable Act;
(xiv) delete any programming service on the Systems or make material
change in the programming services offered on the Systems other than in the
ordinary course of business or as required by the Cable Act, the Social
Contract Order or any amendments thereto;
(xv) except as otherwise permitted by clauses (xi) and (xii), modify,
amend, terminate, renew or fail to use reasonable efforts to renew any
material contract or agreement necessary to continue the Company's business
in the ordinary course or waive, release or assign any material rights or
claims, other than in the ordinary course of business;
(xvi) offer free or reduced-price service as an inducement to any Person,
except in the ordinary course of business consistent with past practice;
(xvii) except as permitted by Applicable Law, including the Social
Contract Order and any amendments thereto, (A) except as disclosed to
Acquiror in writing at least 30 days prior to any rate change,
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implement any rate change, retiering or repackaging of CATV programming
offered by any of the Company's Subsidiaries, (B) except as disclosed in
writing to Acquiror at least 30 days prior to any cost-of-service rate
change, make any cost-of-service election under the rules and regulations
adopted under the Cable Act, (C) determine a method of refund pursuant to 47
C.F.R. Section 76.942(d) or 76.961(c) or (D) amend any Franchise or agree to
make any payments or commitments, including commitments to make future
capital improvements or provide future services, in connection with any
renewal of any Franchise other than that which the Company would make in the
ordinary course of business;
(xviii) enter into any agreement, understanding or commitment that
restrains, limits or impedes the ability of the Company or Acquiror to
compete with or conduct any business or line of business;
(xix) invest or enter into any agreement, understanding or commitment,
whether written or oral, by or on behalf of the Company or its Subsidiaries,
to invest or provide additional capital in respect of assets, businesses or
entities; PROVIDED, HOWEVER, that the restrictions contained in this clause
shall not apply to existing commitments as set forth in Section 6.1(xix) of
the Company Disclosure Letter or to any investments not in excess of $10
million individually or $20 million in the aggregate;
(xx) except as otherwise provided in clause (xix) above or Section 7.14,
enter into any material contract or agreement with, or make any loan or
advance to, any Affiliate (other than a wholly owned Subsidiary) of the
Company or any stockholder or Affiliate thereof;
(xxi) enter into, or amend the terms of, any agreement relating to
interest rate swaps, caps or other hedging or derivative instruments
relating to Indebtedness of the Company and its Subsidiaries, except as
required under agreements relating to existing Indebtedness and Indebtedness
permitted by clause (vii) above;
(xxii) conduct its business in a manner or take, or cause to be taken, any
other action (including, without limitation, effecting or agreeing to effect
or announcing an intention or proposal to effect, any acquisition, business
combination, merger, consolidation, restructuring or similar transaction)
that would or might reasonably be expected to prevent Acquiror, Company Sub
or the Company from consummating the transactions contemplated hereby in
accordance with the terms of this Agreement (regardless of whether such
action would otherwise be permitted or not prohibited hereunder), including,
without limitation, any action which may limit the ability of Acquiror,
Company Sub or the Company to consummate the transactions contemplated
hereby as a result of antitrust or other regulatory concerns;
(xxiii) purchase, sell or trade (or announce any intention or proposal to
purchase, sell or trade) any shares of Media Stock; or
(xxiv) agree, whether in writing or otherwise, to do any of the foregoing.
Prior to the date hereof, Acquiror delivered to the Company a list (which the
Acquiror may update from time to time) designating certain individuals of
Acquiror to whom the Company may direct requests for consents under this Section
6.1.
6.2 CONDUCT OF BUSINESS OF ACQUIROR AND COMPANY SUB. (a) Except as set
forth in Section 6.2 of the Acquiror Disclosure Letter, from the date hereof to
the Effective Time, Acquiror shall not (and shall cause its Subsidiaries not
to):
(i) issue shares of Media Stock or any option, warrant or right relating
thereto or any securities convertible into or exchangeable for any shares of
Media Stock at less than fair market value as determined by the board of
directors of Acquiror (other than pursuant to the terms of existing options
or benefit plans), or split, combine, redeem, convert or reclassify the
Media Stock or issue any securities in exchange or in substitution for
shares of Media Stock;
(ii) amend its Certificate of Incorporation or Bylaws (other than the
filing of a Certificate of Designation for the issuance of any series of
Preferred Stock) in any manner adverse to the holders of Media Stock;
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(iii) declare, set aside or make any dividends or distributions in cash,
securities or property to holders of Media Stock;
(iv) conduct its business in a manner or take, or cause to be taken, any
other action (including, without limitation, effecting or agreeing to effect
or announcing an intention or proposal to effect, any acquisition, business
combination, merger, consolidation, restructuring or similar transaction)
that would or might reasonably be expected to prevent Acquiror, Company Sub
or the Company from consummating the transactions contemplated hereby in
accordance with the terms of this Agreement (regardless of whether such
action would otherwise be permitted or not prohibited hereunder), including,
without limitation, any action which may limit the ability of Acquiror,
Company Sub or the Company to consummate the transactions contemplated
hereby as a result of antitrust or other regulatory concerns;
(v) take any action that would, or that is reasonably likely to, result
in any of the representations and warranties of Acquiror or Company Sub set
forth in Article V being untrue in any material respect as of the date made
or any of the conditions to the Merger set forth herein not being satisfied;
(vi) purchase or sell (or announce any intention or proposal to purchase
or sell) shares of Media Stock for cash at a price less than the Calculation
Price (other than pursuant to employee benefit plans in the ordinary course
of business or pursuant to the U S WEST Shareowner Investment Plan);
PROVIDED, HOWEVER, that if the Closing shall not have occurred on or prior
to December 31, 1996, then the Acquiror and its Subsidiaries shall have the
right to purchase (or announce any intention or proposal to purchase) shares
of Media Stock for cash at a price less than the Calculation Price after
such date;
(vii) sell all or substantially all of the properties and assets of the
Media Group (within the meaning of Section 2.4.1(B) of Article V of the
Restated Certificate of Incorporation of Acquiror); or
(viii) acquire, or agree to acquire, any shares of Company Capital Stock
if, after giving effect to such acquisition, Acquiror would beneficially own
10% or more of the Company Capital Stock.
(b) During the period of time from the date hereof to the Effective Time,
Company Sub shall not engage in any activities of any nature, except as provided
in or contemplated by this Agreement.
6.3 ACCESS TO INFORMATION. (a) From the date hereof until the Closing
Date, the Company shall permit Acquiror and its representatives to have full
access to the management, facilities, suppliers, accounts, books, records
(including, without limitation, budgets, forecasts and personnel files and
records), contracts and other materials of the Company and its Subsidiaries
reasonably requested by Acquiror or such representatives and to make available
to Acquiror and its representatives the directors, officers, employees and
independent accountants of the Company for interviews for the purpose, among
other things, of verifying the information furnished to Acquiror, developing
transition plans and integrating the operations of the Company and its
Subsidiaries with the operations of Acquiror and its Subsidiaries and
Affiliates. Such access shall be subject to existing confidentiality agreements
and shall be conducted by Acquiror 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 Company and its
Subsidiaries.
(b) From the date hereof until the Closing Date, Acquiror and Company Sub
shall permit the Company 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 Media
Group reasonably requested by the Company or such representatives and to make
available to the Company and its representatives the directors, officers,
employees and independent accountants of the Media Group for interviews for the
purpose, among other things, of verifying the information furnished to the
Company. Such access shall be subject to existing confidentiality agreements and
shall be conducted by the Company 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 Media Group.
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(c) Each of the Company, Acquiror and Company Sub agrees that it will not,
and will cause each of their respective Affiliates and representatives not to,
use any information obtained pursuant to this Section 6.3 for any purpose
unrelated to the consummation of the transactions contemplated by this
Agreement. The Confidentiality Agreement, dated as of September 26, 1994, as
amended on January 11, 1996, between Acquiror and the Company and the
Confidentiality Agreement, dated as of April 19, 1995, between Acquiror and the
Company (the "Confidentiality Agreements") shall apply with respect to
information furnished thereunder or hereunder and any other activities
contemplated thereby.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 PREPARATION OF FORM S-4 AND THE PROXY STATEMENT; STOCKHOLDERS' MEETING;
CHARTER AMENDMENTS. (a) Promptly following the date of this Agreement, the
Company shall prepare and file with the SEC the Proxy Statement and Acquiror
shall prepare and file with the SEC the Form S-4, in which the Proxy Statement
will be included as a prospectus. Each of the Company and Acquiror shall use its
reasonable best efforts to have the Form S-4 declared effective under the
Securities Act as promptly as practicable after such filing. The Company shall
use its reasonable best efforts to cause the Proxy Statement to be mailed to the
Company's stockholders, as promptly as practicable after the Form S-4 is
declared effective under the Securities Act. Acquiror shall also take any action
(other than qualifying to do business in any jurisdiction in which it is not now
so qualified or consenting to service of process in any jurisdiction in which it
has not previously so consented in any action other than one arising out of the
offering of the Media Stock and the Series D Preferred Stock in such
jurisdiction) required to be taken to qualify the Media Stock and Series D
Preferred Stock to be issued in the Merger under any applicable state securities
or "blue sky" laws prior to the Effective Time, and the Company shall furnish
all information concerning the Company and the holders of the Company Capital
Stock as may be reasonably requested in connection with any such action.
(b) None of the information supplied or to be supplied by the Company, on
the one hand, or Acquiror and Company Sub, on the other hand, for inclusion or
incorporation by reference in (i) the Form S-4 will, at the time the Form S-4 is
filed with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, or (ii) the Proxy
Statement will, at the date it is first mailed to the stockholders of the
Company or at the time of each Stockholders' Meeting (as defined in Section
7.1(d)), contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement and the Form S-4 will comply as to form in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be. Notwithstanding the foregoing, (i) no representation is
made by the Company with respect to statements made or incorporated by reference
therein based on information supplied in writing by Acquiror and Company Sub
specifically for inclusion or incorporation by reference in the Proxy Statement
and (ii) no representation is made by Acquiror and Company Sub with respect to
statements made or incorporated by reference therein based on information
supplied in writing by the Company specifically for inclusion or incorporation
by reference in the Form S-4.
(c) The Company and Acquiror shall cooperate with each other and provide to
each other all information necessary in order to prepare the Proxy Statement and
the Form S-4. The Company and Acquiror shall notify each other promptly of the
receipt of any comments from the SEC or its staff and of any requests by the SEC
or its staff for amendments or supplements to the Form S-4 or the Proxy
Statement or for additional information and shall supply the other parties with
copies of all correspondence between the Company or any of its representatives,
or Acquiror or any of its representatives, as the case may be, on the one hand,
and the SEC or its staff, on the other hand, with respect thereto. The Company
and Acquiror shall use their respective reasonable best efforts to respond to
any comments of the SEC with respect to the Form S-4 and the Proxy Statement as
promptly as practicable. If at any time prior to the Effective Time there shall
occur (i) any event with respect to the Company or any of its Subsidiaries, or
with respect to other information supplied by the Company for inclusion in the
Proxy Statement or (ii) any event with respect to Acquiror or
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any of its Subsidiaries, or with respect to other information supplied by
Acquiror for inclusion in the Form S-4, in either case which event is required
to be described in an amendment of, or a supplement to, the Proxy Statement or
Form S-4, such event shall be so described, and such amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the stockholders of the Company. Acquiror shall notify the Company promptly upon
(i) the declaration by the SEC of the effectiveness of the Form S-4, (ii) the
issuance or threatened issuance of any stop order or other order preventing or
suspending the use of any prospectus relating to the Form S-4, (iii) any
suspension or threatened suspension of the use of any prospectus relating to the
Form S-4 in any state, (iv) any proceedings commenced or threatened to be
commenced by the SEC or any state securities commission that might result in the
issuance of a stop order or other order or suspension of use or (v) any request
by the SEC to supplement or amend any prospectus relating to the Form S-4 after
the effectiveness thereof. Acquiror and, to the extent applicable, the Company,
shall use its reasonable best efforts to prevent or promptly remove any stop
order or other order preventing or suspending the use of any prospectus relating
to the Form S-4 and to comply with any such request by the SEC or any state
securities commission to amend or supplement the Form S-4 or the prospectus
relating thereto.
(d) The Company shall, as promptly as practicable, duly call, give notice
of, convene and hold a meeting of its stockholders (the "Initial Stockholders'
Meeting") for the purpose of obtaining the Stockholder Approvals. The Company
shall use its reasonable best efforts to hold such meeting as soon as
practicable. In the event the Consideration Charter Amendment is not adopted at
the Initial Stockholders' Meeting, the Company shall, as promptly as practicable
following the date of the Initial Stockholders' Meeting, duly call, give notice
of, convene and hold another meeting of its stockholders (the "Additional
Stockholders' Meeting" and, together with the Initial Stockholders' Meeting,
collectively, the "Stockholders' Meetings" and individually, a "Stockholders'
Meeting") for the purpose of obtaining adoption of the Consideration Charter
Amendment and any other Stockholder Approvals not previously obtained. The
Company shall, as promptly as practicable after the date of the Initial
Stockholders' Meeting, hold the Additional Stockholders' Meeting. Subject to the
fiduciary duties of the Board of Directors under Applicable Laws and to Section
9.1(g), the Company shall, through the Board of Directors, recommend to its
stockholders adoption of this Agreement, the Charter Amendments and the other
transactions contemplated hereby and shall use its best efforts to solicit from
stockholders proxies in favor of adoption of this Agreement and the Charter
Amendments and to take all other action necessary to secure the Stockholder
Approvals at the Initial Stockholders' Meeting or the Additional Stockholders'
Meeting, as the case may be. Without limiting the generality of the foregoing,
the Company agrees that its obligations pursuant to the first and third
sentences of this Section 7.1(d) shall not be altered by the commencement,
public proposal or communication to the Company of any Acquisition Proposal (as
defined in Section 7.10).
(e) Subject to receipt of the Stockholder Approvals, the Company shall take
all actions necessary to cause a Certificate of Amendment containing the
Consideration Charter Amendment to be executed, acknowledged and filed and to
become effective no later than immediately prior to the Effective Time in
accordance with the DGCL as soon as practicable after the approval thereof at a
Stockholders' Meeting.
(f) The Company shall make stock transfer records relating to the Company
available to Acquiror to the extent reasonably necessary to effectuate the
intent of this Agreement.
7.2 LETTER OF THE COMPANY'S ACCOUNTANTS. The Company shall use its
reasonable best efforts to cause to be delivered to Acquiror letters of (i)
Deloitte & Touche LLP, the Company's independent public accountants and (ii) any
other independent public accountants whose reports are included or incorporated
by reference in the Form S-4, each dated a date within two business days before
the date on which the Form S-4 shall become effective and addressed to Acquiror,
in form and substance reasonably satisfactory to Acquiror and customary in scope
and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Form S-4.
7.3 LETTER OF ACQUIROR'S ACCOUNTANTS. Acquiror shall use its reasonable
best efforts to cause to be delivered to the Company a letter of Coopers &
Lybrand L.L.P., Acquiror's independent public accountants, dated a date within
two business days before the date on which the Form S-4 shall become effective
and
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addressed to the Company, in form and substance reasonably satisfactory to the
Company and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Form S-4.
7.4 REASONABLE BEST EFFORTS. Subject to the terms and conditions of this
Agreement, including, without limitation, Section 7.6, each of the parties
hereto agrees to use its reasonable best efforts to take, or cause to be taken,
all action and to do, or cause to be done, all things necessary, proper or
advisable under Applicable Laws and regulations to consummate and make effective
the transactions contemplated by this Agreement (including the execution of the
Transaction Documents to which they or any of their Affiliates are a party),
subject to the Stockholder Approval, including (a) the obtaining of all
necessary actions or nonactions, waivers, consents and approvals from
Governmental Authorities and the making of it all necessary registrations and
filings (including filings with Governmental Authorities, if any), 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
Authorities, (b) the obtaining of all necessary consents, approvals or waivers
from Third Parties and (c) the execution and delivery of any additional
instruments necessary to consummate the transactions contemplated by this
Agreement and the Transaction Documents. In furtherance of the foregoing,
Acquiror and the Company each shall furnish to the other such necessary
information and reasonable assistance as the other may request in connection
with obtaining any consents required to be obtained by it or its Subsidiaries
hereunder.
7.5 FRANCHISE AND LICENSE CONSENTS. (a) Without limiting the generality of
Section 7.4, the Company and Acquiror shall each use their respective reasonable
best efforts to obtain all Franchise Consents and License Consents, including
taking the actions specified herein. In order to secure the Franchise Consents
and License Consents from Governmental Authorities and the FCC, the Company
shall proceed immediately in good faith and using its reasonable best efforts,
to prepare, file and prosecute each Franchise Consent and License Consent from
the relevant Governmental Authority and the FCC, with the full right of
participation by Acquiror including, without limitation, the right of prior
review and approval of correspondence or forms of transfer resolutions,
applications, ordinances or agreements to be submitted to Governmental
Authorities and the FCC (which approval shall not be unreasonably withheld or
delayed) and to be represented at all meetings or hearings as may be scheduled
to consider such submissions. The Company shall send notice of the transactions
contemplated in this Agreement to all Governmental Authorities. The Company
shall submit to each Governmental Authority whose consent is required a form of
ordinance or resolution, as appropriate, relating to the transfer of the
Franchise, which ordinance or resolution shall be in a form reasonably
acceptable to Acquiror and the Company. The Company shall consult with Acquiror
and promptly and regularly notify Acquiror with regard to all material
developments of the Franchise Consent and License Consent process, and shall
give Acquiror reasonable prior notice of all meetings scheduled with the
Governmental Authorities and the FCC. Acquiror shall use its reasonable best
efforts to promptly assist the Company and shall take such prompt and
affirmative actions as may reasonably be necessary in obtaining such approvals
and shall cooperate with the Company in the preparation, filing and prosecution
of such applications as may reasonably be necessary, including the preparation,
filing and prosecution of any joint applications required to be filed with the
Governmental Authorities or the FCC, and agrees to use its reasonable best
efforts to furnish all information as is reasonably or as is customarily
required by the approving entity, and, if required by a Governmental Authority
or the FCC upon reasonable notice, Acquiror shall have the obligation to be
represented at such meetings or hearings as may be scheduled to consider such
applications. Any administrative filing fees imposed or expenses for which
reimbursement is required by the Governmental Authority in connection with
obtaining the Franchise Consents or the License Consents shall be borne by the
Company and each of the parties shall bear its own legal fees or other costs of
professional advisors incurred in the filing and prosection of such
applications. If, in connection with obtaining Franchise Consents or the License
Consents from a Governmental Authority or the FCC, a Governmental Authority or
the FCC impose new, material Franchise or license conditions as a condition to
granting its consent, Acquiror and the Company shall negotiate jointly with such
Governmental Authority or the FCC with respect to such conditions, with such
conditions to be accepted only if consented to by Acquiror and the Company,
which consent shall not be unreasonably withheld. Acquiror agrees that prior to
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the Closing Date, it will not, without the prior written consent of the Company,
seek amendments, modifications or other changes to Franchises and shall not
institute any discussions with Governmental Authorities or the FCC without the
prior written consent of the Company and without offering a representative of
the Company an opportunity to participate or observe such discussions. To the
extent such request would not, in the reasonable judgment of the Company, delay
or impair the ability to obtain any Franchise Consents, any application to any
Governmental Authority for any Franchise Consent necessary for the transfer of
control of any Franchise shall request that the relevant Governmental Authority
also agree that no further Franchise Consent shall be required for the
subsequent transfer of control of, or assignment of, such Franchise to a
specified Person identified in such application who is an Affiliate of Acquiror
to which Acquiror intends to transfer or assign the Franchise immediately prior
to Closing. In addition, the Company will use reasonable best efforts to obtain
necessary transfers of all private mobile radio service licenses.
(b) To the extent that any Franchise Consents listed in Section 4.6 of the
Company Disclosure Letter have not been obtained by Final Order prior to Closing
(such Franchises hereinafter referred to as the "Non-Required Franchises"),
Acquiror and the Company shall enter into negotiations to determine the
disposition of the Non-Required Franchises after Closing. In the event that the
parties agree to transfer any part of a System which includes, in part, areas
covered by a Non-Required Franchise (hereinafter the "Non-Required Systems"),
the parties shall continue to be subject to Section 7.5(a) until such time as
all Franchise Consents are obtained and the Non-Required Franchises are
transferred to Acquiror.
7.6 ANTITRUST NOTIFICATION. (a) The Company and Acquiror shall as promptly
as practicable, but in no event later than 30 Business Days following the
execution and delivery of this Agreement, file with the FTC and the DOJ the
notification and report form required for the transactions contemplated hereby
and any supplemental information requested in connection therewith pursuant to
the HSR Act. Each of Acquiror and the Company 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. The Company and Acquiror acknowledge that more than
one filing may be required under the HSR Act in order to consummate the
transactions contemplated by this Agreement, and agree to cooperate and furnish
to each other's counsel such necessary information and reasonable assistance as
the other may request in connection with its preparation of any subsequent
filing.
(b) The Company and Acquiror 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 shall comply promptly with any such
inquiry or request.
(c) Each of the Company and Acquiror shall use its reasonable best efforts
to obtain any clearance required under the HSR Act for the consummation of the
Merger, which efforts, for purposes of this Agreement shall not, except with the
mutual agreement of Acquiror and the Company, require Acquiror in order to
obtain any consent or clearance from the DOJ or any other Governmental Authority
to (i) hold separate, sell or otherwise dispose of any assets, including assets
of the Company, the effect of any of which, in the reasonable judgment of
Acquiror, would be to materially impair the value of the Merger to Acquiror or
(ii) contest any suit brought or threatened by the FTC or DOJ or attempt to lift
or rescind any injunction or restraining order obtained by the FTC or DOJ
adversely affecting the ability of the parties hereto to consummate the
transactions contemplated hereby.
7.7 CERTAIN ACTIONS. Except as otherwise specifically limited by this
Agreement, each of the Company and Acquiror agrees to use its reasonable best
efforts and to take, or cause to be taken, all actions and to do, or cause to be
done, all things necessary, proper or advisable to ensure that there shall be no
regulatory impediments, pursuant to the Communications Act, the rules and
regulations of the FCC, or otherwise, to the closing of the transactions
contemplated hereby and the Company agrees not to acquire any assets or engage
in any activities prior to the Closing of a type which Acquiror would be
precluded from acquiring or engaging in pursuant to the Communications Act, the
rules and regulations of the FCC or otherwise.
7.8 SUPPLEMENTAL DISCLOSURE. The Company shall confer on a regular and
frequent basis with Acquiror, report on operational matters and promptly notify
Acquiror of, and furnish Acquiror with, any information it may reasonably
request with respect to, any event or condition or the existence of any fact
that
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would cause any of the conditions to the obligations of Acquiror and Company Sub
to consummate the Merger not to be completed, and Acquiror shall promptly notify
the Company of, and furnish the Company 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 Company's obligation to consummate
the Merger not to be completed.
7.9 ANNOUNCEMENTS. Prior to the Closing, none of the Company, Acquiror or
Company Sub shall 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 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 party reasonable time to
comment on such release or announcement in advance of such issuance.
7.10 NO SOLICITATION. (a) From the date hereof until the Effective Time,
the Company shall not, nor shall it permit any of its Subsidiaries to, nor shall
it authorize or permit any of its officers, directors, employees, agents,
investment bankers, attorneys, financial advisors or other representatives or
those of any of its Subsidiaries (collectively, "Company Representatives") to,
directly or indirectly, solicit, initiate or encourage (including by way of
furnishing information or assistance) or take other action to facilitate any
inquiries or the making of any proposal that constitutes or may reasonably be
expected to lead to, an Acquisition Proposal from any Third Party, or engage in
any discussions or negotiations relating thereto or in furtherance thereof or
accept or enter any agreement with respect to any Acquisition Proposal;
PROVIDED, HOWEVER, that, notwithstanding anything to the contrary in this
Agreement, (i) prior to the approval of this Agreement by the Stockholders of
the Company, the Company may engage in discussions or negotiations with, and may
furnish information concerning the Company and its business, properties and
assets to, a Third Party who, without any solicitation, initiation,
encouragement, discussion or negotiation, directly or indirectly, by or with the
Company or any Company Representatives, or in furtherance thereof makes a
written, bona fide Acquisition Proposal that is not subject to any material
contingencies relating to financing and that is reasonably capable of being
financed and is financially superior to the consideration to be received by the
Company's stockholders pursuant to the Merger (as determined in good faith by
the Board of Directors after consultation with the Company's financial advisors)
if (1) the Board of Directors determines in its good faith, after receipt of
written advice of the Company's outside legal counsel, that such action is
advisable for the Board of Directors to act in a manner consistent with its
fiduciary duties under Applicable Law and (2) prior to furnishing information
with respect to the Company and its Subsidiaries to, such Third Party, the
Company shall receive from such Third Party an executed confidentiality
agreement in reasonably customary form on terms not more favorable to such
Person or entity than the terms contained in the Confidentiality Agreements, or
(ii) the Board of Directors may take and disclose to the Company's stockholders
a position with regard to a tender offer or exchange offer to the extent
required by Rule 14e-2(a) under the Exchange Act. Without limiting the
foregoing, it is understood that any violation of the restrictions set forth in
the preceding sentence by any investment banker or financial advisor retained by
the Company, whether or not such Person is purporting to act of behalf of the
Company of any of its Subsidiaries or otherwise, shall constitute a breach of
this Section 7.10 by the Company.
(b) The Company shall promptly notify Acquiror orally and in writing of any
Acquisition Proposal or any inquiry with respect to or which could lead to any
Acquisition Proposal, within 24 hours of the receipt thereof, including the
identity of the Third Party making any such Acquisition Proposal or inquiry and
the material terms and conditions of any Acquisition Proposal, and if such
Acquisition Proposal or inquiry is in writing, shall deliver to Acquiror a copy
of such Acquisition Proposal or inquiry. The Company shall keep Acquiror
informed of the status and details of any such Acquisition Proposal or inquiry.
(c) The Company shall immediately cease and cause to be terminated any
existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by the Company or any Company
Representatives with respect to any of the foregoing.
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(d) As used in this Agreement, "Acquisition Proposal" shall mean any
proposal or offer, other than a proposal or offer by Acquiror or any of its
Affiliates, for a tender or exchange offer, merger, consolidation or other
business combination involving the Company or any of its material Subsidiaries
or any proposal to acquire in any manner a substantial equity interest in or a
substantial portion of the assets of the Company or any of its material
Subsidiaries; PROVIDED, HOWEVER, that, the term "Acquisition Proposal" shall not
include any acquisition by the Company or any of its Subsidiaries of any assets,
businesses or entities in any transaction or series of related transactions in
exchange for other assets, businesses or entities of any Third Party.
7.11 INDEMNIFICATION; DIRECTORS' AND OFFICERS INSURANCE. (a) If the
Subsidiary Merger is effected, the Certificate of Incorporation and Bylaws of
the Surviving Corporation shall contain the provisions with respect to
indemnification set forth in the Certificate of Incorporation and Bylaws of the
Company on the date hereof, which provisions shall not be amended, repealed or
otherwise modified for a period of six years after the Effective Time in any
manner that would adversely affect the rights thereunder of individuals who at
any time prior to the Effective Time were directors or officers of the Company
in respect of actions or omissions occurring at or prior to the Effective Time
(including, without limitation, the transactions contemplated by this
Agreement), unless such modification is required by law. If the Direct Merger is
effected, the Restated Certificate of Incorporation and Bylaws of the Surviving
Corporation at the Effective Time shall not be amended, repealed or otherwise
modified for a period of six years after the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of the Company or its
Subsidiaries in respect of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement), unless such modification is required by law.
(b) From and after the Effective Time, Acquiror shall indemnify, defend and
hold harmless each Person who is now, or has been at any time prior to the date
hereof or who becomes prior to the Effective Time, an officer or director of the
Company or any of its Subsidiaries (the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including attorneys' fees and
expenses), liabilities or judgments or amounts that are paid in settlement with
the approval of the indemnifying party (which approval shall not be unreasonably
withheld) of or in connection with any threatened or actual claim, action, suit,
proceeding or investigation based in whole or in part on or arising in whole or
in part out of the fact that such Person is or was a director or officer of the
Company or any of its Subsidiaries or served as a director of any Third Party on
behalf of the Company or any of its Subsidiaries whether pertaining to any
matter existing or occurring at or prior to the Effective Time and whether
asserted or claimed prior to, or at or after, the Effective Time ("Indemnified
Liabilities"), including, without limitation, all Indemnified Liabilities based
in whole or in part on, or arising in whole or in part out of, or pertaining to
this Agreement or the transactions contemplated hereby, in each case to the
fullest extent a corporation is permitted under the DGCL to indemnify its own
directors or officers as the case may be (and the Company or the Surviving
Corporation, as the case may be, will pay expenses in advance of the final
disposition of any such action or proceeding to each Indemnified Party to the
full extent permitted by law).
(c) The provisions of this Section 7.11 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his or her heirs and
his or her personal representatives and shall be binding on all successors and
assigns of Acquiror.
7.12 NYSE LISTING. Acquiror shall use its best efforts to cause the shares
of Media Stock and Series D Preferred Stock to be issued in the Merger to be
approved for listing on the NYSE, subject only to notice of official issuance,
prior to the Effective Time. If, for any reason, Acquiror shall not be able to
list the shares of the Series D Preferred Stock to be issued in the Merger on
the NYSE, Acquiror shall use its best efforts to, prior to the Effective Date,
list such shares on such other stock exchange, or cause such shares to be
eligible for trading on such other trading facility, as the Company may request.
7.13 AFFILIATES. Prior to the Closing Date, the Company shall deliver to
Acquiror a letter identifying all Persons who are, at the time this Agreement is
submitted to the stockholders of the Company, "affiliates" of the Company for
purposes of Rule 145 under the Securities Act. The Company shall use its best
efforts to cause each such Person to deliver to Acquiror on or prior to the
Closing Date a written agreement substantially in the form attached as Exhibit
D.
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7.14 EMPLOYEE BENEFITS. (a) For a period of one year following the
Effective Time, Acquiror shall, or shall cause the Surviving Corporation to,
maintain in effect for employees of the Company and its Subsidiaries benefits
(other than RSPAs or similar benefits) no less favorable in the aggregate than
the benefits offered by the Company immediately prior to the Effective Time.
Acquiror agrees to, or to cause the Surviving Corporation to, honor and perform
all severance, employment and similar agreements of the Company disclosed in
Section 4.11 of the Company Disclosure Letter and each RSPA and related Tax
Liability Financing Agreement.
(b) Following the date hereof, the Company shall, after consultation with
Acquiror, be permitted to (i) forgive up to $35.7 million principal amount of
outstanding loans made by the Company to employees to enable such employees to
pay income Taxes incurred by such employees as a result of the purchase of
shares of Company Common Stock by such employees pursuant to the RSPAs in
accordance with the terms of an amendment to the Tax Liability Financing
Agreement substantially in the form set forth in Section 7.14 of the Company
Disclosure Letter; PROVIDED, HOWEVER, that any loan to an employee of the
Company who is, or reasonably can be expected to become, a "covered employee"
(within the meaning of Section 162(m) of the Code) shall in no event be
forgiven, in whole or in part, prior to the day following the Closing Date, (ii)
issue up to 350,000 shares of Company Common Stock pursuant to RSPAs
substantially in the form heretofore provided to Acquiror to employees of the
Company or any of its Subsidiaries; so long as, in each case, such forgiveness
or issuance acts as incentive for the purpose of retaining and motivating such
employee to continue in the employment of the Company following the Effective
Time and is implemented in a manner consistent with such purpose.
(c) If, following the Effective Time, the termination of the employee's
employment with the Company or any of its Subsidiaries results in the
acceleration of the vesting of an award under any RSPA or the forgiveness of a
loan related to an RSPA pursuant to a Tax Liability Financing Agreement (other
than as a result of termination of employment by reason of the employee's death
or disability) (an "Acceleration Event") and as a result of such Acceleration
Event, the employee either (i) becomes subject to an excise tax (the "Excise
Tax") under Section 4999 of the Code that such employee would not have been
subject to without the occurrence of such Acceleration Event or (ii) the amount
of the Excise Tax imposed on such employee is greater than the amount of the
Excise Tax that would have been imposed without the occurrence of such
Acceleration Event (the "Incremental Excise Tax"), Acquiror shall pay or shall
cause to be paid to the employee, at the time specified below, an additional
amount (the "Additional Payment") sufficient to (a) in the case of clause (i)
above, reimburse the employee for the Excise Tax and in the case of clause (ii)
above, reimburse the employee for the Incremental Excise Tax and (b) in either
case, reimburse the employee for any federal, state or local income tax or any
additional excise tax under Section 4999 of the Code payable with respect to any
Additional Payment made pursuant to this Section 7.14(c). The Additional Payment
provided for in this Section 7.14(c) shall be made no later than the due date
for the Excise Tax or Incremental Excise Tax (as the case may be) imposed. In
the event of any dispute in the calculations made pursuant to this Section
7.14(c), an independent big six accounting firm shall be selected to resolve any
such dispute and the decision of such accounting firm shall be final and binding
on the Company and the employee. The fees and costs of such accounting firm
shall be shared equally among the Company and the employee.
7.15 REGISTRATION RIGHTS AGREEMENT. Acquiror shall execute and deliver to
the other parties thereto the Registration Rights Agreement at or prior to the
Closing.
7.16 TAX TREATMENT. Each of Acquiror, Company Sub and the Company shall
use its reasonable best efforts to cause the Merger to qualify as a
reorganization under the provisions of Section 368(a) of the Code and to obtain
the opinions of counsel referred to in Sections 8.2(c) and 8.3(c).
7.17 SERIES D PREFERRED STOCK. Prior to the Effective Time, Acquiror shall
file with the Secretary of State of the State of Delaware a Certificate of
Designation in the form of Exhibit C hereto with respect to the shares of Series
D Preferred Stock issuable pursuant to Section 3.1.
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7.18 COMPANY INDEBTEDNESS. The Company shall assist Acquiror, and shall
take such actions as Acquiror may reasonably request at Acquiror's sole expense
in order to facilitate the amendment, repayment, redemption, refinancing or
other restructuring of outstanding Indebtedness of the Company on or after the
Effective Time.
7.19 AUTHORIZATION OF ISSUANCE OF MERGER CONSIDERATION. Acquiror shall
obtain any authorizations and consents necessary, and shall take such further
actions as may be required, for the issuance of the Media Stock and the Series D
Preferred Stock to holders of Company Common Stock pursuant to the terms of this
Agreement.
7.20 ATTRIBUTION. Following the Effective Time, the board of directors of
Acquiror shall attribute all of the assets and liabilities of the Company and
its Subsidiaries or, in the case of the Subsidiary Merger, of Company Sub and
its subsidiaries to the Media Group pursuant to Sections 2.5.1 and 2.6.15 of
Article V of the Restated Certificate of Incorporation of Acquiror.
7.21 FURTHER ASSURANCES. Each of the parties hereto shall execute such
documents and other instruments and take such further actions as may be
reasonably required or desirable to carry out the provisions hereof and
consummate and evidence the transactions contemplated hereby or, at and after
the Closing Date, to evidence the consummation of the transactions contemplated
by this Agreement. Upon the terms and subject to the conditions hereof, each of
the parties hereto shall take or cause to be taken all actions and to do or
cause to be done all other things necessary, proper or advisable to consummate
and make effective as promptly as practicable the transactions contemplated by
this Agreement and to obtain in a timely manner all necessary waivers, consents
and approvals and to effect all necessary registrations and filings.
7.22 INTERNAL REVENUE SERVICE RULING. Acquiror, the Company and The
Providence Journal Company submitted to the IRS on June 12, 1996 a request for
the Ruling. Acquiror and the Company shall provide each other and The Providence
Journal Company with copies of all materials subsequently submitted to the IRS.
Acquiror, the Company and The Providence Journal Company shall have the
opportunity to participate in all meetings and conferences with IRS personnel,
whether telephonically or in person. Each of Acquiror and the Company shall
cooperate in seeking to obtain the Ruling, subject to Section 2.1.
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Closing Date of the following conditions:
(a) STOCKHOLDER APPROVALS; CONSIDERATION CHARTER AMENDMENT. The
Company shall have obtained the Stockholder Approvals and a Certificate of
Amendment containing the Consideration Charter Amendment shall have been
executed, acknowledged and filed and shall have become effective in
accordance with the DGCL.
(b) 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; and (iii) no such proceeding
will be pending as of the Closing Date.
(c) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation,
injunction, restraining order or decree of any court or Governmental
Authority of competent jurisdiction shall be in effect that restrains or
prevents the transactions contemplated hereby.
(d) FORM S-4. The Form S-4 shall have been declared effective under
the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material "blue sky" and other
state securities laws applicable to the issuance of the Media Stock and
Series D Preferred Stock shall have been complied with.
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(e) NYSE LISTING. The shares of Media Stock issuable to the Company's
stockholders pursuant to this Agreement shall have been approved for listing
on the NYSE, subject only to official notice of issuance.
(f) CONVERSION OF COMPANY PREFERRED STOCK; CERTAIN ELECTIONS. The
holders of shares of Company Preferred Stock shall have converted such
shares into shares of Class B Common Stock, effective no later than
immediately prior to the Effective Time.
8.2 CONDITIONS TO OBLIGATIONS OF ACQUIROR AND COMPANY SUB. The obligations
of Acquiror and Company Sub to effect the Merger are subject to the satisfaction
of the following conditions, any or all of which may be waived in whole or in
part by Acquiror:
(a) REPRESENTATIONS AND WARRANTIES. There shall be no breach of any
representation or warranty of the Company made hereunder that, individually
or together with all other such breaches, results in a Material Adverse
Effect with respect to the Company. Acquiror shall have received a
certificate from the Company dated the Closing Date signed by an authorized
officer of the Company certifying to the fulfillment of this condition.
(b) AGREEMENTS. The Company shall have performed and complied in all
material respects with all of its undertakings, covenants, conditions and
agreements required by this Agreement to be performed or complied with by it
prior to or at the Closing. Acquiror shall have received a certificate from
the Company dated the Closing Date signed by an authorized officer of the
Company and certifying to the fulfillment of this condition.
(c) TAX OPINION. Acquiror shall have received an opinion of Weil,
Gotshal & Manges LLP, dated the Closing Date, to the effect that (i) the
Merger should be treated for Federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (ii) each of Acquiror, the
Company and, in the case of the Subsidiary Merger, Company Sub should be a
party to the reorganization within the meaning of Section 368(b) of the
Code; and (iii) no gain or loss should be recognized by the Company,
Acquiror or, in the case of the Subsidiary Merger, Company Sub as a result
of the Merger. In rendering such opinion, Weil, Gotshal & Manges LLP may
receive and rely upon representations contained in certificates of the
Company, Acquiror, certain stockholders of the Company and, in the case of
the Subsidiary Merger, Company Sub.
(d) LETTERS FROM AFFILIATES. Acquiror shall have received from each
Person in the letter referred to in Section 7.13 an executed copy of an
agreement substantially in the form of Exhibit D.
(e) CONSENTS. All Company Consents (other than Franchise Consents) and
Acquiror Consents shall have been obtained, except where the failure to
obtain any such consent would not have a Material Adverse Effect with
respect to the Company or Acquiror, as the case may be.
(f) TRANSACTION DOCUMENTS. Each of the Transaction Documents which
were not executed on the date hereof shall have been duly authorized and
executed by the parties thereto other than Acquiror.
(g) DISSENTING SHARES. Acquiror shall have received evidence, in form
and substance reasonably satisfactory to it, that the number of Dissenting
Shares shall constitute no greater than 10% of the total number of shares of
Company Common Stock (assuming conversion of the Company Preferred Stock)
outstanding immediately prior to the Effective Time.
(h) [INTENTIONALLY OMITTED.]
(I) LITIGATION. Except as described in Section 7.6(c), there shall not
be pending or threatened by any Governmental Authority any suit, action or
proceeding, (i) seeking to restrain or prohibit the Merger or seeking to
obtain from Acquiror or the Company or any of their respective Subsidiaries
in connection with the Merger any material damages, (ii) seeking to prohibit
or limit the ownership or operation by Acquiror, the Company or any of their
respective Subsidiaries of any material portion of the business or assets of
Acquiror and its Subsidiaries taken as a whole or the Company and its
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Subsidiaries taken as a whole, or to compel Acquiror, the Company or any of
their respective Subsidiaries to dispose of or hold separate any material
portion of the business or assets of Acquiror and its Subsidiaries taken as
a whole or the Company and its Subsidiaries taken as a whole, in each case
as a result of the Merger or any of the other transactions contemplated by
this Agreement or the Transaction Documents, (iii) seeking to impose
limitations on the ability of Acquiror to acquire or hold, or exercise full
rights of ownership of, any shares of capital stock of the Company,
including the right to vote such shares on all matters properly presented to
the stockholders of the Company or (iv) seeking to prohibit Acquiror from
effectively controlling in any material respect any portion of the business
or operations of the Company or any of its Subsidiaries taken as a whole,
which, in each case, has a reasonable likelihood of success and if
determined in a manner adverse to the Company or Acquiror, could reasonably
be expected to result in a Material Adverse Effect with respect to Acquiror
or the Company.
(j) FRANCHISE AND LICENSE CONSENTS. The Company shall have obtained,
in accordance with the terms of Section 7.5, (i) all Franchise Consents
required pursuant to this Section 8.2(j) (the "Required Franchise
Consents"); (ii) all License Consents for each FCC license set forth in
Section 4.6 of the Company Disclosure Letter and (iii) to the extent
required by the FCC or any Governmental Authority with jurisdiction, the
Social Contract Consent; PROVIDED, HOWEVER, that each Franchise Consent and
License Consent and the Social Contract Consent required to be obtained
hereunder shall be a Final Order. The aggregate number of Subscribers
covered by the Required Franchise Consents (i) as to which Franchise
Consents are obtained in accordance with the terms of Section 7.5 and (ii)
that do not require Franchise Consents, shall equal at least ninety percent
(90%) of the total number of Subscribers covered by all Franchises and shall
equal at least ninety-five percent (95%) of the total number of Subscribers
covered by Franchises located within the thirty largest Metropolitan
Statistical Areas (as ranked on the basis of the 1994 U.S. Census by Rand
McNally) in which the Company or its Subsidiaries operates a Franchise, in
each case as of March 31, 1996 based on the Company's month-end billing
report as of such date, as adjusted to reflect any acquisitions or
dispositions of Systems. The aggregate number of Required Franchise Consents
(i) as to which Franchise Consents are obtained in accordance with the terms
of Section 7.5 and (ii) that do not require Franchise Consents, shall equal
at least eighty-five percent (85%) of the total number of Franchises as of
the date hereof.
(k) CORPORATE PROCEEDINGS AND DOCUMENTS. All corporate proceedings
taken by the Company in connection with the transactions contemplated hereby
and all documents incident thereto shall be reasonably satisfactory in all
material respects to Acquiror and Acquiror's counsel, and Acquiror and
Acquiror's Counsel shall have received all such counterpart originals or
certified or other copies of such documents as they may reasonably request.
8.3 CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation of the
Company to effect the Merger is subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by the
Company:
(a) REPRESENTATIONS AND WARRANTIES. There shall be no breach of any
representation or warranty of Acquiror and Company Sub made hereunder that,
individually or together with all other such breaches, results in a Material
Adverse Effect with respect to Acquiror. The Company shall have received a
certificate dated the Closing Date signed by an authorized officer of
Acquiror certifying to the fulfillment of this condition.
(b) AGREEMENTS. Acquiror and Company Sub shall have performed and
complied in all material respects with all of their respective undertakings,
covenants, conditions and agreements required by this Agreement to be
performed or complied with prior to or at the Closing. The Company shall
have received a certificate dated the Closing Date signed by an authorized
officer of Acquiror certifying to the fulfillment of this condition.
(c) TAX OPINION. The Company shall have received an opinion of
Sullivan & Worcester LLP, dated the Closing Date, to the effect that (i) the
Merger should be treated for Federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (ii) each of the Acquiror,
the Company and, in the case of the Subsidiary Merger, Company Sub should be
a party to
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the reorganization within the meaning of Section 368(b) of the Code; and
(iii) no gain or loss will be recognized by a stockholder of the Company as
a result of the Merger except (x) with respect to cash received by such
stockholder in lieu of fractional shares or pursuant to the exercise of
appraisal rights and (y) if a stockholder of the Company receives cash,
gain, if any, realized by such stockholder will be recognized, but only to
the extent of the cash received. In rendering such opinion, Sullivan &
Worcester LLP, may receive and rely upon representations contained in
certificates of Acquiror, the Company, certain stockholders of the Company
and, in the case of the Subsidiary Merger, Company Sub.
(d) CONSENTS. All Company Consents (other than Franchise Consents) and
Acquiror Consents shall have been obtained, except where the failure to
obtain any such consent would not have a Material Adverse Effect with
respect to the Company or Acquiror, as the case may be.
(e) TRANSACTION DOCUMENTS. Each of the Transaction Documents shall
have been duly authorized and executed by the parties thereto other than the
Company.
(f) PREFERRED STOCK LISTING. The shares of Series D Preferred Stock
issuable to the Company's stockholders pursuant to this Agreement shall have
been approved for listing on the NYSE or otherwise approved for listing or
eligible for trading as provided in Section 7.12 hereof, subject only to
official notice of issuance.
(g) CORPORATE PROCEEDINGS AND DOCUMENTS. All corporate proceedings
taken by Acquiror and Company Sub in connection with the transactions
contemplated hereby and all documents incident thereto shall be reasonably
satisfactory in all material respects to the Company and the Company's
counsel, and the Company and the Company's counsel shall have received all
such counterpart originals or certified or other copies of such documents as
they may reasonably request.
(h) FRANCHISE AND LICENSE CONSENTS. The Company shall have obtained,
in accordance with the terms of Section 7.5, (i) all Franchise Consents
required pursuant to this Section 8.3(h) (the "Company Required Franchise
Consents"); (ii) all License Consents for each FCC license set forth in
Section 4.6 of the Company Disclosure Letter and (iii) to the extent
required by the FCC or any Governmental Authority with jurisdiction, the
Social Contract Consent; PROVIDED, HOWEVER, that each Franchise Consent and
License Consent and the Social Contract Consent required to be obtained
hereunder shall be a Final Order. The aggregate number of Subscribers
covered by the Company Required Franchise Consents (i) as to which Franchise
Consents are obtained in accordance with the terms of Section 7.5 and (ii)
that do not require Franchise Consents, shall equal at least ninety percent
(90%) of the total number of Subscribers covered by all Franchises and shall
equal at least ninety-five percent (95%) of the total number of Subscribers
covered by Franchises located within the thirty largest Metropolitan
Statistical Areas (as ranked on the basis of the 1994 U.S. Census by Rand
McNally) in which the Company or its Subsidiaries operates a Franchise, in
each case as of March 31, 1996 based on the Company's month-end billing
report as of such date, as adjusted to reflect any acquisitions or
dispositions of Systems. The aggregate number of Company Required Franchise
Consents (i) as to which Franchise Consents are obtained in accordance with
the terms of Section 7.5 and (ii) that do not require Franchise Consents,
shall equal at least eighty-five percent (85%) of the total number of
Franchises as of the date hereof.
ARTICLE IX
TERMINATION AND AMENDMENT
9.1 TERMINATION. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, whether before or after the
Stockholder Approvals:
(a) by mutual written consent of the Company, on the one hand, and
Acquiror, on the other hand, or by mutual action of their respective boards
of directors;
(b) by Acquiror, if any of the conditions set forth in Section 8.1 or
8.2 shall have become incapable of fulfillment, and shall not have been
waived by Acquiror, or if the Company shall breach in any
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material respect any of its representations, warranties or obligations
hereunder and such breach shall not have been cured in all material respects
or waived and the Company shall not have provided reasonable assurance that
such breach will be cured in all material respects on or before the Closing
Date, but only if such breach, singly or together with all other such
breaches, would have a Material Adverse Effect with respect to the Company;
(c) by the Company, if any of the conditions set forth in Section 8.1 or
8.3 shall have become incapable of fulfillment, and shall not have been
waived by the Company, or if Acquiror or Company Sub shall breach in any
material respect any of its representations, warranties or obligations
hereunder and such breach shall not have been cured in all material respects
or waived and Acquiror shall not have provided reasonable assurance that
such breach will be cured in all material respects on or before the Closing
Date, but only if such breach, singly or together with all other such
breaches, would have a Material Adverse Effect with respect to Acquiror;
(d) by either the Company or Acquiror, if the Merger shall not have been
consummated on or before August 31, 1997 (the "Termination Date"); PROVIDED,
HOWEVER, that if all the conditions set forth in Article VIII (other than
the conditions set forth in Sections 8.1(a), 8.1(b), 8.1(c), 8.2(e), 8.2(i)
and 8.2(j)) have been satisfied at the Termination Date, either Acquiror or
the Company may, by notice to the other prior to such date, extend the
Termination Date to the latest date so extended by either party but in no
event later than December 31, 1997;
(e) by either the Company or Acquiror if the Stockholder Approvals shall
not have been obtained by reason of the failure to obtain the required vote
upon a vote held at the Stockholders' Meetings (including any postponements
or adjournments thereof); PROVIDED, HOWEVER, that if the Stockholder
Approvals are not obtained at the Initial Stockholders' Meeting solely by
reason of a failure to obtain approval of the Consideration Charter
Amendment, then this Agreement shall not be terminable unless the
Stockholder Approvals shall not have been obtained by reason of a failure to
obtain the required vote upon a vote held at the Additional Stockholders'
Meeting;
(f) by Acquiror, if the Company shall have (i) withdrawn or modified, in
a manner adverse to Acquiror, its approval or recommendation of this
Agreement or any of the transactions contemplated hereby, (ii) failed to
include such recommendation in the Proxy Statement, (iii) approved or
recommended any Acquisition Proposal from a Third Party or (iv) resolved to
do any of the foregoing; or
(g) by the Company, prior to the adoption of this Agreement by the
stockholders of the Company, if the Board of Directors shall approve, and
the Company shall enter into, a definitive agreement providing for the
implementation of an Acquisition Proposal; PROVIDED, HOWEVER, that (i) the
Company is not then in breach of Section 7.10, (ii) prior to such
termination, the Company has negotiated with Acquiror in good faith to make
such adjustments in the terms and conditions of this Agreement as would
enable the Company to proceed with the transactions contemplated hereby and
(iii) the Board of Directors, has determined in good faith (on the basis of
the terms of such Acquisition Proposal and the terms of this Agreement,
after giving effect to any concessions offered by Acquiror pursuant to
clause (ii) above), after receipt of written advice from the Company's
outside legal counsel, that such termination is advisable for the Board of
Directors to act in a manner consistent with its fiduciary duties to
stockholders under Applicable Law and (iv) the Company shall provide to
Acquiror prior written notice of such termination, which notice shall advise
Acquiror of the matters described in clauses (ii) and (iii) above.
Notwithstanding the foregoing, a party shall not be permitted to terminate this
Agreement pursuant to clause (b), (c) or (d) hereof if such party is in breach
of any of its material representations, warranties, covenants or agreements
contained in this Agreement.
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9.2 EFFECT OF TERMINATION. In the event of termination by the Company or
Acquiror pursuant to Section 9.1, written notice thereof shall promptly be given
to the other parties and, except as otherwise provided herein, the transactions
contemplated by this Agreement shall be terminated, without further action by
any party. Notwithstanding the foregoing, nothing in this Section 9.2 shall be
deemed to release any party from any liability for any breach by such party of
the terms and provisions of this Agreement or to impair the right of the
Company, on the one hand, and Acquiror and Company Sub, on the other hand, to
compel specific performance of the other party of its or their obligations under
this Agreement.
9.3 FEES AND EXPENSES. In order to induce Acquiror to, among other things,
enter into this Agreement, the Company agrees that if this Agreement is
terminated (A) by Acquiror pursuant to Section 9.1(f) hereof, (B) by the Company
pursuant to Section 9.1(g) hereof, or (C) by the Company or Acquiror pursuant to
Section 9.1(e) hereof and the Board of Directors shall have materially modified
or withdrawn its approval, determination or recommendation of this Agreement or
any of the transactions contemplated hereby prior to the Initial Stockholders'
Meeting or there shall have been an Acquisition Proposal and such proposal shall
not have been withdrawn prior to the Initial Stockholders' Meeting and within
one year thereafter the Company enters into a definitive agreement with respect
to such Acquisition Proposal (including any definitive agreement relating to an
Acquisition Proposal offered by the same proponent or its Affiliate as such
Acquisition Proposal), then the Company shall promptly pay Acquiror a fee of
$125 million, plus an amount equal to the actual reasonable fees and expenses
paid or payable by or on behalf of Acquiror to its attorneys, accountants,
environmental consultants, management consultants, and other consultants and
advisors in connection with the negotiation, execution and delivery of this
Agreement and the transactions contemplated hereby; PROVIDED, HOWEVER, that
payment for fees and expenses shall in no event exceed $15 million. Any payment
required by this Section 9.3 shall be made in same day funds to Acquiror by the
Company no later than five Business Days following termination of this Agreement
by Acquiror or the Company, as the case may be.
9.4 [INTENTIONALLY OMITTED.]
9.5 AMENDMENT. Subject to Applicable Law, this Agreement may be amended,
modified or supplemented only by written agreement of Acquiror and the Company
at any time prior to the Effective Time with respect to any of the terms
contained herein; PROVIDED, HOWEVER, that, after this Agreement is adopted by
the Company's stockholders, no such amendment or modification shall (i) alter or
change the amount or kind of consideration to be delivered to the stockholders
of the Company or (ii) alter or change any of the terms and conditions of this
Agreement, if such alteration or change would adversely affect the holders of
any class of capital stock of the Company.
9.6 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 allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto; and (iii) 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 nor in any way effect the validity of this Agreement or
any part hereof or the right of such party thereafter to enforce each and every
provision of this Agreement. No waiver of any breach of or non-compliance with
this Agreement shall be held to be a waiver of any other or subsequent breach or
non-compliance.
ARTICLE X
GENERAL PROVISIONS
10.1 FRUSTRATION OF THE CLOSING CONDITIONS. None of the Company, Acquiror
or Company Sub may rely on the failure of any condition precedent set forth in
Article VIII to be satisfied if such failure was caused by such party's (or
parties') failure to act in good faith or to use its reasonable best efforts to
consummate the transactions contemplated by this Agreement in accordance with
Section 7.4.
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10.2 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties and agreements in this Agreement shall terminate at
the Effective Time or upon the termination of this Agreement pursuant to Article
IX, except that the agreements set forth in Articles I, II and III and Sections
7.11, 7.14 and 7.20 shall survive the Effective Time and those set forth in
Sections 9.2, 9.3, 9.4 and Article X hereof shall survive termination.
10.3 EXPENSES. Except as otherwise provided herein, including in Sections
7.5 and 9.3, each of the parties hereto 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 Transaction Documents and the consummation
of the transactions contemplated hereby and thereby; PROVIDED, HOWEVER, that the
Company shall pay, with funds of the Company and not with funds provided by
Acquiror, any and all property or transfer Taxes imposed on the Company or any
Gains Taxes.
10.4 APPLICABLE 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, including all matters of construction, validity and
performance.
10.5 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 Persons giving them (in the case of any
corporation the signature shall be by an officer thereof) and delivered by hand,
deposited in the United States mail (registered or certified, return receipt
requested), properly addressed and postage prepaid, or delivered by telecopy:
If to the Company, to:
Continental Cablevision, Inc.
The Pilot House
Lewis Wharf
Boston, Massachusetts 02110
Telephone: (617) 742-9500
Telecopy: (617) 742-0530
Attention: Amos B. Hostetter, Jr.
with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
Telephone: (212) 408-5100
Telecopy: (212) 541-5369
Attention: Dennis J. Friedman, Esq.
and:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 338-2800
Telecopy: (617) 338-2880
Attention: Patrick K. Miehe, Esq.
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If to Acquiror or Company Sub, to:
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Telephone: (303) 793-6310
Telecopy: (303) 793-6707
Attention: General Counsel
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
Attention: Dennis J. Block, Esq.
Such names and addresses may be changed by notice given in accordance with this
Section 10.5.
10.6 ENTIRE AGREEMENT. This Agreement and the Transaction Documents
(including the Exhibits attached hereto, all of which are a part hereof) contain
the entire understanding of the parties hereto and thereto with respect to the
subject matter contained herein and therein, supersede and cancel all prior
agreements, negotiations, correspondence, undertakings and communications of the
parties, oral or written, respecting such subject matter. There are no
restrictions, promises, representations, warranties, agreements or undertakings
of any party hereto or to any of the Transaction Documents with respect to the
transactions contemplated by this Agreement and the Transaction Documents other
than those set forth herein or therein or made hereunder or thereunder.
Notwithstanding the foregoing, the Confidentiality Agreements shall remain in
full force and effect and shall survive any termination of this Agreement.
10.7 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.
10.8 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.
10.9 PARTIES IN INTEREST; ASSIGNMENT. 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, except
that Company Sub may assign, in its sole discretion, any or all of its rights,
interests and obligations under this Agreement to any direct wholly owned
subsidiary of Acquiror, but no such assignment shall relieve Company Sub of any
of its obligations hereunder. Subject to the preceding sentence, this Agreement
shall inure to the benefit of and be binding upon the Company, Acquiror and
Company Sub and shall inure to the sole benefit of the Company, Acquiror and
Company Sub and their respective successors and permitted assigns. Except as set
forth in Section 7.11 and Section 7.14(c), 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.
10.10 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.
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10.11 SPECIFIC PERFORMANCE. The parties hereto agree that the remedy at
law for any breach of this Agreement will be inadequate and that any party by
whom this Agreement is enforceable shall be entitled to specific performance in
addition to any other appropriate relief or remedy. Such party may, in its sole
discretion, apply to a court of competent jurisdiction for specific performance
or injunctive or such other relief as such court may deem just and proper in
order to enforce this Agreement or prevent any violation hereof and, to the
extent permitted by Applicable Law, each party waives any objection to the
imposition of such relief.
10.12 JURISDICTION. Each party to this Agreement hereby irrevocably agrees
that any legal action, suit or proceeding arising out of or relating to this
Agreement, the Transaction Documents or any other agreements or transactions
contemplated hereby shall be brought in the Chancery Court of the State of
Delaware and each party hereto agrees not to assert, by way of motion, as a
defense or otherwise, in any such action, suit or proceeding any claim that it
is not subject personally to the jurisdiction of such court, that the action,
suit or proceeding is brought in an inconvenient forum, that the venue of the
action, suit or proceeding is improper or that this Agreement, any Transaction
Document, any other agreement or transaction or the subject matter hereof or
thereof may not be enforced in or by such court. Each party hereto further and
irrevocably submits to the jurisdiction of such court in any action, suit or
proceeding.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
U S WEST, INC.
By: /s/ CHARLES M. LILLIS
--------------------------------------
Name: Charles M. Lillis
Title: Executive Vice President;
President and Chief Exective
Officer of the U S WEST
Media Group
CONTINENTAL MERGER CORPORATION
By: /s/ CHARLES M. LILLIS
--------------------------------------
Name: Charles M. Lillis
Title: President
CONTINENTAL CABLEVISION, INC.
By: /s/ AMOS B. HOSTETTER, JR.
--------------------------------------
Name: Amos B. Hostetter, Jr.
Title: Chairman of the Board and
Chief
Executive Officer
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<PAGE>
EXHIBIT A
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CONTINENTAL CABLEVISION, INC.
Continental Cablevision, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at meetings duly
called and held, in accordance with the provisions of Section 242 of the General
Corporation Law of the State of Delaware, duly adopted resolutions setting forth
proposed amendments to the Restated Certificate of Incorporation of the
Corporation. The resolutions setting forth the proposed amendments are as
follows:
RESOLVED: That Section H of Article FOURTH of the Corporation's Restated
Certificate of Incorporation be amended to read as follows:
H. OTHER RIGHTS. Except as otherwise required by the Delaware
General Corporation Law or as otherwise provided in this Restated
Certificate of Incorporation, and except as provided in the Agreement and
Plan of Merger, dated as of February 27, 1996, as amended and restated as
of June 27, 1996, as the same may be further amended from time to time
(the "Merger Agreement"), among U S WEST, Inc., a Delaware corporation,
Continental Merger Corporation, a Delaware corporation, and the
Corporation, each share of Class A Common Stock and each share of Class B
Common Stock shall have identical powers, preferences, rights and
privileges.
RESOLVED: That Article FOURTH of the Corporation's Restated Certificate of
Incorporation be amended by adding a new Section J immediately
following Section I to read as follows:
J. CERTAIN MATTERS RELATING TO THE MERGER
AGREEMENT. Notwithstanding anything in this Article FOURTH to the
contrary, so long as the Merger Agreement shall remain in effect, (i) any
person holding shares of Class B Common Stock may transfer, and the
Corporation shall register the transfer of, any share of Class B Common
Stock to any transferee of such holder (including, without limitation,
any Permitted Transferee of such holder), and such transfer shall not
result in the conversion of such shares into shares of Class A Common
Stock, and (ii) only a person who was a Deemed Record Holder of Record
Date Shares (as such terms are defined below) on September 20, 1996 or
who is a Permitted Transferee of such Deemed Record Holder to which such
Deemed Record Holder has transferred any of such shares on or after
September 20, 1996 shall be entitled to convert such Record Date Shares
into shares of Class A Common Stock pursuant to Section F of Article
FOURTH and any such conversion shall only be permissible if the aggregate
number of such Record Date Shares so converted by such Deemed Record
Holder and any such Permitted Transferees of such Deemed Record Holder
(together with any other Record Date Shares converted pursuant to this
clause (ii)) does not exceed, at the time any such conversion is
requested by such Deemed Record Holder or any such Permitted Transferee,
%1 of the aggregate number of Record Date Shares registered in the
name of such Deemed Record Holder as of September 20, 1996; PROVIDED,
HOWEVER, that, notwithstanding the foregoing clause (ii), any
1 This percentage will be determined as of the close of business on the date
of the Special Meeting (the "Charter Amendment Adoption Date"), by dividing
(i)(x) the aggregate number of shares of Class B Common Stock that would be
outstanding as of the Charter Amendment Adoption Date (other than shares of
Common Stock issued to employees of the Corporation that are subject to vesting
pursuant to restricted stock purchase agreements with the Corporation) if all
outstanding shares of Series A Participating Convertible Preferred Stock had
been converted into Class B Common Stock as of such date (the "Outstanding Class
B Shares") less (y) the maximum amount of cash consideration then payable by U S
WEST in the Merger divided by $30, by (ii) the Outstanding Class B Shares.
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<PAGE>
fully paid Record Date Share may be converted into a share of Class A
Common Stock in connection with the enforcement by a secured party of its
rights in and to such Record Date Share pursuant to a BONA FIDE pledge of
such share to secure obligations. For purposes of the foregoing, (a) the
term "Deemed Record Holder" means any record holder of shares of Class B
Common Stock or Series A Participating Convertible Preferred Stock as of
the close of business on September 20, 1996 and (b) the term "Record Date
Shares" means (i), with respect to any Deemed Record Holder, the
aggregate number of shares of Class B Common Stock registered in the name
of such Deemed Record Holder as of the close of business on September 20,
1996 and (ii), in the case of any holder of Series A Participating
Convertible Preferred Stock as of the close of business on September 20,
1996, the aggregate number of shares of Class B Common Stock that would
have been registered in the name of such holder had such holder converted
prior to September 20, 1996 all of the shares of Series A Participating
Convertible Preferred Stock registered in the name of such holder into
shares of Class B Common Stock.
RESOLVED: That the foregoing amendments to the Restated Certificate of
Incorporation of the Corporation are recommended to the
stockholders for approval as being in the best interests of the
Corporation and that said amendments be presented to the
stockholders for their adoption and that a special meeting of the
stockholders duly be called for that purpose.
SECOND: The stockholders of the Corporation (including (i) the holders of
the Class A Common Stock, the Class B Common Stock, and the Series A
Participating Convertible Preferred Stock voting together as a single class,
(ii) the holders of the Class A Common Stock voting together as a separate class
(but only with regard to the proposed amendment to Section H of Article FOURTH
of the Corporation's Restated Certificate of Incorporation) and (iii) the
holders of the Class B Common Stock and the Series A Participating Convertible
Preferred Stock voting together as a separate class) approved said proposed
amendments at a special meeting of stockholders for which written notice was
given pursuant to Section 222 of the General Corporation Law of the State of
Delaware.
THIRD: That said amendments were duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed
by William T. Schleyer, its duly authorized officer, this day of
, 1996.
CONTINENTAL CABLEVISION, INC.
By: __________________________________
Name: William T. Schleyer
Title: President
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<PAGE>
ANNEX II
[LAZARD FRERES & CO. LLC LETTERHEAD]
October 1, 1996
Members of the Board of Directors
Continental Cablevision, Inc.
The Pilot House, Lewis Wharf
Boston, Massachusetts 02110
Members of the Board:
We understand that Continental Cablevision, Inc. (the "Company") and U S
WEST, Inc. ("Acquiror") propose to enter into an amendment dated as of the date
hereof (the "Amendment") to the Agreement and Plan of Merger, dated as of
February 27, 1996 (as amended and restated as of June 27, 1996 and as amended by
the Amendment, the "Merger Agreement"), pursuant to which the Company will be
merged with and into Acquiror (the "Merger"). We understand that in the Merger,
(i) each share of Class A Common Stock of the Company shall be converted into
the right to receive a fraction of a share of U S WEST, Inc. Media Group Common
Stock plus a fraction of a share of U S WEST, Inc. Series D Convertible
Preferred Stock and (ii) each share of Class B Common Stock of the Company shall
be converted into (A) the right to receive a fraction of a share of U S WEST,
Inc. Media Group Common Stock plus a fraction of a share of U S WEST, Inc.
Series D Convertible Preferred Stock, subject to proration, (B) the right to
receive an amount in cash, subject to proration, or (C) the right to receive a
combination of a fraction of a share of U S WEST, Inc. Media Group Common Stock,
a fraction of a share of U S WEST, Inc. Series D Preferred Stock, and an amount
of cash, all as further provided in and subject to the Merger Agreement.
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of the Company of the consideration to be received by
such stockholders pursuant to the Merger.
In connection with this opinion, we have:
(i) Reviewed the financial terms of the Merger Agreement;
(ii) Analyzed certain historical business and financial information
relating to the Company and Acquiror;
(iii) Reviewed various financial forecasts and other data provided to us
by the Company and Acquiror relating to their businesses;
(iv) Held discussions with members of senior management of the Company
and Acquiror with respect to the past and current operations and financial
condition of the Company and Acquiror and the business, prospects and
strategic objectives of the Company and Acquiror;
(v) Reviewed public information with respect to certain other companies
in lines of business we believe to be generally comparable, in whole or in
part, to the business of the Company and Acquiror;
(vi) Reviewed the financial terms of certain business combinations
involving companies in lines of businesses which we believe to be generally
comparable to those of the Company, and in other industries generally;
(vii) Reviewed historical stock prices and trading volumes of stock of U
S WEST, Inc. (including U S WEST, Inc. Media Group stock); and
(viii) Conducted such other financial studies, analyses, and
investigations as we deemed appropriate.
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<PAGE>
In rendering our opinion, we have assumed and relied upon the accuracy and
the completeness of the financial and other information provided to us by the
Company and Acquiror and have not assumed responsibility for any independent
verification of such information or any independent valuation or appraisal of
the assets or liabilities of the Company or Acquiror. With respect to financial
forecasts, we have assumed that such forecasts were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of
management of the Company or Acquiror. We assume no responsibility for, and
express no view as to, such forecasts or the assumptions on which they are
based.
In rendering our opinion, we have also assumed that the Merger will be
consummated on the terms contained in the Merger Agreement, without any waiver
of any material terms or conditions by the Company, and that obtaining the
necessary regulatory and governmental approvals for the Merger will not impose
any material adverse impact on the contemplated benefits of the Merger. We have
not reviewed any proxy or information statements or similar documents that may
be prepared for use in connection with the Merger.
Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the other information made available to us
as of, the date hereof. We express no opinion as to what the value of U S WEST,
Inc. stock (including U S WEST, Inc. Media Group stock to be issued in the
Merger) actually will be upon consummation of the Merger.
Our opinion is directed to the Board of Directors of the Company and does
not constitute a recommendation to any stockholder of the Company as to whether
or not such stockholder should vote with respect to the Merger. It is understood
that this letter may not be disclosed or otherwise referred to without our prior
written consent, except as may otherwise be required by law or by a court of
competent jurisdiction.
We understand the Board of Directors of the Company has received, or is
concurrently receiving, a written opinion from Allen & Company Incorporated,
dated as of even date herewith, to the effect that, as of the date hereof, the
consideration to be received by holders of the Company's Class A Common Stock
pursuant to the Merger is fair from a financial point of view.
We have acted as financial advisor to the Company in connection with the
Merger. We will receive fees for such services, which were earned partially upon
announcement of the Merger and will be earned partially upon consummation of the
Merger. Our firm has in the past provided investment banking and financial
advisory services to the Company and has received customary investment banking
and financial advisory fees for rendering such services.
As you are aware, Lazard Freres & Co. LLC, certain of its managing
directors, and its affiliate, Corporate Partners, L.P., and certain related
entities, have direct or indirect interests in stock of the Company, including
ownership of all of the Company's outstanding Series A Preferred Stock, and
principals of Corporate Partners, L.P. (who are also managing director of Lazard
Freres & Co. LLC) are members of the Company's Board of Directors. We understand
that as set forth in the Merger Agreement a condition to the Merger is that all
outstanding shares of the Company's Series A Preferred Stock be converted into
Class B Common Stock of the Company immediately prior to the effective time of
the Merger.
Based on and subject to the foregoing, we are of the opinion that the
consideration to be received by the stockholders of the Company pursuant to the
Merger is fair to the stockholders of the Company from a financial point of
view.
Very truly yours,
LAZARD FRERES & CO. LLC
By /s/ PETER R. EZERSKY
--------------------------------------
Peter R. Ezersky
Managing Director
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<PAGE>
ANNEX III
[ALLEN & COMPANY INCORPORATED LETTERHEAD]
October 1, 1996
Members of the Board of Directors
Continental Cablevision, Inc.
The Pilot House
Lewis Wharf
Boston, Massachusetts 02110
Ladies and Gentlemen:
You have requested our opinion, as of this date, as to the fairness, from a
financial point of view, to the holders of the outstanding shares of Class A
Common Stock, par value $0.01 per share (the "Class A Common Stock"), of
Continental Cablevision, Inc., a Delaware corporation (the "Company"), of the
consideration to be received by such holders in connection with the Proposed
Transaction hereinafter referred to.
Pursuant to the Agreement and Plan of Merger, dated as of February 27, 1996,
as amended and restated as of June 27, 1996, and as presently proposed to be
amended (the "Merger Agreement") by and between the Company and U S WEST, Inc.,
a Delaware corporation, (the "Acquiror") and Continental Merger Corporation, a
Delaware corporation, the Company will enter into a business combination
transaction pursuant to which the Company and the Continental Merger Corporation
or one of Acquiror's other affiliates will merge (the "Proposed Transaction").
Unless otherwise specifically defined herein, all capitalized terms used herein
shall have the meanings ascribed to such terms in the Merger Agreement.
Pursuant to the terms, and subject to the conditions contained in, the
Merger Agreement, among other things, each share of the Company's Class A Common
Stock issued and outstanding on the date hereof and as of the Effective Time
will be converted into the right to receive $30 per share, subject to adjustment
in certain circumstances (valued at approximately $25.76, based on the closing
price of U S WEST Media Group Common Stock on September 30, 1996), comprised of
(i) Acquiror's Series D Convertible Preferred Stock, par value $1.00 per share,
with a liquidation value of $50 per share and having the rights, preferences and
terms set forth in the Certificate of Designations appended to the Merger
Agreement and (ii) Acquiror's U S WEST Media Group Common Stock, par value $.01
per share. We understand that the terms of the Proposed Transaction, including
the intended qualification for treatment as a reorganization pursuant to Section
368(a) of the Internal Revenue Code, have been structured, in part, to optimize
the tax treatment of the Proposed Transaction for the Company's Class A
stockholders and to minimize the tax consequences of the Proposed Transaction to
the Company and the Acquiror.
We understand that all approvals required for the consummation of the
Proposed Transaction have been or, prior to consummation of the Proposed
Transaction, will be obtained. As you know Allen & Company Incorporated
("Allen") will receive a fee for preparing and rendering this opinion pursuant
to the Engagement Letter Agreement dated February 16, 1996 by and between the
Company and Allen.
In arriving at our opinion, we have among other things:
(i) reviewed the terms and conditions of the Merger Agreement (including
the proposed draft amendment thereto, which prior to the delivery of this
opinion has not been executed by the parties);
(ii) analyzed publicly available historical business and financial
information relating to the Company and the Acquiror, as presented in
documents filed with the Securities and Exchange Commission;
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<PAGE>
(iii) reviewed certain financial forecasts, budgets and other data
provided to us by the Company and the Acquiror relating to their respective
businesses for their 1995 and 1996 fiscal years;
(iv) conducted discussions with certain members of the senior management
of the Company and the Acquiror with respect to the financial condition,
business, operations, strategic objectives and prospects of the Company and
the Acquiror, respectively;
(v) reviewed and analyzed public information, including certain stock
market data and financial information relating to selected public companies
which we deemed generally comparable to the Company and the Acquiror;
(vi) reviewed the trading history of the Acquiror's Common Stock,
including its performance in comparison to market indices and to selected
companies in comparable businesses;
(vii) reviewed public financial and transaction information relating to
merger and acquisition transactions we deemed to be comparable to the
Proposed Transaction; and
(viii) conducted such other financial analyses and investigations as we
deemed necessary or appropriate for the purposes of the opinion expressed
herein.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information respecting the Company and
the Acquiror and any other information provided to us, and we have not assumed
any responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets of the Company. With
respect to the financial forecasts referred to above, we have assumed that they
have been reasonably prepared on a basis reflecting the best currently available
information and the good faith estimates and judgments of the management of the
Company and the Acquiror as to the future financial performance of the Company
and the Acquiror, respectively.
In addition to our review and analysis of the specific information set forth
above, our opinion herein reflects and gives effect to our assessment of general
economic, monetary and market conditions existing as of the date hereof as they
may affect the business and prospects of the Company.
We understand that the Company has retained Lazard Freres & Co. LLC
("Lazard") as its financial advisor in connection with the Proposed Transaction,
Lazard is rendering its opinion as to the fairness, from a financial point of
view, of the terms of the Proposed Transaction, and as such, the scope of
Allen's engagement has been limited to the preparation and rendering of the
opinion contained herein. In connection with the preparation of this opinion, we
have not been authorized by the Company or its Board of Directors to solicit,
nor have we solicited, third party indications of interest for the acquisition
of all or any part of the Company. Furthermore, the opinion rendered herein does
not constitute a recommendation that any stockholder of the Company vote to
approve the Merger.
Based on and subject to the foregoing, we are of the opinion that, as of
this date, the consideration to be received by the holders of the Company's
Class A Common Stock in the Proposed Transaction pursuant to the Merger
Agreement is fair to such holders from a financial point of view.
Very truly yours,
ALLEN & COMPANY INCORPORATED
By: /s/ NANCY B. PERETSMAN
--------------------------------------
Nancy B. Peretsman
Managing Director
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ANNEX IV
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS. - (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
stockholders; and further provided that no appraisal rights shall be available
for any shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the holders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of stock
of a constituent corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to Section Section 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc. or held of record by more than 2,000 stockholders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its
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<PAGE>
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
253 or this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation that are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Any stockholder entitled to appraisal rights may, within
twenty days after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either (i)
each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send a second notice to all such
holders on or within 10 days after such effective date; provided, however, that
if such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such holder's
shares in accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that is required
to give either notice that such notice has been given shall, in the absence of
fraud, be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive such notice, each constituent
corporation may fix, in advance, a record date that shall be not more than 10
days prior to the date the notice is given; provided that, if the notice is
given on or after the effective date of the merger or consolidation, the record
date shall be the close of business on the next day preceding the day on which
the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days
IV-2
<PAGE>
after the effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon written
request, shall be entitled to receive from the corporation surviving the merger
or resulting from the consolidation a statement setting forth the aggregate
number of shares not voted in favor of the merger or consolidation and with
respect to which demands for appraisal have been received and the aggregate
number of holders of such shares. Such written statement shall be mailed to the
stockholder within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a
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<PAGE>
portion of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable attorney's fees
and the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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<PAGE>
ANNEX V
DESCRIPTION OF CONTINENTAL
<TABLE>
<S> <C>
BUSINESS............................................................................. V-2
General............................................................................ V-2
Business Strategy.................................................................. V-3
U.S. Cable Television Business..................................................... V-3
U.S. Operating Strategy............................................................ V-4
U.S. Systems....................................................................... V-9
U.S. Acquisitions and Investments.................................................. V-14
International Operations........................................................... V-15
Telecommunications and Technology.................................................. V-17
Programming and Other Investments.................................................. V-18
Competition........................................................................ V-20
Properties......................................................................... V-22
Employees.......................................................................... V-23
Legal Proceedings.................................................................. V-23
SELECTED CONSOLIDATED FINANCIAL INFORMATION.......................................... V-24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... V-26
General............................................................................ V-26
Results of Operations.............................................................. V-27
Liquidity and Capital Resources.................................................... V-30
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION..................... V-36
LEGISLATION AND REGULATION........................................................... V-41
Cable Communications Policy Act of 1984............................................ V-41
Cable Television Consumer Protection and Competition Act of 1992................... V-41
Telecommunications Act of 1996..................................................... V-42
Federal Regulation................................................................. V-42
Copyright Regulation............................................................... V-48
State and Local Regulations........................................................ V-48
Regulation of Telecommunications Activities........................................ V-49
MANAGEMENT........................................................................... V-50
Directors and Executive Officers................................................... V-50
Executive Compensation............................................................. V-52
Compensation of Directors.......................................................... V-56
Executive Compensation Policies.................................................... V-56
CERTAIN TRANSACTIONS................................................................. V-57
CREDIT ARRANGEMENTS OF THE COMPANY................................................... V-57
1994 Credit Facility............................................................... V-58
1995 Credit Facility............................................................... V-58
1996 Credit Facility............................................................... V-59
Indentures for Outstanding Senior and Subordinated Debt Securities................. V-60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........................................... F-1
</TABLE>
V-1
<PAGE>
BUSINESS
CONTINENTAL CABLEVISION, INC. IS REFERRED TO HEREIN AS THE "COMPANY" OR
"CONTINENTAL," WHICH TERMS INCLUDE ITS CONSOLIDATED SUBSIDIARIES UNLESS THE
CONTEXT INDICATES OTHERWISE. THE SUBSCRIBER-RELATED INFORMATION FOR 1995 IN THIS
ANNEX V TO THE PROXY STATEMENT, EXCEPT AS OTHERWISE PROVIDED, GIVES EFFECT TO
(I) THE ACQUISITION ON OCTOBER 5, 1995 BY CONTINENTAL OF THE CABLE TELEVISION
BUSINESS AND ASSETS OF PROVIDENCE JOURNAL COMPANY ("PROVIDENCE JOURNAL"),
SERVING APPROXIMATELY 779,000 BASIC SUBSCRIBERS, THROUGH THE MERGER OF
PROVIDENCE JOURNAL WITH AND INTO CONTINENTAL AND RELATED TRANSACTIONS (THE
"PROVIDENCE JOURNAL MERGER"); (II) THE RECENT ACQUISITIONS OF SYSTEMS SERVING
APPROXIMATELY 88,000 BASIC SUBSCRIBERS IN CHICAGO, ILLINOIS ("CABLEVISION OF
CHICAGO"), 74,000 BASIC SUBSCRIBERS IN MICHIGAN ("COLUMBIA CABLE OF MICHIGAN")
AND 12,000 BASIC SUBSCRIBERS IN NORTHERN CALIFORNIA ("CONSOLIDATED CABLEVISION
OF CALIFORNIA"); (III) THE RECENT ACQUISITION BY CONTINENTAL OF THE REMAINING
66.2% INTEREST IN N-COM LIMITED PARTNERSHIP II ("N-COM"), SERVING APPROXIMATELY
56,000 BASIC SUBSCRIBERS IN MICHIGAN (THE "N-COM BUYOUT" AND, COLLECTIVELY WITH
THE ACQUISITIONS REFERRED TO IN THE FOREGOING CLAUSE (II), THE "RECENT
ACQUISITIONS"); AND (IV) THE PENDING ACQUISITION BY CONTINENTAL OF THE REMAINING
62.1% INTEREST IN MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. ("M/NH"), WHICH
OWNS SYSTEMS SERVING APPROXIMATELY 127,000 BASIC SUBSCRIBERS IN THE
MINNEAPOLIS/ST. PAUL, MINNESOTA AREA (THE "PENDING M/NH BUYOUT," AND,
COLLECTIVELY WITH THE PROVIDENCE JOURNAL MERGER AND THE RECENT ACQUISITIONS, THE
"ACQUISITIONS"). THE SHARE INFORMATION IN THIS PROXY STATEMENT, EXCEPT AS
OTHERWISE PROVIDED, GIVES EFFECT TO A STOCK DIVIDEND, EFFECTIVE SEPTEMBER 29,
1995, OF 24 SHARES OF THE RESPECTIVE CLASS OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, OF THE COMPANY (THE "COMMON STOCK") ON EACH SHARE OF CLASS A COMMON STOCK
OF THE COMPANY (THE "CLASS A COMMON STOCK") AND CLASS B COMMON STOCK OF THE
COMPANY (THE "CLASS B COMMON STOCK") OUTSTANDING ON THE RECORD DATE FOR SUCH
STOCK DIVIDEND.
GENERAL
Continental is a leading provider of broadband communications services. As
of June 30, 1996, Continental's systems and those of its U.S. affiliates passed
approximately 7.4 million homes and provided service to approximately 4.3
million basic cable subscribers, making the Company the third-largest cable
television system operator in the United States. In addition, Continental has
pursued investments in sectors that are complementary to its core business,
including (i) international broadband communications; (ii) telecommunications
and technology industries, including competitive-access telephony and direct
broadcast satellite ("DBS") service; and (iii) programming services.
Continental's business strategy is to capitalize on its clustered systems,
technologically advanced broadband networks, management expertise and reputation
for quality to compete effectively in new and existing businesses and markets.
CABLE TELEVISION SYSTEMS. The Company's five management regions operate
systems that are organized into 22 operating clusters in 20 states. As of June
30, 1996, approximately 57.8% of Continental's total basic subscribers were
located in the Company's seven largest operating clusters. Continental believes
that its operating scale in key markets generates significant benefits,
including operating efficiencies, and enhances its ability to develop and deploy
new technologies and services.
Continental's systems have channel capacity and addressability that are
among the highest in the cable industry. The Company's systems are located
principally in suburban communities adjacent to major metropolitan markets and
in mid-sized cities that generally have attractive demographics and are
geographically diverse. These systems serve communities with a median household
income of approximately $42,300 versus the national median of approximately
$37,900. Continental 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 pay-to-basic
penetration rates and total monthly revenue per average basic subscriber that
are among the highest in the cable television industry. Continental believes
that the geographic diversity of its system clusters reduces its exposure to
economic, competitive or regulatory factors in any particular region.
INTERNATIONAL. Continental participates in several broadband communications
ventures outside the United States. The Company owns an approximate 50% interest
in Fintelco S.A. ("Fintelco"), one of the largest cable television system
operators in Latin America, which currently serves approximately 632,000
subscribers in Argentina. Continental has also formed a joint venture in
Australia ("Optus Vision"), in which it holds a 46.5% equity interest. Optus
Vision is constructing a broadband communications network to
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<PAGE>
provide local telephony, cable television and a variety of advanced interactive
services to business and residential customers in Australia's major markets.
Continental has a 25% equity interest in Singapore Cablevision Pte Ltd ("SCV"),
a joint venture that began providing cable television services in Singapore in
June 1995. Upon completion of its broadband network, SCV will offer cable
television and a variety of advanced interactive services to substantially all
households in Singapore.
TELECOMMUNICATIONS AND TECHNOLOGY. The Company has a number of investments
in the telecommunications and technology industries, including: (i) a minority
ownership interest in Teleport Communications Group Inc. ("TCG"), a leading
provider of local telecommunications services to high-volume business customers
in major metropolitan areas nationwide; (ii) controlling interests in two
companies that provide local telecommunications services to business customers
in Richmond, Virginia and Jacksonville, Florida; and (iii) an approximate 10%
ownership interest in PrimeStar Partners, L.P. ("PrimeStar"), which provides
more than 90 channels of medium-powered DBS service to over 1.2 million
customers nationwide.
PROGRAMMING. The Company has selectively made investments in programming
services. The Company's programming investments include interests in Turner
Broadcasting System, Inc. ("Turner"), E! Entertainment Television, Inc. ("E!"),
New England Cable News, Home Shopping Network, Inc. ("HSN"), Viewer's Choice,
Digital Cable Radio Associates ("Music Choice"), The Golf Channel, the TV Food
Network, the Outdoor Life Network and Speedvision.
BUSINESS STRATEGY
Continental's business strategy has been to capitalize on its clustered
systems, technologically advanced broadband networks, management expertise and
reputation for quality to compete effectively in new and existing businesses and
markets.
U.S. OPERATIONS. The Company's strategy in the United States has been to
acquire and retain customers that will subscribe to a broad range of enhanced
video, high-speed data, telephony and other telecommunications services.
Execution of this strategy involves the following key operating principles: (i)
expansion of its nationwide operating scale (as measured by homes passed); (ii)
further development of large regional system clusters in demographically
attractive markets; (iii) development of technologically advanced broadband
networks capable of providing enhanced video, high-speed data, telephony and
other telecommunications services; (iv) dedication to decentralized and locally
responsive management; (v) increased focus on marketing; (vi) commitment to
superior customer service and community relations; and (vii) continued
leadership in regulatory and other industry matters.
INTERNATIONAL OPERATIONS. Continental has made investments in international
broadband communications networks, principally in Latin America and the Pacific
Rim. These investments represent opportunities for Continental to capitalize on
its managerial, technical and marketing expertise in international markets.
U.S. CABLE TELEVISION BUSINESS
Cable television is a service that delivers a wide variety of channels of
television programming, consisting primarily of video entertainment, sports and
news, as well as informational services, locally originated programming and
digital audio programming, to the homes of subscribers who pay a monthly fee for
the service. Television and radio signals are received by off-air antennas,
microwave relay systems, satellite earth stations and fiber-optic cables and
then distributed to subscribers' homes over networks of coaxial and fiber-optic
cables.
Continental's systems offer subscribers various levels (or "tiers") of cable
services consisting of broadcast television signals available off-air in any
locality, television signals from so-called "superstations" originating in
distant cities (such as WTBS, WGN and WWOR), various satellite-delivered,
non-broadcast channels (such as Entertainment and Sports Programming Network
("ESPN"), Cable News Network ("CNN"), the USA Network ("USA"), and Music
Television ("MTV")), displays of information featuring news, weather and stock
market reports and programming originated locally by the systems (such as
public, educational and governmental access channels). Continental's systems
also provide premium services to basic subscribers for an extra monthly charge.
These premium services include Home Box Office ("HBO"),
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<PAGE>
Cinemax, Showtime, The Movie Channel, Encore, The Disney Channel and certain
regional sports networks, which are satellite-delivered channels that consist
principally of feature films, live sporting events and other
special-entertainment features, usually presented without commercial
interruption. Certain of Continental's systems also carry "multiplexed" premium
services, which are available from certain premium-service providers such as
HBO. Multiplexing allows a premium-service provider to offer its programming on
two or more channels simultaneously, but scheduled differently, so as to provide
the subscriber with an expanded choice of programs at any given time.
Although services vary from system to system because of differences in
channel capacity and viewer interest, most of Continental's systems offer a
basic service tier ("BBT") as the lowest-priced tier (consisting generally of
broadcast television signals available locally off-air, local origination and
public, educational and governmental access channels), one or more cable
programming services ("CPS") tiers (which include satellite-delivered cable
programming services) and several premium and pay-per-view channels. Subscribers
may choose various combinations of such services. Certain Continental systems
offer satellite-delivered, non-broadcast services as a New Product Tier ("NPT"),
which the Federal Communications Commission ("FCC") has indicated it will
forebear from regulating. See "Legislation and Regulation" for a description of
recent legislation and regulation, which limits Continental's ability to price
and tier certain programming services. Continental may offer such NPTs to
subscribers in additional systems as it expands channel capacity in such
systems. As a result of the Social Contract between the FCC and Continental,
which was adopted by the FCC on August 3, 1995 (the "Social Contract"),
Continental is permitted on each existing system (excluding the systems acquired
in the Acquisitions) to move up to four existing services on CPS tier(s) to a
single tier called a Migrated Product Tier, provided such tier is offered
without requiring customers to purchase any tier other than the BBT. The rates
of the Migrated Product Tier will be regulated under the Social Contract until
January 1997 at which point the Migrated Product Tier may be converted into
NPTs. Under the recently approved amendment to the Social Contract (the "Social
Contract Amendment"), former Providence Journal systems and systems acquired in
the Recent Acquisitions are also permitted to implement Migrated Product Tiers.
See "-- U.S. Operating Strategy -- U.S. Regulatory Strategy; Social Contract."
A customer generally pays an initial installation charge and fixed monthly
fees for the BBT, CPS tier, NPT, Migrated Product Tier and premium programming
services. Such monthly service fees constitute Continental's primary source of
revenues. In addition to these monthly revenues, Continental's systems currently
generate revenues from additional fees paid by customers for pay-per-view
programming of movies and special events and from the sale of available
advertising spots on advertiser-supported programming. Continental's systems
also offer home shopping services, from which Continental receives a share of
revenues from sales of merchandise in its service areas.
U.S. OPERATING STRATEGY
Continental's strategy in the United States has been to acquire and retain
customers that will subscribe to a broad range of enhanced video, high-speed
data, telephony and other telecommunications services. Execution of this
strategy involves the following key operating principles:
OPERATING SCALE. Continental has been committed to preserving and further
expanding its operating scale in key markets (as measured by the number of homes
passed) through internal growth and strategic acquisitions and exchanges of
systems. Continental believes that operating scale has been critical to its
ability to meet the growing capital and technical requirements that are vital to
its long-term competitiveness and will enable it to realize operating
efficiencies, enhance its ability to develop and deploy new technologies and
provide new services.
LARGE REGIONAL SYSTEM CLUSTERS. Since its inception, Continental has
concentrated its operations in large regional system clusters located primarily
in suburban communities adjacent to major metropolitan markets and in mid-sized
cities that generally have attractive demographics and are geographically
diverse. Continental believes that clustering creates operating efficiencies
through reduced marketing and personnel costs and lower capital expenditures,
particularly in systems where cable service can be delivered to several
communities within a single region through a central headend reception facility.
Regional system clusters are
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attractive to advertisers in that they maximize the scope and effectiveness of
advertising expenditures. Large system clusters also enable Continental to
attract and retain high-quality management at the system level and to more
effectively deploy new products and services. In addition to selectively
acquiring systems, Continental is exploring opportunities to enlarge and enhance
key system clusters by exchanging certain systems with other cable television
operators. See "-- U.S. Acquisitions and Investments."
As of June 30, 1996, approximately 57.8% of Continental's total basic
subscribers were located in the Company's seven largest operating clusters,
which include the greater metropolitan areas of Boston, Chicago, Los Angeles,
Detroit and Miami.
Communities that are served by Continental's systems have a median household
income of approximately $42,300, versus the national median of approximately
$37,900. Continental's five management regions operate systems that are
organized into 22 operating clusters in 20 states. No single region accounts for
more than 24.6% of total basic subscribers. Continental believes that this
geographic diversity reduces its exposure to economic, competitive and
regulatory factors in any particular region.
TECHNOLOGICALLY ADVANCED SYSTEMS. Continental strives to maintain the
highest technological standards in the industry and is continually upgrading its
systems. By deploying high-capacity fiber-optic cable and addressable technology
in its broadband network, Continental continues to develop the foundation from
which to provide a broad range of enhanced video, high-speed data, telephony and
other telecommunications services. Fiber-optic cable provides the capacity
necessary to offer such services. Addressable technology, which enables
Continental to control electronically the cable television services to be
delivered to each customer, is essential to realize the full growth potential of
pay-per-view, tiered programming offerings such as NPTs and Migrated Product
Tiers and other interactive video services. Continental's continuing investment
in its systems enhances picture quality and signal reliability, reduces
operating costs and improves overall customer satisfaction.
Continental continues to upgrade its systems with addressable technology and
fiber-optic cable. As of June 30, 1996, Continental provided addressable
technology and at least 54-channel capacity in systems serving over 87.5% of its
basic subscribers. In addition, Continental will also begin to deploy digital
converter boxes, as they become commercially available, to certain basic
subscribers. Digital compression significantly increases the number of video
channels that can be carried on a system and greatly increases Continental's
ability to provide enhanced video, high-speed data, telephony and other
telecommunications services. In addition to upgrading its systems, Continental
is deploying an information technology system in order to increase operating
efficiencies (including billing and customer service).
Continental has installed digital advertising insertion equipment in several
markets including Boston, Richmond, Jacksonville, Pompano, Dayton, Fresno and
Detroit. This equipment allows Continental to download advertisements
electronically to certain headends, thereby significantly enhancing the
flexibility and reliability of Continental's advertising sales. Continental's
Northeast region employs high-speed Asynchronous Transfer Mode switches, which,
in addition to facilitating advertising insertion, have other potential uses,
including improving Continental's ability to provide enhanced video, voice and
high-speed data offerings. Asynchronous Transfer Mode is a new high-speed data
transport and packaging protocol that allows data, video and voice to be sent
simultaneously over the same communication line.
DECENTRALIZED AND LOCALLY RESPONSIVE MANAGEMENT. Continental has developed
a decentralized and locally responsive management structure that brings
significant management expertise and stability to every region and allows
Continental to respond effectively to the specific needs of the communities it
serves. Broad operating authority has been delegated to the Senior Vice
President managing each region, who has, on average, 13 years of experience with
Continental and 20 years within the cable industry. Certain employees, including
the regional Senior Vice Presidents, are awarded equity compensation in the form
of restricted stock grants, which vest over time, as an additional incentive to
maximize stockholder value. Continental believes that the expertise, stability
and commitment of its regional management is integral to its ability to provide
superior customer service, maintain strong community and local regulatory
relations and maximize growth potential.
V-5
<PAGE>
EFFECTIVE MARKETING. Continental seeks to maximize revenues by increasing
subscriptions to its BBT, CPS, NPT, Migrated Product Tier, premium and
pay-per-view programming services through effective marketing, combined with a
local focus on customer service and community relations. Continental markets
cable television services through telemarketing, direct mail and door-to-door
solicitation, reinforced by radio, cable television, off-air television and
newspaper advertising. Continental seeks to attract and retain long-term
subscribers and increase the percentage of homes in its service areas that
subscribe to expanded service offerings. Continental believes that its
technologically advanced systems and the demographic profile of its subscriber
base, coupled with its effective marketing, have been essential to its ability
to sustain pay-to-basic penetration rates and total monthly revenues per average
basic subscriber that are among the highest in the cable industry. As of June
30, 1996, Continental's actual ratio of premium service subscriptions to basic
subscribers was 82.3% and its actual total monthly cable revenue per average
basic subscriber was $37.06.
CUSTOMER SERVICE AND COMMUNITY RELATIONS. Continental believes that it is
an industry leader in addressing the needs of its local customers. Through the
use of surveys, focus groups, and other research tools, and by continually
investing in information technology and employee training, Continental believes
it has created one of the most extensive customer service programs in the cable
television industry, supported by training centers in each of its regions. To
improve its customer service efforts, Continental is in the process of
incorporating information technology into its customer service functions, which
will enable customer service representatives to more effectively interact with
the customer. Continental's emphasis on customer service has helped to foster
and sustain good relationships with the communities it serves.
LEADERSHIP IN REGULATORY AND OTHER INDUSTRY MATTERS. Continental has
fostered strong regulatory relations at the federal and local levels. In order
to resolve a variety of significant regulatory issues and obtain more certainty
in the regulatory environment, Continental negotiated the Social Contract, the
first comprehensive rate agreement involving cable television ever approved by
the FCC. The Social Contract was adopted by the FCC on August 3, 1995 and
extends through the year 2000. See "-- U.S. Regulatory Strategy; Social
Contract." It settled all rate cases pending before the FCC at the time and all
cost-of-service cases pending before local franchise authorities. The Social
Contract Amendment, which incorporates into the Social Contract the systems
acquired in the Providence Journal Merger and the Recent Acquisitions and
settles all outstanding rate cases and appeals involving these systems pending
before the FCC, was adopted on August 21, 1996. See "-- U.S. Regulatory
Strategy; Social Contract." Continental was also the first major cable
television company to reach a retransmission consent agreement with a
broadcaster not requiring cash compensation in exchange for the right to carry
the broadcaster's local television signals.
EXPANDED SERVICE OFFERINGS. Continental believes that its operating
strategy has generated and will continue to generate additional revenues from
numerous sources, as customer demand expands and regulations permit. Increased
channel capacity and addressability enable Continental to offer enhanced video
services such as "tiered" and "multiplexed" services. Continental believes that
the "tiering" of programming services, which includes providing Migrated Product
Tiers and NPTs, leads to increased customer satisfaction by offering subscribers
a wider variety of programming and pricing packages from which to choose. In
addition, Continental currently uses "multiplexing" in many systems to enhance
the perceived value of certain of its premium service offerings such as HBO.
Pay-per-view programming is offered to subscribers on an individual event
basis and consists of recently released movies and special events (including
boxing matches, other sporting events and concerts). Continental realized 14.9%
compound annual growth in pay-per-view revenues from December 31, 1990 to
December 31, 1995; for the year ended December 31, 1995 and the six months ended
June 30, 1996, pay-per-view revenues accounted for approximately 2.0% of
Continental's total revenues.
Continental believes that increased channel capacity and the further
deployment of addressable technology in its systems will enable it to expand the
number of channels dedicated to pay-per-view services and increase the number of
subscribers with access to pay-per-view programming.
V-6
<PAGE>
Continental derives revenues from the sale of advertising time on
advertising-supported, satellite-delivered networks such as ESPN, MTV and CNN,
as well as on locally originated programming. Continental's advertising revenues
increased from $27.0 million for the year ended December 31, 1990 to $73.4
million for the year ended December 31, 1995 (representing a 22.1% compound
annual growth rate in advertising revenues) and accounted for 5.1% of
Continental's total revenues for the year ended December 31, 1995 and the six
months ended June 30, 1996. Continental has increased its advertising sales
through its participation in several regional cable advertising interconnects
(associations of cable companies organized to effectively deliver a large market
to advertisers), as well as through the deployment of advanced technologies,
including digital advertising insertion equipment and Asynchronous Transfer Mode
switches. Continental also participates in the national development of cable
advertising through its ownership interest in National Cable Communications L.P.
("NCC"), the largest cable advertising representation firm in the country.
Continental also receives a percentage of the proceeds from subscribers'
purchases of merchandise offered on home shopping programming services such as
QVC, Inc. ("QVC"), HSN and Valuevision. Combined, pay-per-view advertising, and
home shopping revenues have increased at a compound annual rate of 20.2% from
December 31, 1990 to December 31, 1995. Although Continental believes that these
and other services could become more substantial sources of revenue over time,
there can be no assurance in this regard.
In addition, Continental has created an advanced broadband
telecommunications network for Boston College in Newton, Massachusetts, which is
a fully interactive, 750 MHz network providing service to 150 classrooms, 250
administrative locations and over 8,000 outlets in dormitory locations on
campus. The network provides video and high-speed data services, including full
access to library resources and the Internet from each outlet, and will provide
"cable-commuting" services to faculty, administrators and students. The project
represents an opportunity for Continental to capitalize on its existing network
infrastructure to provide comprehensive broadband network services. In September
1996, Continental launched "Highway 1", a high-speed Internet access service
provided over its broadband communications network. Initially this service is
being offered in certain areas of greater metropolitan Boston, Massachusetts and
Jacksonville, Florida. During the fourth quarter of 1996, Highway 1 will also be
introduced in certain areas of greater metropolitan Detroit, Michigan with
deployment in additional areas as the Company completes the upgrade of its
broadband communications network.
Continental currently provides competitive-access telephony service to
business customers in Jacksonville, Florida and Richmond, Virginia through its
subsidiaries, Continental Fiber Technologies, Inc. and Alternet of Virginia,
Inc. Continental is currently certificated to provide telephony service in
Florida, California, Illinois, Massachusetts, Michigan, New Hampshire and
Virginia and has already installed telephony switching equipment in
Jacksonville, Florida. The Company plans to provide residential telephone
service initially to multiple-dwelling units in selected Florida communities in
1996 and introduce residential telephone service to single-family homes by the
end of 1997.
Finally, the Company currently acts as a local distributor of the PrimeStar
DBS service. In this role, it sells to, services, and collects monthly fees from
consumers. PrimeStar, in which Continental owns a 10.4% interest, currently
offers more than 90 channels of programming, including cable and network
television, sports and movies as well as several audio channels. As of June 30,
1996, Continental served 103,000 of PrimeStar's approximately 1.2 million
customers. In addition, Continental's DBS-service business generated revenue of
$37.0 million and operating income before depreciation and amortization of $4.3
million for the year ended December 31, 1995. For the six months ended June 30,
1996, Continental's DBS-service business generated revenue of $30.6 million and
operating income before depreciation and amortization of $4.4 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "-- General -- Telecommunications and Technology."
U.S. REGULATORY STRATEGY; SOCIAL CONTRACT. In October 1992, Congress
enacted the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), which, among other things,
V-7
<PAGE>
authorized the FCC to set standards for governmental authorities to regulate the
rates for certain cable television services and equipment and gave local
broadcast stations the option to elect mandatory carriage or require
retransmission consent.
After extensive evaluation of cost-of-service principles and economic and
legal analyses by experts in the rate regulation area, Continental decided to
defend certain of its service rates using the FCC's benchmark methodology and
certain of its service rates using the cost-of-service methodology.
On August 3, 1995, the FCC adopted the Social Contract with Continental,
which covered all of Continental's franchises, regulated or unregulated
(excluding the franchises acquired in the Providence Journal Merger and the
Recent Acquisitions). It was the first comprehensive rate agreement involving
cable television ever approved by the FCC. Continental's Social Contract
resolved 377 rate cases; provided $9.5 million of in-kind refunds to affected
subscribers; created low-priced life-line BBTs in all Continental systems in a
manner that was revenue-neutral to the Company; committed Continental to invest
at least $1.35 billion in system rebuilds and upgrades from 1995 through 2000 to
expand channel capacity and improve technical reliability and picture quality;
and established a plan to stabilize rates for the BBT and for CPS tiers in all
Continental franchises, including franchises that are not subject to rate
regulation.
The averaging of all equipment into three broad categories (converters,
remotes, and inside wiring) is now also permitted by FCC rules issued pursuant
to the Telecommunications Act of 1996 (the "1996 Telecommunications Act").
However, under the Social Contract, equipment rates filed by Continental will be
reviewed and approved by the FCC, subject to enforcement by local franchise
authorities.
Continental has the right to petition the FCC to incorporate acquisitions of
cable television systems under the Social Contract. The Social Contract
Amendment was adopted on August 21, 1996. The Social Contract Amendment
incorporated into the Social Contract all franchises acquired in the Providence
Journal Merger and the Recent Acquisitions; resolved all CPS-tier rate cases
involving the systems acquired in the Providence Journal Merger and the Recent
Acquisitions; provided for cash refunds in the form of bill credits to affected
customers totaling approximately $1.67 million; and found that current rates
being charged for CPS-tier services in all such franchises, except for Naples,
Florida, are not unreasonable. Subscribers in the upgraded portions of the
Naples, Florida system, which was acquired in the Providence Journal Merger,
will receive their proportionate share of cumulative rate reductions on the BBT,
CPS tier and Migrated Product Tier not to exceed $250,000 in the aggregate,
provided the local franchise authorities do not opt out of the a la carte
refunds as discussed below. For at least 80% of subscribers in the systems
acquired in the Providence Journal Merger and the Recent Acquisitions,
Continental will establish a life-line BBT priced 15% to 20% below current rates
and will recoup the reduced amount by a revenue-neutral increase on CPS-tier
services, as in the original Social Contract.
The Company will continue to offer all packages of a la carte channels that
are currently offered in former Providence Journal systems; such packages will
be treated as Migrated Product Tiers. The only exception is the upgraded portion
of the Naples, Florida system, where four of eight channels in the a la carte
package will have to be moved to the CPS tier. New channels may be added to the
Migrated Product Tier at a price of $.20 per channel plus actual license fees.
Where only one a la carte package was created, it may later be converted into an
NPT. If two a la carte packages were created, they will remain Migrated Product
Tiers through the term of the Social Contract. For systems acquired in the
Providence Journal Merger and the Recent Acquisitions that did not create a la
carte packages, the Company will be able to create Migrated Product Tiers
consisting of up to four services migrated from the BBT or CPS tier.
The Social Contract Amendment provides for two types of refunds: those
covering the resolution of a la carte issues; and those not involving a la carte
issues. Local franchising authorities scheduled to receive a la carte refunds
may elect to opt out of their share of approximately $1.67 million in cash
refunds, but will be bound by the other terms of the Social Contract Amendment.
The resolution of pending rate cases is without any finding by the FCC of
any wrongdoing by the Company, Providence Journal or any of the entities from
which the Company purchased systems in the Recent Acquisitions.
V-8
<PAGE>
In addition, the Social Contract Amendment effects certain changes to the
original Social Contract, such as increasing the minimum capital investment
commitment from $1.35 billion to $1.7 billion for the upgrade of Continental's
systems, including the systems acquired in the Providence Journal Merger and the
Recent Acquisitions. In addition, instead of using the Going Forward Rules and
the second round of Going Forward Rules permitted by the Social Contract,
Continental has agreed to add, on average, 10 additional regulated services to
the CPS tier and/or the Migrated Product Tier during the life of the Social
Contract and will be able to increase monthly rates for the CPS tier by $1.00
per year in the systems acquired in the Providence Journal Merger and Recent
Acquisitions from 1996 through 1999 (net of any Going Forward increases taken in
1996 for channels added in 1996) and by $1.00 per year in all other Continental
systems from 1997 through 1999. During the life of the Social Contract, the only
other permitted CPS-tier increases will be for inflation and increases in
external costs. Rates for the BBT and for existing channels on a Migrated
Product Tier also may be increased for inflation and increases in external
costs. The Company will provide a free cable connection to public schools (K-12)
and a cable connection at cost to secondary private schools whose students
receive funding under Title I of the Elementary and Secondary Education Act and
will provide free cable service to all connected schools. Within one year of the
commercial availability of a Continental on-line service for Internet-access in
a given franchise, the Company will, upon request, provide the cable-connected
schools with one free modem and free on-line service. Additional modems would be
made available at cost. The Company will also provide teacher training and
support.
The rate restructuring, Migrated Product Tier and "Going Forward"
adjustments that Continental has implemented under the Social Contract and the
Social Contract Amendment will continue to apply to systems divested by
Continental through a system sale or exchange. Other rights and obligations will
apply only if the new owner notifies the FCC that it agrees to be bound by the
same or similar terms and conditions as those contained in the Social Contract
and the Social Contract Amendment. Continental will not be relieved of its total
capital investment requirement under the Social Contract and the Social Contract
Amendment by reason of these divestitures. The Social Contract also provides for
its termination in the future 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. In that instance, the
Company may petition the FCC to terminate the Social Contract.
In February 1996, the 1996 Telecommunications Act was enacted into law. The
1996 Telecommunications Act modifies various provisions of the Communications
Act of 1934, the Cable Communications Policy Act of 1984 (the "1984 Cable Act")
and the 1992 Cable Act, with the intent of establishing a pro-competitive,
deregulatory policy framework for the telecommunications industry. Among other
provisions discussed below, the 1996 Telecommunications Act sets a date for
removal of CPS-tier rate regulations, allows telephone companies to build and
operate cable systems in their local markets, and sets forth the conditions for
voice and data competition in the local telephone market. The Company at this
time cannot predict the full effect that the 1996 Telecommunications Act or the
FCC's implementing regulations may have on Continental's operations. See
"Legislation and Regulation."
U.S. SYSTEMS
The following table summarizes the growth of Continental and its affiliates
within the United States since December 31, 1993 and includes certain pro forma
operating data of Continental's U.S. systems and its U.S. affiliates, giving
effect to the Acquisitions.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------ --------------------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
------------------------------- --------- --------- ---------
1993 1994 1995 1995 1996 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Homes passed by cable (1)....................... 5,192,000 5,372,000 7,191,000 7,340,000 7,243,000 7,394,000
Number of basic subscribers (2)................. 2,895,000 3,081,000 4,190,000 4,268,000 4,234,000 4,312,000
Basic penetration (3)........................... 55.8% 57.4% 58.3% 58.1% 58.5% 58.3%
Number of premium subscriptions (4)............. 2,454,000 2,635,000 3,770,000 3,820,000 3,485,000 3,530,000
Premium penetration (5)......................... 84.8% 85.5% 90.0% 89.5% 82.3% 81.9%
Monthly cable revenue per average basic
subscriber (6)................................. $35.69 $35.06 $35.99 $35.87 $37.06 $38.31
</TABLE>
V-9
<PAGE>
- ------------------------------
(1) Represents estimated dwelling units located sufficiently close to the
Company's cable plant to be practicably connected without any further
extension of principal transmission lines.
(2) A "basic subscriber" means a person who, at a minimum, subscribes to the
Company's BBT which consists of broadcast television signals available
off-air locally, local origination and public, educational and governmental
access channels. Bulk subscribers are accounted for on an "equivalent
billing unit" basis, dividing aggregate BBT revenues by the stated BBT rate.
(3) Basic subscribers as a percentage of homes passed by cable.
(4) Equals the number of premium services subscribed to by basic subscribers.
Premium services include only single channel services offered for a monthly
fee per channel and do not include packages of channels offered for a single
monthly fee.
(5) Premium subscriptions as a percentage of basic subscribers. A basic
subscriber may purchase more than one premium service, each of which is
counted as separate premium subscription. This ratio may be greater than
100% if the average customer subscribes to more than one premium service.
(6) Cable revenues (excluding DBS-service revenues) divided by the weighted
average number of basic subscribers for the Company's consolidated
subsidiaries during the twelve-month period ended December 31 for each year
presented and during the six-month period ended June 30, 1996.
V-10
<PAGE>
The following table sets forth operating information pertaining to
Continental's U.S. systems and the systems of certain U.S. affiliates as of June
30, 1996, giving effect to the Pending M/NH Buyout.
<TABLE>
<CAPTION>
HOMES NUMBER OF NUMBER
PASSED BY BASIC BASIC OF PREMIUM PREMIUM
MANAGEMENT REGIONS CABLE SUBSCRIBERS PENETRATION SUBSCRIPTIONS PENETRATION
- ------------------------------------------------- ----------- ----------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NORTHEAST REGION
Eastern New England (MA)......................... 475,051 328,614 69.17% 251,786 76.62%
Southern New England (RI, MA)(1)................. 387,217 275,266 71.09% 214,455 77.91%
Northern New England (NH, ME).................... 234,116 182,556 77.98% 93,283 51.10%
Western New England (MA, CT)..................... 222,899 153,064 68.67% 125,381 81.91%
New York (Haverstraw/Ossining)................... 150,130 121,121 80.68% 92,561 76.42%
----------- ----------- ----- ------------ ------------
Total........................................ 1,469,413 1,060,621 72.18% 777,466 73.30%
----------- ----------- ----- ------------ ------------
----------- ----------- ----- ------------ ------------
WESTERN REGION
Southern California.............................. 1,429,459 567,905 39.73% 587,892 103.52%
Greater Metropolitan Fresno...................... 336,803 158,165 46.96% 166,969 105.57%
Greater Metropolitan Stockton.................... 196,170 112,232 57.21% 78,717 70.14%
Yuba City, California............................ 44,495 32,649 73.38% 20,041 61.38%
Reno, Nevada..................................... 13,976 9,864 70.58% 6,118 62.02%
Northern California/Washington/Idaho............. 53,816 34,653 64.39% 15,500 44.73%
----------- ----------- ----- ------------ ------------
Total........................................ 2,074,719 915,468 44.12% 875,237 95.61%
----------- ----------- ----- ------------ ------------
----------- ----------- ----- ------------ ------------
SOUTHEAST REGION
Jacksonville, Florida............................ 422,901 246,073 58.19% 258,876 105.20%
Pompano/Hialeah, Florida......................... 390,359 236,185 60.50% 161,064 68.19%
Naples, Florida.................................. 180,149 106,950 59.37% 56,223 52.57%
Richmond, Virginia(1)............................ 248,742 167,552 67.36% 145,941 87.10%
----------- ----------- ----- ------------ ------------
Total........................................ 1,242,151 756,760 60.92% 622,104 82.21%
----------- ----------- ----- ------------ ------------
----------- ----------- ----- ------------ ------------
MIDWEST REGION
Greater Dayton................................... 251,848 173,486 68.89% 112,168 64.66%
Greater Metropolitan Detroit..................... 396,090 261,353 65.98% 231,469 88.57%
Lansing and Greater Metropolitan Lansing......... 127,479 88,830 69.68% 45,232 50.92%
Greater Metropolitan Cleveland................... 121,756 86,713 71.22% 53,216 61.37%
North Central Ohio............................... 122,497 86,781 70.84% 57,130 65.83%
----------- ----------- ----- ------------ ------------
Total........................................ 1,019,670 697,163 68.37% 499,215 71.61%
----------- ----------- ----- ------------ ------------
----------- ----------- ----- ------------ ------------
CENTRAL REGION
Greater Metropolitan Chicago (West).............. 636,689 359,659 56.49% 369,859 102.84%
Southern Illinois................................ 85,832 62,636 72.98% 36,897 58.91%
St. Louis, Missouri (2).......................... 174,831 101,289 57.94% 121,167 119.63%
Minneapolis/St. Paul, Minnesota.................. 556,259 281,934 50.68% 181,878 64.51%
----------- ----------- ----- ------------ ------------
Total........................................ 1,453,611 805,518 55.41% 709,801 88.12%
----------- ----------- ----- ------------ ------------
----------- ----------- ----- ------------ ------------
Affiliated Companies (3)......................... 134,414 76,825 57.16% 45,743 59.54%
----------- ----------- ----- ------------ ------------
Total........................................ 7,393,978 4,312,355 58.32% 3,529,566 81.85%
----------- ----------- ----- ------------ ------------
----------- ----------- ----- ------------ ------------
SYSTEMS DESIGNATION:
Consolidated Systems............................. 7,259,564 4,235,530 58.34% 3,483,823 82.25%
Affiliated Companies (3)......................... 134,414 76,825 57.16% 45,743 59.54%
----------- ----------- ----- ------------ ------------
Total........................................ 7,393,978 4,312,355 58.32% 3,529,566 81.85%
----------- ----------- ----- ------------ ------------
----------- ----------- ----- ------------ ------------
</TABLE>
- ------------------------------
(1) The Company has entered into an agreement to exchange certain of these
systems for other systems in New England. See "-- U.S. Acquisitions and
Investments -- Other U.S. Acquisitions."
(2) The Company has entered into an agreement to exchange these systems for
other systems in New England. See "-- U.S. Acquisitions and Investments --
Other U.S. Acquisitions."
(3) Affiliated Companies are those companies not majority-owned or controlled by
Continental. The systems held by Affiliated Companies consist of systems
held by three limited partnerships. See "-- U.S. Acquisitions and
Investments-- U.S. Minority Cable Investments." Continental owns less than
50% of the outstanding limited partnership interests of each such
partnership. None of the systems owned by Affiliated Companies are managed
by Continental. In reporting subscriber and other data for systems not
controlled or managed by Continental, only that portion of data
corresponding to Continental's percentage ownership is included. For
purposes of this table, M/NH has been treated as if it was wholly owned by
the Company.
V-11
<PAGE>
MANAGEMENT REGIONS. A description of Continental's five U.S. cable
television management regions and their significant operating clusters is set
forth below.
NORTHEAST. The Northeast region is Continental's largest management region
based on the number of basic cable subscribers, representing approximately 19.9%
of Continental's total homes passed and 24.6% of its total basic subscribers as
of June 30, 1996. This region includes systems in the New England states of
Maine, New Hampshire, Massachusetts, Connecticut and Rhode Island, as well as in
and around Westchester County, New York. Significant operating clusters in
Massachusetts, which include greater metropolitan Boston and the city of
Springfield and its surrounding communities in the western part of the state,
represent approximately 68.1% of the region's total basic subscribers. The
Northeast region commenced a five-year rebuild program in 1994, which upon
completion will result in a combination of 550 MHz and 750 MHz capacity for most
of the region. The median household income for the communities served by
Continental in the Northeast region is approximately $47,700, versus the
national median household income of $37,900.
WESTERN. The Western region represented approximately 28.1% of
Continental's total homes passed and 21.2% of its total basic subscribers as of
June 30, 1996. This region includes systems in the city and county of Los
Angeles, where Continental is the largest cable operator, with approximately
570,000 of its basic subscribers clustered in geographically contiguous
franchises served by two headends. This region also includes Continental's
Northern California systems, which include the cities of Fresno, Visalia,
Stockton, and Yuba City, as well as Reno, Nevada. An upgrade of the Los Angeles
systems, that will bring capacity to 750 MHz, is currently under way. The median
household income for the communities served by Continental in the Western region
is approximately $41,300.
SOUTHEAST. The Southeast region represented approximately 16.8% of
Continental's total homes passed and 17.6% of its total basic subscribers as of
June 30, 1996. This region includes significant operating clusters serving the
communities surrounding Jacksonville, Naples and Pompano, Florida and Richmond,
Virginia. The Jacksonville cluster is one of Continental's largest, serving over
246,000 basic subscribers. In 1994, the Jacksonville and Pompano systems
commenced rebuild projects which will provide 750 MHz capacity to fiber nodes
serving approximately 1,000 or fewer homes by 1997. The median household income
for the communities served by Continental in the Southeast region is
approximately $35,600.
MIDWEST. The Midwest region represented approximately 13.8% of
Continental's total homes passed and 16.2% of its total basic subscribers as of
June 30, 1996. This region includes systems in greater metropolitan Detroit and
Lansing, which includes the communities of Southfield, Dearborn Heights,
Westland, and Jackson. In Ohio, Continental's systems serve the greater Dayton
and Cleveland communities, as well as several communities throughout North
Central Ohio. The Dayton systems have recently been rebuilt to provide 550 MHz
capacity to fiber nodes serving approximately 2,000 or fewer homes. The median
household income for the communities served by Continental in the Midwest region
is approximately $40,000.
CENTRAL. The Central region represented approximately 19.7% of
Continental's total homes passed and 18.7% of its total basic subscribers as of
June 30, 1996. This region includes systems in metropolitan Chicago and Southern
Illinois, Minneapolis/St. Paul, Minnesota, and St. Louis, Missouri.
Continental's metropolitan Chicago cluster, which includes the suburban Chicago
communities of Elmhurst, Forest Park, Oak Brook, Rosemont, Northfield,
Westchester, and Wilmette, is one of Continental's largest, with approximately
360,000 basic subscribers served by four headends. All of the Central region's
systems are scheduled to be rebuilt or upgraded by 1997, at which time all major
markets will have between 600 MHz and 750 MHz capacity. The Company has entered
into an agreement to exchange its systems in St. Louis for other systems in New
England. See "-- U.S. Acquisitions and Investments -- Other U.S. Acquisitions."
The median household income for the communities served by Continental in the
Central region is approximately $44,800.
FRANCHISES. Continental believes it has maintained good relations with its
local franchise authorities. Continental has never had a franchise revoked, and
to date all of its franchises have been renewed or
V-12
<PAGE>
extended at their expirations, frequently on modified but satisfactory terms.
Continental's franchises establish the terms and conditions under which its
systems are operated. Typically, they establish certain performance and safety
standards related to Continental's construction and maintenance of facilities
in, under and over public streets and rights-of-way in the franchise areas.
Some, but not all, of these franchises specify the services to be offered.
Nearly all of Continental's franchises provide for the payment of fees to the
local franchising authorities, which currently average approximately 3.3% of
gross revenues. The 1984 Cable Act prohibits local franchising authorities from
imposing annual franchise fees in excess of 5.0% of gross revenues and also
permits the cable system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances. Continental's
franchises are usually issued for fixed terms ranging from 10 to 15 years and
must periodically be renewed. Most of such franchises can be terminated prior to
their stated expirations for breach of material provisions.
Franchises representing approximately 1.9 million basic subscribers are
scheduled to expire through 2001. The 1984 Cable Act provides, among other
things, for an orderly franchise renewal process in which a franchise renewal
will not be unreasonably withheld or, if renewal is withheld and the system is
acquired by the franchise authority or a third party, the franchise authority
must pay the operator the "fair market value" of the system covered by such
franchise. In addition, the 1984 Cable Act establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. See "Legislation and Regulation -- Cable Communications
Policy Act of 1984."
PROGRAMMING. Continental provides programming to its subscribers pursuant
to contracts with programming suppliers. Continental generally pays a flat
monthly fee per subscriber for programming on its basic and premium services.
Some programming suppliers provide volume discount pricing structures and/or
offer marketing support to Continental. Continental's programming contracts are
generally for fixed periods of time ranging from 3 to 10 years and are subject
to negotiated renewal. The costs to Continental to provide cable programming
have increased in recent years and are expected to continue to increase due to
additional programming being provided to basic subscribers, increased costs to
produce or purchase cable programming, inflationary increases and other factors.
Increases in the cost of programming services have been offset in part by
additional volume discounts as a result of the growth of Continental and its
success in selling such services to its customers. Effective in May 1994, the
FCC's rate regulations under the 1992 Cable Act permit operators to pass through
to customers increases in programming costs in excess of the inflation rate.
Management believes that Continental will continue to have access to programming
services at reasonable price levels. See "Legislation and Regulation."
The "program-access" provisions of the 1992 Cable Act require that much of
the cable network programming in which Continental has ownership interests be
sold, under certain circumstances, to multichannel video programming providers
that compete with Continental's local cable systems. The 1996 Telecommunications
Act extends the program-access requirements of the 1992 Cable Act to a telephone
company that provides video programming by any means directly to subscribers,
and to programming in which such a company holds an attributable ownership
interest, thus allowing Continental's cable systems similar access to
programming developed by their telephone company competitors.
MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast
signal carriage requirements, and the FCC has adopted regulations which are
currently in force implementing such statutory carriage requirements. These new
rules allow local commercial television broadcast stations, commencing on June
17, 1993 and every three years thereafter, either to elect required carriage
("must-carry" status), or to require a cable television system to negotiate for
"retransmission consent" rights. A cable television system generally is required
to devote up to one-third of its activated channel capacity for the mandatory
carriage of local commercial television stations. Local non-commercial
television stations are also given mandatory carriage rights on cable television
systems under the 1992 Cable Act and the FCC's rules; however, such stations are
not given the option to negotiate for retransmission consent rights.
Additionally, as of October 6, 1993, cable television systems were required to
obtain retransmission consent for all
V-13
<PAGE>
"distant" commercial television stations (except for commercial
satellite-delivered independent "superstations" such as WTBS), commercial radio
stations and certain low-power television stations carried by cable television
systems. A second election period for must-carry or retransmission consent will
occur for many stations this year, ending on October 6, 1996. See "Legislation
and Regulation."
U.S. ACQUISITIONS AND INVESTMENTS
Continental has recently acquired or agreed to acquire cable television
systems that are contiguous or in close proximity to its existing systems. The
Company also continues to review opportunities to exchange additional systems
for those of other cable television system operators in order to enlarge and
enhance its system clusters. Continental generates incremental operating income
from such acquisitions and exchanges through the expansion of service offerings
and efficiencies resulting from system consolidation.
THE PROVIDENCE JOURNAL MERGER. On October 5, 1995, pursuant to the terms of
an Agreement and Plan of Merger, dated as of November 18, 1994, as amended and
restated as of August 1, 1995 (the "Providence Journal Merger Agreement"), by
and among Continental, Providence Journal, The Providence Journal Company, King
Holding Corp. and King Broadcasting Company, Continental acquired all of the
cable television businesses and assets of Providence Journal ("Providence
Journal Cable") in a series of related transactions, the result of which was
that Providence Journal, following an internal corporate restructuring in which
the non-cable businesses and assets of Providence Journal were transferred to a
new company (The Providence Journal Company), merged with and into Continental.
Continental issued approximately 30.1 million shares of Class A Common Stock to
Providence Journal stockholders in the Providence Journal Merger. The shares of
Class A Common Stock received in the Providence Journal Merger are not
transferable by the former Providence Journal stockholders except for transfers
not for value to certain specified permitted transferees until October 5, 1996.
As part of the Providence Journal Merger, Continental also purchased certain
cable television systems owned by a subsidiary of Providence Journal for a
purchase price of $405.0 million and discharged approximately $410.0 million of
Providence Journal indebtedness. The systems acquired in the Providence Journal
Merger passed approximately 1.3 million homes and served approximately 779,000
basic subscribers in nine states as of the date of the acquisition. Such systems
are, for the most part, located in communities contiguous, or in close proximity
to, other Continental systems.
In connection with the Providence Journal Merger, Continental's stockholders
adopted an amendment to Continental's Restated Certificate of Incorporation (the
"Restated Certificate") that increased the number of authorized shares of
capital stock of Continental from 17.7 million to 825 million, including an
increase in the number of authorized shares of Class A Common Stock to 425
million, Class B Common Stock to 200 million and Preferred Stock to 200 million.
In addition, the Continental Board of Directors declared a stock dividend in the
form of (a) 24 shares of Class A Common Stock for each share of Class A Common
Stock outstanding on the record date for such stock dividend and (b) 24 shares
of Class B Common Stock for each share of Class B Common Stock outstanding on
the record date for such stock dividend, effective September 29, 1995.
OTHER U.S. ACQUISITIONS. The following is a summary of other recent
acquisitions of U.S. cable systems and other pending transactions:
In June 1994, Continental acquired a system serving approximately 44,000
basic subscribers in Manchester, New Hampshire and its surrounding communities
for a purchase price of approximately $48.0 million. The Manchester system is
adjacent to several of Continental's other systems in the Northeast region.
In November 1994, Continental acquired Clay Cablevision's systems serving
approximately 34,000 basic subscribers in Florida for a purchase price of
approximately $67.0 million. These systems are in close proximity to
Continental's other systems in the Southeast region.
In August 1995, Continental acquired Cablevision of Chicago's systems
serving approximately 88,000 basic subscribers in the Chicago, Illinois area for
a purchase price of approximately $168.5 million. These systems are in close
proximity to Continental's other systems in its Central region.
V-14
<PAGE>
In September 1995, Continental acquired Consolidated Cablevision of
California's systems serving approximately 12,000 basic subscribers in Northern
California for approximately $17.0 million. These systems are in close proximity
to Continental's other systems in its Western region.
In October 1995, Continental purchased Columbia Cable of Michigan's systems
serving approximately 74,000 basic subscribers in Michigan for approximately
$155.0 million. In December 1995, Continental acquired the remaining partnership
interests and discharged certain liabilities of N-COM, a limited partnership
that operates cable television systems serving approximately 56,000 basic
subscribers in greater metropolitan Detroit for approximately $88.0 million. The
Columbia Cable of Michigan and N-COM systems are in close proximity to
Continental's other systems in its Midwest region.
In March 1996, Continental entered into a purchase agreement to acquire the
remaining partnership interests in M/NH. Continental currently owns a 37.9%
interest in M/NH. Under the terms of the transaction, Continental would acquire
the remaining interests in M/NH for a cash purchase price of approximately
$129.2 million, plus the assumption or repayment of approximately $90.0 million
of indebtedness. As of June 30, 1996, M/NH owned and operated cable television
systems serving approximately 127,000 basic subscribers in the Minneapolis/St.
Paul, Minnesota area. These systems are in close proximity to Continental's
other systems in the Minneapolis/St. Paul area. The closing of the Pending M/NH
Buyout is expected to occur in the fourth quarter of 1996.
In December 1995, Continental and TCI Cable Partners of St. Louis L.P. ("TCI
Cable Partners") agreed to a tax-free exchange of the Company's systems in and
around St. Louis County, Missouri for TCI Cable Partners' systems in and around
Andover, Barnstable, Nantucket and Waltham, Massachusetts. The systems of each
party serve approximately 100,000 basic subscribers. The Company expects to
consummate this transaction in the fourth quarter of 1996.
In July 1996, Continental entered into an agreement with Cox Communications,
Inc. ("Cox") pertaining to a tax-free exchange of the Company's systems in York
County and James City, Virginia and Pawtucket, Rhode Island for Cox's systems in
Amherst and Weymouth, Massachusetts. The systems of each party serve
approximately 48,000 basic subscribers. Continental expects to consummate this
transaction in the fourth quarter of 1996.
U.S. MINORITY CABLE INVESTMENTS. The acquisition of minority ownership
interests in various U.S. cable television companies has contributed to
Continental's nationwide operating scale. As of June 30, 1996, Continental held
minority ownership positions in the following U.S. cable companies:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------------------------------
HOMES TOTAL BASIC TOTAL PERCENTAGE
INVESTMENT PASSED SUBSCRIBERS DEBT OWNERSHIP
- ----------------------------------------------------------------- --------- ----------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Insight Communications Company, L.P.............................. 310,185 166,663 $ 173,750 34.4%
Meredith/New Heritage Strategic Partners, L.P. (1)............... 242,430 126,883 87,488 37.9%
Prime Cable of Hickory, L.P...................................... 53,597 37,117 38,919 33.3%
Inland Bay Cable TV Associates................................... 20,001 14,510 4,453 49.0%
</TABLE>
- ------------------------------
(1) Continental has entered into a purchase agreement to acquire the remaining
ownership interests in M/NH from the other partners and discharge or assume
certain liabilities for total consideration of approximately $219.2 million.
No assurances can be made at this time that such transaction will be
consummated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources --
Capital Expenditures and U.S. Acquisitions."
INTERNATIONAL OPERATIONS
Continental has made investments in international broadband communications
networks, principally in Latin America and the Pacific Rim. These investments
represent opportunities for Continental to capitalize on its managerial,
technical and marketing expertise in international markets.
ARGENTINA. Continental owns an approximate 50% interest in Fintelco, an
Argentine cable television operator. Fintelco is one of the largest cable
television operators in Argentina, with approximately 632,000
V-15
<PAGE>
subscribers in regional system clusters in the Argentine provinces of Buenos
Aires, Cordoba and Santa Fe. These systems are currently managed by
Continental's Argentine partner, with technical assistance provided by
Continental.
Fintelco's operating strategy focuses on creating large regional system
clusters in key markets. As of June 30, 1996, Fintelco had approximately 323,000
subscribers in the province of Buenos Aires, 182,000 subscribers in the province
of Cordoba and 127,000 subscribers in the province of Santa Fe. Average monthly
subscriber rates for Fintelco's cable television services are the equivalent of
approximately US$30. Most systems in Argentina provide a single package of
services, which typically includes premium movie channels such as HBO Ole. For
the fiscal year ended November 30, 1995, Fintelco recorded revenues of
approximately US$244.0 million and operating income before depreciation and
amortization of approximately US$47.0 million.
There is currently no regulation of cable subscription rates in Argentina.
Cable operators in Argentina are issued non-exclusive broadcast licenses for the
carriage of their programming services, and may compete with other cable
operators for the same subscribers. The multi-channel television industry in
Argentina is extremely competitive. Fintelco competes in certain areas of Buenos
Aires, Cordoba and Santa Fe. Fintelco believes that competition is primarily
based on price, program offerings, customer satisfaction and quality of the
system network. Other cable operators in Buenos Aires include: Cablevision, S.A.
(which is currently 51% owned by an affiliate of U.S. cable operator
Tele-Communications, Inc. ("TCI")), and Grupo Clarin (d/b/a Multicanal).
In November 1990, the Argentine telephone system was privatized, and two
companies, Telefonica de Argentina S.A. ("Telefonica") and Telecom Argentina
STET-France Telecom S.A. ("Telecom"), were granted exclusive licenses to provide
local and long-distance telephony service. The exclusivity of these licenses is
scheduled to expire in 1997, but may be extended for an additional three-year
period if the licensees have met certain mandatory standards for the expansion
of their telephone networks and improvements in quality of service. No assurance
can be given, however, that cable operators in Argentina will be permitted to
offer telephony services in 1997, in 2000 or at any other time in the future.
During the period their telephony licenses are exclusive, Telefonica and Telecom
are not permitted to provide cable television on a commercial basis over their
networks.
AUSTRALIA. Continental has entered into an agreement with Optus
Communications Pty Limited ("Optus"), the second licensed carrier in Australia
providing long-distance and cellular telephone services, Publishing and
Broadcasting Limited ("Nine"), the parent company of Kerry Packer's Nine
Network, and Seven Network Limited ("Seven"), to construct a broadband
communications network in Australia. The venture, Optus Vision, is owned 46.5%
by Continental, 46.5% by Optus, 5% by Nine and 2% by Seven. Nine and Seven
represent two of Australia's three major commercial television networks. Nine
and Seven have options to increase their shareholding to 20% and 15%,
respectively, which expire in 1997. Optus Vision is providing cable television
and local telephone services, and will provide a variety of advanced broadband
interactive services to business and residential customers in Australia's major
markets. Optus Vision began offering pay-television service in September 1995
and local telephone service in June 1996.
Australia has a population of approximately 17.8 million, with over 5.6
million television households and VCR penetration of approximately 71%.
Construction of the Optus Vision network began in March 1995. Optus Vision
anticipates passing 2.0 million households throughout Australia by the end of
1996, beginning with the major metropolitan centers of Sydney, Melbourne,
Brisbane and Adelaide.
Optus Vision currently offers more than 25 channels, including movie
channels, sports channels and a wide range of news and general entertainment.
The subscription television industry in Australia has been and is expected
to continue to be competitive. Optus Vision expects to compete in Australia
with, among others, (i) FOXTEL, the joint venture between Telstra Corporation
Limited, the government-owned Australian national telecommunications carrier,
and The News Corporation Limited, a major international media and entertainment
company, which provides subscription television services under the name FOXTEL
over a cable television network, and (ii) Australis
V-16
<PAGE>
Media Ltd. ("Australis"), which currently provides subscription television
services by way of Multi-channel, Multi-point Distribution Services ("MMDS") and
DBS technology under the name Galaxy. FOXTEL has entered into a long-term
programming agreement for the exclusive distribution of certain of Australis'
programming.
Optus Vision intends to offer its pay-television service using DBS
technology beginning in 1997. In August 1996, Optus Vision agreed to establish a
joint venture with Australis, each with a 50% ownership interest, for the
purpose of sharing certain infrastructure and other costs associated with the
provision of DBS service. The joint venture is subject to various regulatory and
other approvals and there can be no assurances that all of such approvals can be
obtained.
Optus Vision currently employs approximately 2,000 people, including several
former Continental employees. Frank Anthony, the former Senior Vice President
and General Manager of Continental's Northeast region, serves as the Chief
Operating Officer of Optus Vision.
SINGAPORE. Continental has a 25% equity interest in SCV, a joint venture
which is constructing a high-capacity network to provide cable television and a
variety of interactive services to substantially all of Singapore's
approximately 820,000 households. SCV has the exclusive right, through June
2002, to provide traditional cable television service in Singapore. Cable
television service has not previously been available in Singapore. Continental's
partners in this venture are Singapore Technologies Venture Pte. Ltd., Singapore
International Media Pte. Ltd. and Singapore Press Holdings Limited, each of
which is affiliated with the government of Singapore. The system activated its
first subscribers in June 1995, and by 1999, when construction is expected to be
completed, it is anticipated that there will be nearly one million households in
Singapore. SCV's service offerings include both Mandarin and English language
programming.
TELECOMMUNICATIONS AND TECHNOLOGY
Continental is currently rebuilding and upgrading its U.S. systems to create
advanced hybrid fiber-optic and coaxial cable networks that will serve as the
infrastructure for the provision of enhanced video, high-speed data, telephony
and other telecommunications services. Although Continental believes that demand
exists to support the entry of cable television companies into the telephony
businesses, the offering of these services will require the removal of existing
regulatory and legislative barriers to local telephone competition. See "--
Competition" and "Legislation and Regulation."
TCG. Continental currently has a minority interest in TCG, the first and
largest competitive local-exchange carrier in the United States. TCG competes
largely with Regional Bell Operating Companies ("RBOCs") and local-exchange
carriers ("LECs") by providing high quality integrated local telecommunications
services, primarily over high-capacity fiber-optic digital networks (which it
owns or leases from cable operators such as Continental) to meet the voice, data
and video transmission needs of its customers. TCG's customers are principally
telecommunications-intensive businesses, long-distance carriers and resellers
and wireless communications companies located in major metropolitan areas
throughout the United States.
Since 1985, TCG has owned and operated the nation's largest non-LEC local
telecommunications network in the New York City metropolitan area, the country's
leading telecommunications market. Beginning in 1988 with the construction of a
Boston network, TCG has expanded its network operations to 48 metropolitan
markets in the United States, including Los Angeles, Chicago, San Francisco,
Dallas, Detroit, Miami, Houston, Seattle, San Diego and Milwaukee.
On July 2, 1996, TCG consummated a public offering of certain debt and
equity securities, which included an initial public offering of TCG's common
stock. In conjunction with the initial public offering, TCG implemented a plan
of reorganization, under which Continental exchanged certain loans and
contributed certain partnership interests to TCG for additional shares of TCG
common stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." At the time of the initial public offering, TCG also
redeemed approximately 8.0 million shares of TCG common stock from Continental,
for net cash proceeds of approximately $121.0 million. As a result of the
redemption and the initial public offering, Continental holds an approximate
11.2% interest in TCG.
V-17
<PAGE>
OTHER TELECOMMUNICATIONS ACTIVITIES. Continental also owns an 80.0%
interest in Continental Fiber Technologies, Inc. and a 63.0% interest in
Alternet of Virginia, Inc., which both have fiber-optic networks that they own
or lease from Continental. Such networks provide local telephony service to
business customers in Jacksonville, Florida and Richmond, Virginia,
respectively.
Continental is currently certificated to provide telephony service in
Florida, California, Illinois, Massachusetts, Michigan, New Hampshire and
Virginia and has already installed telephony switching equipment in
Jacksonville, Florida. The Company plans to provide residential telephone
service initially to multiple-dwelling units in selected Florida communities in
1996 and introduce residential telephone service to single-family homes by 1997.
PRIMESTAR. Continental currently owns a 10.4% interest in PrimeStar, a
nationwide provider of DBS service. The remaining interests in PrimeStar are
held by GE Americom Communications, Inc. (an affiliate of General Electric) with
16.6% and five other cable television operators (TCI and Time Warner Cable own
20.9% each; Comcast, Cox and Newhouse Broadcasting Corp. own 10.4% each).
PrimeStar provided medium-powered DBS service to approximately 1.2 million
customers nationwide as of June 30, 1996. PrimeStar acts as a wholesaler of DBS
services, securing programming services for eventual resale to consumers and
arranging for the transmission of the programming via satellite. PrimeStar does
not sell directly to end users, but rather sells the rights to resell
programming to local distributors, including Continental and its other cable
partners, who in turn sell to, service, and collect monthly fees from consumers.
Continental served approximately 103,000 of PrimeStar's customers as of June 30,
1996. During the year ended December 31, 1995, Continental recorded DBS-service
revenue of $37.0 million and EBITDA of $4.3 million. During the six months ended
June 30, 1996, Continental recorded DBS-service revenue of $30.6 million and
EBITDA of $4.4 million. PrimeStar currently offers more than 90 channels of
programming, including cable and network television, sports and movies, as well
as several music channels. In order to expand its service, PrimeStar's partners
have agreed in principle on a long-term path for medium-powered DBS service with
the option for a fifteen-year transponder lease from GE Americom Communications,
Inc. This would give PrimeStar the potential to deliver approximately 150
channels of programming. PrimeStar is still considering its options for the
delivery of high-powered DBS service following the conclusion of an FCC auction,
which left PrimeStar without the assured use of certain desirable spectrum
frequencies for high-powered service.
The following is a summary of financial and operating statistics for
PrimeStar, which commenced operations in 1991.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Revenues......................................... $ 10,900 $ 27,800 $ 180,595
Growth rate...................................... 109.6% 155.0% 549.6%
Customers........................................ 66,800 230,800 961,200
Growth rate...................................... 51.1% 245.5% 316.5%
</TABLE>
PROGRAMMING AND OTHER INVESTMENTS
Continental has made minority investments in programming services based upon
Continental's belief that programming is a means of generating additional
interest in cable television. The following summarizes certain of Continental's
programming investments:
TURNER BROADCASTING SYSTEM, INC. AND HOME SHOPPING NETWORK,
INC. Continental holds marketable equity securities of Turner and HSN. As of
September 30, 1996, the approximate market values of Continental's investments
in Turner and HSN were $159.6 million and $5.1 million, respectively. On
September 22, 1995, Turner and Time Warner Inc. ("Time Warner") entered into a
merger agreement providing for the merger of Turner into a wholly owned
subsidiary of Time Warner. The merger agreement provides that all outstanding
shares of Turner capital stock will be converted into shares of Time Warner
common stock. If the merger is consummated under its current terms, the Company
will receive approximately 4.4 million shares
V-18
<PAGE>
of Time Warner common stock in exchange for its shares of Turner capital stock.
The merger is subject to a number of conditions, including regulatory approvals.
There can be no assurances that all of the conditions to the consummation of the
merger will be satisfied or that, as a condition to the grant of regulatory
approvals, changes will not be required to the terms of the merger. The
approximate market value of the Time Warner shares that Continental would have
received had the merger taken place as of September 30, 1996 would have been
approximately $169.9 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Timothy P. Neher, Director and Vice Chairman of the Board of
Continental, serves on the Board of Directors of Turner.
E! ENTERTAINMENT TELEVISION, INC. Continental owns a 10.4% interest in E!,
whose programming includes entertainment related news, information and features.
E! has agreements with every major U.S. cable television operator and, as of
December 31, 1995, was distributed to approximately 37.3 million customers,
representing more than 50% of U.S. multi-channel television households. Other
shareholders in E! include Comcast, Cox and TCI, each with an approximate 10.4%
interest, and Time Warner Cable, with a 48% interest. Robert A. Stengel, a
Senior Vice President of Continental, serves on the Board of Directors of E!.
The following is a summary of financial and operating statistics for E!:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues........................................... $ 31,700 $ 49,100 $ 74,300
Growth rate........................................ 43.4% 54.9% 51.3%
Subscribers........................................ 25,800 27,800 37,300
Growth rate........................................ 30.1% 7.8% 34.2%
</TABLE>
NATIONAL CABLE COMMUNICATIONS, L.P. Continental has a 12.5% limited
partnership interest in NCC, the largest representation firm in spot cable
advertising sales. The other limited partners in NCC are Cox, Time Warner Cable
and Comcast, each with a 12.5% interest. NCC's managing partner is Katz Cable
Corporation, with a 50% interest. Robert A. Stengel, a Senior Vice President of
Continental, serves on the management committee of NCC. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
NEW ENGLAND CABLE NEWS. Continental and The Hearst Corporation each own
50.0% of New England Cable News, a regional cable news network featuring news,
sports and weather programming on an exclusive basis to cable television systems
in the New England area. New England Cable News had revenues of $5.5 million for
the year ended December 31, 1995. Russell Stephens, a Senior Vice President of
Continental's Northeast region, serves on the Board of Directors of New England
Cable News.
VIEWER'S CHOICE. PPVN Holding Co. ("PPVN"), which operates under the
brand-name Viewer's Choice, is a cable operator-controlled buying cooperative
and distributor for pay-per-view programming. Continental holds a 10.0% interest
in PPVN. William T. Schleyer, the President and Chief Operating Officer of
Continental, serves on the Board of Directors of PPVN.
THE GOLF CHANNEL. Continental owns an approximate 14.4% interest in The
Golf Channel, a cable programming service which provides golf-related
programming 24 hours a day. Timothy P. Neher, Director and Vice Chairman of the
Board of Continental, serves on the Board of Directors of The Golf Channel.
TV FOOD NETWORK. Continental owns an approximate 14.0% interest in the TV
Food Network, a cable operator-owned programming service which offers programs
on cooking, food preparation and other related topics. Robert A. Stengel, a
Senior Vice President of Continental, serves on the Management Committee of the
TV Food Network.
THE SUNSHINE NETWORK. Continental owns an approximate 6.5% interest in The
Sunshine Network, a joint venture that provides programming consisting of
Florida sporting events, sports news and related programs, as well as local
public affairs programs. H. W. Goodall, a Senior Vice President of the Southeast
Region, serves on the Board of Directors of The Sunshine Network.
V-19
<PAGE>
MUSIC CHOICE. Music Choice distributes audio programming in digital format
over coaxial cable. The service allows cable television customers to receive
compact disc-quality sound in several music formats. Continental owns an
approximate 10.1% interest in Music Choice. Robert A. Stengel, a Senior Vice
President of Continental, serves on the Board of Directors of Music Choice.
OUTDOOR LIFE NETWORK AND SPEEDVISION. Continental owns an approximate 21.9%
and 21.7% interests in the Outdoor Life Network and Speedvision, respectively,
both newly created programming services. The Outdoor Life Network, which began
operations in 1995, is the first 24-hour network dedicated entirely to outdoor
activities. Speedvision, which began operations in 1996, is the first network
for automotive, marine and aviation enthusiasts. Robert A. Stengel, a Senior
Vice President of Continental, serves on the Boards of Directors of both Outdoor
Life and Speedvision.
COMPETITION
CABLE TELEVISION COMPETITION. Continental's systems compete with other
communications and entertainment media, including conventional off-air
television broadcasting services, newspapers, movie theaters, live sporting
events and home-video products. Cable television service was first offered as a
means of improving television reception in markets where terrain factors or
distance from major cities limited the availability of off-air television. In
some of the areas served by the systems, a substantial variety of television
programming can be received off-air, including low-power UHF television
stations, which have increased the number of television signals in the country
and provided off-air television programs to limited local areas. The extent to
which cable television service is competitive depends upon a cable television
system's ability to provide, on a cost-effective basis, an even greater variety
of programming than that available off-air or through other alternative delivery
sources.
Since Continental's U.S. cable television systems operate under
non-exclusive franchises, other companies may obtain permission to build cable
television systems in areas where Continental presently operates. Telephone
company affiliates have recently applied for and been granted franchises in
certain markets in which Continental operates. While Continental believes that
the current level of overbuilding is not material, it is currently unable to
predict the extent to which overbuilds may occur in its franchise areas and the
impact, if any, such overbuilds may have on Continental in the future.
Additional competition may come from satellite master antenna television
("SMATV") systems serving condominiums, apartment complexes and other private
residential developments. The operators of these private systems often enter
into exclusive agreements with apartment building owners or homeowners'
associations that preclude operators of franchised cable television systems from
serving residents of such private complexes. The widespread availability of
reasonably priced earth stations enables private cable television systems to
offer both improved reception of local television stations and many of the same
satellite-delivered program services that are offered by franchised cable
television systems. FCC regulations permit SMATV operators to use point-to-point
microwave service to distribute video entertainment programming to their SMATV
systems. A private cable television system normally is free of the regulatory
burdens imposed on franchised cable television systems. Although a number of
states have enacted laws to afford operators of franchised cable television
systems access to private complexes, the U.S. Supreme Court has held that cable
companies cannot have such access without compensating the property owner. The
access statutes of several states have been challenged successfully in the
courts, while others have been upheld.
In recent years, the FCC has initiated new policies and authorized new
technologies to provide a more favorable operating environment for certain
existing technologies and to create substantial additional competition to cable
television systems. These technologies include, among others, DBS services which
transmit signals by satellite to receiving facilities located on customers'
premises. Although satellite-delivered programming has been available to
backyard earth stations for some time, new, high-powered direct-to-home
satellites make possible the wide-scale delivery of programming to individuals
throughout the United States using roof-top or wall-mounted antennas. Companies
offering DBS services use video compression technology to increase channel
capacity and to provide a package of movies, broadcast and other program
services highly competitive with those of cable television systems. Two
companies began offering high-powered DBS service in 1994, and a third company
began service in 1996 in competition with cable television
V-20
<PAGE>
operators and PrimeStar. Continental has invested in PrimeStar, a medium-powered
DBS-service provider, which currently offers more than 90 channels of video and
audio service. In order to expand its service, PrimeStar's partners have agreed
in principle on a long-term path for medium-powered DBS service with the option
for a fifteen-year transponder lease from GE Americom Communications, Inc.,
which would give PrimeStar the potential to deliver approximately 150 channels
of programming. Other companies intend to offer expanded service over
high-powered satellites using video compression technology. DBS-service
providers may be able to offer new and highly specialized services using a
national base of subscribers. The ability of DBS-service providers to compete
with the cable television industry depends on, among other factors, the
availability of reception equipment at reasonable prices. Initial sales of DBS
services indicate that it may offer substantial competition to cable television
operators. PrimeStar is still considering its options for the delivery of
high-powered DBS service following the conclusion of an FCC auction, which left
PrimeStar without the assured use of certain desirable spectrum frequencies for
high-powered service. See "Telecommunications and Technology."
Cable television systems also may compete with wireless video program
distribution services such as MMDS, which are licensed to serve specific areas.
MMDS uses low-power microwave frequencies to transmit television programming
over-the-air to subscribers. MMDS systems' ability to compete with cable
television systems has previously been limited by a lack of channel capacity,
the inability to obtain programming and regulatory delays. However, several of
the former Bell operating companies such as NYNEX, Bell Atlantic and Pacific
Telesis Group have acquired or invested in MMDS operators in states in which
Continental has cable systems. A series of actions taken by the FCC, including
reallocating certain frequencies to the wireless services and making it possible
for them to provide digital video transmissions, are intended to facilitate the
development of wireless cable television systems as an alternative means of
distributing video programming. The FCC has also allocated frequencies in the 28
GHz band for a new multi-channel wireless video service. Continental is unable
to predict the extent to which additional competition from these services will
materialize in the future or the impact such competition would have on
Continental's operations.
Continental believes that as a result of its investment in technologically
advanced systems, it is well-positioned to offer new services such as on-line
services, data communications and telephony. Continental believes that the
ability to offer interactive services over a high-capacity, two-way network
provides a distinct competitive advantage over DBS and MMDS, which are currently
one-way services.
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. The FCC has authorized
television broadcast stations to transmit textual and graphic information useful
both to consumers and to businesses. The FCC also permits commercial and non-
commercial FM stations to use their subcarrier frequencies to provide
non-broadcast services, including data transmissions. The FCC established an
over-the-air Interactive Video and Data Service that will permit two-way
interaction with commercial and educational programming along with informational
and data services. Telephone companies and other common carriers also provide
facilities for the transmission and distribution of data and other non-video
services.
In the past, federal cross-ownership restrictions have limited entry into
the cable television business by potentially strong competitors such as
telephone companies. Removal of these entry barriers makes it possible for
companies with considerable resources, and, consequently, a potentially greater
willingness or ability to overbuild, to enter the cable television and
telecommunications business. The 1996 Telecommunications Act repeals the 1984
Cable Act's prohibition against telco-cable cross ownership and provides that a
local exchange telephone company, also known as a LEC, may provide video
programming directly to subscribers through a variety of means, including: (1)
as a radio-based (MMDS or DBS) multichannel video programming distributor; (2)
as a cable operator, fully subject to the franchising, rate regulation and other
provisions of the 1984 Cable Act and the 1992 Cable Act; and (3) through an
"open video system" that is certified by the FCC to offer non-discriminatory
access to a portion of its channel capacity for unaffiliated program
distributors, subject only to selected portions of the regulations applicable to
cable operators. A local telephone company may also provide the "transmission of
video programming" on a common carrier basis. Telephone companies in several of
the Company's franchise areas have applied for franchises to offer
V-21
<PAGE>
cable service. Ameritech Corporation, for example, has obtained a franchise to
build a cable system in several of the communities formerly served by N-COM,
which Continental acquired in December 1995. The total number of subscribers is
not material in relation to Continental's total subscriber base, but there can
be no assurances with respect to the number of communities for which Ameritech
Corporation or other telephone companies may obtain franchises in the future.
See "Legislation and Regulation -- Federal Regulation."
The 1996 Telecommunications Act also prohibits a telephone company or a
cable system operator in the same market from acquiring each other, except in
limited circumstances, such as areas of smaller population.
TELEPHONY COMPETITION. LECs currently dominate the two-way switched voice
and data market. The LECs provide a full range of local telecommunications
services and equipment to customers as well as origination and termination
access to their local networks to inter-exchange carriers ("IXCs") and mobile
radio service providers. Prior to the 1996 Telecommunications Act, in many
states the LECs have had an exclusive franchise by law to provide telephone
service. As a consequence of this monopoly position, the LECs have established
relationships with their customers and provide those customers with various
transmission and switching services that other potential telecommunications
service providers were permitted by law to offer.
In addition to the LECs and existing competitive-access providers,
competitors which are potentially capable of offering private line, special
access and switched services include other cable television companies, electric
utilities, long-distance carriers, microwave carriers, wireless service
providers and private networks built by large end-users.
While several states have engaged in legislative or regulatory efforts to
remove local telecommunications market entry restrictions, new market entrants
have maintained a high degree of dependance upon the incumbent LEC for
interconnection to LEC customers and for allocation of telephone numbers.
TELECOMMUNICATIONS REGULATION. The 1996 Telecommunications Act removes
barriers to entry in the local telephone market that is now monopolized by the
RBOCs and other LECs by preempting state and local laws that restrict
competition and by requiring incumbent LECs to provide non-discriminatory access
and interconnection to potential competitors, such as cable operators and
long-distance companies. At the same time, the new law eliminates the Modified
Final Judgment and permits the RBOCs to enter the market for long-distance
service (through a separate subsidiary) after they satisfy a "competitive
checklist." The 1996 Telecommunications Act also permits interstate utility
companies to enter the telecommunications market for the first time.
The 1996 Telecommunications Act also eliminates or streamlines many of the
requirements applicable to LECs, and requires the FCC and states to review
universal service programs and encourages access to advanced telecommunications
services provided by all entities, including cable companies, by schools,
libraries and other public institutions. The FCC and, in some cases, states are
required to conduct numerous rulemaking proceedings to implement these
provisions.
PROPERTIES
Continental's principal physical assets consist of cable television systems,
including signal receiving, encoding and decoding apparatus, headends,
distribution systems, and subscriber house-drop equipment for each of its
systems. The signal receiving apparatus typically includes a tower, antenna,
ancillary electronic equipment, and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, are located near the
receiving devices. Continental's distribution systems consist of coaxial and
fiber-optic cables and related electronic equipment. Subscriber equipment
consists of taps, house drops, converters and analog addressable converters.
Continental owns its distribution system, various office and studio fixtures,
test equipment and service vehicles. The physical components of Continental's
systems require maintenance and periodic upgrading to keep pace with
technological advances.
V-22
<PAGE>
Continental's coaxial and fiber-optic cables are generally attached to
utility poles under pole-rental agreements with local public utilities, although
in some areas the distribution cable is buried in underground ducts or trenches.
The FCC regulates pole attachment rates under the Federal Pole Attachments Act.
See "Legislation and Regulation Federal Regulation -- Pole Attachments."
Continental owns or leases parcels of real property for signal reception
sites (antenna towers and headends), microwave facilities and business offices.
Continental owns the building which houses its headquarters in Boston,
Massachusetts.
Continental believes that its properties, both owned and leased, are in good
operating condition and are suitable and adequate for its business operations.
EMPLOYEES
Continental currently has approximately 10,000 full-time employees,
including approximately 100 employees located at its Boston headquarters, who
provide staff support in the areas of corporate planning, finance, marketing,
program acquisition, employee training and benefits administration, government
relations, internal auditing, financial and tax reporting and regulatory
compliance. Continental believes that its relations with its employees are good.
LEGAL PROCEEDINGS
There are no material pending legal proceedings against the Company. The
Company is subject to legal proceedings and claims that arise in the ordinary
course of business, none of which is material to its consolidated financial
condition or results of operations in the opinion of management.
V-23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information for and as of each
year in the five-year period ended December 31, 1995 and the six months ended
June 30, 1996 has been derived from the Consolidated Financial Statements of the
Company. This selected consolidated financial information should be read in
conjunction with the Consolidated Financial Statements of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Proxy Statement. The unaudited selected
historical financial information for the six months ended June 30, 1995 and 1996
reflects all adjustments of a normal recurring nature that are, in the opinion
of management, necessary for a fair presentation of that information. Results of
operations for the six months ended June 30, 1995 and 1996 are not necessarily
indicative of the results that may be expected for any other interim period or
the year as a whole.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $1,039,163 $1,113,475 $1,177,163 $1,197,977 $1,442,392 $ 650,048 $ 942,930
Costs and expenses:
Operating...................... 347,469 365,513 382,195 405,535 498,239 224,846 334,827
Selling, general and
administrative................ 246,986 259,632 267,376 267,349 339,002 150,332 221,533
Depreciation and
amortization.................. 267,510 272,851 279,009 283,183 341,171 148,412 231,696
Restricted stock purchase
program (1)................... 10,067 9,683 11,004 11,316 12,005 5,905 8,654
--------- --------- --------- --------- --------- --------- ---------
Total........................ 872,032 907,679 939,584 967,383 1,190,417 529,495 796,710
--------- --------- --------- --------- --------- --------- ---------
Operating income................. 167,131 205,796 237,579 230,594 251,975 120,553 146,220
--------- --------- --------- --------- --------- --------- ---------
Interest expense (net)........... 324,976 296,031 282,252 315,541 363,826 166,314 233,578
Other (income) expense (2)....... 1,936 11,071 (10,978) 24,048 48,085 2,016 68,237
--------- --------- --------- --------- --------- --------- ---------
Total........................ 326,912 307,102 271,274 339,589 411,911 168,330 301,815
--------- --------- --------- --------- --------- --------- ---------
Loss before income taxes,
extraordinary item and
cumulative effect of accounting
change.......................... (159,781) (101,306) (33,695) (108,995) (159,936) (47,777) (155,595)
Benefit (provision) for income
taxes........................... (1,861) (1,654) 7,921 40,419 47,909 14,710 45,409
--------- --------- --------- --------- --------- --------- ---------
Loss before extraordinary item
and cumulative effect of
accounting change............... (161,642) (102,960) (25,774) (68,576) (112,027) (33,067) (110,186)
Extraordinary item............... -- -- -- (18,265) -- -- --
--------- --------- --------- --------- --------- --------- ---------
Loss before cumulative effect of
accounting change............... (161,642) (102,960) (25,774) (86,841) (112,027) (33,067) (110,186)
Cumulative effect of accounting
change.......................... -- -- (184,996) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss......................... (161,642) (102,960) (210,770) (86,841) (112,027) (33,067) (110,186)
Preferred stock preferences...... (5,771) (16,861) (34,115) (36,800) (39,802) (19,347) (21,041)
--------- --------- --------- --------- --------- --------- ---------
Loss applicable to common
stockholders.................... $(167,413) $(119,821) $(244,885) $(123,641) $(151,829) $ (52,414) $(131,227)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
V-24
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
(CONTINUED)
<S> <C> <C> <C> <C> <C> <C> <C>
Per common share:
Loss before extraordinary item
and cumulative effect of
accounting change............. $ (1.42) $ (1.00) $ (.53) $ (.92) $ (1.22) $ (0.45) $ (0.88)
Extraordinary item............. -- -- -- (.16) -- -- --
Cumulative effect of accounting
change........................ -- -- (1.62) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net loss....................... $ (1.42) $ (1.00) $ (2.15) $ (1.08) $ (1.22) $ (0.45) $ (0.88)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average common shares
outstanding (in thousands)...... 117,534 119,544 114,055 114,334 124,882 117,627 148,440
OTHER DATA:
EBITDA (3)....................... $ 444,708 $ 488,330 $ 527,592 $ 525,093 $ 605,151 $ 274,870 $ 386,570
Net cash provided from operating
activities...................... $ 123,543 $ 215,045 $ 250,504 $ 236,304 $ 221,264 $ 77,527 $ 175,030
Capital expenditures............. $ 145,846 $ 145,189 $ 185,691 $ 300,511 $ 518,161 $ 231,021 $ 311,447
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE
AS OF DECEMBER 31, 30,
---------------------------------------------------------- ----------
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................................. $ 14,265 $ 27,352 $ 122,640 $ 11,564 $ 18,551 $ 27,056
Total assets.......................... 2,082,182 2,003,196 2,091,853 2,483,639 5,080,593 5,284,734
Total debt............................ 3,338,281 3,011,669 3,177,178 3,449,907 5,285,159 5,604,137
Redeemable common stock............... 445,463 223,716 213,548 232,399 256,135 270,290
Stockholder's equity (deficiency)..... (1,919,525) (1,486,231) (1,667,088) (1,688,334) (1,215,951) (1,319,133)
</TABLE>
- ------------------------------
(1)
Represents the difference between the consideration paid by employees for
purchases of shares of Common Stock of the Company under the Company's
Restricted Stock Purchase Program and the fair market value of such shares (as
determined by the Company's Board of Directors) at the date of issuance,
amortized over the vesting schedule of such shares. See Note 11 to the
Company's Consolidated Financial Statements.
(2)
Includes equity in net income (loss) of affiliates, minority interest in net
loss of subsidiaries, other non-operating income and expenses, gains on sale
of marketable equity securities of $10.3 million, $17.1 million and $24.1
million from the Company's sales of its investment in affiliates in 1992 and
1993 (before post-closing adjustments), and sale of marketable equity
securities and a portion of an investment in 1995, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3)
Operating income before depreciation and amortization and non-cash stock
compensation (Restricted Stock Purchase Program expense). Based on its
experience in the cable television industry, the Company believes that EBITDA
and related measures of cash flow serve as important financial analysis tools
for measuring and comparing cable television companies in several areas, such
as liquidity, operating performance and leverage. EBITDA should not be
considered by the reader as an alternative to operating or net income (as
determined in accordance with GAAP) as an indicator of the Company's
performance or as an alternative to cash flows from operating activities (as
determined in accordance with GAAP) as a measure of liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." EBITDA for the year ended December 31, 1995 and the six months
ended June 30, 1996 include EBITDA of the systems acquired in the Providence
Journal Merger and the Recent Acquisitions from their respective dates of
acquisition.
V-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF CONTINENTAL'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS OF
CONTINENTAL APPEARING ELSEWHERE IN THIS PROXY STATEMENT.
GENERAL
Continental is a leading provider of broadband communications services.
Continental's operations consist primarily of U.S. cable television systems with
complementary operations and investments in three other areas: (i) international
broadband communications ventures; (ii) interests in the telecommunications and
technology industries, including companies offering competitive-access telephony
and DBS service; and (iii) interests in programming services.
Substantially all of Continental's revenues are earned from customer fees
for basic cable programming and premium television services, the rental of
converters and remote control devices, and cable installation fees. During the
period from December 31, 1992 through December 31, 1995, Continental's revenues
increased at a compound annual growth rate of 9.0% primarily through basic
subscriber growth and increases in monthly revenue per average basic subscriber.
Revenues for the year ended December 31, 1995, however, increased 20.4% (10.3%
excluding acquisitions) as compared to the same period in 1994. Revenues for the
year ended December 31, 1994 increased only 1.8% compared to 1993 due to basic
rate reductions and non-cash revenue reserves recorded in connection with the
FCC rate regulations.
Additional revenues are generated by the sale of advertising, pay-per-view
programming fees, DBS service and payments received as a result of
revenue-sharing agreements for products sold through home shopping networks.
Continental expects that advertising and home shopping revenues (which currently
represent approximately 7.1% of Continental's total revenues) may become a
larger percentage of total revenues. These sources of revenues tend to be
cyclical and seasonal in nature and could increase the cyclicality and
seasonality in Continental's total revenues.
Continental's business is subject to significant regulatory developments,
including recent federal laws and regulations, which regulate rates charged by
Continental for certain cable services. Such laws and regulations will limit
Continental's ability to increase or restructure its rates for certain services.
On August 3, 1995, the Social Contract between Continental and the FCC was
adopted, which covers all of Continental's existing franchises (excluding the
systems acquired in the Providence Journal Merger and the Recent Acquisitions),
including those that are currently unregulated, and is the first comprehensive
rate agreement involving cable television ever approved by the FCC. The Social
Contract settled Continental's pending cost-of-service rate cases and its
benchmark CPS-tier rate cases. The Social Contract Amendment was adopted by the
FCC on August 21, 1996. This amendment incorporates into the Social Contract the
cable television systems acquired in the Providence Journal Merger and the
Recent Acquisitions and makes certain other changes to the Social Contract. See
"Legislation and Regulation" and "Business -- U.S. Operating Strategy -- U.S.
Regulatory Strategy; Social Contract." In addition, the 1996 Telecommunications
Act has been enacted into law. The 1996 Telecommunications Act modifies various
provisions of the Communications Act of 1934, the 1984 Cable Act and the 1992
Cable Act with the intent of establishing a pro-competitive, deregulatory policy
framework for the telecommunications industry.
The high level of depreciation and amortization associated with
Continental's capital expenditures and acquisitions and the interest costs
related to financing activities, have caused Continental to report net losses.
Continental believes that such net losses are common for cable television
companies.
Continental has recently completed a series of acquisitions in the United
States, the most significant of which was the acquisition of the cable
television businesses and assets of Providence Journal. See "Business -- U.S.
Acquisitions and Investments -- The Providence Journal Merger." Results of
operations of the companies and businesses acquired have been included in the
accompanying results of operations from their respective dates of acquisition.
V-26
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain items in
Continental's Selected Consolidated Financial Information. See the footnotes to
"Selected Consolidated Financial Information" and, as to subscriber information,
"Business -- U.S. Systems." The following subscriber information does not give
effect to the Pending M/NH Buyout.
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Basic cable service.................................... $ 845,213 $ 849,889 $1,013,405 $ 456,284 $ 665,102
Premium cable service.................................. 242,956 245,605 269,069 126,480 158,604
Pay-per-view........................................... 25,746 24,523 32,467 13,158 19,019
DBS.................................................... 1,755 6,029 37,048 14,179 30,572
Advertising and other.................................. 61,493 71,931 90,403 39,947 69,633
--------- --------- --------- --------- ---------
Total................................................ 1,177,163 1,197,977 1,442,392 650,048 942,930
Operating, selling, general and administrative
expenses................................................ 649,571 672,884 837,241 375,178 556,360
Depreciation and amortization............................ 279,009 283,183 341,171 148,412 231,696
Restricted stock purchase program........................ 11,004 11,316 12,005 5,905 8,654
--------- --------- --------- --------- ---------
Operating income......................................... 237,579 230,594 251,975 120,553 146,220
Interest expense, net.................................... 282,252 315,541 363,826 166,314 233,578
Other (income) expenses.................................. (10,978) 24,048 48,085 2,016 68,237
--------- --------- --------- --------- ---------
Loss before income taxes, extraordinary item and
cumulative effect of accounting change.................. (33,695) (108,995) (159,936) (47,777) (155,595)
Benefit for income taxes................................. (7,921) (40,419) (47,909) (14,710) (45,409)
--------- --------- --------- --------- ---------
Loss before extraordinary item and cumulative effect of
accounting change....................................... (25,774) (68,576) (112,027) (33,067) (110,186)
Extraordinary item....................................... -- (18,265) -- -- --
--------- --------- --------- --------- ---------
Loss before cumulative effect of accounting change....... (25,774) (86,841) (112,027) (33,067) (110,186)
Cumulative effect of accounting change................... (184,996) -- -- -- --
--------- --------- --------- --------- ---------
Net loss................................................. $(210,770) $ (86,841) $(112,027) $ (33,067) $(110,186)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
EBITDA................................................... $ 527,592 $ 525,093 $ 605,151 $ 274,870 $ 386,570
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, JUNE 30,
------------------------------- ---------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SUBSCRIBER DATA FOR U.S. CABLE SYSTEMS:
Homes passed by cable................................................. 5,192,000 5,372,000 7,191,000 7,243,000
Number of basic subscribers........................................... 2,895,000 3,081,000 4,190,000 4,234,000
Basic penetration..................................................... 55.8% 57.4% 58.3% 58.5%
Number of premium subscriptions....................................... 2,454,000 2,635,000 3,770,000 3,485,000
Premium penetration................................................... 84.8% 85.5% 90.0% 82.3%
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30,
1995. Revenues increased 45.1% (or $292.9 million) to $942.9 million. The
acquisition of cable television systems during 1995 serving a total of
approximately 1,009,000 basic subscribers as of the acquisition dates, accounted
for $210.8 million of such revenue increase. Excluding the effects of the
foregoing acquisitions, revenues increased 12.6% (or $82.1 million) to $732.1 as
a result of a 2.4% increase in ending basic cable subscribers, an increase in
cable revenue per average basic subscriber and increases in DBS-service
revenues. Excluding the foregoing acquisitions and DBS-service revenues, monthly
cable revenue per average basic subscriber increased 7.4% from $35.71 to $38.34.
The $2.63 increase in monthly cable revenue per average basic subscriber
primarily reflects the addition of new channels and increases in rates. The
increase in cable revenues (excluding the foregoing acquisitions and DBS
services) also includes a $14.4 million increase in advertising and home
V-27
<PAGE>
shopping revenues to $53.1 million, and a $2.0 million increase in pay-per-view
revenues to $15.1 million. Revenues from DBS services increased by $16.4 million
to $30.6 million principally as a result of an increase of 54,000 DBS-service
customers to approximately 103,000 as of June 30, 1996.
Operating, selling, general and administrative expenses increased 48.3% to
$556.4 million due primarily to the foregoing acquisitions, the provision of DBS
service, and increases in programming costs and wages. Depreciation and
amortization expenses increased 56.1% to $231.7 million due to the foregoing
acquisitions and increased levels of capital expenditures. Non-cash stock
compensation (Restricted Stock Purchase Program expense) increased 46.6% to $8.7
million due to the vesting of a greater number of shares issued under
Continental's Restricted Stock Purchase Program as compared to 1995. Operating
income increased 21.3% to $146.2 million. Interest expense increased 40.4% to
$233.6 million as a result of a 51.1% increase in average debt outstanding due
primarily to the foregoing acquisitions, offset by a decrease in the effective
interest rate from 9.3% to 8.6%. Other (income) expenses include equity in net
loss of affiliates, which increased from $25.8 million to $62.8 million due to
Continental recording its proportionate share of losses from its international
investments in Australia, Argentina, and Singapore and its investments in TCG
and The Golf Channel.
As a result of such factors, the net loss for the six months ended June 30,
1996 compared to the same period in 1995 increased by $77.1 million to $110.2
million.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31,
1994. Revenues increased 20.4% (or $244.4 million) to approximately $1.4
billion. The acquisition of cable television systems in New Hampshire and
Florida during 1994, the Providence Journal Merger and the Recent Acquisitions,
serving a total of approximately 1,087,000 basic subscribers as of their
respective acquisition dates, accounted for $122.1 million of such revenue
increase. Excluding the effects of the foregoing acquisitions, revenues
increased 10.3% (or $122.3 million) as a result of a 3.1% increase in ending
basic cable subscribers, an increase in cable revenue per average basic
subscriber and an increase in DBS-service revenues. Excluding the foregoing
acquisitions and DBS-service revenues, monthly cable revenue per average basic
subscriber increased from $35.23 to $36.56. The $1.33 increase in monthly cable
revenue per average basic subscriber reflects: (i) increases in basic rates and
a reversal during 1995 of certain non-cash revenue reserves (see below) as a
result of the Social Contract and (ii) an increase in premium and other revenue
categories. Revenues from premium cable services increased by $3.8 million to
$248.1 million (excluding the foregoing acquisitions and DBS service) due to an
increase in premium subscriptions. The increase in revenues (excluding the
foregoing acquisitions and DBS service) was also due to a $9.2 million increase
in advertising revenues to $66.9 million, a $2.4 million increase in home
shopping revenues to $16.4 million and a $5.6 million increase in pay-per-view
revenues to $30.1 million. Revenues from DBS service increased by $31.0 million
to $37.0 million principally as a result of an increase of 58,000 in the number
of DBS-service customers to approximately 80,000 as of December 31, 1995.
Operating, selling, general and administrative expenses increased 24.4% to
$837.2 million due primarily to the foregoing acquisitions, the provision of DBS
service, and increases in programming costs and wages. Many of the increases in
expenses were not passed through to subscribers in the form of rate increases,
which is allowed under the FCC's rate regulations, due to the negotiation and
implementation of the Social Contract. See "Business -- U.S. Operating Strategy
- -- U.S. Regulatory Strategy; Social Contract." Depreciation and amortization
expenses increased 20.5% to $341.2 million due to the foregoing acquisitions and
increased levels of capital expenditures. Non-cash stock compensation
(Restricted Stock Purchase Program expense) increased 6.1% to $12.0 million due
to a vesting of a greater percentage of shares issued under Continental's
Restricted Stock Purchase Program as compared to 1994. Operating income
increased 9.3% to $252.0 million. Interest expense increased 15.3% to $363.8
million as a result of a 25.0% increase in average debt outstanding. The
effective interest rate decreased from 9.7% to 9.0%. Other (income) expenses
included a gain of $23.0 million from the sale of Continental's shares of QVC
common stock and a gain of $1.0 million on the sale of a portion of its
investment in NCC. Other (income) expense also includes equity in net loss of
affiliates, which increased from $25.0 million to $70.4 million primarily due to
Continental recording its proportionate share of losses from its international
investments in Australia, Argentina, and
V-28
<PAGE>
Singapore and its investments in TCG and The Golf Channel. The effective tax
rate was lower in 1995 since a tax benefit was not recorded for the equity in
net loss of foreign affiliates. As a result of such factors, the net loss before
extraordinary item for 1995 compared to 1994 increased by $43.5 million to
$112.0 million.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31,
1993. Revenues increased by 1.8% (or $20.8 million) to approximately $1.2
billion. The cable television systems acquired in New Hampshire and Florida
during 1994 served a total of approximately 78,000 basic subscribers as of their
respective acquisition dates and accounted for $8.0 million of such revenue
increase. See "Business -- U.S. Acquisitions and Investments -- Other U.S.
Acquisitions." Excluding the effects of the foregoing acquisitions, revenues
increased 1.1% (or $12.8 million) as a result of a 3.7% increase in ending basic
subscribers and an increase in premium and certain other revenue. Monthly cable
revenue per average basic subscriber decreased from $35.71 to $35.23. The $.48
decrease was primarily due to rate reductions and non-cash revenue reserves
recorded during 1994 in connection with the FCC's rate regulations, net of an
$.11 increase in premium, advertising and other revenue. See "-- Liquidity and
Capital Resources -- Recent Legislation" and "Legislation and Regulation."
Revenues from premium cable services increased by $1.3 million (excluding the
foregoing acquisitions and DBS-service revenues) due to an increase in premium
subscriptions. The increase in revenues (excluding the foregoing acquisitions
and DBS-service revenues) was also due to a $5.0 million increase in advertising
revenue and a $5.1 million increase in other revenue due to continued growth in
home shopping revenue, less a $1.3 million decrease in pay-per-view revenue.
Pay-per-view revenue decreased due to the lack of availability of special events
offered as compared to 1993, reflecting industry-wide trends. Revenues from DBS
service increased $4.3 million or 244.0% as a result of an increase in
DBS-service customers from 4,300 to 22,000.
Operating, selling, general and administrative expenses increased 3.6% to
$672.9 million, primarily due to the foregoing acquisitions and increases in
programming costs and wages. Depreciation and amortization expenses increased
1.5% to $283.2 million due to an increase in capital expenditures. Non-cash
stock compensation (Restricted Stock Purchase Program expense) increased 2.8% to
$11.3 million due to the vesting of a greater percentage of shares issued under
Continental's Restricted Stock Purchase Program as compared to 1993. Operating
income decreased 2.9% to $230.6 million. Interest expense increased
approximately 11.8% to $315.5 million due to a 5.0% increase in average debt
outstanding and an increase in the effective interest rate from 9.1% to 9.7%.
Other (income) expenses decreased as a result of equity in net loss of
affiliates which increased from $12.8 million to $25.0 million, primarily due to
Continental recording its proportionate share of losses from PrimeStar and TCG
and its affiliates. Continental also recorded an extraordinary loss of $18.3
million due to the extinguishment of debt.
As a result of such factors, loss before the cumulative effect of the
accounting change for the year ended December 31, 1994 compared to December 31,
1993, increased by $61.1 million to $86.8 million, and net loss for the year
ended December 31, 1994 compared to December 31, 1993, decreased from $210.8
million to $86.8 million.
Continental implemented Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") as of January 1, 1993. SFAS 109
required a change from the deferred to the liability method for computing
deferred income taxes. The cumulative effect of this change was a non-recurring
increase in net loss of $185.0 million. The cumulative change resulted from net
deferred tax liabilities recognized for the difference between the financial
reporting and tax bases of assets and liabilities. The income tax benefit
recognized in 1993 was $7.9 million due to deferred tax benefits recognized
under SFAS 109. The income tax benefit for 1993 was decreased by $4.2 million as
a result of applying the newly enacted federal tax rates to deferred tax
balances as of January 1, 1993.
EBITDA. Based on its experience in the cable television industry,
Continental believes that EBITDA and related measures of cash flow serve as
important financial analysis tools for measuring and comparing cable television
companies in several areas, such as liquidity, operating performance and
leverage. EBITDA should not be considered as an alternative to operating or net
income (measured in accordance with GAAP) as an indicator of Continental's
performance or as an alternative to cash flows from operating activities
(measured in accordance with GAAP) as a measure of Continental's liquidity. For
the six months ended
V-29
<PAGE>
June 30, 1996, EBITDA increased 40.6% to $386.6 million, as compared to the same
period in 1995. Excluding the effects of the acquisitions of cable television
systems during 1995, EBITDA increased 9.5% to $301.1 million. DBS service
accounted for approximately $1.2 million and $4.4 million of EBITDA for the six
months ended June 30, 1995 and 1996, respectively. The remaining increase in
EBITDA for the six months ended June 30, 1996 (excluding the effects of
acquisitions) was the result of increases in revenues. For the year ended
December 31, 1995, EBITDA increased 15.2% to $605.2 million, as compared to the
same period in 1994. Excluding the effect of the acquisition of cable television
systems in New Hampshire and Florida in 1994, the Providence Journal Merger and
the Recent Acquisitions, EBITDA increased 6.3%. DBS service accounted for $4.3
million of EBITDA for the year ended December 31, 1995 compared to $(1.9)
million as of December 31, 1994. The remaining increase in EBITDA for the year
ended December 31, 1995 (excluding the effects of acquisitions) was the result
of increases in revenue. EBITDA decreased 0.5% to $525.1 million for the year
ended December 31, 1994, primarily due to rate reductions and non-cash revenue
reserves recorded in connection with the FCC's rate regulations.
INFLATION. Certain of Continental's expenses, such as those for wages and
benefits, for equipment repair and replacement and for billing and marketing,
increase with general inflation. However, Continental does not believe that its
results of operations have been, or will be, adversely affected by inflation,
provided that it is able to increase its service rates periodically. For a
description of recent laws and regulations that may limit Continental's ability
to raise its rates for certain services, see "Business -- U.S. Operating
Strategy -- U.S. Regulatory Strategy; Social Contract" and "Legislation and
Regulation."
RECENT ACCOUNTING PRONOUNCEMENTS. In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("SFAS 121"), which is effective for fiscal years
beginning after December 15, 1995. SFAS 121 addresses the accounting for
potential impairment of long-lived assets. The effect of implementing SFAS 121
is expected to be immaterial to Continental's financial position and results of
operations.
In October 1995, the FASB issued Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123, which is
effective for fiscal years beginning after December 15, 1995, establishes
financial accounting and reporting requirements for stock-based employee
compensation plans. The effect of implementing SFAS 123 is expected to be
immaterial to Continental's financial position and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth for the period indicated certain items from
Continental's Statement of Consolidated Cash Flows (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30,
1996
-----------
<S> <C>
Net Cash Provided From Operating Activities...................... $ 175,030
-----------
-----------
Financing Activities:
Net borrowings....................................................... $ 310,852
Other................................................................ 2,310
-----------
Net Cash Provided From Financing Activities...................... $ 313,162
-----------
-----------
Investing Activities:
Property, plant and equipment........................................ $(311,447)
Investments.......................................................... (133,020)
Other assets......................................................... (24,242)
Acquisition.......................................................... (10,978)
-----------
Net Cash Used For Investing Activities........................... $(479,687)
-----------
-----------
</TABLE>
V-30
<PAGE>
RECENT FINANCING ACTIVITIES. Continental recently arranged a short-term
unsecured, revolving credit facility, which will mature on July 1, 1997 (the
"1996 Credit Facility"). Maximum availability under the 1996 Credit Facility is
$1.0 billion. Borrowings under the 1996 Credit Facility may be used to fund
general corporate purposes, including capital expenditures, investments and
acquisitions. The terms and conditions of the 1996 Credit Facility are similar
to those of the 1994 Credit Facility (as defined below). Indebtedness under the
1996 Credit Facility will rank PARI PASSU with Continental's other senior
indebtedness. See "Credit Arrangements of the Company."
On December 13, 1995, Continental issued $600.0 million in aggregate
principal amount of its 8.30% Senior Notes Due 2006 (the "Old 8.30% Notes") in
an offering pursuant to Rule 144A of the Securities Act. The net proceeds from
the sale of the 8.30% Notes were used initially to repay $587.1 million of the
indebtedness outstanding under the unsecured, reducing, revolving credit
facility of Continental and certain of its subsidiaries (the "1994 Credit
Facility"). The maximum credit availability under the 1994 Credit Facility is
$2.2 billion, which will decrease annually commencing in December 1997, with a
final maturity in October 2003.
On June 5, 1996, Continental completed an exchange offer registered under
the Securities Act of 1933, as amended, pursuant to which Continental offered to
exchange its 8.30% Senior Notes Due 2006 (the "New 8.30% Notes" and, together
with the Old 8.30% Notes, the "8.30% Notes") for an equal principal amount of
the then outstanding Old 8.30% Notes. The form and terms of the New 8.30% Notes
are the same as the form and terms of the Old 8.30% Notes, except that the New
8.30% Notes do not bear legends restricting the transfer thereof.
On July 18, 1995, certain of Continental's subsidiaries entered into an
unsecured, reducing revolving credit facility (the "1995 Credit Facility"). The
maximum credit availability under the 1995 Credit Facility is $1.2 billion,
which will decrease annually commencing in December 1998, with a final maturity
in September 2004. Such facility has other terms and conditions that are similar
in certain respects to those contained in the 1994 Credit Facility.
In October 1995, Continental borrowed under the 1995 Credit Facility to fund
approximately $815.0 million in connection with the Providence Journal Merger
and approximately $155.0 million for the acquisition of Columbia Cable of
Michigan. In December 1995, Continental borrowed under the 1995 Credit Facility
to fund approximately $88.0 million in connection with the N-COM Buyout.
Subsequent borrowings under the 1995 Credit Facility will be used for general
corporate purposes, including capital expenditures for the Providence Journal
Cable, Columbia Cable of Michigan and N-COM systems. See "Credit Arrangements of
the Company."
CREDIT ARRANGEMENTS OF CONTINENTAL. On June 30, 1996, Continental had cash
on hand of $27.1 million and the following credit arrangements: (i)
approximately $2.0 billion outstanding under the 1994 Credit Facility; (ii)
approximately $1.0 billion outstanding under the 1995 Credit Facility; (iii)
$112.5 million of the 10.12% Senior Notes Due 1999 to the Prudential Life
Insurance Company (the "Prudential Notes"); (iv) $200.0 million of 8 1/2% Senior
Notes due 2001 (the "8 1/2% Notes"); (v) $100.0 million of 8 5/8% Senior Notes
due 2003 (the "8 5/8% Notes"); (vi) $275.0 million of 8 7/8% Senior Debentures
due 2005 (the "8 7/8% Debentures"); (vii) $600.0 million of 8.30% Notes; (viii)
$300.0 million of 9% Senior Debentures due 2008 (the "9% Debentures"); (ix)
$525.0 million of 9 1/2% Senior Debentures due 2013 (the "9 1/2% Debentures");
(x) $100.0 million of 10 5/8% Senior Subordinated Notes due 2002 (the "10 5/8%
Notes"); and (xi) $300.0 million of 11% Senior Subordinated Debentures due 2007
(the "11% Debentures"). Other miscellaneous debt was approximately $41.2 million
as of June 30, 1996. As of September 30, 1996, there was aggregate credit
availability of over $1.1 billion under the 1994 Credit Facility, the 1995
Credit Facility and the 1996 Credit Facility. In February 1996, the Company
borrowed funds under the 1994 Credit Facility in order to redeem $100.0 million
in aggregate principal amount of Floating Rate Debentures, plus accrued interest
thereon.
V-31
<PAGE>
As of June 30, 1996, a subsidiary of Continental had issued a standby letter
of credit of approximately $70.6 million on behalf of PrimeStar, which
guaranteed a portion of the financing incurred by PrimeStar to construct a
successor-satellite system. The letter of credit is secured by certain
marketable equity securities with a fair market value of approximately $164.7
million as of September 30, 1996.
The annual maturities, as of December 31, 1995, of Continental's
indebtedness for the years ending December 31, 1996, 1997, 1998, 1999 and 2000
will be approximately $29.6 million, $32.1 million, $33.6 million, $112.3
million and $559.0 million, respectively.
CAPITAL EXPENDITURES AND U.S. ACQUISITIONS. Continental's expenditures for
property, plant and equipment totaled approximately $518.2 million for the year
ended December 31, 1995. The increase in Continental's capital expenditures for
1995 as compared to 1994 was due to: (i) the rebuild and upgrade of its systems;
(ii) the provision of DBS service; and (iii) the acquisition of cable systems in
New Hampshire and Florida in 1994, the Providence Journal Merger and the Recent
Acquisitions. For the six months ended June 30, 1996, capital expenditures for
property, plant and equipment totaled approximately $311.4 million (of which
approximately $34.2 million was related to the provision of DBS service and
approximately $46.7 million was related to the development of new businesses).
Continental anticipates that it will spend during 1996: (i) approximately $529.0
million in capital expenditures for its systems (excluding the systems to be
acquired in the Pending M/NH Buyout); (ii) approximately $85.0 million on
capital expenditures for the provision of DBS service; and (iii) approximately
$120.0 million on capital expenditures for new businesses such as telephony and
high-speed data services. However, Continental is continually reevaluating its
capital budget based on economic, technological and other factors. In accordance
with the recently adopted Social Contract with the FCC, Continental has agreed
to invest a minimum of $1.35 billion in system rebuilds and upgrades in the
United States through 2000 to expand channel capacity and improve system
reliability and picture quality. Under the Social Contract Amendment, which was
recently adopted by the FCC, Continental has agreed to increase the minimum
investment to $1.7 billion, in order to incorporate into the Social Contract the
cable television systems acquired in the Providence Journal Merger and the
Recent Acquisitions. See "Business -- U.S. Operating Strategy U.S. Regulatory
Strategy; Social Contract."
In 1995, Continental acquired (i) the cable television systems of Providence
Journal Cable for total consideration of approximately $1.4 billion pursuant to
the Providence Journal Merger and (ii) other cable television systems, or
interests therein, in the Recent Acquisitions for an aggregate of approximately
$428.5 million. See "Investments -- Other Financing and Investment Activities."
Continental has entered into a purchase agreement to acquire the remaining
ownership interests and discharge or assume certain liabilities of M/NH for
total consideration of approximately $219.2 million. The Cablevision of Chicago
and the Consolidated Cablevision of California acquisitions closed in August
1995 and September 1995, respectively, and both the Providence Journal Merger
and Columbia Cable of Michigan acquisition closed in October 1995. The N-COM
Buyout closed in December 1995. The Pending M/NH Buyout is expected to close in
the fourth quarter of 1996. All of these cable television systems primarily
serve communities that are contiguous or in close proximity to Continental's
other systems. Continental funded the acquisition of Columbia Cable of Michigan
and the N-COM Buyout with borrowings under the 1995 Credit Facility. Continental
funded the Cablevision of Chicago and the Consolidated Cablevision of California
acquisitions with borrowings under the 1994 Credit Facility. Continental funded
the Providence Journal Merger with borrowings under the 1995 Credit Facility as
well as through the issuance of approximately 30.1 million shares of Class A
Common Stock. See "Business -- U.S. Acquisitions and Investments."
INVESTMENTS. For purposes of the Statement of Consolidated Cash Flows,
Continental's investments include, among other things, interests in
telecommunications and technology and international broad band communications
ventures.
INTERNATIONAL INVESTMENTS. As of June 30, 1996, Continental had advanced
US$150.5 million to Fintelco. In addition, Continental has recorded commitments
to contribute an additional US$17.1 million to Fintelco in order to finance a
portion of certain acquisitions of Argentine cable television systems. Fintelco
entered into a US$140.0 million credit facility in 1995 and recently arranged an
additional credit facility of US$50.0 million. Proceeds from such facilities
will be used to refinance existing short-term indebtedness and
V-32
<PAGE>
for general corporate purposes, including capital expenditures. Such facilities
may reduce the amount of future advances from Fintelco's shareholders, including
Continental. See "Business -- International Operations."
As of June 30, 1996, Continental had invested approximately US$286.6 million
in Optus Vision. Optus Vision anticipates at this time that its remaining
funding needs will be provided by a combination of equity from the joint venture
partners and third-party debt. Optus Vision currently has A$280.0 million of
short-term credit facilities. Proceeds from such facilities can be used for
general corporate purposes including capital expenditures. In addition,
Continental's future funding requirements could be reduced if either or both of
Nine and Seven exercise their options to increase their equity interests in
Optus Vision to 20% and 15%, respectively, but there can be no assurances that
Nine and/or Seven will exercise such options. See "Business -- International
Operations."
As of June 30, 1996, Continental had made capital contributions to SCV of
US$17.6 million and committed to contribute up to approximately US$27.0 million
(based on exchange rates as of June 30, 1996) in additional capital. In
addition, Continental has committed to lend up to approximately US$45.0 million
(based on exchange rates as of June 30, 1996) to SCV if third-party debt
financing is unavailable. SCV has arranged an aggregate of S$176.0 million in
senior credit facilities. Such facilities may reduce the amount of future
advances from SCV's shareholders, including Continental. See "Business
International Operations."
INVESTMENTS IN TELECOMMUNICATIONS AND TECHNOLOGY. Continental has made
numerous investments which are related to its ownership interests in TCG and
PrimeStar.
In 1993, Continental purchased 20% of TCG for a purchase price of $66.0
million. In addition, Continental committed to lend up to $69.9 million to TCG
through 2003, of which $53.8 million was advanced as of June 30, 1996.
Continental had also invested, as of June 30, 1996, $62.1 million in
partnerships involving TCG and other cable television operators.
Subsequent to June 30, 1996, TCG consummated an initial public offering of
shares of its common stock. In conjunction with the initial public offering, TCG
implemented a plan of reorganization, under which Continental exchanged its
$53.8 million loan and contributed its interests in TCG partnerships to TCG for
additional shares to TCG common stock. At the time of the initial public
offering, TCG redeemed approximately 8.0 million shares of TCG common stock from
Continental for net cash proceeds of approximately $121.0 million. Continental
used such proceeds to repay amounts outstanding under the 1994 Credit Facility.
After the redemption and the initial public offering, Continental owned
approximately 17.9 million shares of TCG common stock, which represented an
approximate 11.2% ownership interest and had a market value of $422.0 million as
of September 30, 1996.
Simultaneous with the initial public offering, TCG issued $925.0 million of
public debt securities. As a result of the initial public offering and such
public debt issuance, Continental does not anticipate making any additional
advances to TCG in the future.
Continental also owns an approximate 10.4% partnership interest in
PrimeStar. Continental has made cash investments totaling $31.4 million as of
June 30, 1996 to fund PrimeStar's ongoing operations and may in the future make
additional investments in PrimeStar. See "Business -- Telecommunications and
Technology."
OTHER FINANCING AND INVESTMENT ACTIVITIES. Intangible and other assets
increased by $1.5 billion during the year ended December 31, 1995 due primarily
to assets recorded in connection with the Providence Journal Merger and the
Recent Acquisitions and an increase of approximately $14.2 million in loans to
certain employees to cover tax obligations in connection with Continental's
Restricted Stock Purchase Program. During the six months ended June 30, 1996,
Continental invested approximately $24.2 million in other assets which included,
among other things, an increase in loans to certain employees to cover tax
obligations in connection with the Company's Restricted Stock Purchase Program.
See Note 11 to Continental's Consolidated Financial Statements.
V-33
<PAGE>
1998-1999 SHARE REPURCHASE PROGRAM. Continental is a party to a liquidity
agreement (the "Stock Liquidation Agreement") with certain stockholders,
including H. Irving Grousbeck (a co-founder of Continental), and the partners of
certain general investment limited partnerships managed by Burr, Egan, Deleage &
Co. (collectively, the "Subject Stockholders"). Continental's obligation under
the Stock Liquidation Agreement is to repurchase approximately 16.7 million
shares of Redeemable Common Stock held by the Subject Stockholders, as well as
by the other stockholders who elected to participate in this aspect of the
liquidity program (collectively, the "Selling Stockholders"), on December 15,
1998 (or January 15, 1999, at each Selling Stockholder's election). The purchase
price for such redemption is equal to the greater of (i) the dollar amount that
a holder of Common Stock would receive per share of Common Stock upon a sale of
Continental as a whole pursuant to a merger or a sale of stock or, if greater,
the dollar amount a holder of Common Stock would then receive per share of
Common Stock derived from the sale of Continental's assets and subsequent
distribution of the proceeds therefrom (net of corporate taxes, including sales
and capital gains taxes in connection with such sale of assets), in either case
less a discount of 22.5%, or (ii) the dollar amount equal to the net proceeds
which would be expected to be received by a stockholder of Continental from the
sale of a share of Common Stock in an underwritten public offering at the time
the shares are to be repurchased after, under certain circumstances, being
reduced by pro forma expenses and underwriting discounts. In the event
Continental is unable to perform its obligation to complete the 1998-1999 Share
Repurchase Program within six months of the payment date therefor, Continental
is obligated, at the request made within such six-month period by any one or
more Subject Stockholders or transferees holding an aggregate of at least 2.5
million shares of such transferred shares of Redeemable Common Stock, to use its
best efforts (subject to compliance with applicable laws and regulations) to
cause the sale of all or substantially all of the assets of Continental and,
following the consummation of such sale, to liquidate Continental.
CAPITAL RESOURCES. Historically, cash generated from Continental's
operating activities in conjunction with borrowings and, to a lesser extent,
proceeds from private equity issuances have been sufficient to fund the
Company's capital expenditures, investments, acquisitions, debt service
requirements and stock repurchase obligations. Prior to the consummation of the
proposed merger (the "Merger") of Continental with and into U S WEST, Inc. ("U S
WEST") or a wholly owned subsidiary thereof, Continental anticipates funding its
capital expenditures, acquisitions, investments and debt service requirements
with cash provided from operating activities and borrowings under existing
credit facilities. If the Merger is not consummated, Continental anticipates
funding its capital needs with cash provided from operating activities,
borrowings under existing and new credit facilities and future equity issuances.
However, there can be no assurances in this regard. Furthermore, there can be no
assurances that the terms available for any future debt or equity financing
would be favorable to Continental.
RECENT LEGISLATION. In October 1992, Congress enacted the 1992 Cable Act,
which, among other things, authorized the FCC to set standards for governmental
authorities to regulate the rates for certain cable television services and
equipment and gives local broadcast stations the option to elect mandatory
carriage or require retransmission consent. 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. In addition, the
Social Contract Amendment was adopted by the FCC on August 21, 1996 and
incorporates into the Social Contract the systems acquired in the Providence
Journal Merger and the Recent Acquisitions. The Social Contract and the Social
Contract Amendment will govern Continental's future rates. The Social Contract
also provides for its termination in the future 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. In that
instance, the Company may petition the FCC to terminate the Social Contract. For
a description of the Social Contract and the Social Contract Amendment, see
"Business -- U.S. Operating Strategy -- U.S. Regulatory Strategy; Social
Contract."
V-34
<PAGE>
Furthermore, the 1996 Telecommunications Act has been enacted into law. The
1996 Telecommunications Act modifies various provisions of the Communications
Act of 1934, the 1984 Cable Act and the 1992 Cable Act, with the intent of
establishing a pro-competitive, deregulatory policy framework for the
telecommunications industry. See "Legislation and Regulation."
V-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Financial
Information is based on the historical financial statements appearing elsewhere
in this Proxy Statement. The Unaudited Pro Forma Condensed Consolidated Balance
Sheet gives effect to (i) the Pending M/NH Buyout and (ii) the redemption of
shares of TCG common stock and reclassification of the remaining shares of TCG
common stock as marketable equity securities as though each transaction occurred
as of June 30, 1996. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1995 gives effect to (i) the
Acquisitions, (ii) the sale of the 8.30% Notes and the application of the
proceeds therefrom and (iii) the redemption of shares of TCG common stock and
reclassification of the remaining shares of TCG common stock as though each
transaction had occurred as of January 1, 1995. The Unaudited Pro Forma
Condensed Consolidated Statement of Operations for the six months ended June 30,
1996 gives effect to (i) the Pending M/NH Buyout and (ii) the redemption of
shares of TCG common stock and reclassification of the remaining shares of TCG
common stock as though each transaction occurred as of January 1, 1995.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable and are described in the
notes accompanying the Unaudited Pro Forma Condensed Consolidated Balance Sheet
and the Unaudited Pro Forma Condensed Consolidated Statements of Operations. The
Unaudited Pro Forma Condensed Consolidated Financial Information does not
purport to represent what Continental's financial position or results of
operations would actually have been had the transactions in fact occurred at
such dates or to project Continental's financial position or results of
operations at or for any future date or period. In the opinion of management,
all adjustments necessary to present fairly such Unaudited Pro Forma Condensed
Consolidated Financial Information have been made. The Unaudited Pro Forma
Condensed Consolidated Financial Information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements appearing elsewhere in this
Proxy Statement.
V-36
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------------------------------------------------------
ADJUSTMENTS
FOR THE
PENDING PRO FORMA FOR ADJUSTMENTS
M/NH THE PENDING FOR THE TCG
ACTUAL BUYOUT(1) M/NH BUYOUT TRANSACTIONS(2) TOTAL
------------- ----------- ------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash.................................. $ 27,056 $ 6,883 $ 33,939 $ -- $ 33,939
Accounts receivable (net)............. 100,608 1,688 102,296 -- 102,296
Prepaid expenses and other............ 6,975 329 7,304 -- 7,304
Supplies.............................. 104,266 -- 104,266 -- 104,266
Marketable equity securities.......... 161,324 -- 161,324 284,570 445,894
Investments........................... 617,751 -- 617,751 (137,683) 480,068
Property, plant and equipment (net)... 2,243,525 70,957 2,314,482 -- 2,314,482
Other assets (net).................... 2,023,229 120,740 2,143,969 -- 2,143,969
------------- ----------- ------------- -------------- -------------
Total............................... $ 5,284,734 $ 200,597 $ 5,485,331 $ 146,887 $ 5,632,218
------------- ----------- ------------- -------------- -------------
------------- ----------- ------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Accounts payable...................... $ 113,339 $ 1,064 $ 114,403 $ -- $ 114,403
Accrued interest...................... 88,085 -- 88,085 -- 88,085
Accrued and other liabilities......... 235,336 4,333 239,669 -- 239,669
Debt.................................. 5,604,137 195,200 5,799,337 (121,025) 5,678,312
Deferred income taxes................. 264,245 -- 264,245 104,485 368,730
Minority interest in subsidiaries..... 28,435 -- 28,435 -- 28,435
Redeemable common stock............... 270,290 -- 270,290 -- 270,290
Stockholders' equity (deficiency)..... (1,319,133) -- (1,319,133) 163,427 (1,155,706)
------------- ----------- ------------- -------------- -------------
Total............................... $ 5,284,734 $ 200,597 $ 5,485,331 $ 146,887 $ 5,632,218
------------- ----------- ------------- -------------- -------------
------------- ----------- ------------- -------------- -------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet.
V-37
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) The Pending M/NH Buyout will be accounted for under the purchase method of
accounting. The following adjustments have been recorded to reflect the
Pending M/NH Buyout as of June 30, 1996: (i) Continental will borrow
approximately $219.2 million to finance the Pending M/NH Buyout; (ii)
existing indebtedness of Continental to M/NH totalling $24.0 million will be
discharged and has been recorded as a reduction to other assets; and (iii)
the excess of the purchase price over property, plant and equipment and
acquired franchises in the amount of $8.1 million has been recorded as other
assets. It is anticipated that the Pending M/NH Buyout will occur in the
fourth quarter of 1996. The preliminary estimates of the fair value of
property, plant and equipment and acquired franchises may change.
(2) In July 1996, TCG consummated an initial public offering of shares of its
common stock. Subsequent to the initial public offering, TCG redeemed
approximately 8.0 million shares of TCG common stock from Continental. After
the redemption and the initial public offering, Continental had an
approximate 11.2% ownership interest in TCG.
The following adjustments have been recorded to reflect the foregoing TCG
transactions as of June 30, 1996: (i) an increase of $30.7 million in
investments representing Continental's proportionate increase in TCG's net
assets as a result of the equity offering, (ii) a gain of $68.9 million
resulting from the redemption by TCG of approximately 8.0 million shares of
TCG common stock with a cost basis of $52.1 million for net cash proceeds of
$121.0 million, (iii) the application of the proceeds received from the
redemption to repay amounts outstanding under the 1994 Credit Facility, (iv)
a deferred tax liability of $38.8 million relating to the foregoing, (v) the
impact of the change in the method of accounting for the remaining
investment of $116.3 million in TCG from the equity method to a marketable
equity security available for sale, resulting in an increase to marketable
equity securities of $168.3 million and a net unrealized gain of $102.7
million, net of taxes of $65.6 million, based on the initial public offering
price of $16.00 per share.
V-38
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------------------------------
PRO FORMA
FOR THE
ADJUSTMENTS ACQUISITIONS
ADJUSTMENTS PRO FORMA FOR THE SALE AND FOR THE ADJUSTMENTS
FOR THE FOR THE OF THE 8.30% SALE OF THE FOR TCG
ACTUAL ACQUISITIONS ACQUISITIONS NOTES 8.30% NOTES TRANSACTIONS TOTAL
--------- ------------- ----------- ------------- ----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $1,442,392 $ 340,026(1) $1,782,418 $ -- $1,782,418 $ -- $1,782,418
Costs and expenses:
Operating.......... 498,239 133,693(1) 631,932 -- 631,932 -- 631,932
Selling, general
and
administrative.... 339,002 73,758(1) 412,760 -- 412,760 -- 412,760
Depreciation and
amortization...... 341,171 109,809(1) 450,980 -- 450,980 -- 450,980
Restricted stock
purchase program.. 12,005 -- 12,005 -- 12,005 -- 12,005
--------- ------------- ----------- ------------- ----------- ------------- ---------
Total............ 1,190,417 317,260 1,507,677 -- 1,507,677 -- 1,507,677
--------- ------------- ----------- ------------- ----------- ------------- ---------
Operating income..... 251,975 22,766 274,741 -- 274,741 -- 274,471
Interest expense
(net)............... 363,826 84,226(1) 448,052 5,046(3) 453,098 (9,077)(4) 444,021
Other (income)
expenses (net)...... 48,124 (9,170)(1) 38,954 -- 38,954 (16,863)(5) 22,091
Minority interest.... (39) -- (39) -- (39) -- (39)
--------- ------------- ----------- ------------- ----------- ------------- ---------
Loss from
operations.......... (159,936) (52,290) (212,226) (5,046) (217,272) 25,940 (191,332)
Income tax (benefit)
expense............. (47,909) (18,946)(2) (66,855) (1,968)(2) (68,823) 10,117(2) (58,706)
--------- ------------- ----------- ------------- ----------- ------------- ---------
Net loss before
extraordinary
item................ $(112,027) $ (33,344) $(145,371) $ (3,078) $(148,449) $ 15,823 $(132,626)
--------- ------------- ----------- ------------- ----------- ------------- ---------
--------- ------------- ----------- ------------- ----------- ------------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
------------------------------------------------------------------
ADJUSTMENTS PRO FORMA FOR
FOR THE THE ADJUSTMENTS
PENDING PENDING M/NH FOR TCG
ACTUAL M/NH BUYOUT BUYOUT TRANSACTIONS TOTAL
--------- ------------- -------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 942,930 $ 26,674(1) $ 969,604 $ -- $ 969,604
Costs and expenses:
Operating..................................... 334,827 6,265(1) 341,092 -- 341,092
Selling, general and administrative........... 221,533 6,986(1) 228,519 -- 228,519
Depreciation and amortization................. 231,696 5,057(1) 236,753 -- 236,753
Restricted stock purchase program............. 8,654 -- 8,654 -- 8,654
--------- ------------- -------------- ------------- ---------
Total....................................... 796,710 18,308 815,018 -- 815,018
--------- ------------- -------------- ------------- ---------
Operating income................................ 146,220 8,366 154,586 -- 154,586
Interest expense (net).......................... 233,578 8,275(1) 241,853 (4,569)(4) 237,284
Other (income) expenses (net)................... 68,163 424(1) 68,587 (15,039)(5) 53,548
Minority interest............................... 74 -- 74 -- 74
--------- ------------- -------------- ------------- ---------
Loss from operations............................ (155,595) (333) (155,928) 19,608 (136,320)
Income tax (benefit) expense.................... (45,409) (129)(2) (45,538) 7,647(2) (37,891)
--------- ------------- -------------- ------------- ---------
Net loss before extraordinary item.............. $(110,186) $ (204) $ (110,390) $ 11,961 $ (98,429)
--------- ------------- -------------- ------------- ---------
--------- ------------- -------------- ------------- ---------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations.
V-39
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) To record the results of operations for the Acquisitions. The results of
operations for certain cable television systems have been adjusted, where
necessary, to a December 31 fiscal year end. The results of operations have
been adjusted to reverse historical interest expense of $59.8 million and
record interest expense of $84.2 million for the year ended December 31,
1995, as a result of approximately $623.7 million of additional debt
incurred or to be incurred to finance the Recent Acquisitions and the
Pending
M/NH Buyout and the net $815.0 million increase in debt as a result of the
Providence Journal Merger. The results of operations have been adjusted to
reverse historical interest expense of $3.1 million and record interest
expense of $8.3 million for the six months ended June 30, 1996, as a result
of approximately $219.2 million of additional debt to be incurred to finance
the Pending
M/NH Buyout. The incremental interest rate used to calculate pro forma
interest expense for the year ended December 31, 1995 and the six months
ended June 30, 1996 was approximately 7.6%. Continental's equity in net loss
includes a loss of $2.6 million for the year ended December 31, 1995
relating to its 33.8% interest in N-COM. This amount has been eliminated to
reflect the results of operations of N-COM as if it was wholly owned by
Continental during 1995. The results of operations have also been adjusted
to reverse historical depreciation and amortization expense of $104.2
million and $9.6 million for the year ended December 31, 1995 and the six
months ended June 30, 1996, respectively, and record depreciation and
amortization expense of $109.8 million and $5.1 million for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively,
based on the fair value of the assets acquired. Depreciation expense for
property, plant and equipment acquired has been determined based on an
estimated weighted average life of five to ten years. Costs of acquired
franchises and goodwill arising from the Acquisitions are amortized over 40
years. Allocated corporate overhead from parent companies recorded by
Providence Journal Cable and M/NH has been eliminated. These costs relate to
allocated corporate overhead, such as executive salaries and other corporate
departments including treasury, tax and human resources, and include certain
management fees. Continental will not be incurring these costs in the
future.
The following table sets forth the historical results of operations for the
Acquisitions for the periods in which they were not owned by Continental for
the year ended December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------------------
COMPLETED ACQUISITIONS
---------------------------------------------------------------
CONSOLIDATED PROVIDENCE COLUMBIA PENDING
CABLEVISION CABLEVISION JOURNAL CABLE OF M/NH PRO FORMA
OF CHICAGO OF CALIFORNIA CABLE MICHIGAN N-COM BUYOUT ADJUSTMENTS TOTAL
----------- ------------- ----------- ----------- --------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $ 20,828 $ 3,233 $ 221,998 $ 22,074 $ 21,786 $ 50,107 $ -- $ 340,026
Costs and expenses:
Operating.................... 8,371 1,535 91,358 8,947 8,742 14,740 -- 133,693
Selling, general and
administrative.............. 5,516 568 45,224 4,675 4,253 13,522 -- 73,758
Allocated corporate overhead
from parent companies....... -- -- 6,309 -- -- 1,578 (7,887) --
Depreciation and
amortization................ 2,882 2,356 64,947 6,000 11,586 16,394 5,644 109,809
----------- ------------- ----------- ----------- --------- --------- ----------- ---------
Total...................... 16,769 4,459 207,838 19,622 24,581 46,234 (2,243) 317,260
----------- ------------- ----------- ----------- --------- --------- ----------- ---------
Operating income (loss)........ 4,059 (1,226) 14,160 2,452 (2,795) 3,873 2,243 22,766
Interest expense (net)......... 6,491 1,219 30,770 -- 12,266 9,101 24,379 84,226
Other (income) expenses
(net)......................... 39 9 (2,415) 21 466 (4,643) (2,647) (9,170)
----------- ------------- ----------- ----------- --------- --------- ----------- ---------
Income (loss) from operations
before income taxes........... $ (2,471) $ (2,454) $ (14,195) $ 2,431 $ (15,527) $ (585) $ (19,489) $ (52,290)
----------- ------------- ----------- ----------- --------- --------- ----------- ---------
----------- ------------- ----------- ----------- --------- --------- ----------- ---------
</TABLE>
(2) To record the income tax effect of the pro forma adjustments at the
respective effective rates.
(3) To record the net increase in interest expense due to the sale of $600.0
million of the 8.30% Notes and the application of the net proceeds therefrom
to repay $587.1 million of borrowings under the 1994 Credit Facility and the
subsequent reborrowing under the 1994 Credit Facility to redeem the entire
$100.0 million of the Floating Rate Debentures. The incremental interest
rate used to calculate the adjustment to interest expense was (i)
approximately 7.6% for the 1994 Credit Facility and (ii) approximately 8.9%
for the Floating Rate Debentures.
(4) To record the decrease in interest expense as a result of the $121.0 million
repayment of borrowings outstanding under the 1994 Credit Facility with the
net proceeds from the redemption of the TCG common stock. The incremental
interest rate used to calculate the adjustment to interest expense was
approximately 7.6% for the year ended December 31, 1995 and the six months
ended June 30, 1996.
(5) To record the decrease in other expense for the reversal of equity losses
related to TCG of $16.9 million and $15.0 million for the year ended
December 31, 1995 and six months ended June 30, 1996, respectively.
V-40
<PAGE>
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies may materially affect the cable television
industry. The following is a summary of federal laws and regulations affecting
the growth and operation of the cable television industry and a description of
certain state and local laws.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective in December 1984. This federal statute,
which amended the Communications Act of 1934, created uniform national standards
and guidelines for the regulation of cable television systems. Violations by a
cable television system operator of provisions of the 1984 Cable Act, as well as
of FCC regulations, can subject the operator to substantial monetary penalties
and other sanctions. Among other things, the 1984 Cable Act affirmed the right
of franchising authorities (state or local, depending on the practice in
individual states) to award one or more franchises within their jurisdictions.
It also prohibited non-grandfathered cable television systems from operating
without a franchise in such jurisdictions. In connection with new franchises,
the 1984 Cable Act provides that in granting or renewing franchises, franchising
authorities may establish requirements for cable-related facilities and
equipment, but may not establish or enforce requirements for video programming
or information services other than in broad categories. The 1996
Telecommunications Act preempted the ability of franchising authorities to
impose any oversight of cable operators' technical standards.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
In October 1992, Congress enacted the 1992 Cable Act. This legislation made
significant changes to the legislative and regulatory environment in which the
cable industry operates. It amended the 1984 Cable Act in many respects. The
1992 Cable Act became effective in December 1992, although certain provisions,
most notably those dealing with rate regulation and retransmission consent,
became effective at later dates. The legislation required the FCC to initiate a
number of rule-making proceedings to implement various provisions of the
statute, the majority of which, including certain of those related to rate
regulation, have been completed. The 1992 Cable Act allows for a greater degree
of regulation of the cable industry with respect to, among other things: (i)
cable system rates for both the BBT and certain CPS tiers; (ii) programming
access and exclusivity arrangements; (iii) access to cable channels by
unaffiliated programming services; (iv) leased-access terms and conditions; (v)
horizontal and vertical ownership of cable systems; (vi) customer service
requirements; (vii) franchise renewals; (viii) television broadcast signal
carriage and retransmission consent; (ix) technical standards; (x) customer
privacy; (xi) consumer protection issues; (xii) cable equipment compatibility;
(xiii) obscene or indecent programming; and (xiv) subscription to tiers of
service other than the BBT as a condition of purchasing premium services.
Additionally, the 1992 Cable Act encourages competition with existing cable
television systems by: allowing municipalities to own and operate their own
cable television systems without a franchise; preventing franchising authorities
from granting exclusive franchises or unreasonably refusing to award additional
franchises covering an existing cable system's service area; and prohibiting the
common ownership of cable systems and co-located MMDS or SMATV systems. The 1992
Cable Act also precludes video programmers affiliated with cable television
companies from favoring cable operators over competitors and requires such
programmers to sell their programming to other multi-channel video distributors.
Various cable operators have filed actions in the United States District
Court in the District of Columbia challenging the constitutionality of several
sections of the 1992 Cable Act. Pursuant to special jurisdictional provisions in
the 1992 Cable Act, a challenge to the must-carry provisions of the 1992 Cable
Act was heard by a three-judge panel of the district court. In April 1993, the
three-judge court granted summary judgment for the government, upholding the
constitutional validity of the must-carry provisions of the 1992 Cable Act. That
decision was appealed directly to the United States Supreme Court, which in June
1994 remanded the case to the district court. The lower court again upheld the
must-carry rules, but this
V-41
<PAGE>
decision is again on appeal to the United States Supreme Court, which heard this
appeal in October 1996. Pending the outcome of further proceedings, the
must-carry statutes and the FCC regulations remain in place.
The cable operators' constitutional challenge to the balance of the 1992
Cable Act provisions was heard by a single judge of the district court. In
September 1993, the court rendered its decision upholding the constitutionality
of all but three provisions of the statute (multiple ownership limits for cable
operators, advance notice of free previews for certain programming services, and
channel set-asides for DBS operators). The United States Court of Appeals for
the District of Columbia Circuit in 1996 reaffirmed the constitutionality of the
other challenged provisions and, in addition, held the advance notice of free
previews and DBS set-asides to be constitutional, holding in abeyance a decision
on multiple ownership limits. Appeals were also filed in that court from the
FCC's rate regulation rule-making decisions. The FCC's rate regulations were
substantially upheld in June 1995, and the United States Supreme Court has
refused to hear an appeal of that decision.
TELECOMMUNICATIONS ACT OF 1996
As noted above, the 1996 Telecommunications Act was enacted into law in
February 1996. The 1996 Telecommunications Act modifies various provisions of
the Communications Act of 1934, the 1984 Cable Act and the 1992 Cable Act, with
the intent of establishing a pro-competitive, deregulatory policy framework for
both video and telecommunications services. Continental cannot predict the full
effect that the 1996 Telecommunications Act or the FCC's implementing
regulations may have on Continental's operations.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has promulgated regulations covering such areas as the
registration of cable television systems, cross-ownership between cable
television systems and other communications businesses, carriage of television
broadcast programming, consumer education and lockbox enforcement, origination,
cablecasting and sponsorship identification, children's programming, the
regulation of basic cable service rates in areas where cable television systems
are not subject to effective competition, signal leakage and frequency use,
technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
has the authority to enforce these regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the imposition
of other administrative sanctions, such as the revocation of FCC licenses needed
to operate certain transmission facilities often used in connection with cable
operations. The 1992 Cable Act required the FCC to adopt additional regulations
covering, among other things, cable rates, signal carriage, consumer protection
and customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of DBS system
ownership and operation. The 1996 Telecommunications Act mandates changes in
certain of these regulations. A brief summary of certain of these federal
regulations as adopted to date follows.
RATE REGULATION. The 1984 Cable Act codified existing FCC preemption of
rate regulation for premium channels and optional CPS tiers. The 1984 Cable Act
also deregulated basic cable rates for cable television systems determined by
the FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the 1984 Cable Act and FCC rate regulation standards then in existence.
The 1992 Cable Act replaced the FCC's old standard for determining effective
competition, under which most cable systems were not subject to local rate
regulation, with a statutory provision that results in nearly all cable
television systems becoming subject to local rate regulation of the BBT.
Additionally, the legislation eliminates the 5% annual rate increase for basic
service previously allowed by the 1984 Cable Act without local approval;
requires the FCC to adopt a formula for franchising authorities to enforce, to
assure that BBT rates are reasonable; allows the FCC to review rates for CPS
tiers (other than per-channel or per-event services) in response to complaints
filed by franchising authorities and/or cable customers; prohibits cable
television systems from requiring subscribers to purchase service tiers above
the BBT in order to purchase premium services if the system is technically
capable of doing so; requires the FCC to adopt regulations to establish, on
V-42
<PAGE>
the basis of actual costs, the price for installation of cable service, remote
controls, converter boxes and additional outlets; and allows the FCC to impose
restrictions on the retiering and rearrangement of cable services under certain
limited circumstances.
The 1992 Cable Act authorizes the FCC to, among other things, set standards
for governmental authorities to regulate the rates for certain cable television
services and equipment and gives local broadcast stations the option to elect
mandatory carriage or require retransmission consent.
Pursuant to authority granted under the 1992 Cable Act, the FCC in April
1993 promulgated rate regulations that established maximum allowable rates for
cable television services, except for services offered on a per-channel or
per-program basis. In February 1994, the FCC adopted a revised regulatory scheme
which included, among other things, interim cost-of-service standards and a new
benchmark formula to determine certain service rates. In creating the new
benchmark formula, the FCC mandated a further reduction in rates for certain
regulated services. Final cost-of-service rules were adopted in January 1996.
The FCC has issued a series of new rules covering such issues as increases
for inflation and external costs, and the addition of new channels to regulated
CPS tiers; rules permitting a single annual rate increase, and allowing
operators to anticipate 12 months of inflation and known increases in external
costs, while providing for a true-up of costs after 12 months; abbreviated
cost-of-service rules for network upgrades; and rules that limit the FCC's
review of CPS tier rates to the amount of the increase only, thereby
grandfathering all rates that were unregulated prior to November 1995. The FCC
has also proposed to allow cable operators to decrease BBT rates and increase
CPS-tier rates to offset the lost revenue on the BBT.
The FCC has also used "social contracts" as an alternative form of rate
regulation for cable operators. Continental's Social Contract with the FCC was
adopted by the FCC in August 1995. The Social Contract settled all of
Continental's pending cost-of-service rate cases and all of its benchmark
CPS-tier rate cases. Benchmark BBT cases have been resolved by Continental and
local franchise authorities. Under the Social Contract Amendment, which was
adopted on August 21, 1996 and incorporates into the Social Contract the systems
acquired in the Providence Journal Merger and the Recent Acquisitions, CPS-tier
rates may be increased by $1.00 per year per subscriber beginning in 1996 for
the systems acquired from Providence Journal and in the Recent Acquisitions and
in 1997 for prior Continental systems. Continental will not avail itself of any
additional per channel adjustments permitted under the FCC's Going Forward Rules
for any services added to the CPS tier after the effective date of the Social
Contract Amendment, except where Continental has upgraded or rebuilt a system in
1996 that was not a system acquired from Providence Journal or in the Recent
Acquisitions. BBT rates may increase by inflation and external costs. The Social
Contract and the Social Contract Amendment govern Continental's future rates.
The Social Contract also provides for its termination in the future 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. In that instance, the Company may petition the FCC to terminate the
Social Contract. For a description of the Social Contract and the Social
Contract Amendment see "Business -- U.S. Operating Strategy -- U.S. Regulatory
Strategy; Social Contract."
Furthermore, the 1996 Telecommunications Act, which provides for the
deregulation of CPS-tier rates after March 31, 1999, permits regulated equipment
rates to be computed by aggregating costs of broad categories of equipment at
the franchise, system, regional or company level. The 1996 Telecommunications
Act also eliminates the right of individual subscribers to file rate complaints
with the FCC concerning CPS tiers, and instead requires that such complaints be
filed by a franchising authority.
The 1992 Cable Act provided that all rate regulation, for both the CPS tiers
and for the BBT, is eliminated when a cable system is subject to "effective
competition" from another multichannel video programming provider such as MMDS,
DBS, a telephone company, or a combination of any or all of these. The 1996
Telecommunications Act expanded the definition of "effective competition" to
include instances in which a local telephone company or its affiliate (or a
multi-channel video programming distributor using the
V-43
<PAGE>
facilities of a telephone company or its affiliate) offers comparable video
programming directly to subscribers by any means (other than DBS) in the cable
operator's franchise area. Since telephone companies are providing or planning
to provide video services in several of Continental's franchise areas, this
provision will allow the Company greater flexibility in packaging and pricing
its product in those markets.
The 1996 Telecommunications Act also eliminates the uniform rate structure
requirements of the 1992 Cable Act for cable operators in areas subject to
effective competition or as applied to video programming offered on a
per-channel or per-program basis and allows non-uniform bulk discount rates to
be offered to multiple dwelling units.
OTHER REGULATIONS UNDER THE 1992 CABLE ACT. In addition to the foregoing
rate regulations, the FCC has adopted regulations pursuant to the 1992 Cable Act
which require cable systems to permit customers to purchase video programming on
a per-channel or a per-event basis without the necessity of subscribing to any
tier of service, other than the basic service tier, unless the cable system is
technically incapable of doing so. Generally, this exemption from compliance
with the statute for cable systems that do not have such technical capability is
available until a cable system obtains the capability, but not later than
December 2002. The FCC also has adopted a number of measures for improving
compatibility between existing cable systems and consumer equipment. In
conjunction therewith, the FCC rules prohibit cable operators from scrambling
program signals carried on the basic tier, absent a waiver.
The FCC also has adopted regulations in connection with its cost-of-service
proceedings which govern programming charges for affiliated entities. These
rules apply to systems subject to regulation under both the benchmark and
cost-of-service regulations. The cost of programming to affiliated entities must
be the prevailing company price, based on the sale of programming to third
parties, or a price equal to the lower of the programming service's net book
cost and its estimated fair market value.
CARRIAGE OF BROADCAST TELEVISION SIGNALS. The 1992 Cable Act contains
signal carriage requirements allowing commercial television broadcast stations
which are "local" to a cable system (i.e., the system is located in the
station's Area of Dominant Influence) to elect every three years whether to
require the cable system to carry the station ("must carry status") or to
negotiate for "retransmission consent" to carry it. The first such election was
made in June 1993. A recent amendment to the Copyright Act in some cases
increased the number of stations that may elect must-carry status on cable
systems located within such stations' Areas of Dominant Influence. Local
non-commercial television stations are given mandatory carriage rights, subject
to certain exceptions, within the larger of: (i) a 50-mile radius from the
station's city of license or (ii) the station's grade B contour (a measure of
signal strength). Unlike commercial stations, non-commercial stations are not
given the option to negotiate retransmission consent for the carriage of their
signal. In addition, cable systems have to obtain retransmission consent for the
carriage of all "distant" commercial broadcast stations, except for certain
"superstations" (i.e., commercial satellite-delivered independent stations such
as WTBS).
NONDUPLICATION OF NETWORK PROGRAMMING. Cable television systems that have
1,000 or more customers must, upon the appropriate request of a local television
station, delete the simultaneous or non-simultaneous network programming of a
distant station when such programming has also been contracted for by the local
station on an exclusive basis.
DELETION OF SYNDICATED PROGRAMMING. FCC regulations enable television
broadcast stations that have obtained exclusive distribution rights for
syndicated programming in their market to require a cable system to delete or
"black out" such programming from other television stations which are carried by
the cable system. The extent of such deletions will vary from market to market
and cannot be predicted with certainty. However, it is possible that such
deletions could be substantial and could lead the cable operator to drop a
distant signal in its entirety. The FCC also has commenced a proceeding to
determine whether to relax or abolish the geographic limitations on program
exclusivity contained in its rules, which would allow parties to set the
geographic scope of exclusive distribution rights entirely by contract, and to
determine whether such exclusivity rights should be extended to non-commercial
educational stations. It is possible that the outcome
V-44
<PAGE>
of these proceedings will increase the amount of programming that cable
operators are required to black out. Finally, the FCC has declined to impose
equivalent syndicated exclusivity rules on satellite carriers who provide
services to the owners of home satellite dishes similar to those provided by
cable systems.
FRANCHISE FEES. Although franchising authorities may impose franchise fees
under the 1984 Cable Act, such payments cannot exceed 5% of a cable system's
annual gross revenues. Franchising authorities are also empowered in awarding
new franchises or renewing existing franchises to require cable operators to
provide cable-related facilities and equipment and to enforce compliance with
voluntary commitments. In the case of franchises in effect prior to the
effective date of the 1984 Cable Act, franchising authorities may enforce
requirements contained in the franchise relating to facilities, equipment and
services, whether or not cable-related. The 1984 Cable Act, under certain
limited circumstances, permits a cable operator to obtain modifications of
franchise obligations.
RENEWAL OF FRANCHISES. The 1984 Cable Act established renewal procedures
and criteria designed to protect incumbent franchises against arbitrary denials
of renewal. While these formal procedures are not mandatory unless timely
invoked by either the cable operator or the franchising authority, they can
provide substantial protection to incumbent franchisees. Even after the formal
renewal procedures are invoked, franchising authorities and cable operators
remain free to negotiate a renewal outside the formal process.
Nevertheless, renewal is by no means assured, as the franchisee must meet
certain statutory standards. Even if a franchise is renewed, a franchising
authority may impose new and more onerous requirements such as upgrading
facilities and equipment, although the municipality must take into account the
cost of meeting such requirements.
The 1992 Cable Act made several changes to the process under which a cable
operator seeks to enforce its renewal rights that could make it easier in some
cases for a franchising authority to deny renewal. While a cable operator must
still submit its request to commence renewal proceedings within 30 to 36 months
prior to franchise expiration to invoke the formal renewal process, the request
must be in writing and the franchising authority must commence renewal
proceedings not later than six months after receipt of such notice. The
four-month period for the franchising authority to grant or deny the renewal now
runs from the submission of the renewal proposal, not the completion of the
public proceeding. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
Franchising authorities are no longer precluded from denying renewal based on
failure to substantially comply with the material terms of the franchise where
the franchising authority has "effectively acquiesced" to such past violations.
However, the franchising authority is estopped from denying renewal if, after
giving the cable operator notice and opportunity to cure, it fails to respond to
a written notice from the cable operator of its failure or inability to cure.
Courts may not reverse a denial of a renewal based on procedural violations
found to be "harmless error."
CHANNEL SET-ASIDES. The 1984 Cable Act permits local franchising
authorities to require cable operators to set aside certain channels for public,
educational and governmental access programming. The 1984 Cable Act further
requires cable television systems with 36 or more activated channels to
designate a portion of their channel capacity for commercial leased access by
unaffiliated third parties. While the 1984 Cable Act allowed cable operators
substantial latitude in setting leased-access rates, the 1992 Cable Act required
leased-access rates to be set according to an FCC-prescribed formula. The FCC
adopted such a formula and implemented regulations in April 1993. In March 1996,
the FCC issued an order amending these regulations and proposing to adopt lower
leased-access rates.
COMPETING FRANCHISES. The 1992 Cable Act, prohibits franchising authorities
from unreasonably refusing to grant franchises to competing cable television
systems and permits franchising authorities to operate their own cable
television systems without franchises.
OWNERSHIP AND CROSS-OWNERSHIP LIMITATIONS. The 1984 Cable Act codified
then-existing FCC cross-ownership regulations, which, in part, prohibited LECs
from providing video programming directly to customers within their local
exchange telephone service areas, except in rural areas or by specific waiver of
FCC rules. As noted above, this restriction was removed by the 1996
Telecommunications Act.
V-45
<PAGE>
The 1984 Cable Act and the FCC's rules also prohibited the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's significant signal strength as defined by the FCC's rules) covers any
portion of the community served by the cable system. Common ownership or control
has historically also been prohibited by the FCC (but not by the 1984 Cable Act)
between a cable system and a national television network, although the FCC
adopted an order that substantially relaxed the network/cable cross-ownership
prohibitions subject to certain national and local ownership limits. Finally, in
order to encourage competition in the provision of video programming, the FCC
adopted a rule prohibiting the common ownership, affiliation, control or
interest in cable television systems and MMDS facilities having overlapping
service areas, except in very limited circumstances. The 1992 Cable Act codified
this restriction and extended it to co-located SMATV systems. Permitted
arrangements in effect as of October 5, 1992 were grandfathered. In January
1995, the FCC loosened its previously stringent interpretation of the lack of
ability of a cable operator to purchase a SMATV system in the same franchise
area. The 1992 Cable Act permits states or local franchising authorities to
adopt certain additional restrictions on the ownership of cable television
systems.
The 1996 Telecommunications Act repealed the statutory ban on
cable-broadcast station cross-ownership to permit common ownership or control of
a television station and a cable system with overlapping service areas. The 1996
Telecommunications Act left in place, however, the cable system-television
station cross-ownership restriction contained in the FCC's rules and does not
mandate an outcome for the FCC's review of the regulation, which will occur this
year. The 1996 Telecommunications Act also directed the FCC to revise its
existing regulations concerning broadcast network-cable cross-ownership to
permit common control of both a television network and a cable system. The 1996
Telecommunications Act removed the statutory ban on cable-MMDS cross-ownership
by any cable operator in a franchise area where one cable operator is subject to
effective competition.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number of
cable systems which a single cable operator can own. In general, no cable
operator can have an attributable interest in cable systems which pass more than
30% of all homes nationwide. Attributable interests for these purposes include
voting interests of 5% or more (unless there is another single holder of more
than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of these rules
pending the outcome of the appeal from the United States District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional.
The FCC has also adopted rules which limit the number of channels on a cable
system which may be occupied by programming in which the entity that owns the
cable system has an attributable interest to 40% of all activated channels.
EQUAL EMPLOYMENT OPPORTUNITY. The 1984 Cable Act includes provisions to
ensure that minorities and women are provided equal employment opportunities
within the cable television industry. The statute requires the FCC to adopt
reporting and certification rules that apply to all cable system operators with
more than five full-time employees. Pursuant to the requirements of the 1992
Cable Act, the FCC has imposed more detailed annual Equal Employment Opportunity
("EEO") reporting requirements on cable operators and has expanded those
requirements to all multi-channel video-service distributors. Failure to comply
with the EEO requirements can result in the imposition of fines and/or other
administrative sanctions, or may, in certain circumstances, be cited by a
franchising authority as a reason for denying a franchisee's renewal request.
PRIVACY. The 1984 Cable Act imposes a number of restrictions on the manner
in which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator must
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer privacy
V-46
<PAGE>
provisions of the 1984 Cable Act, it could be required to pay damages,
attorneys' fees and other costs. Under the 1992 Cable Act, the privacy
requirements are strengthened to require that cable operators take such actions
as are necessary to prevent unauthorized access to personally identifiable
information.
ANTI-TRAFFICKING/FRANCHISE TRANSFER APPROVAL. The 1992 Cable Act precluded
cable operators from selling or otherwise transferring ownership of a cable
television system within 36 months after acquisition or initial construction,
with various exceptions. This provision was eliminated by the 1996
Telecommunications Act. The 1992 Cable Act also requires franchising authorities
to act on any franchise transfer request submitted after December 4, 1992 within
120 days after receipt of all information required by FCC regulations and by the
franchising authority. Approval is deemed to be granted if the franchising
authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS. Prior to commencing
operation in a particular community, all cable television systems must file a
registration statement with the FCC listing the broadcast signals they will
carry and certain other information. Additionally, cable operators periodically
are required to file various informational reports with the FCC. Cable operators
who operate in certain frequency bands are required on an annual basis to file
the results of their periodic cumulative leakage testing measurements. Operators
who fail to make this filing or who exceed the FCC's allowable cumulative
leakage index risk being prohibited from operating in those frequency bands in
addition to other sanctions.
TECHNICAL REQUIREMENTS. Historically, the FCC has imposed technical
standards applicable to the cable channels on which broadcast stations are
carried, and has prohibited franchising authorities from adopting standards that
were in conflict with or more restrictive than those established by the FCC. The
FCC has recently revised such standards and made them applicable to all classes
of channels which carry downstream National Television System Committee video
programming. Local franchising authorities were permitted to enforce the FCC's
new technical standards. The FCC also has adopted additional standards
applicable to cable television systems using frequencies in the 108-137 MHz and
225-400 MHz bands in order to prevent harmful interference with aeronautical
navigation and safety radio services and has also established limits on cable
system signal leakage. The 1992 Cable Act requires the FCC to periodically
update its technical standards to take into account changes in technology and to
entertain waiver requests from franchising authorities who would seek to impose
more stringent technical standards upon their franchised cable television
systems. Although the 1992 Cable Act requires the FCC to establish "minimum
technical standards relating to cable televisions systems technical operation
and signal quality," the FCC announced that its recently completed cable
television technical standards rule-making satisfied the new statutory mandate.
The 1996 Telecommunications Act preempted the ability of franchising authorities
to impose any oversight of cable operators' technical standards.
POLE ATTACHMENTS. The FCC currently regulates the rates and conditions
imposed by certain public utilities for use of their poles, unless under the
Federal Pole Attachments Act, state public utility commissions are able to
demonstrate that they regulate rates, terms and conditions of the cable
television pole attachments. A number of states and the District of Columbia
have certified to the FCC that they regulate the rates, terms and conditions for
pole attachments. In the absence of state regulation, the FCC administers such
pole attachment rates through use of a formula which it has devised and from
time to time revises.
The 1996 Telecommunications Act modifies the current pole attachment
provisions of the Communications Act of 1934 by requiring that utilities provide
cable systems and telecommunications carriers with non-discriminatory access to
any pole, conduit or right-of-way controlled by the utility. The FCC is required
to adopt new regulations to govern the charges for pole attachments used by
companies providing telecommunications services, including cable operators.
These regulations are likely to increase the rates charged to cable companies
providing voice and data, in addition to video services. These new pole
attachment regulations will not become effective, however, until five years
after enactment of the 1996 Telecommunications Act, and any increase in
attachment rates resulting from the FCC's new regulations will be phased in
equal annual increments over a period of five years.
V-47
<PAGE>
OTHER MATTERS. FCC regulation also includes matters regarding a cable
system's carriage of local sports programming; restrictions on origination and
cablecasting by cable system operators; application of the rules governing
political broadcasts; customer service; home wiring and limitations on
advertising contained in non-broadcast children's programming.
The FCC has adopted requirements for payment of annual "regulatory fees,"
which may be passed on to subscribers as "external cost" adjustments to rates
for basic cable service. The $.37 per subscriber fee in 1994 was increased to
$.49 per subscriber in 1995 and $.55 per subscriber in 1996. Fees are also
assessed for other licenses, including licenses for business radio and cable
television-relay systems and earth stations, which, however, may not be
collected directly from subscribers. No fee is assessed for receive-only cable
earth stations.
COPYRIGHT REGULATION
Cable television systems are subject to federal copyright licensing covering
carriage of broadcast signals. In exchange for making semi-annual payments to a
federal copyright royalty pool and meeting certain other obligations, cable
operators obtain a statutory license to retransmit broadcast signals. The amount
of this royalty payment varies, depending on the amount of system revenues from
certain sources, the number of distant signals carried and the location of the
cable system with respect to over-the-air television stations. Cable operators
are liable for interest on underpaid and unpaid royalty fees, but are not
entitled to collect interest on refunds received for the overpayment of
copyright fees. Originally, the Federal Copyright Royalty Tribunal was empowered
to make and, in fact, did make several adjustments in copyright royalty rates.
This tribunal was eliminated by Congress in 1993. Any future adjustment to the
copyright royalty rates will be done through an arbitration process to be
supervised by the U.S. Copyright Office.
Various bills have been introduced into Congress over the past several years
that would eliminate or modify the cable television compulsory copyright
license. The FCC has recommended to Congress that it repeal the cable industry's
compulsory copyright license. The FCC determined that the statutory compulsory
copyright license for local and distant broadcast signals no longer serves the
public interest and that private negotiations between the applicable parties
would better serve the public. Without the compulsory license, cable operators
might need to negotiate rights from the copyright owners for each program
carried on each broadcast station in the channel lineup. Such negotiated
agreements could increase the cost to cable operators of carrying broadcast
signals. The 1992 Cable Act's retransmission consent provisions expressly
provide that retransmission consent agreements between television broadcast
stations and cable operators do not obviate the need for cable operators to
obtain a copyright license for the programming carried on each broadcaster's
signal.
Copyright music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and cable programming networks (such
as USA) has generally been licensed by the networks through private agreements
with the American Society of Composers, Authors & Publishers ("ASCAP") and BMI,
Inc. ("BMI"), the two major performing rights organizations in the United
States. ASCAP and BMI offer "through to the viewer" licenses to the cable
networks, which cover the retransmission of the cable networks' programming by
cable television systems to their customers. The cable industry has not yet
concluded negotiations on licensing fees with music performing rights societies
for the use of music performed in programs locally originated by cable
television systems. See "Business -- Legal Proceedings."
STATE AND LOCAL REGULATIONS
Because cable television systems use local streets and rights-of-way, cable
television systems are subject to state and local regulation, typically imposed
through the franchising process. State and/or local officials are usually
involved in franchise selection, system design and construction, safety, service
rates, consumer relations, billing practices and community-related programming
and services.
Cable television systems generally are operated pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchise operator fails to comply with
material provisions. Although the 1984 Cable Act provides for certain procedural
protection, there can be no
V-48
<PAGE>
assurance that renewals will be granted or that renewals will be made on similar
terms and conditions. Franchises usually call for the payment of fees, often
based on a capped percentage of 5% of the system's gross customer revenues, to
the granting authority. Upon receipt of a franchise, the cable system owner
usually is subject to a broad range of obligations to the issuing authority
directly affecting the business of the system. The terms and conditions of
franchises vary materially from jurisdiction to jurisdiction, and even from city
to city within the same state, historically ranging from reasonable to highly
restrictive or burdensome. The 1984 Cable Act places certain limitations on a
franchising authority's ability to control the operation of a cable system, and
the courts have from time to time reviewed the constitutionality of several
general franchise requirements, including franchise fees and leased-access
channel requirements, often with inconsistent results. On the other hand, the
1992 Cable Act prohibits exclusive franchises, and allows franchising
authorities to exercise greater control over the operation of franchised cable
television systems, especially in the areas of customer service and rate
regulation. The 1992 Cable Act also allows franchising authorities to operate
their own multi-channel video distribution system without having to obtain a
franchise and permits states or local franchising authorities to adopt certain
restrictions on the ownership of cable television systems. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation of
cable television systems or decisions made on franchise grants, renewals,
transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable television systems, and a number of states
have adopted legislation subjecting cable television systems to the jurisdiction
of centralized state governmental agencies, some of which impose regulations of
a character similar to that of a public utility.
REGULATION OF TELECOMMUNICATIONS ACTIVITIES
As noted above under "Business -- Telecommunications and Technology,"
Continental provides in certain of its systems alternate-access local
telecommunications services over a portion of its fiber-optic cable facilities.
Local telecommunications activities are regulated by either the FCC or state
public utility commissions, or both. In some instances, Continental may be
required to obtain regulatory permission to offer such services, and may be
required to file tariffs for its service offerings, depending on whether
particular alternate-access activities of Continental are classified as common
carriage or private carriage. As noted above, the 1996 Telecommunications Act
preempts state and locally imposed barriers to the provision of intrastate and
interstate telecommunications services by cable system operators in competition
with local telephone companies. The FCC has recently adopted rules governing
interconnection by cable system telecommunications services with the facilities
of local telephone companies, and the ability of customers who switch to cable
telecommunications providers to retain their same telephone numbers.
The foregoing does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing,
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings, and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable industry or Continental can be
predicted at this time.
V-49
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The positions held by each Director and Executive Officer of Continental are
shown below. There are no family relationships among the following persons.
<TABLE>
<CAPTION>
NAME OF DIRECTOR OR EXECUTIVE OFFICER POSITION WITH CONTINENTAL
- -------------------------------------------- --------------------------------------------------------------------
<S> <C>
Amos B. Hostetter, Jr. (1).................. Chairman of the Board, Chief Executive Officer and Director
Timothy P. Neher............................ Vice Chairman of the Board and Director
William T. Schleyer......................... President, Chief Operating Officer and Director
Roy F. Coppedge III (2)..................... Director
Stephen Hamblett............................ Director
Jonathan H. Kagan (1),(2)................... Director
Robert B. Luick............................. Director and Secretary
Henry F. McCance............................ Director
Trygve E. Myhren (2)........................ Director
Lester Pollack.............................. Director
Michael J. Ritter........................... Director
Vincent J. Ryan (1)......................... Director
Ronald H. Cooper............................ Executive Vice President
Jeffrey T. DeLorme.......................... Executive Vice President
Nancy Hawthorne............................. Senior Vice President and Chief Financial Officer
</TABLE>
- ------------------------------
(1) Members of the Executive Committee
(2) Members of the Audit Committee
Continental has a classified Board composed of three classes. Each class
serves for three years, with one class being elected each year. The term of the
Class A Directors, Messrs. McCance, Coppedge, Ritter and Luick, will expire at
the 1996 Annual Meeting of Continental. The term of the Class B Directors,
Messrs. Neher, Ryan, Kagan and Schleyer will expire at the 1997 Annual Meeting
of Continental. The term of the Class C Directors, Messrs. Hostetter, Pollack,
Hamblett and Myhren, will expire at the 1998 Annual Meeting of Continental.
Under the terms of certain stock purchase agreements with Continental, Corporate
Advisors, L.P. ("Corporate Advisors"), on behalf of the investors (the
"Continental Preferred Stock Investors") who purchased Continental's Series A
Participating Convertible Preferred Stock, par value $.01 per share (the "Series
A Preferred Stock"), currently has the right to designate two persons, and
Boston Ventures Limited Partnership III, on behalf of itself and Boston Ventures
Limited Partnership IIIA, Boston Ventures Limited Partnership IV and Boston
Ventures Limited Partnership IVA (collectively, the "Boston Ventures
Investors"), currently has the right to designate one person, to be nominated as
members of the Board of Directors. Lester Pollack and Jonathan H. Kagan are the
designees of the Continental Preferred Stock Investors, and Roy F. Coppedge III
is the designee of the Boston Ventures Investors. The Providence Journal Company
has the right to designate two individuals to be nominated as members of
Continental's Board for a three-year term after the term of its two designees,
Stephen Hamblett and Trygve E. Myhren, expires.
The Executive Officers were elected by the Continental Board of Directors on
May 18, 1995. All Executive Officers hold office until the first meeting of the
Continental Board of Directors following the next annual meeting of stockholders
and until their successors are chosen and qualified.
The following is a description of the business experience during the past
five years of each Director and Executive Officer and includes, as to Directors,
other directorships held in companies required to file periodic reports with the
Securities and Exchange Commission and registered investment companies.
Amos B. Hostetter, Jr. (59), a cofounder of Continental, is the Chairman of
the Board and Chief Executive Officer of Continental. He has been a Director
since 1963. Mr. Hostetter is a past Chairman of the National Cable Television
Association ("NCTA") and currently serves on NCTA's Board and Executive
V-50
<PAGE>
Committee. He is past Chairman and serves on the Executive Committee of the
Board of Directors of both Cable in the Classroom and C-SPAN and serves as a
Director and Chairman of the Audit Committee of Commodities Corporation (USA).
Timothy P. Neher (49) is the Vice Chairman of the Board of Continental. He
has been a Director since 1982 and has been employed by Continental since 1974.
Prior to 1991 he was President and Chief Operating Officer of Continental, prior
to 1986 he was an Executive Vice President of Continental, and prior to 1982 he
was Vice President and Treasurer of Continental. He currently is on the Board of
Directors of Turner and The Golf Channel, Inc.
William T. Schleyer (45) is the President and Chief Operating Officer of
Continental. He was elected to serve as a Director on May 16, 1996. Prior to
March 15, 1995 he was an Executive Vice President and prior to 1989 he was the
Senior Vice President and General Manager of Continental's Northeast region. He
is a member of the Boards of Directors of CableLabs, the research and
development arm of the cable industry, PPVN and Optus Vision. He has been
employed by Continental since 1978.
Roy F. Coppedge III (48) has been a Director of Boston Ventures Management,
Inc. since 1983. He currently is on the Board of Directors of American Media,
Inc. He was elected to serve as a Director of Continental in 1992.
Stephen Hamblett (62) has been the Chairman of the Board and Chief Executive
Officer and a Director of The Providence Journal Company (as successor to
Providence Journal) and Publisher of the Journal-Bulletin newspapers since 1987.
He has been a Director of Continental since October 1995. Mr. Hamblett also
serves on the Boards of Directors of the Associated Press and the Inter-American
Press Association.
Jonathan H. Kagan (40) is Managing Director of Corporate Advisors and of
Centre Partners, L.P., investment partnerships affiliated with Lazard Freres &
Co. LLC ("Lazard") and a Managing Director of Lazard. He has been associated
with Lazard since 1980. He was elected to serve as a Director of Continental in
1992. Mr. Kagan currently is on the Board of Directors of Tyco Toys, Inc.
Robert B. Luick (85) is of counsel to the law firm of Sullivan & Worcester
LLP ("Sullivan & Worcester"), which firm has acted as counsel to Continental
since its inception. Prior to 1992 Mr. Luick was a partner at Sullivan &
Worcester. Mr. Luick has been with Sullivan & Worcester since 1943. He is a
member of the Board of Directors of Ionics, Incorporated, a diversified water
treatment company. He has been Secretary and a Director of Continental since
1963.
Henry F. McCance (54) has been general partner of the following venture
capital partnerships (either directly or indirectly as the general partner of
the general partner of such partnerships) since their formation: Greylock
Ventures Limited Partnership (1983), Greylock Investments Limited Partnership
(1985), Greylock Capital Limited Partnership (1987), Greylock Limited
Partnership (1990) and Greylock Equity Limited Partnership (1994). He is also
President and Treasurer of Greylock Management Corporation, an investment
services organization, and a Director of Brookstone, Inc., Manugistics, Inc.,
Shiva Corporation and CATS Software. Prior to 1990, Mr. McCance was a Vice
President and Treasurer of Greylock Management Corporation. Mr. McCance has been
a Director of Continental since 1972.
Trygve E. Myhren (60) was President and Chief Operating Officer and a
Director of The Providence Journal Company (as successor to Providence Journal).
He has been a Director of Continental since October 1995. Mr. Myhren is a past
Chairman of the NCTA and is currently a Director of Advanced Marketing Services,
Inc., Cable Labs and Peapod Limited, a company that provides consumer on-line
grocery shopping services. From 1981 through 1988 he was the Chairman and Chief
Executive Officer of American Television & Communications Corporation, which is
now part of Time Warner.
Lester Pollack (63) is Senior Managing Director of Corporate Advisors and
Chief Executive Officer of Centre Partners, L.P., investment partnerships
affiliated with Lazard, as well as a Managing Director of Lazard. He currently
is on the Board of Directors of SunAmerica Inc., Kaufman & Broad Home
Corporation, Tidewater, Inc., LaSalle Re Holdings Limited, Parlex Corporation,
Polaroid Corporation and Sphere Drake Holdings Limited. He was elected to serve
as a Director of Continental in 1992.
V-51
<PAGE>
Michael J. Ritter (56) has been a Director since 1991 and was employed by
Continental from 1980 until March 15, 1995, at which time he retired as the
President and Chief Operating Officer of Continental. Prior to 1991 he was an
Executive Vice President, and prior to 1988 he was the Senior Vice President and
General Manager of Continental's Michigan management region.
Vincent J. Ryan (60) has been Chairman of the Board and a Director of
Schooner Capital Corporation, a venture capital organization, since 1971. Mr.
Ryan is also a Director of Iron Mountain Incorporated, an information-management
company. He has been a Director of Continental since 1980.
Ronald H. Cooper (39) is an Executive Vice President of Continental. Prior
to 1995, he was the Senior Vice President of Continental's Southern California
management region. Prior to 1990 he was the Senior Vice President of
Continental's Northern California management region. He is a member of the
Boards of Directors of Cable Advertising Partners. He has been employed by
Continental since 1982.
Jeffrey T. DeLorme (44) is an Executive Vice President of Continental. Prior
to February 1993, he was the Senior Vice President and General Manager of
Continental's Florida/Georgia management region. He serves on the Partners'
Committee of PrimeStar. He has been employed by Continental since 1980.
Nancy Hawthorne (45) is the Chief Financial Officer and a Senior Vice
President of Continental. Prior to December 1993, she was also the Treasurer of
Continental, in addition to being Chief Financial Officer and a Senior Vice
President. Prior to December 1992, she was a Senior Vice President and the
Treasurer of Continental. Prior to 1988, she was a Vice President and the
Treasurer of Continental. She is a member of the Boards of Directors of Perini
Corporation, a construction company, New England Zenith Fund, a mutual fund, and
Optus Vision. She has been employed by Continental since 1982.
Biographical information concerning the Directors and Executive Officers is
as of August 15, 1996.
EXECUTIVE COMPENSATION
The following table (the "Summary Compensation Table") discloses
compensation received by Continental's Chief Executive Officer and the four most
highly compensated other Executive Officers of Continental (the Chief Executive
Officer and the other Executive Officers are hereinafter referred to as the
"Named Executive Officers") for the three fiscal years ended December 31, 1993,
1994 and 1995.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------------- -------------------------------------
OTHER ANNUAL RESTRICTED STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR # SALARY ($) BONUS ($)(1) COMPENSATION ($) AWARDS ($)(2)(3) COMPENSATION ($)(4)
- ------------------------------------ --------- ----------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Amos B. Hostetter, Jr. 1995 $650,000 $208,848 $-- $4,849,900 $4,273
Chairman and Chief 1994 649,876 97,991 -- -- 4,273
Executive Officer 1993 624,961 238,653 -- -- 4,273
William T. Schleyer 1995 424,077 14,052 -- 4,364,910 3,403
President and Chief 1994 315,815 30,639 -- -- 3,403
Operating Officer 1993 291,923 61,418 -- -- 3,403
Jeffrey T. DeLorme 1995 324,764 105,370 -- 2,424,950 3,403
Executive Vice 1994 294,846 49,166 -- -- 3,403
President 1993 268,484 56,871 111,608(5) -- 3,403
Ronald H. Cooper 1995 267,123 34,543 -- 2,424,950 3,315
Executive Vice
President
Nancy Hawthorne 1995 274,746 67,488 -- 2,085,457 3,403
Chief Financial 1994 241,938 18,331 -- -- 3,403
Officer and Senior 1993 224,896 46,590 -- -- 3,403
Vice President
</TABLE>
- ------------------------------
(1) See Note 11 to Consolidated Financial Statements. Continental has made loans
to these and other persons in amounts equal to the income taxes incurred by
them as a result of their restricted stock purchases. Such loans were
financed through cash provided from operating activities and long-term
borrowings. Continental charges interest on these loans generally at rates
ranging from 5% to 8% per annum and declares bonuses to each of these
persons in the amount of the interest due each year. Continental declared no
other bonus to any Named Executive Officer during the years presented. As of
July 31, 1996, the amounts of the loans outstanding to certain of the Named
Executive Officers were as follows: Jeffrey T. DeLorme ($1,564,043), Ronald
H. Cooper ($623,633) and Nancy Hawthorne ($1,573,480). The outstanding
principal balance of each such loan is generally payable upon the earlier to
occur of (i) the due date of such loan or (ii) the termination of such
person's employment with Continental. Each of Mr. DeLorme and Mr. Cooper has
an additional loan from a subsidiary of Continental, of which the current
amounts outstanding are: Mr. DeLorme ($400,000) and Mr. Cooper ($284,513).
Since the beginning of the fiscal year ended December 31, 1993, the largest
aggregate amounts of indebtedness of the following Named Executive Officers
are the current amounts outstanding, except for Mr. DeLorme and Mr. Cooper,
whose largest amounts outstanding were $1,964,043 and $799,303,
respectively. See "-- Compensation Committee Interlocks and Insider
Participation" for loan amounts to certain other Named Executive Officers.
(2) Shares of restricted stock are entitled to dividends at the same rate as all
other shares of Common Stock.
(3) Shown below are (i) the total number of unvested shares and market value of
such shares as of December 31, 1995 and (ii) the vesting schedule of such
shares for each of the Named Executive Officers:
<TABLE>
<CAPTION>
TOTAL RESTRICTED
SHARES VESTING OVER THREE YEARS FROM 12/31/95
HELD AS OF 12/31/95 ---------------------------------------------------
------------------- SHARES VESTING SHARES VESTING SHARES VESTING
NAME SHARES VALUE IN 1996 IN 1997 IN 1998
- ---------------------------------- ------- ---------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Amos B. Hostetter, Jr............. 266,250 $5,165,250 91,250 50,000 50,000
William T. Schleyer............... 216,250 4,195,250 58,750 45,000 45,000
Jeffrey T. DeLorme................ 124,875 2,422,575 37,375 25,000 25,000
Ronald H. Cooper.................. 118,550 2,299,870 31,050 25,000 25,000
Nancy Hawthorne................... 105,550 2,047,670 30,300 21,500 21,500
</TABLE>
(4) Includes payment by Continental in the fiscal years ended December 31,
1993, 1994 and 1995, respectively, of premiums for term life insurance on
behalf of the Named Executive Officers: Amos B. Hostetter, Jr. ($1,125 each
year), William T. Schleyer ($255 each year), Jeffrey T. DeLorme ($255 each
year), Ronald H. Cooper ($165) and Nancy Hawthorne ($255 each year). The
remaining amounts for the Named Executive Officers represents the employer
matching contribution under Continental's matched savings plan.
(5) Represents a one-time reimbursement of moving and related expenses incurred
by Mr. DeLorme in connection with his relocation to Continental's Boston,
Massachusetts office (grossed up for income taxes incurred by Mr. DeLorme).
V-53
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CERTAIN PROVISIONS OF THE RESTRICTED STOCK PURCHASE AGREEMENTS. On
February 28, 1996, the Company offered to sell restricted stock to certain key
employees under the Company's 1995 Restricted Stock Purchase Program (the
"Restricted Stock Purchase Program"). At the same time all outstanding
agreements pursuant to which employees had purchased restricted stock in the
past were amended. In purchasing restricted shares, an employee enters into a
Restricted Stock Purchase Agreement (an "RSPA") with the Company containing
restrictions on transfer, vesting provisions and a non-competition covenant,
among other provisions. All of the RSPAs provide that the Company may repurchase
for the amount that the employee has paid the unvested stock of any employee
whose employment terminates for any reason. Vesting occurs over time according
to a schedule designated in each RSPA. The Restricted Stock Purchase Agreements
dated February 28, 1996 (the "New RSPA") entered into between certain key
employees and the Company and the amendments to outstanding RSPAs provide that
if the Merger with U S WEST is consummated, then vesting is accelerated upon the
first to occur of the following events after the effective date of the Merger:
(i) death or disability; (ii) in the case of an employee based in the existing
corporate headquarters of the Company, termination by reason of an involuntary
relocation to a place of employment that is more than 25 miles from the existing
headquarters, or relocation of the corporate headquarters; (iii) termination of
employment within twenty-four months of the effective date of the Merger, other
than in connection with the sale, swap or other disposition of a system or other
business unit in which the employee is employed, if such termination is by
reason of: (a) a diminution in the employee's compensation, including a material
adverse change in employee benefits; (b) the assignment to the employee of
duties and responsibilities which are materially less than the employee's duties
and responsibilities as of the effective date of the Merger; or (c) an
involuntary termination of employment other than a "Termination for Cause."
"Termination for Cause" means termination because of the employee's (A) refusal
or failure (other than for reasons of illness, incapacity due to physical or
mental illness or physical injury), to perform, or persistent and material
deficiencies in performing, his or her duties, provided such duties are
substantially similar to such person's duties prior to the Merger; (B)
misappropriation of any funds or property of the Company; (C) conduct which
could reasonably result in the employee's conviction of a felony; or (D) conduct
which could reasonably result in termination of the employee's employment due to
violation of published internal policies. U S WEST will assume the obligations
under the RSPAs in connection with the Merger, and any reference to the Company
as employer will thereafter be deemed to refer to U S WEST.
In addition, each employee, in connection with the execution of an RSPA, has
the option of entering into a tax liability financing agreement, pursuant to
which the Company agrees to lend the employee an amount up to the employee's
total additional federal, state and local income taxes incurred in connection
with grants of restricted stock. The tax liability financing agreements executed
in connection with the New RSPA provide, and the outstanding tax liability
financing agreements under existing RSPAs were amended to provide, that,
conditioned upon the consummation of the Merger and continued employment through
January 1, 1999, the entire principal amount of the outstanding loans will be
forgiven on January 2, 2002. If an employee's employment terminates before
January 2, 1999 and after January 1, 1998, two-thirds of the principal amount
will be forgiven on January 2, 2002. If an employee's employment terminates
before January 2, 1998 and after January 1, 1997, one-third of the principal
amount will be forgiven on January 2, 2002. In addition, if the Merger is
consummated, the loan will be forgiven in full upon the occurrence of the same
events that would result in acceleration of vesting under the RSPAs described
above. A loan must be repaid in full if an employee violates the non-competition
agreement in the RSPAs. The maturity dates of the loans granted to pay taxes
were all extended to January 2, 2002.
All of the Named Executive Officers entered into such amendments to their
outstanding RSPAs and the related tax liability financing agreements. In
addition, Mr. Cooper and Ms. Hawthorne purchased additional shares of restricted
stock under the New RSPA and will receive loans under the related tax liability
financing agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Base annual
compensation for Executive Officers was determined during the last fiscal year
by the Chairman, the Vice Chairman and the President of Continental. Pursuant to
authority delegated by the Continental Board of Directors, the Chairman also
awarded grants of restricted stock in 1995 and 1996 to key employees designated
by the Continental Board of
V-54
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Directors in accordance with Continental's Restricted Stock Purchase Program.
Amos B. Hostetter, Jr., Timothy P. Neher and William T. Schleyer, the Chairman,
Vice Chairman and President of Continental, respectively, are Directors and
participate in deliberations concerning Executive Officer compensation.
Continental has made loans to these three Executive Officers and other
persons in amounts equal to the income taxes incurred by them as a result of
their restricted stock purchases. Such loans were financed through cash provided
from operating activities and long-term borrowings. Continental charges interest
on these loans generally at rates ranging from 5% to 8% per annum and declares
bonuses to each of these persons in the amount of the interest due each year. As
of July 31, 1996, the amounts of the loans outstanding to the three Executive
Officers named above were as follows: Amos B. Hostetter, Jr. ($3,888,438),
Timothy P. Neher ($2,669,856) and William T. Schleyer ($2,273,963). Since the
beginning of the fiscal year ended December 31, 1993, the largest aggregate
amounts of indebtedness of such Executive Officers were as follows: Amos B.
Hostetter, Jr. ($3,888.438), Timothy P. Neher ($4,057,356) and William T.
Schleyer ($2,273,963). The outstanding principal balance of each such loan is
generally payable upon the earlier to occur of (i) the due date of such loan or
(ii) the termination of such person's employment with Continental. For
information regarding loans to other Executive Officers, see footnote (1) to the
Summary Compensation Table.
On December 31, 1993, Continental accepted payment for loans incurred in
connection with restricted stock purchases pursuant to Continental's 1989
Restricted Stock Purchase Agreement ("RSPA III") which became due on such date
by (i) transfer to Continental and cancellation of vested shares of Common Stock
with a value equal to the loan outstanding, valued at $19.40 per share (the
"Stock-for-Loan Exchange"), (ii) payment in cash or (iii) a combination of the
two. Continental also made an offer (the "RSPA Offer") in January 1994 to
purchase shares of Common Stock up to a maximum of 1,334,975 shares at a
purchase price of $19.40 per share. The persons who were eligible to participate
in the Stock-for-Loan Exchange and to accept the RSPA Offer were persons who
held shares of Common Stock issued pursuant to RSPA III (current or former
employees and family members of employees and former employees). The valuation
of the shares at $19.40 was equal to the price last paid in a private placement
of shares of Class A Common Stock, which was consummated in November 1993. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The three Executive Officers
named above repaid the following loan amounts in shares of Common Stock in the
Stock-for-Loan Exchange: Amos B. Hostetter, Jr. ($1,471,936), Timothy P. Neher
($1,387,500) and William T. Schleyer ($291,000), and sold the following number
of shares of Common Stock to Continental pursuant to the RSPA Offer: Amos B.
Hostetter, Jr. (0), Timothy P. Neher (29,800) and William T. Schleyer (0). For
information regarding other Executive Officers, see "Certain Transactions." In
addition, William T. Schleyer made a cash payment for the remaining $141,063 of
his outstanding loan incurred in connection with restricted stock purchases
pursuant to RSPA III. In addition, the Hostetter Foundation, an entity
controlled by Mr. Hostetter, sold 29,600 shares of Common Stock to Continental
in January 1994 for a purchase price of $19.40 per share.
RETIREMENT PLANS. The following table sets forth, as computed in accordance
with the basic benefit formula employed for purposes of Continental's Retirement
Plan (the "Continental Retirement Plan") and its Supplemental Executive
Retirement Plan ("SERP"), the estimated annual benefits payable upon retirement
to employees of Continental in the following compensation and years-of-service
classifications. The amounts shown in the table do not take into account an
offset in recognition of the employer contribution toward social security
benefits.
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------
COMPENSATION 10 15 20 25 30 OR MORE
- ----------------------------------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
$150,000........................... $14,250 $21,375 $ 28,500 $ 35,625 $ 42,750
$200,000........................... 19,000 28,500 38,000 47,500 57,000
$300,000........................... 28,500 42,750 57,000 71,250 85,500
$400,000........................... 38,000 57,000 76,000 95,000 114,000
$500,000........................... 47,500 71,250 95,000 118,750 142,500
$600,000........................... 57,000 85,500 114,000 142,500 171,000
$700,000........................... 66,500 99,750 133,000 166,250 199,500
</TABLE>
V-55
<PAGE>
Actual benefits are computed on the basis of (1) .95% of the employee's
average annual compensation less .37% of average annual compensation (limited to
social security covered compensation) multiplied by (2) the number of years of
service (not to exceed thirty years). Average annual compensation is the average
of a participant's compensation for the five consecutive years in which
compensation was the highest.
The SERP, effective in 1995, provides additional retirement benefits for any
employee of Continental whose accrued benefits under the Continental Retirement
Plan are limited by the Internal Revenue Code's (the "Code") limit (currently
$150,000) on annual compensation which may be taken into account under that plan
or by the Code's Section 415 limit on the size of retirement benefits which may
be funded under that plan. The SERP is an unfunded, non tax-qualified plan which
is intended to create for each participant a benefit upon termination of
employment generally equal in value to the excess of what his accrued vested
benefit in the Continental Retirement Plan would have been without the $150,000
compensation limit and the Section 415 limit on benefits which may be funded,
over the actual benefit under that plan. The benefit under the SERP is payable
upon termination of employment, at the participant's election, in a lump sum or
in equal annual installments (with interest) over 2, 5 or 10 years. A
participant may designate a beneficiary under the SERP to receive his benefit
should he die before its complete pay-out.
The covered compensation for each Named Executive Officer is based upon the
amounts shown in the "Salary" column of the Summary Compensation Table. For each
Named Executive Officer, the current compensation covered by the Continental
Retirement Plan does not differ substantially (by more than 10%) from the
aggregate compensation set forth in the Summary Compensation Table.
The Named Executive Officers have been credited with the following years of
service: Mr. Hostetter, 33 years; Mr. Schleyer, 18 years; Mr. DeLorme, 16 years;
Mr. Cooper, 14 years and Ms. Hawthorne, 14 years.
COMPENSATION OF DIRECTORS
The members of the Continental Board of Directors who are not officers of
Continental currently receive an annual retainer of $16,000 and a fee of $3,500
for each meeting attended. Members of the Audit Committee receive $1,000 for
meetings held separately from Board meetings. In addition, Directors who reside
outside the Greater Boston area are reimbursed for their travel expenses
incurred in connection with attendance at meetings of the Continental Board of
Directors or its Committees.
EXECUTIVE COMPENSATION POLICIES
Continental does not have a Compensation Committee of the Board of
Directors. Historically (including for fiscal year 1995), Mr. Hostetter, in
consultation with Messrs. Neher and Schleyer, has determined the nature and
amount of the Company's Executive Officers' compensation packages, including his
own. These packages have generally included base salary and restricted stock
awards. Factors considered by Mr. Hostetter have typically included the results
of a performance review of each Executive Officer's performance and an
evaluation of the significance of the executive's contribution. The compensation
packages have been designed to attract and retain experienced and well-qualified
Executive Officers who will enhance the performance of the Company.
The Company has attempted to set the base salary of its Executive Officers
to be competitive within the cable television and telecommunications industries.
The Company conducts performance reviews to determine and adjust each executive
officer's base salary. During the past 10 years, restricted stock awards have
generally been a major component of each Executive Officer's total compensation.
As the restricted stock awards vest over time, their ultimate value depends on
the long-term appreciation of the Company's stock price. Such restricted stock
awards are intended to increase Executive Officers' equity interests in the
Company, providing executives with the opportunity to share in the future value
they help to create. In addition, the Company provides to executives the
standard benefits package offered to all salaried employees.
V-56
<PAGE>
CERTAIN TRANSACTIONS
Lazard received fees and underwriting discounts from Continental in an
aggregate amount of $7.4 million for its services as an underwriter to
Continental of $1.4 billion of senior notes and debentures during the year ended
December 31, 1993.
Lazard acted as a financial advisor to Continental in connection with the
negotiations and the consummation of the Providence Journal Merger, and, for
such services, received a fee of $5.5 million. Continental also reimbursed
Lazard for its reasonable out-of-pocket expenses, including fees and expenses of
legal counsel.
Lazard acted as a Placement Agent in the sale of the Old 8.30% Notes, and,
for such services received underwriting discounts and commissions totalling
approximately $3.5 million.
Lazard also acted as financial advisor to the Company in connection with the
proposed Merger with U S WEST and received a fee of $4.0 million upon its
announcement. Lazard will receive an additional fee of $16.0 million upon the
consummation of the Merger. If the merger is not consummated and Continental
elects to put shares of a new class of convertible preferred stock to U S WEST,
then Lazard will receive a fee to be mutually agreed upon by Lazard and
Continental.
Corporate Advisors is the sole general partner of Corporate Partners, L.P.
("Corporate Partners") and Corporate Offshore Partners, L.P. ("Corporate
Offshore Partners"), both of which own shares of Series A Preferred Stock. A
wholly owned subsidiary of Lazard is the sole general partner of Corporate
Advisors. Corporate Advisors is also an investment manager for The State Board
of Administration of Florida, which also owns shares of Series A Preferred
Stock. Certain entities controlled by Lazard also own limited partnership
interests in Corporate Partners and Corporate Advisors.
For a discussion of loans made to Executive Officers of Continental in
connection with Continental's Restricted Stock Purchase Program, see footnote
(1) to the Summary Compensation Table and "Management Executive Compensation
Compensation Committee Interlocks and Insider Participation." For a description
of Continental's Stock-for-Loan Exchange and the RSPA Offer to repurchase shares
of Common Stock, and information regarding certain Executive Officers who are
Directors participating therein, see "Management -- Executive Compensation --
Compensation Committee Interlocks and Insider Participation." The following
Executive Officers who are not Directors of Continental participated in the
Stock-for-Loan Exchange in the following amounts: Jeffrey T. DeLorme ($155,000),
Ronald H. Cooper ($159,497) and Nancy Hawthorne ($274,464).
CREDIT ARRANGEMENTS OF THE COMPANY
The following is a summary description of the various material credit
arrangements which Continental has entered into with its lenders or, in the case
of the 1995 Credit Facility, which it has arranged on behalf of certain of its
subsidiaries. The summary does not purport to be complete and is qualified in
its entirety by reference to such agreements.
The Company's obligations under the 1994 Credit Facility and the following
outstanding debt securities: the Prudential Notes, the 8 1/2% Notes, the 8 5/8%
Notes, the 8 7/8% Debentures, the 9% Debentures, the 9 1/2% Debentures and the
8.30% Notes (collectively, the "Senior Debt Securities"), together with all
other unsubordinated indebtedness that the Company may from time to time incur,
are sometimes referred to collectively as the "Senior Indebtedness."
The 10 5/8% Notes and the 11% Debentures (collectively, the "Subordinated
Debt Securities") are subordinate to the prior payment, when due, of the
principal and interest on, and other amounts relating to, the Senior
Indebtedness, and are sometimes referred to, together with all other
subordinated indebtedness that the Company may from time to time incur, as the
"Subordinated Indebtedness."
Restricted Subsidiaries are subsidiaries that Continental has designated as
such for purposes of certain of Continental's credit arrangements, including the
1994 Credit Facility and the Prudential Notes but excluding the 1995 Credit
Facility. Restricted Subsidiaries as a group are subject to the covenants and
V-57
<PAGE>
obligations imposed by the agreements representing such indebtedness to the same
extent as Continental, and their relevant financial measures are taken into
account in computing the various ratios and tests imposed by such agreements. To
be eligible for such designation, Continental or one or more other Restricted
Subsidiaries must own at least 80% of the voting securities or the equity,
partnership or other beneficial interests of such subsidiary, and such
subsidiary must conduct its business so as to derive its revenues from the cable
television or telecommunications businesses and related activities. Upon
designation, Restricted Subsidiaries typically become guarantors of the
obligations of Continental under the 1994 Credit Facility and the Prudential
Notes (which together constitute the Company Guaranteed Senior Indebtedness).
All subsidiaries of Continental that currently own and operate systems located
in the United States have been designated Restricted Subsidiaries, other than
the subsidiaries that are borrowers or guarantors under the 1995 Credit
Facility.
Unrestricted Subsidiaries are subsidiaries that have not been designated as
Restricted Subsidiaries. Continental's credit agreements give Continental the
ability to terminate the designation of a Restricted Subsidiary under certain
circumstances. The borrowers and guarantors under the 1995 Credit Facility are
Unrestricted Subsidiaries for purposes of the Company Guaranteed Senior
Indebtedness.
None of the Company's existing indebtedness is secured.
1994 CREDIT FACILITY
Continental and the Restricted Subsidiaries (the "Restricted Group") are
parties to the 1994 Credit Facility, which provides for revolving credit
availability to Continental of $2.2 billion. Credit availability under the 1994
Credit Facility will decrease on a schedule commencing December 31, 1997 with
annual reductions on each December 31 thereafter, with a final maturity of
October 10, 2003. As of September 30, 1996, Continental had credit availability
of approximately $19.2 million under the 1994 Credit Facility. Continental's
obligations under the 1994 Credit Facility are guaranteed by the Restricted
Subsidiaries.
The interest rates on indebtedness outstanding under the 1994 Credit
Facility fluctuate and are based, at Continental's election, on the "base" rate
of the agent, as from time to time in effect, or may be fixed for periods of up
to 60 months based on the prevailing interest rates in selected interbank
Eurodollar markets ("Eurodollar" rates). Continental is required to pay a spread
or margin over these rates, which varies depending on the ratio of the
consolidated total debt of the Restricted Group, minus cash and certain cash
equivalents held by the Restricted Group ("Consolidated Total Debt"), to
annualized consolidated operating income, including income on account of
management fees, before depreciation, amortization, restricted stock purchase
program expense, non-cash regulatory reserves and non-operating expenses,
interest and income taxes of the Restricted Group ("Consolidated Operating
Income"). The margins currently in effect are .375% for base rate borrowings and
1.625% for Eurodollar borrowings.
Prepayments of borrowings under the 1994 Credit Facility are required in
certain circumstances from a portion of the proceeds of certain sales of
Restricted Group assets.
In addition to customary financial covenants, the 1994 Credit Facility
contains covenants restricting the incurrence of debt, investments and
encumbrances on assets, covenants limiting mergers and acquisitions, and
restrictions on dividends and other distributions to stockholders.
In addition to customary events of default, it is an event of default under
the 1994 Credit Facility if, prior to the consummation of the Merger, Amos B.
Hostetter, Jr., certain of his permitted transferees and the other officers of
Continental and its subsidiaries (collectively, the "Management Group") fail to
own (i) at least 25% of the voting power of Continental's capital stock or (ii)
if the Management Group's percentage ownership falls below 25% of the voting
power, then a block of voting power larger than any block of voting power held
by any other person, together with such person's affiliates and any members of a
group with such person.
1995 CREDIT FACILITY
Continental recently arranged the 1995 Credit Facility on behalf of certain
of its subsidiaries. The 1995 Credit Facility provides such subsidiaries (the
"Borrowers" and, collectively with certain of their subsidiaries,
V-58
<PAGE>
the "New Borrowing Group") with maximum credit availability of $1.2 billion. The
following discussion summarizes certain material terms of the 1995 Credit
Facility, which generally contains terms and conditions similar to those
contained in the 1994 Credit Facility. Neither Continental nor any Restricted
Subsidiary has any obligations in respect of the 1995 Credit Facility. As of
September 30, 1996, the New Borrowing Group had credit availability of
approximately $150.0 million under the 1995 Credit Facility.
Borrowings under the 1995 Credit Facility were used to fund (1)
approximately $410.0 million of the Providence Journal liabilities discharged in
connection with the Providence Journal Merger, (2) the purchase of cable
television systems from a subsidiary of Providence Journal for $405.0 million,
(3) the acquisition of Columbia Cable of Michigan for approximately $155.0
million, (4) the N-COM Buyout for approximately $88.0 million, and (5) general
corporate purposes of the New Borrowing Group, which includes future capital
expenditures of Providence Journal Cable, Columbia Cable of Michigan, and N-COM.
See "Business -- U.S. Acquisitions and Investments -- Providence Journal
Merger." Each Borrower guarantees each other Borrower's obligations under the
1995 Credit Facility, and all subsidiaries of the Borrowers also guarantee such
obligations.
Borrowings under the 1995 Credit Facility are available to the Borrowers on
a revolving basis. Credit availability will decrease on a schedule commencing
December 31, 1998 with annual reductions each December 31 thereafter, and a
final maturity date of September 30, 2004.
As with the 1994 Credit Facility, the interest rates on indebtedness
outstanding under the 1995 Credit Facility fluctuate and are based, at the
Borrower's election, on the "base" rate of the agent, as from time to time in
effect, or may be fixed for periods of up to 60 months based on the prevailing
Eurodollar rates. The Borrowers are required to pay a spread or margin over
these rates which varies depending on the ratio of the combined total debt of
the New Borrowing Group, minus cash and certain cash equivalents of the New
Borrowing Group ("Combined Total Debt"), to annualized combined operating income
of the New Borrowing Group, before depreciation, amortization, non-cash
regulatory reserves and non-operating expenses, interest and income taxes of the
New Borrowing Group ("Combined Operating Income"). The margins currently in
effect are .50% for base rate borrowings and 1.75% for Eurodollar borrowings.
In addition to customary financial covenants similar to those found in the
1994 Credit Facility, the 1995 Credit Facility prohibits the New Borrowing Group
from purchasing or redeeming, or paying cash dividends on, its capital stock,
including without limitation, payments to Continental, (other than, so long as
no event of default results therefrom, certain subordinated debt payments, the
purchase of minority interests in any member of the New Borrowing Group,
dividends paid to another member of the New Borrowing Group and certain
dividends paid in respect of minority interests) when the ratio of Combined
Total Debt to Combined Operating Income exceeds 5 to 1. The 1995 Credit Facility
does not impose any restrictions (other than that no default exists) on any such
dividend, purchase or redemption at any time when the ratio of Combined Total
Debt to Combined Operating Income is less than 5 to 1; provided, however, that
the New Borrowing Group is required to permanently reduce the 1995 Credit
Facility in an amount equal to the amount of any cash dividends paid or stock
repurchases or redemptions made by the New Borrowing Group.
Prepayments of outstanding borrowings under the 1995 Credit Facility are
required out of a portion of the proceeds of certain sales of New Borrowing
Group assets and of certain additional indebtedness.
In addition to customary events of default, prior to the consummation of the
Merger, it is an event of default under the 1995 Credit Facility (1) if
Continental fails to own directly or indirectly at least 80% of the voting power
of each Borrower's capital stock, and (2) if the Management Group fails to own
(i) at least 25% of the voting power of Continental's capital stock or (ii) if
the Management Group's percentage ownership falls below 25% of the voting power,
then a block of voting power larger than any block of voting power held by any
other person, together with such person's affiliates and any members of a group
with such person.
1996 CREDIT FACILITY
The Restricted Group is also party to the 1996 Credit Facility, which is a
short-term, senior, unsecured, revolving credit facility with maximum credit
availability of up to $1.0 billion. Borrowings under the 1996 Credit Facility
may be used to fund general corporate purposes, including capital expenditures,
investments
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<PAGE>
and acquisitions. The 1996 Credit Facility matures on July 1, 1997 and has other
terms and conditions that are similar to those contained in the 1994 Credit
Facility. As of September 30, 1996, Continental had credit availability of
approximately $985 million under the 1996 Credit Facility.
INDENTURES FOR OUTSTANDING SENIOR AND SUBORDINATED DEBT SECURITIES
Continental is currently party to indentures for the following debt
securities:
(i) the Prudential Notes, the 8 1/2% Notes, the 8 5/8% Notes, the 8 7/8%
Debentures, the 9% Debentures, the 9 1/2% Debentures and the 8.30% Notes, which
together constitute the Senior Debt Securities; and
(ii) the 10 5/8% Notes and the 11% Debentures, which together constitute the
Subordinated Debt Securities.
The Senior Debt Securities rank PARI PASSU in right of payment with the 1994
Credit Facility and senior in right of payment to the Subordinated Debt
Securities.
The Subordinated Indebtedness of the Company evidenced by the Subordinated
Debt Securities is subordinate to the prior payment, when due, of the principal
of and interest on, and other amounts relating to, all Senior Indebtedness of
the Company. The indentures for the Subordinated Debt Securities provide that
the holders of the Subordinated Debt Securities will not be entitled to receive,
and the Company will not make, any payment on account of the Subordinated Debt
Securities, or redeem or purchase or otherwise acquire any of the Subordinated
Debt Securities, unless full payment of amounts then due and payable (whether
upon scheduled or accelerated maturity) in respect of Senior Indebtedness of the
Company has been made or duly provided for in cash or cash equivalents. Upon (a)
the happening and continuance of an event of default with respect to any Senior
Indebtedness (other than a payment default) permitting the holders of such
Senior Indebtedness to accelerate the maturity thereof without any action by
them or on their behalf other than the giving of notice of such acceleration (a
"Senior Indebtedness Event of Default") and (b) receipt by the Company of
written notice (a "Company Default Notice") by holders of a majority in interest
of such Senior Indebtedness or their representative or representatives of the
event of default and of the election of such holders to commence a Payment
Blockage Period (as defined below), no payment will be made by the Company with
respect to the Subordinated Debt Securities for a period (a "Payment Blockage
Period") commencing on the date the Company receives the Company Default Notice
and ending on the earlier of (i) 179 days thereafter and (ii) the date on which
such Senior Indebtedness Event of Default has been cured or waived or has ceased
to exist or the Company receives notice from such holder or holders, or their
representative or representatives, terminating the Payment Blockage Period. In
no event will a Payment Blockage Period extend beyond 179 days from the date the
payment on the Subordinated Debt Securities was due. Not more than one Payment
Blockage Period may be commenced with respect to the Subordinated Debt
Securities during any period of 365 consecutive days. Under the terms of the
indentures for the Subordinated Debt Securities, no Senior Indebtedness Event of
Default that existed or was continuing on the date of the commencement of any
Payment Blockage Period with respect to the Senior Indebtedness initiating such
Payment Blockage Period will be, or be made, the basis for the commencement of a
second Payment Blockage Period by a holder or holders of such Senior
Indebtedness, or their representative or representatives, unless such Senior
Indebtedness Event of Default shall have been cured or waived or has ceased to
exist for a period of not less than 90 consecutive days.
The 9% Debentures, the 8 5/8% Notes, the 8 1/2% Notes, the 8 7/8% Debentures
and the 8.30% Notes are not redeemable at the option of Continental prior to
their maturity. At any time after June 1, 1999 for the 11% Debentures, June 15,
1997 for the 10 5/8% Notes, and August 1, 2005 for the 9 1/2% Debentures,
Continental may prepay all or any part of each such class of securities at a
premium (which differs for each class and which decreases on an annual basis
after the date on which a particular class becomes callable). The Prudential
Notes may be prepaid at the option of Continental at any time, in whole or in
part, with a prepayment premium.
Continental is required to prepay the principal amount of the Prudential
Notes on a semi-annual amortization schedule with a final principal repayment of
$17.5 million due on July 1, 1999. Continental's
V-60
<PAGE>
obligations under the Prudential Notes are guaranteed by substantially all of
the Restricted Subsidiaries. As of September 30, 1996, approximately $98.5
million in aggregate principal amount of the Prudential Notes was outstanding.
The holders of each class of the Senior Debt Securities (excluding the
Prudential Notes) and Subordinated Debt Securities are entitled to demand
prepayment of such securities, plus a premium (which differs for each class and
which decreases on an annual basis), under certain circumstances. The indentures
for the Senior Debt Securities and Subordinated Debt Securities contain
customary financial and other covenants, as well as a restriction against the
redemption or repurchase of, or the payment of cash dividends on, the capital
stock of Continental.
V-61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
Independent Auditors' Report................................................................................ F-3
Consolidated Balance Sheets, December 31, 1994 and 1995 and (Unaudited) June 30, 1996....................... F-4
Statements of Consolidated Operations, Years Ended December 31, 1993, 1994 and 1995 and (Unaudited) Six
Months Ended June 30, 1995 and 1996........................................................................ F-5
Statements of Consolidated Stockholders' Equity (Deficiency), Years Ended December 31, 1993, 1994 and 1995
and (Unaudited) Six Months Ended June 30, 1996............................................................. F-6
Statements of Consolidated Cash Flows, Years Ended December 31, 1993, 1994 and 1995 and (Unaudited) Six
Months Ended June 30, 1995 and 1996........................................................................ F-7
Notes to Consolidated Financial Statements.................................................................. F-8
PROVIDENCE JOURNAL CABLE
Independent Auditors' Reports............................................................................... F-26
Combined Balance Sheets, December 31, 1993 and 1994 and (Unaudited) September 30, 1995...................... F-28
Combined Statements of Operations, for the Years Ended December 31, 1992, 1993 and 1994 and (Unaudited) Nine
Months Ended September 30, 1994 and 1995................................................................... F-29
Combined Statements of Changes in Group Equity, for the Years Ended December 31, 1992, 1993 and 1994 and
(Unaudited) Nine Months Ended September 30, 1995........................................................... F-30
Combined Statements of Cash Flows, for the Years Ended December 31, 1992, 1993 and 1994 and (Unaudited) Nine
Months Ended September 30, 1994 and 1995................................................................... F-31
Notes to Combined Financial Statements...................................................................... F-32
COLUMBIA CABLE OF MICHIGAN (A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
Report of Independent Public Accountants.................................................................... F-42
Statements of Assets, Liabilities and Control Account, December 31, 1993 and 1994 and (Unaudited) September
30, 1995................................................................................................... F-43
Statements of Operations and Control Account, for the Years Ended December 31, 1993 and 1994 and (Unaudited)
Nine Months Ended September 30, 1994 and 1995.............................................................. F-44
Statements of Cash Flows, for the Years Ended December 31, 1993 and 1994 and (Unaudited) Nine Months Ended
September 30, 1994 and 1995................................................................................ F-45
Notes to Financial Statements............................................................................... F-46
CABLEVISION OF CHICAGO (A LIMITED PARTNERSHIP)
Independent Auditors' Report................................................................................ F-49
Balance Sheets, December 31, 1993 and 1994 and (Unaudited) June 30, 1995.................................... F-50
Statements of Operations and Partners' Deficiency, for the Years Ended December 31, 1993 and 1994 and
(Unaudited) Six Months Ended June 30, 1994 and 1995........................................................ F-51
Statements of Cash Flows, for the Years Ended December 31, 1993 and 1994 and (Unaudited) Six Months Ended
June 30, 1994 and 1995..................................................................................... F-52
Notes to Financial Statements............................................................................... F-53
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
Independent Auditors' Report................................................................................ F-59
Consolidated Balance Sheet, June 30, 1996................................................................... F-60
Consolidated Statement of Operations for the Year Ended June 30, 1996....................................... F-62
Consolidated Statement of Partners' Equity for the Year Ended June 30, 1996................................. F-63
Consolidated Statement of Cash Flows for the Year Ended June 30, 1996....................................... F-64
Notes to Consolidated Financial Statements.................................................................. F-65
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Continental Cablevision, Inc.:
We have audited the accompanying consolidated balance sheets of Continental
Cablevision, Inc. and its subsidiaries as of December 31, 1994 and 1995 and the
related statements of consolidated operations, consolidated stockholders' equity
(deficiency) and consolidated cash flows for each of the three years in the
period 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 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, such consolidated financial statements of Continental
Cablevision, Inc. and its subsidiaries present fairly, in all material respects,
the financial position of the companies at December 31, 1994 and 1995 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in Notes 12 and 4 to the consolidated financial statements, the
Company changed its method of accounting for income taxes and investments in
1993 and 1994, respectively.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 14, 1996
F-3
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash................................................................. $ 11,564 $ 18,551 $ 27,056
Accounts Receivable -- net........................................... 58,212 110,132 100,608
Prepaid Expenses and Other........................................... 14,321 9,967 6,975
Supplies............................................................. 62,517 88,687 104,266
Marketable Equity Securities......................................... 122,510 151,378 161,324
Investments.......................................................... 335,479 538,352 617,751
Property, Plant and Equipment -- net................................. 1,353,789 2,107,473 2,243,525
Intangible Assets -- net............................................. 421,420 1,902,796 1,868,123
Other Assets -- net.................................................. 103,827 153,257 155,106
------------- ------------- -------------
TOTAL.......................................................... $ 2,483,639 $ 5,080,593 $ 5,284,734
------------- ------------- -------------
------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Accounts Payable..................................................... $ 82,083 $ 96,833 $ 113,339
Accrued Interest..................................................... 82,040 86,977 88,085
Accrued and Other Liabilities........................................ 206,271 238,343 235,336
Debt................................................................. 3,449,907 5,285,159 5,604,137
Deferred Income Taxes................................................ 116,482 307,041 264,245
Minority Interest in Subsidiaries.................................... 2,791 26,056 28,435
Commitments and Contingencies
Redeemable Common Stock, $.01 par value; 16,684,150 shares
outstanding......................................................... 232,399 256,135 270,290
Stockholders' Equity (Deficiency):
Preferred Stock, $.01 par value; 198,857,142 shares authorized;
none outstanding -- -- --
Series A Convertible Preferred Stock, $.01 par value; 1,142,858
shares authorized and outstanding; liquidation preference --
$487,776,000, $527,578,000 and $548,619,000....................... 11 11 11
Class A Common Stock, $.01 par value; 425,000,000 shares
authorized; 8,585,500, 38,780,694 and 38,820,774 shares
outstanding....................................................... 86 388 388
Class B Common Stock, $.01 par value; 200,000,000 shares
authorized; 90,291,375, 92,572,000 and 93,060,671 shares
outstanding....................................................... 903 926 931
Additional Paid-In Capital......................................... 583,181 1,181,193 1,178,929
Unearned Compensation.............................................. (12,097) (45,851) (49,276)
Foreign Currency Translation Adjustment............................ -- -- 6,746
Net Unrealized Holding Gain on Marketable Equity Securities........ 47,996 67,823 73,765
Deficit............................................................ (2,308,414) (2,420,441) (2,530,627)
------------- ------------- -------------
Stockholders' Equity (Deficiency)................................ (1,688,334) (1,215,951) (1,319,133)
------------- ------------- -------------
TOTAL.......................................................... $ 2,483,639 $ 5,080,593 $ 5,284,734
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------- ---------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues........................................... $ 1,177,163 $ 1,197,977 $ 1,442,392 $ 650,048 $ 942,930
Costs and Expenses:
Operating........................................ 382,195 405,535 498,239 224,846 334,827
Selling, General and Administrative.............. 267,376 267,349 339,002 150,332 221,533
Depreciation and Amortization.................... 279,009 283,183 341,171 148,412 231,696
Restricted Stock Purchase Program................ 11,004 11,316 12,005 5,905 8,654
----------- ----------- ----------- --------- ----------
Total........................................ 939,584 967,383 1,190,417 529,495 796,710
----------- ----------- ----------- --------- ----------
Operating Income................................... 237,579 230,594 251,975 120,553 146,220
----------- ----------- ----------- --------- ----------
Other (Income) Expense:
Interest......................................... 282,252 315,541 363,826 166,314 233,578
Equity in Net Loss of Affiliates................. 12,827 25,002 70,364 25,817 62,803
Gain on Sale of Marketable Equity Securities..... (4,322) (1,204) (23,032) (23,032) --
Gain on Sale of Investments...................... (17,067) -- (1,035) (1,035) --
Minority Interest in Net Income (Loss) of
Subsidiaries.................................... 184 (205) (39) (40) 74
Dividend Income.................................. (650) (824) (715) (319) (394)
Other............................................ (1,950) 1,279 2,542 625 5,754
----------- ----------- ----------- --------- ----------
Total........................................ 271,274 339,589 411,911 168,330 301,815
----------- ----------- ----------- --------- ----------
Loss From Operations Before Income Taxes,
Extraordinary Item and Cumulative Effect of Change
in Accounting for Income Taxes.................... (33,695) (108,995) (159,936) (47,777) (155,595)
Income Tax Benefit................................. (7,921) (40,419) (47,909) (14,710) (45,409)
----------- ----------- ----------- --------- ----------
Loss Before Extraordinary Item and Cumulative
Effect of Change in Accounting for Income Taxes... (25,774) (68,576) (112,027) (33,067) (110,186)
Extraordinary Item, Net of Income Taxes............ -- (18,265) -- -- --
----------- ----------- ----------- --------- ----------
Loss Before Cumulative Effect of Change in
Accounting for Income Taxes....................... (25,774) (86,841) (112,027) (33,067) (110,186)
Cumulative Effect of Change in Accounting for
Income Taxes...................................... (184,996) -- -- -- --
----------- ----------- ----------- --------- ----------
Net Loss........................................... (210,770) (86,841) (112,027) (33,067) (110,186)
Preferred Stock Preferences........................ (34,115) (36,800) (39,802) (19,347) (21,041)
----------- ----------- ----------- --------- ----------
Loss Applicable to Common Stockholders............. $ (244,885) $ (123,641) $ (151,829) $ (52,414) $ (131,227)
----------- ----------- ----------- --------- ----------
----------- ----------- ----------- --------- ----------
Loss Per Common Share:
Loss Before Extraordinary Item and Cumulative
Effect of Change in Accounting for Income
Taxes........................................... $ (.53) $ (.92) $ (1.22) $ (0.45) $ (0.88)
Extraordinary Item............................... -- (.16) -- -- --
----------- ----------- ----------- --------- ----------
Loss Before Cumulative Effect of Change in
Accounting for Income Taxes..................... (.53) (1.08) (1.22) (0.45) (0.88)
Cumulative Effect of Change in Accounting for
Income Taxes.................................... (1.62) -- -- -- --
----------- ----------- ----------- --------- ----------
Net Loss......................................... $ (2.15) $ (1.08) $ (1.22) $ (0.45) $ (0.88)
----------- ----------- ----------- --------- ----------
----------- ----------- ----------- --------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
SERIES A ADDITIONAL CURRENCY
CONVERTIBLE ------------ PAID-IN UNEARNED TRANSLATION
PREFERRED STOCK CLASS A CLASS B CAPITAL COMPENSATION ADJUSTMENT
--------------- ----- ----- ----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993.................... $ 11 $ 38 $ 913 $ 558,529 $ (34,919) $ --
Net Loss.................................. -- -- -- -- -- --
Accretion of Redeemable Common Stock...... -- -- -- (14,766) -- --
Issuance of Class A Common Stock.......... -- 24 -- 46,476 -- --
Reclassification of Redeemable Common
Stock to Class A Common Stock............ -- -- -- 5,085 -- --
Restricted Stock Purchase Program:
Stock Issued (Class B).................... -- -- -- 544 (544) --
Stock Vested............................ -- -- -- -- 11,004 --
Stock Forfeited......................... -- -- -- (882) 882 --
Stock Exchanged for Loans............... -- -- -- (6,526) -- --
Stock Repurchased......................... -- -- -- (11,384) -- --
--- ----- ----- ----------- ------------- -------------
Balance, December 31, 1993.................. 11 62 913 577,076 (23,577) --
Adjustment due to change in accounting
principle for marketable equity
securities, net of income taxes of
$56,434.................................. -- -- -- -- -- --
Net Loss.................................. -- -- -- -- -- --
Accretion of Redeemable Common Stock...... -- -- -- (19,932) -- --
Restricted Stock Purchase Program:
Stock Vested............................ -- -- -- -- 11,316 --
Stock Forfeited......................... -- -- -- (164) 164 --
Stock Exchanged for Loans............... -- -- -- (611) -- --
Conversion of Class B to Class A Common
Stock.................................... -- 8 (8) -- -- --
Stock Repurchased......................... -- -- (2) (3,672) -- --
Issuance of Class A Common Stock.......... -- 16 -- 30,484 -- --
Change in Unrealized Gain, net of income
taxes of $24,081......................... -- -- -- -- -- --
--- ----- ----- ----------- ------------- -------------
Balance, December 31, 1994.................. 11 86 903 583,181 (12,097) --
Net Loss.................................. -- -- -- -- -- --
Accretion of Redeemable Common Stock...... -- -- -- (23,736) -- --
Restricted Stock Purchase Program:
Stock Issued............................ -- -- 23 46,205 (46,228) --
Stock Vested............................ -- -- -- -- 12,005 --
Stock Forfeited......................... -- -- -- (469) 469 --
Stock Exchanged for Loans............... -- -- -- (337) -- --
Issuance of Class A Common Stock in
connection with acquisition, net of
issuance costs of $8,111................. -- 302 -- 576,349 -- --
Change in Unrealized Gain, net of income
taxes of $13,364......................... -- -- -- -- -- --
--- ----- ----- ----------- ------------- -------------
Balance, December 31, 1995.................. 11 388 926 1,181,193 (45,851) --
(Unaudited)
Net Loss.................................... -- -- -- -- -- --
Accretion of Redeemable Common Stock........ -- -- -- (14,155) -- --
Restricted Stock Purchase Program:
Stock Issued.............................. -- -- 5 13,266 (13,266) --
Stock Vested.............................. -- -- -- -- 8,654 --
Stock Forfeited........................... -- -- -- (1,187) 1,187 --
Stock Exchanged for Loans................. -- -- -- (188) -- --
Foreign Currency Translation Adjustment..... -- -- -- -- -- 6,746
Change in Unrealized Gain, net of income
taxes of $4,004............................ -- -- -- -- -- --
--- ----- ----- ----------- ------------- -------------
Balance, June 30, 1996...................... $ 11 $ 388 $ 931 $1,178,929 $ (49,276) $ 6,746
--- ----- ----- ----------- ------------- -------------
--- ----- ----- ----------- ------------- -------------
<CAPTION>
NET UNREALIZED
HOLDING GAIN
ON MARKETABLE
EQUITY
SECURITIES DEFICIT
-------------- ----------
<S> <C> <C>
Balance, January 1, 1993.................... $ -- $(2,010,803)
Net Loss.................................. -- (210,770)
Accretion of Redeemable Common Stock...... -- --
Issuance of Class A Common Stock.......... -- --
Reclassification of Redeemable Common
Stock to Class A Common Stock............ -- --
Restricted Stock Purchase Program:
Stock Issued (Class B).................... -- --
Stock Vested............................ -- --
Stock Forfeited......................... -- --
Stock Exchanged for Loans............... -- --
Stock Repurchased......................... -- --
-------------- ----------
Balance, December 31, 1993.................. -- (2,221,573)
Adjustment due to change in accounting
principle for marketable equity
securities, net of income taxes of
$56,434.................................. 84,650 --
Net Loss.................................. -- (86,841)
Accretion of Redeemable Common Stock...... -- --
Restricted Stock Purchase Program:
Stock Vested............................ -- --
Stock Forfeited......................... -- --
Stock Exchanged for Loans............... -- --
Conversion of Class B to Class A Common
Stock.................................... -- --
Stock Repurchased......................... -- --
Issuance of Class A Common Stock.......... -- --
Change in Unrealized Gain, net of income
taxes of $24,081......................... (36,654) --
-------------- ----------
Balance, December 31, 1994.................. 47,996 (2,308,414)
Net Loss.................................. -- (112,027)
Accretion of Redeemable Common Stock...... -- --
Restricted Stock Purchase Program:
Stock Issued............................ -- --
Stock Vested............................ -- --
Stock Forfeited......................... -- --
Stock Exchanged for Loans............... -- --
Issuance of Class A Common Stock in
connection with acquisition, net of
issuance costs of $8,111................. -- --
Change in Unrealized Gain, net of income
taxes of $13,364......................... 19,827 --
-------------- ----------
Balance, December 31, 1995.................. 67,823 (2,420,441)
(Unaudited)
Net Loss.................................... -- (110,186)
Accretion of Redeemable Common Stock........ -- --
Restricted Stock Purchase Program:
Stock Issued.............................. -- --
Stock Vested.............................. -- --
Stock Forfeited........................... -- --
Stock Exchanged for Loans................. -- --
Foreign Currency Translation Adjustment..... -- --
Change in Unrealized Gain, net of income
taxes of $4,004............................ 5,942 --
-------------- ----------
Balance, June 30, 1996...................... $ 73,765 $(2,530,627)
-------------- ----------
-------------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------- --------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net Loss...................................................... $ (210,770) $ (86,841) $ (112,027) $ (33,067) $(110,186)
Adjustments to Reconcile Net Loss to Net Cash Provided from
Operating Activities, Net of Acquisitions:
Extraordinary Item.......................................... -- 18,265 -- -- --
Cumulative Effect of Change in Accounting for Income
Taxes...................................................... 184,996 -- -- -- --
Depreciation and Amortization............................... 279,009 283,183 341,171 148,412 231,696
Restricted Stock Purchase Program........................... 11,004 11,316 12,005 5,905 8,654
Amortization of Deferred Financing Costs.................... 5,554 5,759 9,184 4,366 5,147
Equity in Net Loss of Affiliates............................ 12,827 25,002 70,364 25,817 62,803
Gain on Sale of Marketable Equity Securities................ (4,322) (1,204) (23,032) (23,032) --
Gain on Sale of Investments................................. (17,067) -- (1,035) (1,035) --
Minority Interest in Net Income (Loss) of Subsidiaries...... 184 (205) (39) (40) 74
Deferred Income Taxes....................................... (9,788) (42,272) (48,783) (15,495) (46,800)
Accrued Interest............................................ 15,787 9,632 4,937 (7,979) 1,108
Accounts Payable, Accrued and Other Liabilities............. (3,633) 66,142 5,515 (21,092) 18,937
Other Working Capital Changes............................... (13,277) (52,473) (36,996) (5,233) 3,597
---------- ---------- ---------- --------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES..................... 250,504 236,304 221,264 77,527 175,030
---------- ---------- ---------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from Borrowings...................................... 1,502,304 1,709,980 2,635,240 383,100 762,720
Repayment of Borrowings....................................... (1,369,341) (1,456,061) (806,261) (104,906) (451,868)
Premium Paid on Extinguishment of Debt........................ -- (20,924) -- -- --
Increase (Decrease) in Minority Interests..................... (2,580) 779 3,666 1,047 2,305
Issuance of Common Stock...................................... 46,500 30,500 (8,111) -- 5
Repurchase of Common Stock and Redeemable Common Stock........ (31,232) (4,755) -- -- --
---------- ---------- ---------- --------- ---------
NET CASH PROVIDED FROM FINANCING ACTIVITIES..................... 145,651 259,519 1,824,534 279,241 313,162
---------- ---------- ---------- --------- ---------
INVESTING ACTIVITIES:
Acquisitions, Net of Liabilities Assumed and Cash Acquired.... -- (114,990) (1,243,879) -- (10,978)
Property, Plant and Equipment................................. (185,691) (300,511) (518,161) (231,021) (311,447)
Investments................................................... (106,819) (192,119) (280,142) (121,719) (133,020)
Other Assets.................................................. (7,182) (16,832) (25,167) (28,788) (24,242)
Purchase of Marketable Equity Securities...................... (8,042) -- -- -- --
Proceeds from Sale of Marketable Equity Securities............ 5,719 17,553 27,357 27,357 --
Proceeds from Sale of Investment -- net....................... 1,148 -- 1,181 1,181 --
---------- ---------- ---------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES.......................... (300,867) (606,899) (2,038,811) (352,990) (479,687)
---------- ---------- ---------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 95,288 (111,076) 6,987 3,778 8,505
BALANCE AT BEGINNING OF PERIOD.................................. 27,352 122,640 11,564 11,564 18,551
---------- ---------- ---------- --------- ---------
BALANCE AT END OF PERIOD........................................ $ 122,640 $ 11,564 $ 18,551 $ 15,342 $ 27,056
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
The Company is a provider of broadband communications services with
operations and investments encompassing cable television systems, international
broadband communication ventures, telecommunications and technology ventures and
programming services.
The accompanying consolidated financial statements include the accounts of
Continental Cablevision, Inc. (the Company) and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at each balance
sheet date and during each reporting period. Significant estimates included in
the consolidated financial statements include the assigned useful lives of
property, plant and equipment and intangible assets, the carrying value of cost
method investments, certain accruals, and valuation allowances for deferred tax
assets. Actual results could differ from these estimates.
STOCK DIVIDEND
On September 28, 1995, the stockholders approved an increase in the number
of authorized shares of common stock to 625,000,000 (425,000,000 Class A and
200,000,000 Class B, respectively) and preferred stock to 200,000,000. In
addition, the Company's Board of Directors approved a stock dividend of 24
shares of Class A or B common stock for each share of Class A or B common stock
held as of the record date. Due to the significance of this stock dividend to
the Company's capital structure, all share and per share information have been
restated to present this stock dividend as though it had occurred at the
beginning of the earliest period presented.
SUPPLIES AND PROPERTY, PLANT AND EQUIPMENT
Supplies are stated at the lower of cost (first-in, first-out method) or
market. Property, plant and equipment are stated at cost and include capitalized
interest of $908,000, $2,377,000 and $7,233,000 in 1993, 1994 and 1995,
respectively. Depreciation is provided using the straight-line group method over
estimated useful lives as follows: buildings, 25 to 40 years; reception and
distribution facilities, 3 to 15 years; and equipment and fixtures, 4 to 12 1/2
years. (See Note 6)
INTANGIBLE AND OTHER ASSETS
Intangible assets consist primarily of franchise costs and goodwill recorded
in various acquisitions. Such amounts are generally amortized over 10 to 40
years. Franchise costs, net of accumulated amortization, at December 31, 1994
and 1995 and June 30, 1996 are $355,488,000, $1,491,269,000, and $1,453,804,000,
respectively. Other assets represent deferred financing costs and loans to
employees (see Note 11). Accumulated amortization for intangible and other
assets aggregated $714,492,000, $807,644,000 and $868,665,000 at December 31,
1994 and 1995 and June 30, 1996, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts at December 31, 1994 and 1995 is
$9,771,000 and $12,476,000, respectively.
INVESTMENTS
Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES (SFAS 115) requires that certain debt
and equity securities be categorized as either securities available for sale,
securities held to maturity or trading account securities. The Company has
classified all investments subject to SFAS 115 as available for sale and as such
reports these securities at fair
F-8
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
value, with the unrealized gains or losses, net of tax, reported as a separate
component of stockholders' equity (deficiency). Realized gains and losses are
included in results of operations. Prior to January 1, 1994, marketable equity
securities were carried at either the lower of cost or market. In accordance
with SFAS 115, prior period financial statements have not been restated to
reflect the change in accounting principle. (See Note 4)
Investments in 20-50% owned affiliates and other investments where the
Company owns less than 20% but has the ability to exert significant influence
are generally accounted for using the equity method. The excess of the cost of
equity investments over the underlying value of the net assets is amortized over
a period of approximately 10 years. Investments in less than 20% owned companies
whose equity securities do not have a readily determinable market value are
generally accounted for using the cost method. Investments in debt securities
not subject to SFAS 115 are reported at amortized cost. (See Note 5)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments (primarily Interest Rate
Exchange Agreements (Swaps) and Interest Rate Cap Agreements (Caps)) as a means
of managing interest-rate risk associated with current debt or anticipated debt
transactions that have a high probability of being executed. These instruments
are matched with either fixed or variable rate debt and periodic cash payments
are accrued on a settlement basis as an adjustment to interest expense.
Derivative financial instruments are not held for trading purposes. Any premiums
associated with the instruments are amortized over their term and realized gains
or losses as a result of the termination of the instruments are deferred and
amortized over the shorter of the remaining term of the instrument or the
underlying debt. (See Note 7)
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's non-U.S. investments are
translated into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." Net assets of non-U.S. investments whose functional currencies are
other than the U.S. dollar are translated at current rates of exchange. Income
and expense items are translated at the average exchange rate for the period.
The resulting translation adjustments are recorded directly into a separate
component of stockholders' equity (deficiency).
INCOME TAXES
The Company implemented Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES (SFAS 109) as of January 1, 1993. Deferred tax
liabilities and assets are recognized for the future tax consequences of
temporary differences between the financial reporting and tax bases of existing
assets and liabilities. In addition, future tax benefits, such as net operating
loss and investment tax credit carryforwards, are recognized to the extent
realization of such benefits is more likely than not. (See Note 12)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts. The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1994 and 1995. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and current
estimates of fair value may differ significantly from the amounts presented
herein.
F-9
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a summary of the estimated fair value and carrying value of
the Company's financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1994 1995
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Marketable Equity Securities (See Note 4) $ 122,510 $ 122,510 $ 151,378 $ 151,378
Cost Method Investments (See Note 5) 33,175 47,322 35,663 54,221
LIABILITIES
Total Debt, Swaps and Caps (See Note 7) 3,449,907 3,516,588 5,285,159 5,418,137
Redeemable Common Stock (See Note 9) 232,399 329,011 256,135 353,704
</TABLE>
The Company believes carrying value approximates fair value for all other
financial instruments.
LOSS PER COMMON SHARE
Loss per common share is calculated by dividing the loss available to common
stockholders by the weighted average number of common shares outstanding of
114,055,000, 114,334,000, 124,882,000, 117,627,000 and 148,440,000 for the years
ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995
and 1996, respectively. Shares of the Series A Convertible Preferred Stock were
not assumed to be converted into shares of common stock since the result would
be anti-dilutive.
RECLASSIFICATIONS
Certain amounts have been reclassified from previous presentation in the
accompanying consolidated financial statements.
RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
The Accounting Standards Executive Committee of the AICPA adopted Statement
of Position 94-6 (SOP) on December 30, 1994. This SOP, DISCLOSURE OF CERTAIN
SIGNIFICANT RISKS AND UNCERTAINTIES, is effective for fiscal years ending after
December 15, 1995. The disclosures required by the SOP focus primarily on the
nature of an entity's operations, the use of estimates in preparation of
financial statements and on risks and uncertainties that could significantly
affect the amounts reported in the financial statements. The company's
consolidated financial statements are in compliance with this statement.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which is
effective for fiscal years beginning after December 15, 1995. SFAS 121 addresses
the accounting for potential impairment of long-lived assets. The effect of
implementing SFAS 121 is expected to be immaterial to the Company's financial
position and results of operations.
In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS
123). SFAS 123, which is effective for fiscal years beginning after December 15,
1995, establishes financial accounting and reporting requirements for stock-
based employee compensation plans. The effect of implementing SFAS 123 is
expected to be immaterial to the Company's financial position and results of
operations.
F-10
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INFORMATION
In the opinion of management, the consolidated financial statements for the
unaudited periods include all adjustments of a normal recurring nature necessary
for a fair presentation of such information. The consolidated results of
operations and cash flows for the six months ended June 30, 1995 and 1996 are
not necessarily indicative of results that would be expected for a full year.
2. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The following represents non-cash investing and financing activities and
cash paid for interest and income taxes during the years ended December 31,
1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------ ----------------------
1993 1994 1995 1995 1996
---------- ---------- ------------ ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Acquisitions:
Fair Value of Assets Acquired.......... $ -- $ 114,990 $ 2,135,941 $ -- $ 10,978
Deferred Taxes and Minority Interest
Assumed............................... -- -- (257,946) -- --
Net Working Capital Liabilities
Assumed............................... -- -- (49,354) -- --
Fair Value of Class A Common Stock
Issued................................ -- -- (584,762) -- --
---------- ---------- ------------ ---------- ----------
Cash Paid for Acquisitions......... $ -- $ 114,990 $ 1,243,879 $ -- $ 10,978
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
Dispositions:
Gain on Sale of Investment (See Note
5).................................... $ 15,919 $ -- $ -- $ -- $ --
Deferred Gain on Sale of Investment.... 165 -- -- -- --
Bases of Assets Sold................... 429 -- -- -- --
Gain on Sale of Marketable Equity
Securities............................ 3,471 -- -- -- --
Bases of Property Received............. (19,984) -- -- -- --
---------- ---------- ------------ ---------- ----------
Proceeds Received from
Disposition....................... $ -- $ -- $ -- $ -- $ --
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
Accretion of Redeemable Common Stock..... $ 14,766 $ 19,932 $ 23,736 $ 10,322 $ 14,155
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
Accretion of Series A Convertible
Preferred Stock......................... $ 34,115 $ 36,800 $ 39,802 $ 19,347 $ 21,041
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
Cash Paid During the Period for
Interest................................ $ 261,846 $ 299,115 $ 369,436 $ 178,837 $ 233,099
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
Cash Paid During the Period for Income
Taxes................................... $ 2,370 $ 2,411 $ 1,070 $ 845 $ 869
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
</TABLE>
3. ACQUISITIONS
All acquisitions have been accounted for as purchases. Results of operations
of the companies and businesses acquired have been included in the accompanying
consolidated financial statements from their respective dates of acquisition.
In June 1994, the Company purchased cable television systems in Manchester,
New Hampshire for approximately $47,990,000, and in November 1994 purchased
cable television systems in Florida for approximately $67,000,000.
F-11
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
The Company purchased cable television systems in the Chicago, Illinois area
for approximately $168,500,000 in August 1995 and cable television systems in
California for approximately $17,000,000 in September 1995. In October 1995, the
Company purchased cable television systems in Michigan for approximately
$155,000,000. Also, in October 1995, the Company, Providence Journal, King
Holding Corporation, King Broadcasting Company and The Providence Journal
Company consummated a merger (the Merger) in which the Providence Journal (which
at the time of the Merger included only the Providence Journal cable businesses
and assets) was merged with and into the Company. In connection with the Merger,
the Company purchased the cable television businesses and assets of King
Broadcasting Company (the King Cable Assets, and collectively with Providence
Journal, Providence Journal Cable). The total consideration involved in the
Merger consisted of $405,000,000 in cash, the repayment of approximately
$410,000,000 of existing indebtedness (see Note 7) and the issuance of
30,142,394 shares of the Company's Class A common stock at an ascribed value of
$584,762,000. In December 1995, the Company purchased for $88,000,000 in cash
the non-owned interests in and discharged certain liabilities of N-Com Limited
Partnership II (N-Com), which owns and operates cable television systems in
Michigan.
The summarized unaudited pro forma results of operations for the years ended
December 31, 1994 and 1995, assuming the acquisitions above occurred as of the
beginning of each respective period, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
------------ ------------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Revenues................................................................. $ 1,586,829 $ 1,732,311
Depreciation and Amortization............................................ 388,940 440,109
Operating Income......................................................... 275,652 263,768
Net Loss................................................................. (124,592) (184,671)
Net Loss per Common Share................................................ (0.86) (1.27)
</TABLE>
4. MARKETABLE EQUITY SECURITIES
Effective January 1, 1994, the Company adopted SFAS 115 and classified
marketable equity securities as available for sale. These investments had a fair
value of $183,245,000 and a cost of $42,161,000 at the date of adoption. The
unrealized gain of $141,084,000, less income taxes of $56,434,000 was reported
as an adjustment to stockholders' equity (deficiency). These securities have an
aggregate cost basis of $42,161,000 and $37,837,000 as of December 31, 1994 and
1995, respectively. During the year ended December 31, 1994, the Company
recognized a gross unrealized holding loss of $60,735,000 and a gross realized
gain of $1,204,000. During the year ended December 31, 1995, the Company
recognized a gross unrealized holding gain of $33,191,000 and a gross realized
gain of $23,032,000.
F-12
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The Company's investments consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
APPROXIMATE ---------------------- JUNE 30,
OWNERSHIP 1994 1995 1996
------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Equity Method Investments:
Teleport Communications Group, Inc. (TCG) and TCG
Partners.......................................... 20% $ 93,954 $ 100,058 $ 88,888
Regional TCG Partnerships.......................... 10%-30% 34,609 45,603 48,795
PrimeStar Partners L.P. (PrimeStar)................ 10% 12,500 16,311 20,530
Fintelco, S.A...................................... 50% 146,040 164,144 151,108
Optus Vision Pty Ltd (Optus Vision)................ 47% -- 150,232 246,070
Singapore Cablevision Private Limited (SCV)........ 25% 8,484 15,023 13,301
Other.............................................. 20%-50% 6,717 11,318 13,351
---------- ---------- ----------
302,304 502,689 582,043
Cost Method Investments.............................. 33,175 35,663 35,708
---------- ---------- ----------
Total.......................................... $ 335,479 $ 538,352 $ 617,751
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Estimated fair value of cost method investments is $47,322,000 and
$54,221,000 as of December 31, 1994 and 1995, respectively, based on various
valuation methods.
In October 1993, the Company exchanged its equity interest in Insight
Communications Company U.K., L.P. for stock representing less than a 5% interest
in International CableTel, Incorporated (CableTel), a telecommunications company
operating in the United Kingdom. The Company accounted for the investment in
CableTel as a marketable equity security and recorded a gain of $15,919,000.
During the year ended December 31, 1994, the CableTel marketable equity
securities were sold at an additional realized gain of $1,204,000.
As of December 31, 1995, the Company had invested $66,000,000 in equity and
had made commitments to TCG to loan up to $69,920,000 through 2003, of which
$53,800,000 was outstanding as of December 31, 1995. These loans bear interest
at approximately 7% and are due on the earlier of the seventh anniversary of the
borrowing or May 2003. TCG and its affiliates are telecommunications companies
which operate fiber-optic networks in the United States.
As of December 31, 1995, a wholly owned subsidiary of the Company issued a
standby letter of credit of $56,250,000 on behalf of PrimeStar, a limited
partnership that provides direct broadcast satellite services. The standby
letter of credit guarantees a portion of the financing PrimeStar incurred to
construct a satellite system and is collateralized by certain marketable equity
securities with a carrying value of $151,378,000 as of December 31, 1995. As a
result of these commitments and other qualitative factors, the Company accounts
for its investment in PrimeStar using the equity method.
As of December 31, 1994 and 1995, the Company had advanced $114,000,000 and
$150,500,000, respectively, in cash to Fintelco, S.A. which owns and operates
cable television systems in Argentina. In addition, the Company has recorded
commitments to contribute an additional $24,164,000 to Fintelco, S.A.
As of December 31, 1995, the Company had invested approximately $169,087,000
in Optus Vision, a joint venture which is constructing a broadband
communications network in Australia. The Company currently holds a 46.5%
interest in Optus Vision.
As of December 31, 1995, the Company had invested $17,614,000 in Singapore
Cablevision Pte Ltd (SCV), which owns and operates a cable television system in
Singapore. The Company is committed to make
F-13
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS (CONTINUED)
additional capital contributions to SCV of approximately $27,000,000 to be paid
over time. In addition, the Company has made commitments to SCV to loan up to
approximately $45,000,000 if third party debt financing cannot be obtained by
SCV.
The Company also has various investments in cable television companies which
are not individually material to the Company. The Company has approximately a
one-third ownership interest in these companies and therefore accounts for these
investments using the equity method.
The major components of all equity method investees' combined financial
position and results of operations are as follows (reflects the Company's
proportionate share for the period which the investments are owned):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Property, Plant and Equipment.................................... $ 226,000 $ 387,000 $ 655,000
Total Assets..................................................... 495,000 748,000 1,013,000
Total Liabilities................................................ 387,000 464,000 647,000
Equity........................................................... 108,000 284,000 366,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------------- ENDED JUNE
1993 1994 1995 30, 1996
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................................... $ 63,000 $ 146,000 $ 235,000 $ 140,000
Depreciation and Amortization.......................... 22,000 27,000 38,000 29,000
Operating Loss......................................... (5,000) (4,000) (39,000) (35,000)
Net Loss............................................... (19,000) (28,000) (61,000) (56,000)
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Land and Buildings....................................................... $ 56,630 $ 84,254
Reception and Distribution Facilities.................................... 2,122,304 2,897,745
Equipment and Fixtures................................................... 288,950 377,657
------------ ------------
Total.............................................................. 2,467,884 3,359,656
Less -- Accumulated Depreciation......................................... 1,114,095 1,252,183
------------ ------------
Property, Plant and Equipment -- net............................... $ 1,353,789 $ 2,107,473
------------ ------------
------------ ------------
</TABLE>
F-14
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Total debt outstanding is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
1994 Credit Facility..................................................... $ 1,373,790 $ 1,586,200
1995 Credit Facility..................................................... -- 1,039,000
Insurance Company Notes.................................................. 150,000 125,750
Senior Notes and Debentures.............................................. 1,400,000 2,000,000
Subordinated Debt........................................................ 500,000 500,000
Other.................................................................... 26,117 34,209
------------ ------------
Total.............................................................. $ 3,449,907 $ 5,285,159
------------ ------------
------------ ------------
</TABLE>
In October 1994, the Company amended and restated its bank indebtedness by
entering into a $2,200,000,000 unsecured reducing revolver credit agreement (the
1994 Credit Facility). Credit availability under the 1994 Credit Facility will
decrease annually commencing in December 1997 with a final maturity in October
2003. Borrowings under the 1994 Credit Facility bear interest at a rate between
the agent bank's prime rate (8 1/2% as of December 31, 1994 and 1995) and prime
plus 1/2%, depending on certain financial tests. At the Company's option, most
borrowings bear interest at spreads over LIBOR. The Company's obligations under
the 1994 Credit Facility are guaranteed by the Company's Restricted
Subsidiaries, (collectively with the Company, the Restricted Group) which
represent the majority of the Company's owned and operated cable systems,
excluding those acquired in the Providence Journal Cable and Michigan
acquisitions (collectively, the New Borrowing Group). Prepayments are required
from the proceeds of certain sales of Restricted Subsidiaries' assets.
During 1995, certain of the Company's subsidiaries entered into a
$1,200,000,000 unsecured reducing revolver credit facility (the 1995 Credit
Facility). Initial borrowings under the 1995 Credit Facility were utilized to
finance the acquisitions of Providence Journal Cable and the Michigan cable
systems. Credit availability under the 1995 Credit Facility will decrease
annually commencing in December 1998 with a final maturity in September 2004.
Borrowings under the 1995 Credit Facility bear interest at the agent bank's
prime rate (8 1/2% at December 31, 1995) plus 1/2% or spreads over LIBOR. The
New Borrowing Group's obligations under the 1995 Credit Facility are guaranteed
by substantially all of the New Borrowing Group subsidiaries. Prepayments are
required from the proceeds of certain sales of New Borrowing Group assets.
The Insurance Company Notes are unsecured, bear interest at 10.12%, require
increasing semi-annual repayments through July 1, 1999 and rank PARI PASSU in
right of payment with the 1994 Credit Facility.
The Company's unsecured Senior Notes and Debentures rank PARI PASSU in right
of payment with the Insurance Company Notes and 1994 Credit Facility
(collectively, Senior Debt) and are non-redeemable prior to maturity, except for
the 9 1/2% Senior Debentures. The 9 1/2% Senior Debentures are redeemable at the
Company's option at par plus declining premiums beginning in 2005. In addition,
at any time prior to August 1996, the Company may redeem a portion of the 9 1/2%
Senior Debentures at a premium with the proceeds from any offering by the
Company of its capital stock. In December 1995, the Company issued $600,000,000
of 8.30% Senior Notes. No sinking fund is required for any of the Senior Notes
and Debentures.
F-15
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
The Senior Notes and Debentures consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
8 1/2% Senior Notes, Due September 15, 2001.............................. $ 200,000 $ 200,000
8 5/8% Senior Notes, Due August 15, 2003................................. 100,000 100,000
8 7/8% Senior Debentures, Due September 15, 2005......................... 275,000 275,000
8.30% Senior Notes, Due May 15, 2006..................................... -- 600,000
9% Senior Debentures, Due September 1, 2008.............................. 300,000 300,000
9 1/2% Senior Debentures, Due August 1, 2013............................. 525,000 525,000
------------ ------------
Total.............................................................. $ 1,400,000 $ 2,000,000
------------ ------------
------------ ------------
</TABLE>
The Company's Senior Debt limits the Restricted Group with respect to, among
other things, payment of dividends, the repurchase of capital stock in excess of
$724,000,000, the creation of liens and additional indebtedness, property
dispositions, investments and leases, and requires certain minimum ratios of
cash flow to debt and cash flow to related fixed charges. In addition, the 1995
Credit Facility has similar limitations with respect to the New Borrowing Group.
The Company's Subordinated Debt is redeemable at the Company's option at par
plus declining premiums at various dates, and is subordinated to the Company's
Senior Debt. Subordinated Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
10 5/8% Senior Subordinated Notes, Due June 15, 2002......................... $ 100,000 $ 100,000
Senior Subordinated Floating Rate Debentures, Due November 1, 2004........... 100,000 100,000
11% Senior Subordinated Debentures, Due June 1, 2007......................... 300,000 300,000
---------- ----------
Total.................................................................. $ 500,000 $ 500,000
---------- ----------
---------- ----------
</TABLE>
In November 1994, the Company redeemed $325,000,000 of 12 7/8% Senior
Subordinated Debentures for a price equal to 106.438% of their principal amounts
plus accrued interest thereon. As a result of the redemption and the write-off
of $7,176,000 of unamortized deferred financing costs, the Company recorded an
extraordinary loss of $28,100,000, less an income tax benefit of $9,835,000.
The Senior Subordinated Floating Rate Debentures bear interest at LIBOR plus
3%. In February 1996, the Company redeemed the Senior Floating Rate Debentures
for a price equal to the principal amount plus accrued interest thereon.
Derivative financial instruments used to manage interest rate risk include
Swaps and Caps. The following table summarizes the terms of the Company's
existing Swaps and Caps as of December 31, 1995:
<TABLE>
<CAPTION>
AVERAGE
MATURITIES INTEREST RATE
NOTIONAL AMOUNT ----------- ---------------
----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed to Variable Swaps................................... $ 1,425,000 1998-2003 5.9%
Variable to Fixed Swaps................................... 900,000 1996-2000 8.9%
Caps (carrying value $1,380,000 in Other Assets).......... 800,000 1996-1997 8.0%
</TABLE>
F-16
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
The Company's credit risk if the counterparties failed to perform under
these agreements, would be limited to the periodic settlement of amounts
receivable under these agreements. As of December 31, 1994 and 1995, the net
amounts payable by the Company in connection with the Swaps were $5,000,000 and
$6,460,000, respectively.
The Company's variable-rate Swaps, which are indexed to six month LIBOR,
include a $75,000,000 Swap that may be extended by the counterparty at a certain
time in the future under the same terms and conditions at the existing
contracted rate. The Company entered into this Swap to further manage its
interest rate risk. The Swap is related to specific portions of the Company's
fixed-rate debt and is with a counterparty that is a lender in both the 1994
Credit Facility and 1995 Credit Facility.
The fair value of total debt, Swaps and Caps is estimated to be
$3,516,588,000 and $5,418,137,000 as of December 31, 1994 and 1995,
respectively, and is based on recent trades and dealer quotes. The components of
the fair value are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Carrying Value of Debt................................................... $ 3,449,907 $ 5,285,159
Unrealized (Gain) Loss on Debt........................................... (130,442) 85,195
Unrealized Loss on Floating to Fixed Rate Swaps.......................... 14,247 41,495
Unrealized Loss on Fixed to Floating Rate Swaps.......................... 184,903 6,177
Unrealized (Gain) Loss on Interest Rate Cap Agreements................... (2,027) 111
------------ ------------
Total.............................................................. $ 3,516,588 $ 5,418,137
------------ ------------
------------ ------------
</TABLE>
Annual maturities of debt for the five years subsequent to December 31,
1995, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996.................................................................................... $ 29,641
1997.................................................................................... 32,108
1998.................................................................................... 33,551
1999.................................................................................... 112,267
2000.................................................................................... 558,903
Thereafter.............................................................................. 4,518,689
--------------
Total............................................................................. $ 5,285,159
--------------
--------------
</TABLE>
8. COMMITMENTS
The Company and its subsidiaries have entered into various operating lease
agreements, with total commitments of $48,685,000 as of December 31, 1995.
Commitments under such agreements for the years 1996-2000 approximate
$11,374,000, $8,629,000, $7,024,000, $5,832,000 and $3,895,000, respectively.
The Company and its subsidiaries also rent pole space from various companies
under agreements which are generally terminable on short notice. Lease and
rental costs charged to operations for the years ended December 31, 1993, 1994,
and 1995 were $18,378,000, $20,113,000 and $21,696,000, respectively.
9. REDEEMABLE COMMON STOCK
Pursuant to a Stock Liquidation Agreement with certain stockholders (the
Selling Stockholders), the Company committed to repurchase certain shares of its
common stock (Redeemable Common Stock) in December 1998 or January 1999 at a
defined purchase price (Purchase Price). The Purchase Price is the
F-17
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REDEEMABLE COMMON STOCK (CONTINUED)
greater of the net proceeds per share from the liquidation of the Company less a
22.5% discount or the estimated amount of net proceeds per share from an
underwritten public offering of the Company's common stock.
The fair value of the Redeemable Common Stock is estimated at $329,011,000
and $353,704,000 as of December 31, 1994 and 1995, respectively, based on the
estimate of the Purchase Price at these dates of $19.72 and $21.20 per share,
respectively, as determined by an investment banker for the Company.
In the event the Company is unable to meet its commitments under the Stock
Liquidation Agreement, the Selling Stockholders may cause the sale of all or
substantially all of the assets of the Company.
During 1993, the Company repurchased 1,604,400 shares of Redeemable Common
Stock for approximately $31,125,000 and reclassified 411,175 shares of
Redeemable Common Stock as Class A Common Stock based on an agreement with a
certain stockholder to remove such shares from the 1998-1999 Share Repurchase
Program. During 1994, the Company repurchased 27,475 shares of Class A Common
Stock and 217,625 shares of Class B Common Stock, of which 82,900 were shares of
Redeemable Common Stock.
The initial estimated repurchase cost for the Redeemable Common Stock has
been adjusted by periodic accretions through the repurchase dates based on the
interest method of the difference between the initial estimate and the
subsequent estimates of the Purchase Price.
10. STOCKHOLDERS' EQUITY (DEFICIENCY)
The Company has two classes of stock: Class A Common Stock, which has one
vote per share, and Class B Common Stock, which has ten votes per share. At June
30, 1996 there were 39,141,224 and 109,424,371 Class A and Class B shares of
common stock outstanding, respectively. Stockholders' Equity (Deficiency)
reflects only 38,820,774 and 93,060,671 Class A and Class B shares of common
stock outstanding, respectively, due to the classification of 16,684,150 shares
as Redeemable Common Stock.
In 1993 and 1994, the Company sold 2,396,900 shares of Class A Common Stock
for approximately $46,500,000 and 1,572,150 shares of Class A Common Stock for
approximately $30,500,000, respectively.
Each share of Series A Convertible Preferred Stock (Convertible Preferred)
is entitled to 250 votes per share, shares equally with each common share in all
dividends and distributions, and is convertible into 25 shares of common stock,
at any time, at the option of the holder. The Convertible Preferred stockholders
have the right to sell their shares in a public offering by causing the Company
to register such shares under the Securities Act of 1933. Certain other
stockholders of the Company have similar registration rights.
The Convertible Preferred has a liquidation preference equal to the greater
of its Accreted Value or the amount which would be distributed to common
stockholders, assuming conversion of the Convertible Preferred. The Accreted
Value assumes a yield of 8% per annum, compounded semi-annually in arrears on
the $350 purchase price per share. During the six months ended June 30, 1996,
the carrying value of the Convertible Preferred has been increased by
$21,041,000 to reflect the Accreted Value of $548,619,000 as of June 30, 1996.
After June 1997, if the value of the common stock is greater than 137.5% of
the then Accreted Value, the Company will have the right to convert each
outstanding share of Convertible Preferred into one share of common stock.
In June 2002, each outstanding share of Convertible Preferred may be
converted at the option of the holder or the Company into a number of common
shares which will have a value equal to the Accreted Value. The Company may, at
its sole option, purchase for cash at the Accreted Value all or part of the
Convertible Preferred instead of accepting or requiring conversion.
F-18
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
The Company paid aggregate fees and underwriting discounts to Lazard Freres
& Company (Lazard) of approximately $7,700,000 during 1993 and $9,000,000 during
1995 in connection with certain investment banking services. Two directors of
the Company are general partners of Lazard and managing directors of Corporate
Partners, L.P., which purchased 728,953 shares of Convertible Preferred on the
same terms as all other purchasers of Convertible Preferred.
11. RESTRICTED STOCK PURCHASE PROGRAM
The Company maintains a Restricted Stock Purchase Program under which
certain employees of the Company, selected by the Board of Directors, are
permitted to buy shares of the Company's common stock at the par value of one
cent per share. The shares remain wholly or partly subject to forfeiture for
seven years, during which time a pro rata portion of the shares becomes "vested"
at six-month intervals. Upon termination of employment with the Company, an
employee must resell to the Company, for the price paid by the employee, the
employee's shares which are not then vested. For financial statement
presentation, the difference between the purchase price and the fair market
value at the date of issuance (as determined by the Board of Directors) is
recorded as additional paid-in capital and unearned compensation, and charged to
operations through 2001 as the shares vest. Shares of common stock issued under
the program for the years ended December 31, 1993, 1994 and 1995 were 40,000,
none and 2,382,925, respectively, and 591,775 shares were issued during the six
months ended June 30, 1996. At December 31, 1994 and 1995, and June 30, 1996,
1,003,925, 2,496,025 and 2,540,000 shares, respectively, were not yet vested. In
connection with the Restricted Stock Purchase Program, a wholly-owned subsidiary
of the Company has loaned approximately $13,541,000, $27,746,000 and $33,379,000
at December 31, 1994 and 1995 and June 30, 1996, respectively, to the
participating employees to fund their individual tax liabilities. These loans
are due through 2001, bear interest at a range from 5% to 8% and are included in
Other Assets in the accompanying financial statements.
12. INCOME TAXES
Effective January 1, 1993, the Company implemented the provisions of SFAS
109 and recognized an additional charge of $184,996,000 for deferred income
taxes. Such amount has been reflected in the consolidated financial statements
as the cumulative effect of change in accounting for income taxes.
During 1993, the Company revised its estimated annual effective tax rate to
reflect a change in the federal statutory rate from 34% to 35%. The income tax
benefit for the year decreased approximately $4,182,000 as a result of applying
the newly enacted federal tax rates to deferred tax balances as of January 1,
1993.
The provision (benefit) for income taxes is comprised of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................................. $ 647 $ (196) $ (238)
State............................................................... 1,220 2,049 1,112
Deferred:
Federal............................................................. (7,968) (35,549) (42,416)
State............................................................... (1,820) (6,723) (6,367)
--------- ---------- ----------
Total........................................................... $ (7,921) $ (40,419) $ (47,909)
--------- ---------- ----------
--------- ---------- ----------
Extraordinary Item Deferred........................................... $ -- $ (9,835) $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-19
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Differences between the effective income tax rate and the federal statutory
rate are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal Statutory Rate.................................................. (35.0)% (35.0)% (35.0)%
Enacted Tax Rate Change................................................. 12.4% -- --
Non-Deductible Equity in Net Losses of Foreign Affiliates............... -- -- 6.5%
State Income Tax, Net of Federal Income Tax Benefit..................... (1.2)% (2.2)% (2.4)%
Other................................................................... .3% .5% .9%
--------- --------- ---------
Total............................................................. (23.5)% (36.7)% (30.0)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
significant portions of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation and Amortization............................................ $ (506,560) $ (801,068)
Unrealized Holding Gain on Marketable Equity Securities.................. (32,353) (45,717)
Other.................................................................... (5,245) (15,790)
Deferred Tax Assets:
Net Operating Loss Carryforwards......................................... 460,469 570,739
Tax Credit Carryforwards................................................. 59,397 57,492
Other.................................................................... 60,836 68,729
Valuation Allowance...................................................... (153,026) (141,426)
----------- -----------
Net Deferred Tax Liability................................................. $ (116,482) $ (307,041)
----------- -----------
----------- -----------
</TABLE>
The Company and its subsidiaries have net operating loss carryforwards of
approximately $1,131,000,000 for federal income tax purposes, expiring through
2010, and investment tax credit carryforwards of approximately $57,500,000
expiring through 2005.
Valuation allowances have been established for uncertainties in realizing
transitional investment tax credit carryforwards, the tax benefit of certain
limited use federal net operating losses and certain state net operating losses.
If in future periods the realization of tax credit and net operating loss
carryforwards acquired as a result of business combinations becomes more likely
than not, $36,000,000 of the valuation allowance will be allocated to reduce
goodwill and other intangible assets. The net change of the valuation allowance
during 1994 and 1995 was a decrease of $4,445,000 and $11,600,000, respectively.
The decreases were due primarily to the expiration of state net operating loss
carryforwards and investment tax credit carryforwards.
13. RETIREMENT AND MATCHED SAVINGS PLANS
The Company has a non-contributory defined benefit plan covering
substantially all employees. Benefits under the plan are determined based on
formulas which reflect employees' years of service and the average of the five
consecutive years of highest compensation. The Company's policy is to make
contributions sufficient to meet the minimum funding requirements of ERISA.
F-20
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RETIREMENT AND MATCHED SAVINGS PLANS (CONTINUED)
The components of net periodic pension expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service Cost-Benefits Earned During the Year.............................. $ 2,584 $ 2,934 $ 2,919
Interest Cost on Projected Benefit Obligation............................. 1,336 1,576 1,896
Actual Loss (Return) on Plan Assets....................................... (136) 417 (3,039)
Other Items............................................................... (615) (1,514) 1,672
--------- --------- ---------
Total............................................................... $ 3,169 $ 3,413 $ 3,448
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the funded status and amounts recognized in
the Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Actuarial Present Value of:
Vested Benefit Obligation.................................................. $ (9,159) $ (15,341)
Non-Vested Benefit Obligation.............................................. (1,201) (1,465)
---------- ----------
Accumulated Benefit Obligation............................................... (10,360) (16,806)
Effect of Projected Salary Increases......................................... (12,691) (12,041)
---------- ----------
Projected Benefit Obligation................................................. (23,051) (28,847)
Plan Assets at Market Value.................................................. 12,397 18,498
---------- ----------
Funded Status................................................................ (10,654) (10,349)
Deferred Transition Loss..................................................... 1,194 1,124
Unrecognized Prior Service................................................... (511) (483)
Unrecognized Net Loss........................................................ 2,233 1,963
---------- ----------
Accrued Pension Cost................................................... $ (7,738) $ (7,745)
---------- ----------
---------- ----------
</TABLE>
The actuarial assumptions as of the year-end measurement date are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Discount Rate.......................................................................... 8.75% 7.25%
Expected Long-Term Rate of Return...................................................... 9.00% 9.00%
Rate of Increase in Future Salary Levels............................................... 5.75% 4.25%
</TABLE>
At December 31, 1995, plan assets consist of equity and debt securities,
U.S. Government obligations and cash equivalents.
The Company sponsors a defined contribution Matched Savings Plan covering
substantially all of its employees. The Company's contribution for this plan is
based on a percentage of each participant's salary. Total costs for the years
ended December 31, 1993, 1994 and 1995 were approximately $2,550,000, $2,652,000
and $2,907,000, respectively.
Effective in 1995, the Company approved a Supplemental Executive Retirement
Plan ("SERP"). The SERP provides additional retirement benefits for any employee
of Continental whose accrued benefits under the Continental Retirement Plan are
limited by the Internal Revenue Code's (the "Code") limit on
F-21
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. RETIREMENT AND MATCHED SAVINGS PLANS (CONTINUED)
compensation which may be taken into account under that plan or by the Code's
Section 415 limit on the size of retirement benefits which may be funded under
that plan. The SERP is an unfunded, non tax-qualified plan.
The components of net periodic pension cost for the supplemental retirement
plan for 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, 1995
-------------------
(IN THOUSANDS)
<S> <C>
Service Cost -- Benefits Earned During the Year...................................... $ 77
Interest Cost on Projected Benefit Obligation........................................ 124
Other Items.......................................................................... 79
-----
Total.......................................................................... $ 280
-----
-----
</TABLE>
The actuarial assumptions as of the year-end measurement date are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
<S> <C>
Discount Rate........................................................................ 7.25%
Rate of Increase in Future Salary Levels............................................. 4.25%
</TABLE>
The funded status of the supplemental retirement plan as of December 31,
1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
Actuarial Present Value:
Vested Benefit Obligation.......................................................... $ (651)
Non-Vested Benefit Obligation...................................................... (2)
-------
Accumulated Benefit Obligation....................................................... (653)
Effect of Projected Salary Increases................................................. (1,146)
-------
Projected Benefit Obligation......................................................... (1,799)
Plan Assets at Market................................................................ --
-------
Funded Status........................................................................ (1,799)
Unrecognized Prior Service........................................................... 1,341
Unrecognized Net Loss................................................................ 178
-------
Accrued Pension Cost............................................................. $ (280)
-------
-------
</TABLE>
14. CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the ultimate
resolution of such legal proceedings and claims will not have a material effect
on the consolidated financial position and results of operations of the Company.
15. LEGISLATION AND REGULATION
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992, the FCC in April 1993 promulgated rate regulations that establish maximum
allowable rates for cable television services, except for services offered on a
per-channel or per-program basis. The FCC's regulations require rates for
equipment and installations to be cost-based, and require reasonable rates for
regulated cable television services to be established based on, at the election
of the cable television operator, either application of the FCC's benchmark
formula or a cost-of-service showing pursuant to standards adopted by the FCC.
In addition, the FCC regulations limit future rate increases for regulated
services.
F-22
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. LEGISLATION AND REGULATION (CONTINUED)
Under current FCC regulations, a rate complaint or certification of a local
franchising authority is required to regulate a system. In accordance with the
regulations, the Company either reduced rates under the FCC's benchmark
methodology or supported current rates by cost-of-service showings for regulated
franchises. Certain positions taken by the Company in its cost-of-service
filings were based on provisions of the FCC's interim cost-of-service rules that
allowed certain "presumptions" in the rules to be overcome on a case-by-case
basis. While the Company believes that its showings in this regard were
sufficient, the results of these cases were unknown. As a result, the Company
recorded a revenue reserve during 1994.
On August 3, 1995, a social contract between the Company and the FCC (the
Social Contract) was adopted. The Social Contract is a six-year agreement
covering all of the Company's existing franchises, including those that are
currently unregulated, and settles the Company's pending cost-of-service rate
cases and benchmark cable programming service tier (CPS) rate cases. Benchmark
broadcast service tier (BBT) cases will be resolved by the Company and local
franchising authorities. As part of the resolution of these cases, the Company
agrees to, among other things, (i) invest at least $1.35 billion in domestic
system rebuilds and upgrades in the next six years to expand channel capacity
and improve system reliability and picture quality, (ii) reduce its BBT service
rates and (iii) make in-kind refunds to affected subscribers totaling a retail
value of approximately $9.5 million. In 1995, the Company adjusted the revenue
reserve recorded in 1994 to reflect the impact of the Social Contract. The
resolution of pending rate cases was without any finding by the FCC of any
wrongdoing by the Company.
The Social Contract also provides for its termination in the future 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. In that instance, the Company may petition the FCC to terminate the
Social Contract.
In February 1996, the Telecommunications Act of 1996 was enacted, which
deregulates CPS rates after March 31, 1999.
16. EVENTS SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT (UNAUDITED)
In May 1996, the Company acquired a cable television system in California
for a purchase price of $10,978,000.
The Company has signed a definitive Agreement and Plan of Merger (the Merger
Agreement) providing for the merger of the Company with and into U S WEST, Inc.
or a wholly owned subsidiary thereof. The Merger Agreement provides for the
stockholders of the Company to receive a combination of cash and securities of U
S WEST, Inc. valued at approximately $5.3 billion in exchange for all of the
outstanding stock of the Company. Additionally, U S WEST, Inc. or a wholly owned
subsidiary thereof will assume the Company's outstanding indebtedness and other
liabilities. The merger is contingent upon the receipt of, among other things,
regulatory approvals and approvals from the Company's stockholders. Certain
major stockholders have agreed to vote in favor of the merger and other related
matters. The merger is expected to close in the fourth quarter of 1996 or the
first quarter of 1997. No assurances can be given that the merger will occur, or
occur in the foregoing manner.
The Company has entered into a purchase agreement to acquire the non-owned
interests in and discharge or assume certain liabilities of Meredith/New
Heritage Strategic Partners, L.P. (M/NH) for approximately $219,200,000. M/NH
operates cable systems in the Minneapolis/St. Paul area. This acquisition is
expected to close in the fourth quarter of 1996.
F-23
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. EVENTS SUBSEQUENT TO INDEPENDENT AUDITORS' REPORT (UNAUDITED) (CONTINUED)
The Company has entered into an agreement with TCI Cable Partners of St.
Louis L.P. (TCI Cable Partners) to exchange its cable systems in and around St.
Louis County, Missouri for TCI Cable Partners' systems serving certain
Massachusetts communities. The systems of each party serve approximately 100,000
basic subscribers. The Company expects to consummate this transaction in the
fourth quarter of 1996.
The Company has entered into an agreement with Cox Communications, Inc.
(Cox) to exchange systems serving certain Virginia and Rhode Island communities
for Cox's systems serving certain Massachusetts communities. The systems of each
party serve approximately 48,000 basic subscribers. The Company expects to close
this transaction during the fourth quarter of 1996.
In July 1996, TCG consummated an initial public offering (IPO) of shares of
its common stock. Subsequent to the IPO, TCG implemented a plan of
reorganization, under which the Company exchanged its $53,800,000 loan and
contributed its interests in TCG partnerships to TCG for additional shares of
TCG common stock. At the time of the IPO, TCG also redeemed approximately
7,976,000 shares of TCG common stock from the Company for net cash proceeds of
approximately $121,000,000 from which the Company recognized a gain of
approximately $69,000,000. As a net result of the redemption, the IPO, and the
reorganization, the Company's ownership in TCG is less than 20%, and,
accordingly, the Company will now account for its remaining shares of TCG as
marketable equity securities.
In July 1996, the Company arranged an unsecured revolving credit facility
which will mature on July 1, 1997 (the 1996 Credit Facility). Maximum
availability under the 1996 Credit Facility is $1,000,000,000. Borrowings under
the 1996 Credit Facility may be used to fund general corporate purposes,
including capital expenditures, investments and acquisitions. The terms and
conditions of the 1996 Credit Facility are similar to those of the 1994 Credit
Facility. Indebtedness under the 1996 Credit Facility ranks PARI PASSU in right
of payment with the Company's Senior Debt.
On August 21, 1996, an amendment (the Social Contract Amendment) to the
Social Contract was adopted by the FCC. The Social Contract Amendment
incorporates all franchises acquired during 1995 into the Social Contract, and
settles most CPS-rate cases of the acquired franchises. The Social Contract
Amendment provides for cash refunds of $1.6 million (for which reserves were
recorded as of December 31, 1995) and increases the Company's investment
commitment in domestic system rebuilds and upgrades from $1.35 billion to $1.7
billion.
F-24
<PAGE>
CONTINENTAL CABLEVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly results of operations for 1994, 1995 and 1996 are summarized
below:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1994
Revenues............................................... $ 290,764 $ 298,626 $ 296,246 $ 312,341
Depreciation and Amortization.......................... 67,458 68,065 71,277 76,383
Restricted Stock Purchase Program...................... 2,838 2,837 2,827 2,814
Operating Income....................................... 59,284 61,507 53,565 56,238
Loss Before Extraordinary Item......................... (13,640) (9,981) (21,871) (23,084)
Extraordinary Item..................................... -- -- -- (18,265)
Net Loss............................................... (13,640) (9,981) (21,871) (41,349)
Loss Applicable to Common Stockholders................. (22,518) (18,990) (31,309) (50,824)
Loss Per Common Share:
Loss Before Extraordinary Item....................... (0.19) (0.16) (0.27) (0.28)
Extraordinary Item................................... -- -- -- (0.16)
Net Loss............................................. (0.19) (0.16) (0.27) (0.44)
1995
Revenues............................................... $ 318,576 $ 331,472 $ 342,445 $ 449,899
Depreciation and Amortization.......................... 74,422 73,990 82,156 110,603
Restricted Stock Purchase Program...................... 2,850 3,055 3,042 3,058
Operating Income....................................... 59,192 61,361 61,400 70,022
Net Loss............................................... (6,902) (26,165) (25,065) (53,895)
Loss Applicable to Common Stockholders................. (16,505) (35,909) (35,273) (64,142)
Loss Per Common Share:
Net Loss............................................. (0.14) (0.30) (0.30) (0.44)
1996
Revenues............................................... $ 466,384 $ 476,546
Depreciation and Amortization.......................... 113,029 118,667
Restricted Stock Purchase Program...................... 3,994 4,660
Operating Income....................................... 72,350 73,870
Net Loss............................................... (51,671) (58,515)
Loss Applicable to Common Stockholders................. (62,173) (69,054)
Loss Per Common Share:
Net Loss............................................. (0.42) (0.46)
</TABLE>
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Providence Journal Company:
We have audited the accompanying combined balance sheets of Colony
Communications, Inc., Copley/ Colony, Inc., Colony Cablevision, a division of
Providence Journal Company, and King Videocable Company, (collectively
"Providence Journal Cable"), as of December 31, 1993 and 1994, and the related
combined statements of operations, changes in group equity, and cash flows for
each of the years in the three-year period ended December 31, 1994. These
combined financial statements are the responsibility of Providence Journal
Cable's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits. We did not audit the
consolidated financial statements of King Videocable Company, which statements
reflect total assets constituting 45 percent of the related combined totals in
1993 and 1994, and total revenues constituting 33 percent in 1992, and 30
percent in 1993 and 1994, respectively, of the related combined totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for King
Videocable Company, is based solely on the report of the other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
The accompanying combined financial statements are intended to present the
cable television businesses owned or partially owned by Providence Journal
Company that are to be acquired by Continental Cablevision, Inc., pursuant to an
agreement and plan of merger described in note 1.
In our opinion, based on our audits and the report of the other auditors,
the combined financial statements referred to above present fairly, in all
material respects, the financial position of Providence Journal Cable as of
December 31, 1993 and 1994, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in notes 1(h) and 9 to the combined financial statements,
Providence Journal Cable changed its method of accounting for income taxes in
1992.
KPMG PEAT MARWICK LLP
Providence, Rhode Island
February 10, 1995
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
King Videocable Company:
We have audited the consolidated balance sheets of King Videocable Company
and subsidiaries (a wholly owned subsidiary of King Broadcasting Company, a
subsidiary of King Holding Corp.) as of December 31, 1993 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period February 25, 1992 (date acquired by King Holding Corp.) to
December 31, 1992 and for the years ended December 31, 1993 and 1994 (not
presented herein). 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 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, such consolidated financial statements present fairly, in
all material respects, the financial position of King Videocable Company at
December 31, 1993 and 1994, and the results of their operations and their cash
flows for the period February 25, 1992 (date acquired by King Holding Corp.) to
December 31, 1992 and for the years ended December 31, 1993 and 1994 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 10, 1995
F-27
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1993 1994 1995
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Cash...................................................................... $ 543 $ 237 $ 221
Accounts receivable, less allowance for doubtful accounts of $805 and $419
at December 31, 1993 and 1994, respectively.............................. 23,176 26,894 26,740
Inventory (note 4)........................................................ 5,914 6,131 6,757
Prepaid expenses.......................................................... 3,629 5,124 5,836
Property, plant and equipment, net (note 5)............................... 256,199 254,728 258,204
Franchise costs and other intangible assets, net (note 6)................. 519,553 480,886 508,319
Other assets.............................................................. 4,292 3,102 4,565
---------- ---------- -------------
Total assets.......................................................... $ 813,306 $ 777,102 $ 810,642
---------- ---------- -------------
---------- ---------- -------------
<CAPTION>
LIABILITIES AND GROUP EQUITY
<S> <C> <C> <C>
Accounts payable.......................................................... 13,565 11,993 23,303
Accrued expenses.......................................................... 18,815 22,313 24,810
Deferred revenue.......................................................... 13,456 13,438 14,082
Deferred income taxes (note 9)............................................ 69,030 70,686 86,066
Minority interests in combined entities................................... 34,964 26,709 13,402
Amounts due to parent companies (note 8).................................. 593,073 574,821 599,101
---------- ---------- -------------
Total liabilities......................................................... 742,903 719,960 760,764
Commitments and contingencies (notes 2, 10, 11 and 12)
Group equity.............................................................. 70,403 57,142 49,878
---------- ---------- -------------
Total liabilities and group equity.................................... $ 813,306 $ 777,102 $ 810,642
---------- ---------- -------------
---------- ---------- -------------
</TABLE>
See accompanying notes to combined financial statements
F-28
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------- ----------------------
1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (note 2)..................................... $ 199,684 $ 281,593 $ 284,993 $ 211,320 $ 221,998
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Operating.......................................... 76,523 105,037 114,868 85,459 91,358
Selling, general and administrative................ 45,180 62,446 58,152 43,903 45,224
Depreciation and amortization...................... 58,750 99,554 85,783 66,550 64,947
Allocated overhead from parent companies (note
8(b))............................................. 6,513 9,651 11,034 5,636 6,309
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses............. 186,966 276,688 269,837 201,548 207,838
---------- ---------- ---------- ---------- ----------
Operating income..................................... 12,718 4,905 15,156 9,772 14,160
Other income (note 3)................................ 3,660 2,746 2,547 1,784 2,495
Interest expense (note 7)............................ (3,052) (1,908) (88) (68) (80)
Allocated interest expense from parent companies
(note 8(a))......................................... (16,516) (39,938) (41,318) (30,694) (30,770)
Loss on sale of assets............................... (17) (2,679) (1,904) -- --
---------- ---------- ---------- ---------- ----------
Loss before income taxes, cumulative effect of
accounting change and minority interests............ (3,207) (36,874) (25,607) (19,206) (14,195)
Provision for income taxes (note 9).................. 694 (11,219) (8,182) (4,995) (4,089)
---------- ---------- ---------- ---------- ----------
Loss before cumulative effect of accounting change
and minority interests.............................. (3,901) (25,655) (17,425) (14,211) (10,106)
Cumulative effect at January 1, 1992 of change in
accounting for income taxes (note 9)................ 4,831 -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before minority interests.............. 930 (25,655) (17,425) (14,211) (10,106)
Minority interests in combined entities.............. 4,152 6,724 4,164 3,485 2,842
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 5,082 $ (18,931) $ (13,261) $ (10,726) $ (7,264)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
F-29
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1991 (unaudited).......................................... $ 61,470
Capitalization of King Videocable Company, net of minority interest (note 3)...... 22,782
Net income........................................................................ 5,082
---------
Balance at December 31, 1992...................................................... 89,334
Net loss.......................................................................... (18,931)
---------
Balance at December 31, 1993...................................................... 70,403
Net loss.......................................................................... (13,261)
---------
Balance at December 31, 1994...................................................... $ 57,142
Net loss (unaudited).............................................................. (7,264)
---------
Balance at September 30, 1995 (unaudited)......................................... $ 49,878
---------
---------
</TABLE>
See accompanying notes to combined financial statements.
F-30
<PAGE>
PROVIDENCE JOURNAL CABLE
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1992 1993 1994 1994 1995
---------- ---------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).................................. $ 5,082 $ (18,931) $ (13,261) $ (10,726) $ (7,264)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Change in accounting for income taxes............ (4,831) -- -- -- --
Depreciation and amortization.................... 58,750 99,554 85,783 66,550 64,947
Loss on sale or abandonment of assets............ 17 4,079 1,904 -- 239
Equity in income of affiliates................... (183) (1,187) (1,615) (1,069) (1,281)
Minority interests in combined entities.......... (4,152) (6,724) (4,164) (3,485) (2,842)
Deferred income taxes............................ 2,261 (10,114) 1,656 (2,441) 15,380
Changes in assets and liabilities:
Accounts receivable............................ (3,616) (791) (3,718) (432) 154
Prepaid expenses............................... (2,650) 748 (1,495) (805) (712)
Other assets................................... (309) (413) 1,290 (264) (389)
Accounts payable............................... 1,738 1,714 (1,572) (3,102) 11,310
Accrued expenses............................... (3,470) 1,953 3,498 2,407 2,497
Deferred revenue............................... 5,116 52 (18) (2,212) 644
---------- ---------- ---------- ---------- -----------
Net cash provided by operating activities.... 53,753 69,940 68,288 44,421 82,683
---------- ---------- ---------- ---------- -----------
Investing activities:
Cash distributions received from affiliates........ 50 1,095 1,515 997 1,996
Purchase of minority shareholders' interests....... -- -- -- -- (51,950)
Property, plant, and equipment..................... (27,391) (49,094) (47,766) (36,023) (56,767)
---------- ---------- ---------- ---------- -----------
Net cash used in investing activities........ (27,341) (47,999) (46,251) (35,026) (106,721)
---------- ---------- ---------- ---------- -----------
Financing activities:
Cash distributions to minority shareholders........ (3,085) (2,982) (4,091) (4,125) (258)
Principal payments on long-term debt............... (5,000) (15,000) -- -- --
Increase (decrease) in amounts due to parent
companies......................................... (18,116) (3,812) (18,252) (5,645) 24,280
---------- ---------- ---------- ---------- -----------
Net cash (used in) provided by financing
activities.................................. (26,201) (21,794) (22,343) (9,770) 24,022
---------- ---------- ---------- ---------- -----------
Increase (decrease) in cash.......................... 211 147 (306) (375) (16)
Cash at beginning of period.......................... 185 396 543 543 237
---------- ---------- ---------- ---------- -----------
Cash at end of period................................ $ 396 $ 543 $ 237 $ 168 $ 221
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-31
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1992, 1993 AND 1994
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The combined financial statements are intended to present the cable
television businesses owned or partially owned by Providence Journal Company
(Journal) that are to be acquired by Continental Cablevision, Inc. (Continental)
pursuant to an agreement and plan of merger dated November 18, 1994 and amended
on August 1, 1995. On October 5, 1995, the Merger was completed. (See Note 13
regarding pending litigation.)
The cable television businesses included in the combined financial
statements are Colony Communications, Inc. ("Colony"), a wholly owned subsidiary
of the Journal; Copley/Colony, Inc. ("Copley"), a joint venture between Colony
and Copley Press Electronics Company; Colony Cablevision (formerly Palmer
Communications, Inc.) ("Cablevision"), a division of the Journal; and King
Videocable Company ("KVC"), (collectively, Providence Journal Cable). KVC is
wholly owned by King Broadcasting Company ("Broadcasting"), which in turn is
wholly owned by King Holding Corp. ("King Holding"), a joint venture between the
Journal and an investment banking organization (the Investor Stockholder). All
significant intercompany and affiliated company balances and transactions have
been eliminated in combination. The accompanying combined financial statements
do not reflect adjustments to the valuation of assets or for the recognition of
liabilities that may be required as a consequence of the aforementioned merger.
These combined financial statements include certain allocations from the Journal
and King Holding (collectively, the parent companies).
Although Journal accounted for the operations of investments in the 50%
joint ventures under the equity method, the operations of such ventures have
been fully combined on the basis that they are managed, together with all
wholly-owned and majority owned cable television businesses, by the Journal and
its subsidiaries. In connection with the aforementioned merger, the Journal will
purchase the 50% joint venture partners interest and therefore, at the date of
merger with Continental, all acquired cable television businesses will be
wholly-owned.
Cable franchise areas are located in California, Florida, Massachusetts, New
York, Rhode Island, Minnesota, Idaho and Washington state. Providence Journal
Cable's credit risk is limited primarily to outstanding trade accounts
receivable from subscribers in these states.
(B) CASH
Providence Journal Cable participates in the cash management programs of the
Journal and King Holding. Under these programs, outstanding checks in excess of
cash are not accounted for as reductions of cash until presented to the bank for
payment. Consequently, at December 31, 1993 and 1994, Providence Journal Cable
reclassified outstanding checks to accounts payable totaling $6,132 and $5,225
respectively.
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Income taxes paid during the year (including federal and certain state
taxes paid to the parent companies for returns filed on a combined
basis.................................................................... $ 11,863 $ 1,250 $ 3,648
--------- --------- ---------
--------- --------- ---------
Interest paid during the year, net of amounts capitalized................. $ 2,102 $ 2,092 $ 45
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-32
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Expenditures for
maintenance and repairs are charged to expense as incurred; major improvements
are capitalized. Providence Journal Cable provides for depreciation using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
5-20
Buildings and improvements....................................... years
3-10
Cable systems.................................................... years
5-10
Furniture and fixtures........................................... years
</TABLE>
When assets are sold or retired, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
credited or charged to income.
When Providence Journal Cable determines that certain property, plant and
equipment is impaired, a loss for impairment is recorded for the excess of the
carrying value over the fair value of the asset.
(D) FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS
Franchise costs represent the amount paid to acquire the operating
franchises of Providence Journal Cable. These costs are amortized using the
straight-line method over three to forty years, beginning when the franchise is
awarded. Goodwill resulting from the excess of purchase price over fair value of
net assets acquired is generally amortized over 15-40 years.
Amortization expense on franchise costs and other intangible assets totaled
$18,968, $39,814 and $38,730 for the years ended December 31, 1992, 1993 and
1994, respectively.
Providence Journal Cable continually reviews its intangible assets to
determine whether any impairment has occurred. Providence Journal Cable assesses
the recoverability of intangible assets by reviewing the performance of the
underlying operations, in particular the future operating cash flows (earnings
before income taxes, depreciation, and amortization) of the acquired operation.
(E) INVESTMENTS IN AFFILIATED COMPANIES
Providence Journal Cable has investments in three media limited partnerships
which are accounted for using the equity method with voting interests of
approximately 10%, 10% and 50%. The excess of cost of one investment over
Providence Journal Cable's share of net partnership assets is being amortized
over the life of the related partnership agreement (7 years). These investments
are included with other assets in the accompanying combined financial
statements.
(F) REVENUE RECOGNITION
Providence Journal Cable bills subscribers one month in advance for certain
cable television services. These revenues are deferred and recognized when the
related service is provided.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of substantially all of Providence Journal Cable's
financial instruments approximates fair value due to the short maturity of the
instruments.
(H) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are
F-33
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the period that includes the enactment date.
Effective January 1, 1992, Providence Journal Cable adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" and it has
reported the cumulative effect of that change in the method of accounting for
income taxes in the 1992 combined statement of operations (see note 9).
Colony and Cablevision are included in the consolidated Federal income tax
return of the Journal. KVC is included in the consolidated Federal income tax
return of Broadcasting and King Holding. Copley files its own Federal income tax
return. Federal income taxes are computed for Colony, Cablevision and KVC as if
those entities filed a separate Federal income tax return.
(I) UNAUDITED COMBINED INTERIM FINANCIAL STATEMENTS
The combined financial statements as of and for the nine months ended
September 30, 1994 and 1995 are unaudited, however, they include all adjustments
(consisting of normal recurring adjustments) considered necessary by management
for presentation of the financial position and results of operations for these
periods. The results of operations for interim periods are not necessarily
indicative of the results that may be expected for the entire year.
(2) LEGISLATION AND REGULATION
In October, 1992, the Congress of the United States passed the Cable
Television Consumer Protection and Competition Act of 1992 (Cable Act) which
among other matters, provides for the regulation of basic and cable programming
services (other than per-event and per-channel services), allows broadcast
television stations to choose either "must carry" rights or retransmission
consent rights, regulates the sale of cable programming and implements other
operational requirements.
In April 1993, the Federal Communications Commission (FCC) adopted
regulations governing rates for basic and cable programming services which
became effective September 1, 1993. Under the provisions of these regulations,
certain of Providence Journal Cable's revenues derived from cable television are
determined under either a "benchmark" or "cost of service" method. Effective
December 31, 1994, all but one of Providence Journal Cable's systems had set
their rates using the bench-mark method which compares Providence Journal
Cable's rates to those which are in effect at cable systems deemed by the FCC to
face effective competition.
In February 1994, the FCC significantly modified the September 1993 rate
regulations. These modifications were designed to further reduce subscriber
rates and most annual basic and cable programming service rate increases (other
than per-event and per-channel services). Management has implemented the rules
in a manner it believes to be consistent with the regulations promulgated by the
FCC.
As a result of the 1992 Cable Act, several cable television systems of
Providence Journal Cable are subject to regulation by local franchise
authorities and/or the FCC. Regulations imposed by the 1992 Cable Act, among
other things, allow regulators to limit and reduce the rates that cable
operators can charge for certain basic cable television services and equipment
rental charges. Providence Journal Cable has been notified by certain franchise
authorities that various regulated rates charged to subscribers were in excess
of the rates permitted. Providence Journal Cable has reviewed the notifications
as well as the disputed rates and has accrued for amounts it believes it may be
required to refund.
F-34
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(2) LEGISLATION AND REGULATION (CONTINUED)
On December 22, 1994, the Federal Communications Commission (FCC) issued an
Order concerning one cable television system of Providence Journal Cable. The
Order ruled that certain "a la carte" channels offered by the system are subject
to rate regulation and directed the system to recalculate its maximum permitted
rates as determined under rules and regulations of the FCC. Providence Journal
Cable has filed a petition for reconsideration of this decision with the FCC. If
such petition does not result in adequate relief, Providence Journal Cable can
and presently intends to, pursue its remedies of an appeal to the FCC and/or the
courts. It is too early for management of Providence Journal Cable to determine
whether any rate refunds and prospective rate reductions to subscribers may
result from this action. Accordingly, no amounts have been accrued for rate
refund liabilities in the accompanying combined financial statements.
On July 6, 1995, the City of Los Angeles issued a draft order that the a la
carte channels offered by the cable system servicing part of the Los Angeles
area should be treated as cable programming service tiers and therefor subject
to regulation. Providence Journal Cable has documented its opposition to the
City's conclusions and intends to seek relief with appeal to the FCC, if
necessary. Because of the uncertainty as to the ultimate outcome on
reconsideration by the City, or with appeal to the FCC, Providence Journal Cable
has established an accrual for potential refunds of $1.9 million as of June 30,
1995.
Further rules and regulations are being considered by the FCC, however,
these regulations have not yet been finalized. The ultimate impact on the
operations of Providence Journal Cable resulting from existing rules and
regulations and proposed rules and regulations, if any, cannot be determined.
(3) ACQUISITIONS
COPLEY/COLONY
In May 1995, Colony purchased the 50% interest of its joint venture party in
Copley/Colony for $47,790.
COLONY CABLEVISION (CABLEVISION)
In 1992 the Journal completed the acquisition of the cable television assets
of Cablevision (formerly Palmer Communications, Inc.) for approximately
$326,000. Prior to the acquisition of Cablevision, Colony managed Cablevision
and received a management fee totaling $2,770 in 1992 which has been included in
other income in the accompanying combined statements of operations.
KING VIDEOCABLE COMPANY (KVC)
In February 1992, King Holding acquired the outstanding capital stock of
Broadcasting for a purchase price of approximately $364,000 plus assumed
liabilities aggregating $183,000, resulting in a total purchase price of
$547,000. Based upon the 1992 appraisal of assets acquired, $327,000 of the
total purchase price was allocated to KVC.
LAKEWOOD CABLE, INC.
In January, 1992, Colony completed the acquisition of Lakewood Cable, Inc.
("Lakewood") in Lakewood, California for $25,000.
The aforementioned acquisitions were accounted for as purchases, and for
purposes of these combined financial statements have been presented as purchases
by Providence Journal Cable. The acquisition of KVC in 1992 resulted in the
contribution of capital (push-down of equity) to this entity of $22,782 (net of
minority interest). The results of operations have been included in the
accompanying combined financial statements from the respective dates of
acquisition.
F-35
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(4) INVENTORY
Inventory is recorded at cost and consists primarily of supplies used in
repairs and maintenance and construction inventory used in the construction of
cable plant.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Cable systems......................................................... $ 369,636 $ 384,563
Land and buildings.................................................... 29,483 31,197
Machinery and equipment............................................... 23,953 33,582
Furniture and fixtures................................................ 7,543 8,214
Construction in progress.............................................. 4,381 8,843
---------- ----------
434,996 466,399
Less accumulated depreciation......................................... 178,797 211,671
---------- ----------
$ 256,199 $ 254,728
---------- ----------
---------- ----------
</TABLE>
During 1992, 1993 and 1994, Providence Journal Cable capitalized interest
expense on construction in progress of $109, $223 and $300, respectively.
Depreciation expense on property, plant and equipment totaled $39,782, $59,740
and $47,053 in 1992, 1993 and 1994, respectively.
In 1993, due to provisions of the Cable Act (see note 2) which effectively
transferred to cable customers ownership of wiring and additional outlets
located in cable customers' homes, Providence Journal Cable accelerated the
depreciation of these assets based upon the customer churn rate and expensed all
costs of installation and wiring in the home as incurred effective January 1,
1993.
(6) FRANCHISE COSTS AND OTHER INTANGIBLE ASSETS
Franchise costs and other intangible assets consist of the following:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Franchise costs....................................................... $ 446,760 $ 446,760
Goodwill.............................................................. 107,299 107,299
Non-compete agreements................................................ 19,683 19,683
Other intangible assets............................................... 16,328 15,719
---------- ----------
590,070 589,461
Less accumulated amortization......................................... 70,517 108,575
---------- ----------
$ 519,553 $ 480,886
---------- ----------
---------- ----------
</TABLE>
(7) LONG-TERM DEBT
During 1993, Providence Journal Cable had a note outstanding payable in
annual installments of $2,500. Interest expense on this note totaled $2,268 and
$1,546 in 1992 and 1993, respectively. In December 1993, Providence Journal
Cable settled this note payable and incurred a prepayment penalty equal to $546
(included with interest expense).
(8) RELATED PARTY TRANSACTIONS
(A) AMOUNTS DUE TO PARENT COMPANIES
Substantially all financing arrangements are provided through the parent
companies. Amounts due to parent companies are the net result of transactions
occurring through the shared cash management systems,
F-36
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
additions due to intercompany financing in connection with the acquisitions
discussed in note 3, as well as amounts allocated by parent companies for income
taxes, interest and overhead. Major activity relating to amounts due to parent
companies included the following during 1993 and 1994:
<TABLE>
<CAPTION>
1993 1994
---------- ----------
<S> <C> <C>
Beginning balance..................................................... $ 596,885 $ 593,073
Allocated interest and overhead....................................... 49,589 52,352
Repayments and other activity......................................... (53,401) (70,604)
---------- ----------
$ 593,073 $ 574,821
---------- ----------
---------- ----------
</TABLE>
Interest expense was allocated by parent companies based upon average
monthly balances of amounts due to parent companies. The effective rates on
interest allocated were 7.57% and 8.21% during 1993 and 1994, respectively.
Effective interest rates are based upon parent company financing arrangements.
(B) ALLOCATED OVERHEAD
The parent companies provide certain services to Providence Journal Cable
including cash management, human resources, accounting, legal, tax, and other
corporate services. For purposes of the accompanying combined financial
statements corporate overhead relating to these services, totaling $6,513,
$9,651 and $11,034 in 1992, 1993 and 1994, respectively, has been allocated to
Providence Journal Cable. In the opinion of management these charges have been
made on a basis (revenue of each individual business to total revenue) that is
reasonable, however, these charges are not necessarily indicative of the level
of expenses that might have been incurred by Providence Journal Cable on a
stand-alone basis.
KVC, through King Holding, has entered into a consulting and advisory
services agreement with the Investor Stockholder and a management agreement with
the Journal under which the Journal will operate and manage KVC's cable systems
through 1997. In connection with these agreements, King Holding is obligated to
pay $3,500 in annual fees to the Journal and $1,000 to the Investor Stockholder.
For purposes of the accompanying combined financial statements, a portion of the
expenses incurred in relation to these agreements has been allocated to KVC.
Amounts totaling $2,131, $2,034 and $1,901 were allocated to KVC in 1992, 1993
and 1994, respectively, on the basis of KVC revenue to total King Holding
revenue. These expenses have been included in the allocation of corporate
overhead discussed in the preceding paragraph.
(9) INCOME TAXES
As discussed in note 1(h), Providence Journal Cable adopted Statement 109 as
of January 1, 1992. The cumulative effect of this change in accounting for
income taxes of $4,831 was determined as of January 1, 1992 and was reported
separately in the combined statement of operations for the year ended December
31, 1992.
F-37
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(9) INCOME TAXES (CONTINUED)
Provision for income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- --------- ----------
<S> <C> <C> <C>
Year ended December 31, 1992:
U.S. Federal............................................... $ (453) $ (496) $ (949)
State...................................................... 2,376 (733) 1,643
--------- --------- ----------
$ 1,923 $ (1,229) $ 694
--------- --------- ----------
--------- --------- ----------
Year ended December 31, 1993:
U.S. Federal............................................... $ (4,247) $ (7,763) $ (12,010)
State...................................................... 1,677 (886) 791
--------- --------- ----------
$ (2,570) $ (8,649) $ (11,219)
--------- --------- ----------
--------- --------- ----------
Year ended December 31, 1994:
U.S. Federal............................................... $ (9,318) $ 2,201 $ (7,117)
State...................................................... (519) (546) (1,065)
--------- --------- ----------
$ (9,837) $ 1,655 $ (8,182)
--------- --------- ----------
--------- --------- ----------
</TABLE>
Provision for income tax expense (benefit) differed from the amounts
computed by applying the U.S. federal income tax rate of 34% to pretax income as
a result of the following:
<TABLE>
<CAPTION>
1992 1993 1994
--------- ---------- ---------
<S> <C> <C> <C>
Computed "expected" tax...................................... $ (1,090) $ (12,533) $ (8,707)
Increase (reduction) in income taxes resulting from:
State and local income taxes, net of federal income tax
benefit................................................... 1,085 521 (703)
Amortization of goodwill................................... 1,211 1,198 1,165
Excess of fair value of securities, donated to charitable
foundation, over basis in those securities................ (304) -- --
Utilization of investment tax credit carryforwards......... -- (209) --
Other, net................................................. (208) (196) 63
--------- ---------- ---------
$ 694 $ (11,219) $ (8,182)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
F-38
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(9) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1993 and 1994 are presented below:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Deferred tax assets:
State net operating loss carryforwards.......................................... $ 5,658 $ 5,572
Alternative minimum tax credit carryforward..................................... 1,489 883
Uniform capitalization and Section 263A depreciation............................ 1,434 1,560
Deferred compensation and vacation accrual...................................... 655 776
Self-insurance reserves......................................................... 437 404
Partnership investment, principally due to basis differences.................... 1,084 2,235
Other........................................................................... 722 930
--------- ---------
Total gross deferred tax assets............................................... 11,479 12,360
Less valuation allowance...................................................... (5,456) (5,569)
--------- ---------
Net deferred tax assets....................................................... 6,023 6,791
--------- ---------
Deferred tax liabilities:
Intangibles, principally due to differences in amortization..................... 47,891 48,130
Plant and equipment, principally due to differences in depreciation and
capitalized interest........................................................... 25,895 28,824
Other........................................................................... 1,267 523
--------- ---------
Total gross deferred tax liabilities.......................................... 75,053 77,477
--------- ---------
Total net deferred tax liability.............................................. $ 69,030 $ 70,686
--------- ---------
--------- ---------
</TABLE>
The 1993 beginning valuation allowance for deferred tax assets was $4,867.
The net change in the total valuation allowance was an increase of $589 and $113
in 1993 and 1994, respectively. Changes to the valuation allowance relate
principally to deferred tax assets recorded for state net operating loss
carryforwards.
At December 31, 1994, Providence Journal Cable has net operating loss
carryforwards for state income tax purposes of $99,000, which are available to
offset future state taxable income, if any, expiring in various years ending in
2008.
(10) OPERATING LEASES
Providence Journal Cable has certain noncancelable operating leases with
renewal options for land, buildings and equipment. Leases for land and buildings
are subject to annual consumer price index adjustments. In 1992, 1993 and 1994,
rental expense for all leases, including pole rentals, totaled $3,973, $5,081
and $5,125, respectively.
F-39
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(10) OPERATING LEASES (CONTINUED)
At December 31, 1994, commitments under noncancelable lease agreements were
as follows:
<TABLE>
<S> <C>
1995............................................... $ 2,583
1996............................................... 2,011
1997............................................... 1,636
1998............................................... 1,403
1999............................................... 1,184
Thereafter......................................... 3,808
---------
$ 12,625
---------
---------
</TABLE>
(11) RETIREMENT PLANS
Providence Journal Cable has three defined contribution retirement plans
which include a 401(k) plan and cover substantially all of its employees.
Providence Journal Cable matches participants' 401(k) contributions up to a
maximum of 1% of participants' compensation. Additionally, KVC participates in a
defined benefit plan sponsored by Broadcasting, covering substantially all
employees of KVC. Expenses recorded under these plans totaled $774, $1,516 and
$1,108 in 1992, 1993 and 1994, respectively. Prepaid pension costs with respect
to the defined benefit plan of $457 and $384 have been allocated to KVC at
December 31, 1993 and 1994, respectively.
(12) COMMITMENTS AND CONTINGENCIES
Providence Journal Cable is obligated to make capital improvements of
$55,000 on an annualized basis from the date of the merger agreement with
Continental until the merger's closing date (see note 1). Providence Journal
Cable also has letter of credit commitments amounting to $3,203 at December 31,
1994.
Providence Journal Cable has, or participates with its parent companies in,
insurance programs for workers compensation, general liability, auto and certain
health coverages which are a form of self-insurance. Providence Journal Cable's
liability for large losses is capped, individually and in the aggregate, through
contracts with insurance companies. An estimate for claims incurred but not paid
is accrued annually.
The Journal has a revolving credit and term loan facility (totaling $243,655
at December 31, 1994) that is secured in part by a pledge of stock of Colony
Communications, Inc. and its subsidiaries. King Holding has a credit agreement
with a syndicate of banks (totaling $294,049 at December 31, 1994) that is
secured in part by a pledge of stock and assets of KVC.
Providence Journal Cable is a party to various claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, all such matters are without merit or are of such kind, or involve
such amounts, that unfavorable disposition would not have a material effect on
the financial position or results of operations of Providence Journal Cable.
(13) LITIGATION (UNAUDITED)
On January 17, 1995, a declaratory judgment action was brought against the
Journal, among other parties, claiming that a subsidiary of Colony ("Dynamic")
had breached a right of first refusal entitling a minority partner to purchase a
general partnership interest in a cable system, included as part of these
financial statements, that Colony had transferred to Continental, effective
October 5, 1995 in connection with the Merger Agreement discussed in note 1. A
final declaratory judgment in this action in favor of the
F-40
<PAGE>
PROVIDENCE JOURNAL CABLE
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 IS
UNAUDITED)
(13) LITIGATION (UNAUDITED) (CONTINUED)
minority partner was entered on May 21, 1996. Such judgment requires, among
other matters, Dynamic and Colony to negotiate with the minority partner on a
price to transfer Dynamic's interest in the general partnership to the minority
partner.
The Journal has appealed this judgment. However, at this time, the Journal
is unable to predict the ultimate outcome of this litigation.
The following is summary financial information for the subject cable system
as of September 30, 1995:
<TABLE>
<S> <C>
Total Assets...................................................... $ 28,907
---------
---------
Total Liabilities................................................. 24,590
---------
---------
Minority Interest................................................. 13,403
---------
---------
Total Revenue..................................................... 22,924
---------
---------
</TABLE>
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Columbia Associates, L.P.:
We have audited the financial statements of Columbia Associates, L.P. as of
December 31, 1993 and 1994, and have issued our report thereon dated February
24, 1995. In connection therewith, we have also audited the statements of
assets, liabilities and control account of Columbia Cable of Michigan (a
division of Columbia Associates, L.P.) as of December 31, 1993 and 1994, and the
related statements of operations and control account and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements 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 financial position of Columbia Cable of Michigan
as of December 31, 1993 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Stamford, Connecticut,
February 24, 1995
F-42
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
STATEMENTS OF ASSETS, LIABILITIES AND CONTROL ACCOUNT
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994
-------------- -------------- SEPTEMBER 30,
1995
--------------
(UNAUDITED)
<S> <C> <C> <C>
CASH............................................................. $ 674,099 $ 385,054 $ 275,907
-------------- -------------- --------------
SUBSCRIBER RECEIVABLES, net of allowance for doubtful accounts of
$213,482, $162,191 and $103,202 in 1993, 1994 and 1995,
respectively.................................................... 573,723 605,547 489,871
-------------- -------------- --------------
INVESTMENT IN CABLE TELEVISION SYSTEMS (Notes 3 and 4):
Property, plant and equipment, at cost......................... 54,140,130 58,271,277 59,790,301
Less Accumulated depreciation.................................. (18,032,166) (23,441,707) (27,402,546)
-------------- -------------- --------------
36,107,964 34,829,570 32,387,755
Franchising costs, net of accumulated amortization of
$13,245,295, $14,882,450 and $15,923,456 in 1993, 1994 and
1995,
respectively.................................................. 4,257,209 2,631,381 1,773,570
Goodwill and other intangible assets, net of accumulated
amortization of $2,390,633, $2,663,051 and $2,883,805 in 1993,
1994 and 1995, respectively................................... 637,415 332,766 112,012
-------------- -------------- --------------
Total investment in cable television systems............... 41,002,588 37,793,717 34,273,337
-------------- -------------- --------------
OTHER ASSETS, net................................................ 991,729 1,058,194 727,577
-------------- -------------- --------------
$ 43,242,139 $ 39,842,512 $ 35,766,692
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND CONTROL ACCOUNT
LIABILITIES:
Accounts payable and accrued expenses.......................... $ 1,868,647 $ 2,070,908 $ 1,309,464
Subscriber advance payments and deposits....................... 632,171 658,394 701,297
-------------- -------------- --------------
Total liabilities.......................................... 2,500,818 2,729,302 2,010,761
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 6)
CONTROL ACCOUNT, excess of assets over liabilities............... 40,741,321 37,113,210 33,755,931
-------------- -------------- --------------
$ 43,242,139 $ 39,842,512 $ 35,766,692
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-43
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
STATEMENTS OF OPERATIONS AND CONTROL ACCOUNT
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER
---------------------------- 30,
1993 1994 ----------------------------
------------- ------------- 1994 1995
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................................ $ 25,130,342 $ 26,428,244 $ 19,514,964 $ 20,912,037
------------- ------------- ------------- -------------
EXPENSES:
Service costs..................................... 9,402,956 10,143,788 7,568,006 8,475,837
Selling, general and administrative expenses...... 4,168,761 4,491,103 3,366,129 3,323,050
Indirect expenses................................. 1,413,452 1,449,917 1,048,882 1,106,090
Depreciation and amortization (Notes 3 and 4)..... 7,046,029 7,620,122 5,669,548 5,683,955
Other expense..................................... -- 18,255 6,483 38,141
Gain on disposal of equipment, net................ (57,958) (26,975) (26,975) (18,570)
------------- ------------- ------------- -------------
Total expenses................................ 21,973,240 23,696,210 17,632,073 18,608,503
------------- ------------- ------------- -------------
Net income.................................... 3,157,102 2,732,034 1,882,891 2,303,534
CONTROL ACCOUNT, beginning of period................ 39,723,609 40,741,321 40,741,321 37,113,210
ADVANCES TO PARENT.................................. (2,139,390) (6,360,145) (4,479,340) (5,660,813)
------------- ------------- ------------- -------------
CONTROL ACCOUNT, end of period...................... $ 40,741,321 $ 37,113,210 $ 38,144,872 $ 33,755,931
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-44
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER
---------------------------- 30,
1993 1994 ----------------------------
------------- ------------- 1994 1995
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 3,157,102 $ 2,732,034 $ 1,882,891 $ 2,303,534
------------- ------------- ------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 7,046,029 7,620,122 5,669,548 5,683,955
Gain on disposal of equipment..................... (57,958) (26,975) (26,975) (18,570)
Change in assets and liabilities --
(Increase) decrease in subscriber receivables... (107,581) (31,824) 36,463 115,676
(Increase) decrease in other assets............. (213,137) (66,604) 180,840 330,617
Increase (decrease) in accounts payable and
accrued expenses............................... 115,297 202,261 (412,500) (761,444)
Increase (decrease) in subscriber advance
payments and deposits.......................... (2,984) 26,223 50,496 42,903
------------- ------------- ------------- -------------
Total adjustments........................... 6,779,666 7,723,203 5,497,872 5,393,137
------------- ------------- ------------- -------------
Net cash provided by operating activities... 9,936,768 10,455,237 7,380,763 7,696,671
------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in investment in existing cable television
systems............................................ (7,574,365) (4,454,226) (3,597,163) (2,163,575)
Proceeds on disposal of equipment................... 169,165 70,089 26,975 18,570
------------- ------------- ------------- -------------
Net cash used in investing activities....... (7,405,200) (4,384,137) (3,570,188) (2,145,005)
------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances to parent.................................. (2,139,390) (6,360,145) (4,479,340) (5,660,813)
------------- ------------- ------------- -------------
Net cash used in financing activities....... (2,139,390) (6,360,145) (4,479,340) (5,660,813)
------------- ------------- ------------- -------------
Net increase (decrease) in cash............. 392,178 (289,045) (668,765) (109,147)
CASH, beginning of year............................... 281,921 674,099 674,099 385,054
------------- ------------- ------------- -------------
CASH, end of period................................... $ 674,099 $ 385,054 $ 5,334 $ 275,907
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-45
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
NOTES TO FINANCIAL STATEMENTS
(1) PARTNERSHIP FORMATION AND SALE:
Columbia Cable of Michigan ("Michigan") is a division of Columbia
Associates, L.P. (the "Partnership"). The Partnership is a limited partnership
which was formed on March 7, 1985, under the laws of the State of Delaware and
which operates under the terms of the Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement") dated as of June 2, 1992. The
Partnership will continue until March 1, 1995 unless previously dissolved in
accordance with the terms of the Partnership Agreement. The partners are
presently contemplating an extension of the Partnership Agreement.
On November 1, 1994, the Partnership entered into an agreement to sell
substantially all the assets and certain of the liabilities of Michigan for $155
million, subject to closing adjustments. The Partnership expects the sale to be
completed in 1995.
(2) CABLE REGULATION:
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "Act") which, among other things,
expanded governmental regulation of rates for basic and other cable services.
Pursuant to the Act, the Federal Communications Commission (the "FCC") issued
regulations in April 1993. The FCC's regulations require rates for equipment to
be cost-based. Rates for basic and any regulated tiers of service were to be
based on, at the election of the cable operator, either the FCC's benchmark
rates or a cost-of-service showing based upon interim standards adopted by the
FCC. As a result of these regulations and the actions of the local franchise
authorities, Michigan is currently subject to regulation by the local franchise
authorities and the FCC.
Effective September 1, 1993, Michigan elected to use the FCC's benchmark
methodology. In February 1994, the FCC significantly modified the April 1993
regulations. The new regulations, among other things, ordered a lower benchmark
rate that became effective in May 1994 with allocable extensions until July
1994.
In July 1994, Michigan elected to justify its rates using a cost of service
showing instead of the benchmark methodology, but did not raise its rates to the
maximum permitted cost of service rates. Set forth below is a summary of rates
for the regulated tiers of service:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 COST OF
------------------------ BENCHMARK SERVICE
NUMBER OF RATE RATE
SUBSCRIBERS ACTUAL RATE PER FILING PER FILING
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Michigan -- Ann Arbor Filing......................... 63,043 $ 21.25 $ 20.42 $ 22.92
Michigan -- Brighton Filing.......................... 12,353 21.00 20.24 23.50
</TABLE>
Michigan's cost of service filings are currently being reviewed by the local
franchise authorities and the FCC. Michigan believes it is in compliance in all
material respects with the provisions of the Act and current regulations, and
accordingly, no revenue reserves have been recorded.
(3) SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF FINANCIAL STATEMENT PRESENTATION --
Michigan's financial statements include all the direct costs of operating
the business. Costs specifically incurred by the Partnership on behalf of
Michigan were directly included in selling, general and administrative expenses
and service costs. Costs which were not incurred specifically for any of the
Partnership's divisions were allocated to Michigan based on Michigan's total
subscribers as a percentage of the Partnership's total subscribers. All the
indirect cost incurred by the Partnership which have been allocated to Michigan
have been included as "indirect expenses" in the accompanying statements of
operations and
F-46
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
control account. Management believes the foregoing allocations were made on a
reasonable basis. Nonetheless, the financial information included herein may not
necessarily reflect the financial position and results of operations of Michigan
in the future or what the financial position or results of operations of
Michigan would have been as a separate stand-alone entity.
The control account consists of accumulated earnings/losses, allocated
expenses from the Partnership, as well as any payable/receivable balance due
to/from the Partnership resulting from cash transfers. No provision for interest
has been made to the control account. Set forth below is an analysis of the
control account for the years ended December 31, 1993 and 1994 and the nine
months ended September 30, 1995:
<TABLE>
<S> <C>
Control account -- December 31, 1992................................... $39,723,609
Net income -- 1993..................................................... 3,157,102
Cash transfers to the Partnership...................................... (25,024,245)
Cash transfers from the Partnership.................................... 16,950,000
Direct and indirect expenses........................................... 5,934,855
----------
Control account -- December 31, 1993................................... 40,741,321
Net income -- 1994..................................................... 2,732,034
Cash transfers to the Partnership...................................... (26,789,688)
Cash transfers from the Partnership.................................... 14,000,000
Direct and indirect expenses........................................... 6,429,543
----------
Control account -- December 31, 1994................................... 37,113,210
Net income -- nine months ended September 30, 1995 (Unaudited)......... 2,303,534
Cash transfers to the Partnership (Unaudited).......................... (21,606,737)
Cash transfers from the Partnership (Unaudited)........................ 10,250,000
Direct and indirect expenses (Unaudited)............................... 5,695,924
----------
Control account -- September 30, 1995 (Unaudited)...................... $33,755,931
----------
----------
</TABLE>
The average balance outstanding of the control account was approximately
$40,200,000, $38,900,000, and $35,400,000 during 1993, 1994 and the nine month
period September 30, 1995, respectively.
PROPERTY, PLANT AND EQUIPMENT --
Property, plant and equipment is recorded at purchased cost, together with
labor and indirect labor costs amounting to approximately $446,000 and $364,000
in 1993 and 1994, respectively.
INTANGIBLE ASSETS --
Franchise costs include the assigned fair value of the franchises from
purchased cable television systems and costs of original franchise applications,
which are deferred until the franchise has been granted, at which time such
costs are amortized. All costs related to unsuccessful franchise applications
are charged to expense when it is determined that the efforts to obtain the
franchises were unsuccessful. Franchise costs are amortized over the remaining
franchise life, while goodwill is amortized over ten years and other intangible
assets (primarily subscriber lists) are amortized over the average period that a
subscriber is expected to remain connected to the cable system. Amortization of
franchise costs, goodwill and other intangible assets amounted to approximately
$1,646,000, $263,000 and $48,000 respectively, in 1993 and approximately
$1,642,000, $261,000 and $44,000, respectively in 1994.
REVENUE RECOGNITION --
Revenues are recognized as the services are provided.
F-47
<PAGE>
COLUMBIA CABLE OF MICHIGAN
(A DIVISION OF COLUMBIA ASSOCIATES, L.P.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTERIM FINANCIAL STATEMENTS --
In the opinion of Michigan, the accompanying unaudited financial statements
contain all adjustments, all of which are of a normal recurring nature,
necessary to present fairly the financial position of Michigan as of September
30, 1995 and the results of its operations and changes in its cash flows for the
nine month periods ended September 30, 1994 and 1995.
(4) PROPERTY, PLANT AND EQUIPMENT:
As of December 31, 1993 and 1994, property, plant and equipment consisted
of:
<TABLE>
<CAPTION>
1993 1994
------------- -------------
<S> <C> <C>
Cable systems and equipment.................................... $ 51,855,580 $ 55,994,897
Land, buildings and improvements............................... 808,174 809,696
Vehicles....................................................... 770,857 753,121
Furniture and fixtures......................................... 705,519 713,563
------------- -------------
$ 54,140,130 $ 58,271,277
------------- -------------
------------- -------------
</TABLE>
Depreciation is calculated on a straight-line basis over the following
useful lives:
<TABLE>
<S> <C>
Cable systems and equipment.................................. 5 to 12 years
15 to 20
Buildings and improvements................................... years
Vehicles..................................................... 5 years
Furniture and fixtures....................................... 5 to 10 years
</TABLE>
(5) SALARY DEFERRAL PLAN:
The Partnership established a salary deferral plan (the "Plan") in
accordance with Internal Revenue Code Section 401(k), as amended, in 1989. The
Plan provides for discretionary and matching contributions by Michigan on behalf
of participating employees. Discretionary and matching contributions totaled
approximately $151,000 and $162,000 in 1993 and 1994, respectively.
(6) COMMITMENTS:
Under various lease and rental agreements, Michigan had rental expense of
approximately $114,000 and $112,000 in 1993 and 1994, respectively. Approximate
future minimum annual payments under these agreements are as follows:
<TABLE>
<S> <C>
1995................................................................ 38,000
1996................................................................ 39,000
1997................................................................ 32,000
1998................................................................ 18,000
1999................................................................ 18,000
Thereafter.......................................................... 46,000
</TABLE>
In addition, Michigan rents access to utility poles in its operations
generally under short-term, but recurring, agreements. Total rental expense for
utility poles was approximately $157,000 and $160,000 in 1993 and 1994,
respectively.
F-48
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Cablevision of Chicago:
We have audited the accompanying balance sheets of Cablevision of Chicago (a
limited partnership) as of December 31, 1993 and 1994, and the related
statements of operations and partners' deficiency and cash flows for the years
then ended. 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 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 financial position of Cablevision of Chicago as of
December 31, 1993 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Jericho, New York
March 3, 1995
F-49
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994
---------- ---------- JUNE 30,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................................................... $ 339 $ 11 $ 184
Accounts receivable-subscribers (less allowance for doubtful accounts of
$134, $183 and $143)....................................................... 406 719 509
Other receivables........................................................... 492 335 711
Prepaid expenses............................................................ 165 99 75
Property, plant and equipment, net.......................................... 21,440 21,678 21,434
Deferred acquisition and development costs (less accumulated amortization of
$1,304, $1,422 and $1,457)................................................. 153 35 --
Deferred financing costs (less accumulated amortization of $883, $1,185 and
$1,344).................................................................... 1,888 1,789 1,630
Other intangibles (less accumulated amortization of $981, $1,165 and
$1,257).................................................................... 307 123 31
Deposits and other assets................................................... 103 186 175
---------- ---------- -----------
$ 25,293 $ 24,975 $ 24,749
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND PARTNERS' DEFICIENCY
Accounts payable............................................................ $ 4,554 $ 4,992 $ 5,436
Accounts payable to affiliates, net......................................... 290 783 765
Subordinated amounts payable to affiliates.................................. 26,129 23,569 26,518
Accrued liabilities:
Interest.................................................................. 621 983 653
Franchise fees............................................................ 800 763 876
Payroll and related benefits.............................................. 1,316 1,395 1,168
Other..................................................................... 1,855 1,286 2,231
Debt:
Affiliates................................................................ 12,314 12,314 12,314
Bank and other............................................................ 65,575 71,771 70,120
---------- ---------- -----------
Total liabilities..................................................... 113,454 117,856 120,081
---------- ---------- -----------
Commitments & contingencies
Partners' deficiency
General partners.......................................................... (1,149) (1,196) (1,221)
Limited partners.......................................................... (87,012) (91,685) (94,111)
---------- ---------- -----------
Total partners' deficiency............................................ (88,161) (92,881) (95,332)
---------- ---------- -----------
$ 25,293 $ 24,975 $ 24,749
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to financial statements.
F-50
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS AND PARTNERS' DEFICIENCY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED JUNE
31, 30,
---------------------- ----------------------
1993 1994 1994 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues net...................................................... $ 34,562 $ 34,395 $ 17,262 $ 17,766
Technical expenses (including affiliate amounts of $1,482, $1,184,
$587 and $627)................................................... 14,045 14,402 7,117 7,065
Selling, general and administrative expenses (including affiliate
amounts of $2,432, $2,932, $1,255 and $1,567).................... 9,054 9,092 4,573 5,035
Depreciation and amortization..................................... 5,593 5,288 2,743 2,541
---------- ---------- ---------- ----------
Operating income.............................................. 5,870 5,613 2,829 3,125
---------- ---------- ---------- ----------
Other income (expense):
Interest income................................................. 31 30 -- --
Interest expense (including affiliate amounts of $4,507, $4,493,
$2,228 and $2,328)............................................. (9,760) (10,310) (4,969) (5,543)
Miscellaneous, net.............................................. (12) (53) (48) (33)
---------- ---------- ---------- ----------
(9,741) (10,333) (5,017) (5,576)
---------- ---------- ---------- ----------
Net loss.................................................... $ (3,871) $ (4,720) $ (2,188) $ (2,451)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Partners' deficiency:
Beginning of year/period........................................ $ (84,290) $ (88,161) $ (88,161) $ (92,881)
Net loss allocated to general partners.......................... (39) (47) (22) (25)
Net loss allocated to limited partners.......................... (3,832) (4,673) (2,166) (2,426)
---------- ---------- ---------- ----------
End of year/period.............................................. $ (88,161) $ (92,881) $ (90,349) $ (95,332)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to financial statements
F-51
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
--------------------- --------------------
1993 1994 1994 1995
---------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................................ $ (3,871) $ (4,720) $ (2,188) $ (2,451)
---------- --------- --------- ---------
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization..................................... 5,593 5,288 2,743 2,541
Amortization of deferred financing costs.......................... 287 302 156 159
Loss (gain) on sale of equipment.................................. (4) (39) (8) 3
Changes in asset and liability accounts:
Accounts receivable subscribers................................. 137 (313) (203) 210
Other receivables............................................... (235) 157 (147) (376)
Prepaid expenses................................................ 113 66 68 24
Deposits and other assets....................................... (19) (83) (19) 11
Accounts payable and accrued expenses........................... 193 273 (71) 945
Accounts payable and subordinated amounts payable to affiliates,
net............................................................ (4,320) (2,067) 2,709 2,931
---------- --------- --------- ---------
Total adjustments........................................... 1,745 3,584 5,228 6,448
---------- --------- --------- ---------
Net cash provided by (used in) operating activities......... (2,126) (1,136) 3,040 3,997
---------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures................................................ (3,872) (5,278) (2,594) (2,225)
Proceeds from sale of equipment..................................... 5 93 11 52
---------- --------- --------- ---------
Net cash used in investing activities....................... (3,867) (5,185) (2,583) (2,173)
---------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from bank debt............................................. 70,750 10,971 2,250 449
Repayment of bank debt.............................................. (53,511) (4,750) (2,145) (2,100)
Payment of debt to affiliates....................................... (10,072) -- -- --
Payments of capital lease obligations............................... (79) (25) (22) --
Additions to deferred debt financing................................ (1,035) (203) -- --
---------- --------- --------- ---------
Net cash provided by (used in) financing activities......... 6,053 5,993 83 (1,651)
---------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.................. 60 (328) 540 173
Cash and cash equivalents at beginning of
year/period.......................................................... 279 339 339 11
---------- --------- --------- ---------
Cash and cash equivalents at end of year/period....................... $ 339 $ 11 $ 879 $ 184
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
See accompanying notes to financial statements.
F-52
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. THE COMPANY
Cablevision of Chicago (the "Company") is a limited partnership, organized
in January 1979, under the provisions of the Uniform Limited Partnership Act of
the State of Illinois, for the purpose of constructing and operating cable
television systems. The partnership will terminate December 31, 2020, unless
earlier termination occurs as provided in the partnership agreement.
The partnership consists of two general partners and three limited partners.
The general partners are one individual and Cablevision Systems Services
Corporation (CSSC), a corporation wholly-owned by the individual general
partner. The limited partners of the Company are Cablevision of Illinois (C of
I), Chicago Cablevision Investments (CCI) and Cablevision Headquarters
Investment (CHI) which are all limited partnerships. The individual general
partner of the Company is also a general partner in C of I, CCI and CHI while
CSSC is a general partner in C of I. In addition, a subsidiary of Cablevision
Systems Corporation (CSC), a corporation controlled by the individual general
partner of the Company, is a general partner in CHI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including construction materials, are
recorded at cost, which includes all direct costs and certain indirect costs
associated with the construction of cable television transmission and
distribution systems and the costs of new subscriber installations. Property,
plant and equipment is depreciated on the straight-line method over the
estimated useful life of the asset. Leasehold improvements are amortized over
the shorter of their useful lives or the terms of the related leases.
REVENUE RECOGNITION
The Company recognizes revenues as cable television services are provided to
subscribers.
DEFERRED ACQUISITION, DEVELOPMENT COSTS AND INTANGIBLE ASSETS
Costs incurred to acquire cable television franchises and expenses incurred
during the initial development period were deferred until the date the first
subscriber was connected. Such costs are being amortized on the straight-line
basis over the average lives of the franchises. Intangible assets are being
amortized over periods ranging from seven to fifteen years on the straight line
basis.
DEFERRED FINANCING COSTS
Costs incurred to obtain debt are deferred and amortized on the
straight-line basis over the term to maturity of the related debt.
INCOME TAXES
The Company operates as a limited partnership; accordingly, its taxable
income or loss is includable in the tax returns of the individual partners and
no provision for income taxes is made on the books of the Company. The partners
are required to report their share of income or loss in their income tax
returns. The Company's income or loss is allocated to the partners in accordance
with the terms of the partnership agreement. At December 31, 1994, the carrying
amount of net assets for financial statement purposes was less than their tax
bases by approximately $3,186.
CASH FLOWS
For purposes of the statements of cash flows, the Company considers all
short term investments with a maturity at date of purchase of three months or
less to be cash equivalents. The Company paid cash interest of approximately
$14,444 (of which approximately $8,500 in 1993 represents interest on the CSSC
subordinated demand note) and $11,904 during the years ended December 31, 1993
and 1994, respectively.
F-53
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain 1993 amounts have been reclassified to conform with the 1994
presentation.
UNAUDITED INFORMATION
In the opinion of management, the financial statements for the unaudited
periods include all adjustments (consisting of a normal recurring nature)
necessary for a fair presentation of such information. The results of operations
and cash flows for the six months ended June 30, 1994 and 1995 are not
necessarily indicative of results that would be expected for a full year.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following items which are
depreciated on the straight line basis over the estimated useful lives shown
below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- ESTIMATED USEFUL
1993 1994 LIVES
--------- --------- ----------------
<S> <C> <C> <C>
Cable television transmission and distribution systems:
Converters................................................... $ 11,496 $ 12,441 5 years
Headend...................................................... 4,294 4,420 9 years
Distribution system.......................................... 60,553 63,272 12 years
Program, service and test equipment.......................... 3,977 4,166 7 years
Microwave equipment and satellite receivers.................. 2,771 2,771 7 1/2 years
Construction materials and supplies.......................... 99 112
--------- ---------
83,190 87,182
Land........................................................... 410 410
Building....................................................... 3,186 3,186 25 years
Furniture and fixtures......................................... 622 639 8 years
Vehicles....................................................... 2,169 2,218 4 years
Leasehold improvements......................................... 1,722 1,744 Term of Lease
--------- ---------
91,299 95,379
Less accumulated depreciation and amortization................. 69,859 73,701
--------- ---------
$ 21,440 $ 21,678
--------- ---------
--------- ---------
</TABLE>
4. DEBT
Debt at December 31, 1993 and 1994 consists of the following:
<TABLE>
<CAPTION>
1993 1994
--------- ---------
<S> <C> <C>
Partners:
CSC subordinated demand note, bearing interest at 14% (Note 6).................. $ 12,314 $ 12,314
--------- ---------
--------- ---------
Other:
Bank debt....................................................................... $ 65,550 $ 71,771
Capital lease obligation........................................................ 25 --
--------- ---------
Total other................................................................. $ 65,575 $ 71,771
--------- ---------
--------- ---------
</TABLE>
On February 5, 1993, the Company entered into a third amended and restated
credit agreement (the "New Credit Agreement") with a group of banks led by Bank
of Montreal, as agent. On June 21, 1994 the Company executed the First Amendment
to the New Credit Agreement with the Bank of Montreal and
F-54
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. DEBT (CONTINUED)
several other banks which modified certain restrictive covenants through the
maturity date of the loan. The Company may borrow up to $80,306 under the New
Credit Agreement, of which $7,555 and $150 was restricted for certain letters of
credit at December 31, 1993 and 1994 respectively. Undrawn funds available to
the Company under the New Credit Agreement as of December 31, 1993 and 1994
amount to approximately $10,395 and $8,851 respectively.
The New Credit Agreement includes a $55,306 term loan, of which $58,000 and
$55,305 was outstanding at December 31, 1993 and 1994 respectively, and a
$25,000 revolving line of credit, of which $7,050 and $16,000 was outstanding at
December 31, 1993 and December 31, 1994, respectively. Repayment of the term
loan commenced March 31, 1993 with quarterly payments continuing through
December 31, 2000. The amount available under the revolving line of credit will
be reduced by $2,500 on each of December 31, 1996 and 1997, $3,125 on December
31, 1998, $5,625 on December 31, 1999, and the balance on December 31, 2000.
Based on the outstanding borrowings as of December 31, 1994, future payments
under the terms of the New Credit Agreement are as follows: 1995 -- $4,200; 1996
- -- $7,800; 1997 -- $9,900; 1998 -- $11,100; 1999 -- $11,100; thereafter $11,205.
The Credit Agreement contains various restrictive covenants, among which are
limitations on various payments and the maintenance of various financial ratios.
The Company was in compliance with the covenants of its credit agreement on
December 31, 1994.
Borrowings bear interest at varying rates depending on the ratio of the
Company's debt to annualized cash flow, as defined in the new Credit Agreement.
The Company has the option of selecting either the bank's prime rate or the
London Interbank Offering Rate (LIBOR) as the borrowing base rate. At December
31, 1994, the weighted average interest rate on the bank debt was 7.96%. The
Company is obligated to pay fees to the banks of 3/8 of 1% per annum on the
unused portion of the loan commitment.
The Company has entered into interest rate swap agreements with two banks on
a notional amount of $25,000 whereby the Company pays a fixed rate of interest
and receives a variable rate. Interest rates and terms vary in accordance with
each of the agreements. The lengths of the agreements range from one to two
years. As of December 31, 1994, the agreements have a weighted average remaining
life of two years. The Company is exposed to credit loss in the event of
nonperformance by the other parties to the interest rate swap agreements;
however, the Company does not anticipate nonperformance by the counterparties.
Substantially all of the assets of the Company have been pledged to secure
the borrowings under the Credit Agreement.
In September, 1994 the Company borrowed approximately $8,255, in accordance
with the terms of the New Credit Agreement, to repay $1,503 in accrued
management fees to Cablevision Systems Company and $6,753 in accrued interest
thereon.
In addition the Company has a $2,000 overdraft note with the Bank of
Montreal, of which $466 is outstanding at December 31, 1994.
5. LEASES
The Company leases certain office and production facilities under terms of
leases expiring at various dates through 1999. Rent expense for operating leases
amounted to approximately $457 in 1993 and $499 in 1994.
F-55
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. LEASES (CONTINUED)
In addition, the Company rents space on utility poles in its operations. The
Company's pole rental agreements are for varying terms, and management
anticipates renewals as they expire. Rental expense under these agreements was
approximately $196 in 1993 and $205 in 1994.
Future minimum payments under all noncancelable operating leases, including
pole rentals through December 31, 1998, at rates currently in force as of
December 31, 1994, are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1995............................................................................... $ 540
1996............................................................................... 512
1997............................................................................... 444
1998............................................................................... 446
1999............................................................................... 454
Thereafter......................................................................... 124
-----------
Total future minimum lease payments............................................ $ 2,520
-----------
-----------
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company has an agreement with Cablevision Systems Company to provide the
Company with management services. Cablevision Systems Company is owned by the
individual general partner of the Company and certain trusts established for the
benefit of his family members. The agreement can be renewed indefinitely at the
option of Cablevision Systems Company and generally provides for the payment, in
addition to expense reimbursement, of a fee equal to 3 1/2% of the Company's
gross revenues. The fees accrued for 1993 and 1994 were approximately $1,209 and
$1,203, respectively. In addition, interest accrues on the unpaid balance at
prime plus two percent. For 1993 and 1994 the Company accrued approximately
$1,097 and $1,188, respectively, for interest on unpaid management fees.
Cumulative unpaid management fees and interest thereon at December 31, 1993 and
1994 amounted to $15,458 and $9,593, respectively. Unpaid management fees and
interest are included in subordinated amounts payable to affiliates in the
accompanying balance sheets. The Company paid approximately $730 and $6,753 of
accrued interest outstanding on unpaid management fees in 1993 and 1994,
respectively through available bank debt. Subsequent payments are subject to
certain limitations and restrictions as defined in the New Credit Agreement.
CSC has made advances to or incurred expenses on behalf of the Company.
Unpaid amounts bear interest at the rate of 14% per annum. A portion of this
amount was converted to a subordinated demand note (the "CSC Demand Note"). The
principal balance of the CSC Demand Note at December 31, 1993 and 1994 amounted
to $12,314 and accrued interest thereon approximated $10,089 and $13,394 at
December 31, 1993 and 1994, respectively. The CSC Demand Note is subordinated to
bank debt and is restricted in accordance with certain provisions of the New
Credit Agreement. The amounts of unpaid interest are included in subordinated
amounts payable to affiliates in the accompanying balance sheets.
CSC also has interests in several companies engaged in providing cable
television programming and other services to the cable television industry,
including the Company. During 1993 and 1994 the Company was charged
approximately $1,482 and $1,184, respectively, by these companies primarily for
programming services. One of these companies subleases space in the Company's
main studio production facility, for which the Company was paid approximately
$567 in 1993 and $541 in 1994. Amounts owed these companies
F-56
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
at December 31, 1993 and 1994 were approximately $830 and $900, respectively of
which approximately $161 and $318, respectively are included in accounts payable
to affiliates and approximately $582 in each year is included in subordinated
amounts payable to affiliates in the accompanying balance sheets.
The Company is charged for certain selling, general and administrative
expenses by CSC. For the years ended December 31, 1993 and 1994, these expenses
amounted to approximately $1,223 and $1,729, respectively. Amounts owed CSC at
December 31, 1993 and 1994 were approximately $264 and $723, respectively, and
are included in accounts payable to affiliates in the accompanying balance
sheets.
7. PENSION PLAN
The Company is a participant, with other affiliates, in a defined
contribution pension plan covering substantially all employees. The Company
contributed 1 1/2% of each eligible employees' annual compensation, as defined,
to the defined contribution portion of the Pension Plan (the "Pension Plan") and
an equivalent amount to the Section 401(k) portion of the plan (the "Savings
Plan"). Employees may voluntarily contribute up to 15% of eligible compensation,
subject to certain restrictions, to the Savings Plan, with an additional
matching contribution by the Company of 1/4 of 1% for each 1% contributed by the
employee, up to a maximum contribution by the Company of 1/2 of 1% of eligible
base pay. Employee contributions are fully vested as are employer base
contributions to the Savings Plan. Employer contributions to the Pension Plan
and matching contributions to the Savings Plan become vested in years three
through seven. At December 31, 1993 and 1994, the cost associated with these
plans was approximately $130 and $118, respectively. The Company does not
provide any postretirement benefits for any of its employees.
8. CONTINGENCY
The Company has obtained thirty one franchises authorizing it to construct
and operate cable television systems in the suburban areas of Chicago, Illinois.
Certain franchises contain provisions granting the municipalities an option, at
the expiration of the franchise, to purchase the cable television system for $1
plus any outstanding debt attributable to the system.
9. FINANCING
Since its inception, the Company has incurred substantial losses. Not
withstanding such losses, the Company's cash flow from operations and available
borrowings under its New Credit Agreement (note 4) have been sufficient to meet
its current obligations as a result of the deferral of payment of management
fees and interest thereon and the deferral of interest payments on the
subordinated demand note (note 4 and 6). Payment of the subordinated demand
note, including interest thereon, is restricted in accordance with certain
provisions of the New Credit Agreement. The Company believes that internally
generated funds as well as borrowings under the revolving lines of credit are
sufficient through year end 1995 to fund its requirements for existing cable
operations and meet its debt service requirements.
10. RECENT CABLE TELEVISION REGULATIONS
In October, 1992, the Congress of the United States passed the Cable
Television Consumer Protection and Competition Act of 1992 (Cable Act) which
among other matters, provides for the regulation of basic and cable programming
services. In April 1993, the Federal Communications Commission ("FCC") adopted
regulations governing rates for basic and cable programming services which
became effective September 1, 1993. Under the provisions of these regulations,
certain revenues derived from cable television are determined under either a
"benchmark" or "cost of service" method. Effective September 1, 1993 the
Company's systems had set their rates using the benchmark method which compares
the Company's rates to those which are in effect at cable systems deemed to face
effective competition by the FCC.
F-57
<PAGE>
CABLEVISION OF CHICAGO
(A LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. RECENT CABLE TELEVISION REGULATIONS (CONTINUED)
In February 1994, the FCC significantly modified the September 1993 rate
regulations. These modifications were designed to further reduce subscriber
rates and most annual basic and cable programming service rate increases (other
than per-event and per-channel services). Management has implemented the rules
in a manner it believes to be consistent with the regulations promulgated by the
FCC.
As a result of the 1992 Cable Act, many of the cable television systems of
the Company are subject to regulation by local franchise authorities and/or the
FCC. Regulations imposed by the 1992 Cable Act, among other things, allow
regulators to limit and reduce the rates that cable operators can charge for
certain basic cable television services and equipment rental charges.
Further rules and regulations are being considered by the FCC, however,
these regulations have not yet been finalized. The ultimate impact on the
operation of the Company resulting from existing rules and regulations and
proposed rules and regulations, if any, cannot be determined.
11. SUBSEQUENT EVENTS
In January 1995, the Company entered into an agreement with Continental
Cablevision, Inc. to sell its cable systems for a sale price of $168,500,
subject to post closing adjustments. The sale is expected to close in 1995.
12. TAX INFORMATION (UNAUDITED)
The following represents a reconciliation of the losses allocated to the
partners for financial reporting purposes and that utilized for tax purposes.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Losses allocated to partners for financial reporting purposes...................... $ (3,871) $ (4,720)
Depreciation and amortization adjustments for tax purposes......................... 2,347 1,564
Management fees and related interest............................................... 1,576 (5,886)
Other.............................................................................. (385) 111
--------- ---------
Tax loss allocable to partners..................................................... $ (333) $ (8,931)
--------- ---------
--------- ---------
Tax loss allocable to general partners............................................. $ (4) $ (89)
--------- ---------
--------- ---------
Tax loss allocated to limited partners............................................. $ (329) $ (8,842)
--------- ---------
--------- ---------
</TABLE>
F-58
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Meredith/New Heritage Strategic Partners L.P.:
We have audited the accompanying consolidated balance sheet of Meredith/New
Heritage Strategic Partners L.P. and subsidiary as of June 30, 1996, and the
related consolidated statements of operations, partners' equity, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Meredith/New
Heritage Strategic Partners L.P. and subsidiary as of June 30, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Des Moines, Iowa
August 2, 1996
F-59
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
($ IN THOUSANDS)
<TABLE>
<S> <C> <C>
ASSETS (NOTE 5)
Current assets:
Cash and cash equivalents.............................................. $ 6,883
Receivables:
Trade, net of allowance for doubtful accounts of $88................. $ 1,158
Other, net of allowance for doubtful accounts of $51................. 530
---------
1,688
Prepaid expenses....................................................... 329
---------
Total current assets................................................. 8,900
Property and equipment:
Land................................................................... 353
Building improvements.................................................. 1,374
Cable distribution system.............................................. 94,885
Support equipment...................................................... 2,456
---------
99,068
Less accumulated depreciation.......................................... 28,111
---------
Net property and equipment......................................... 70,957
Programming rights, net of accumulated amortization of $5,703............ 6,198
Goodwill and other intangibles, net of accumulated amortization of
$13,125................................................................. 123,614
Noncompetition agreements, net of accumulated amortization of $15,700.... 4,700
Deferred financing costs, net of accumulated amortization of $1,501...... 1,459
Other assets............................................................. 694
---------
$ 216,522
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
($ IN THOUSANDS)
<TABLE>
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 1,065
Accrued expenses:
Employee wages and benefits.......................................... 352
Programming fees..................................................... 974
Franchise fees....................................................... 1,089
Interest............................................................. 396
Other................................................................ 1,461
Due to affiliates...................................................... 61
Current installments of capital lease obligations (note 7)............. 448
Current installments of long-term debt (note 5)........................ 86,278
---------
Total current liabilities.......................................... 92,124
Capital lease obligations, excluding current installments (note 7)....... 762
---------
Total liabilities.................................................. 92,886
Partners' equity:
General partner........................................................ $ 89,917
Limited partner........................................................ 33,719
---------
Total partners' equity............................................. 123,636
---------
Commitments and contingencies (notes 2, 4, 5, 7, and 10).
$ 216,522
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-61
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996
($ IN THOUSANDS)
<TABLE>
<S> <C> <C>
Revenue................................................................... $ 51,750
Operating costs and expenses:
Costs of sales and services:
System................................................................ $ 3,565
Programming........................................................... 9,926
Amortization of programming rights.................................... 1,488
Selling, general, and administrative.................................... 13,761
Management fees (note 8)................................................ 1,637
Depreciation............................................................ 8,757
Amortization of noncompetition agreements and goodwill and other
intangibles............................................................ 7,505
---------
Total operating costs and expenses.................................. 46,639
---------
Operating income.................................................... 5,111
Other income (expense):
Interest income......................................................... 331
Interest expense........................................................ (6,919)
---------
(6,588)
---------
Net loss............................................................ $ (1,477)
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-62
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF PARTNERS' EQUITY
YEAR ENDED JUNE 30, 1996
($ IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNER EQUITY
--------- --------- ----------
<S> <C> <C> <C>
Balance at June 30, 1995........................................................ $ 90,991 34,122 125,113
Net loss........................................................................ (1,074) (403) (1,477)
--------- --------- ----------
Balance at June 30, 1996........................................................ $ 89,917 33,719 123,636
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-63
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED JUNE 30, 1996
($ IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (1,477)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................... 16,262
Amortization of deferred financing costs.................................... 465
Amortization of programming rights.......................................... 1,488
Increase in trade and other receivables..................................... (155)
Decrease in prepaid expenses................................................ 314
Decrease in accounts payable, accrued expenses and due to affiliates........ (2,334)
Other....................................................................... (36)
---------
Net cash provided by operating activities............................... 14,527
---------
Cash flows from investing activities:
Net proceeds from sale of cable system (note 2)............................... 3,750
Purchase of property and equipment............................................ (10,395)
Sale of property and equipment................................................ 4
Additions to other intangibles................................................ (325)
---------
Net cash used in investing activities................................... (6,966)
---------
Cash flows from financing activities:
Principal payments on long-term debt.......................................... (4,801)
Payments on capital lease obligations......................................... (457)
---------
Net cash used in financing activities................................... (5,258)
---------
Increase in cash and cash equivalents................................... 2,303
Cash and cash equivalents at beginning of year.................................. 4,580
---------
Cash and cash equivalents at end of year........................................ $ 6,883
---------
---------
Supplemental disclosure of cash flow information --Cash paid during the year for
interest....................................................................... $ 6,883
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-64
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
($ IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP, CONSOLIDATION, AND OPERATIONS
Meredith/New Heritage Strategic Partners L.P. was formed by Meredith/New
Heritage Partnership (General Partner) and Continental Cablevision of Minnesota,
Inc. (Limited Partner). Operations commenced with the General Partner's
contribution of its North Dakota cable television system and the acquisition of
all the outstanding stock of North Central Cable Communications Corporation
(North Central) on September 1, 1992.
The consolidated financial statements include the accounts of Meredith/New
Heritage Strategic Partners L.P. and its subsidiary North Central (Strategic
Partners). All significant intercompany balances and transactions have been
eliminated. The consolidated financial statements do not include the assets and
liabilities of the General Partner and Limited Partner.
Strategic Partners operates in the cable television industry with franchises
in the Minneapolis/St. Paul, Minnesota area and operated the Bismarck/Mandan,
North Dakota area franchises through March 9, 1995, the date of sale of this
system.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of Strategic Partners to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, including the portion of the
purchase price of cable television systems acquired allocated to tangible
assets. Construction cost, including labor, indirect labor, interest, and other
costs of construction and completion, are capitalized. Depreciation is
calculated on the straight-line basis over the estimated useful lives, which are
10 years for building improvements, 5-15 years for cable distribution system,
and 5-10 years for support equipment.
Repairs and maintenance are charged to operations, and renewals and
additions are capitalized. At the time of ordinary retirements, sales or other
dispositions of property, the original cost and cost of removal of such property
are charged to accumulated depreciation, and salvage, if any, is credited
thereto. Gains or losses are only recognized in connection with the sales of
properties in their entirety.
GOODWILL
Goodwill includes the difference between the cost of acquiring cable
television systems and the amount assigned to their tangible assets. Such
amounts are being amortized on a straight-line basis over 40 years. Strategic
Partners assesses the recoverability of goodwill through analysis of
undiscounted cash flows.
NONCOMPETITION AGREEMENTS
Noncompetition agreements executed in connection with the acquisition of
North Central are being amortized using the straight-line method over the life
of the agreements (five years).
PROGRAMMING RIGHTS
Programming rights (purchased from the Limited Partner in connection with
the acquisition of North Central) are being amortized using the straight-line
method over the life of the rights (eight years). The amortization is included
in cost of sales and services.
F-65
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
($ IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS
Deferred financing costs consist primarily of loan origination fees and
legal expenses incurred to obtain financing. These costs are being amortized
over the contractual term of the related loan agreement. Amortization of these
costs is included in interest expense.
INCOME TAXES
Income and losses of Strategic Partners are to be included in the income tax
returns of the General and Limited Partners, and such income and losses are
allocated to the General and Limited Partners based upon each partner's
respective ownership interests. Accordingly, the consolidated financial
statements make no provision for income taxes, except for income taxes related
to its wholly owned subsidiary, North Central.
North Central accounts for income taxes under the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds which are stated at cost,
which approximates market. For purposes of the statements of cash flows,
Strategic Partners considers all short-term investments purchased with a
maturity of three months or less at date of purchase to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures About Fair Value of Financial Instruments," requires
that Strategic Partners disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth below:
CASH AND CASH EQUIVALENTS, RECEIVABLES, ACCOUNTS PAYABLE, AND ACCRUED
EXPENSES
The carrying amount approximates fair value because of the short-term
nature of the instruments.
LONG-TERM DEBT
The fair value of long-term debt is calculated by discounting scheduled
cash flows through maturity using estimated market rates. The market rates
are estimated using rates currently available for borrowing.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
Because no market exists for a portion of Strategic Partners' financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
F-66
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
($ IN THOUSANDS)
(2) SALE OF CABLE SYSTEM
On March 9, 1995, Strategic Partners sold the assets of the cable television
system located in the Bismarck/Mandan, North Dakota area. As required by the
sale agreement, $3,750 of the sales proceeds were placed in escrow for a period
of 180 days and were collected in September 1995. In addition, through November
15, 1996, Strategic Partners will be liable to the purchaser for any rate
regulation refunds related to services provided prior to the sale date.
(3) PARTNERS' EQUITY
In accordance with the partnership agreement, profits and losses will be
allocated in accordance with the partners' respective partnership interests, and
the partnership shall continue until December 31, 2050, unless earlier
terminated.
(4) ACQUISITION CONTINGENT PAYMENTS
On September 1, 1992, Strategic Partners acquired all of the outstanding
stock of North Central. The purchase agreement provides for contingent payments
through June 30, 1999. For each period ended June 30, the contingent payments
are based upon the excess, if any, of actual cash flows over targeted cash flows
as set forth in the purchase agreement. The contingent payments are set at 25
percent of any excess cash flows until payments aggregate to $35,000;
thereafter, the contingent payments are set at 5 percent of any excess cash
flows. For the year ended June 30, 1996, no contingent payments were due under
the purchase agreement. An agreement was entered into in February 1996 providing
that, in the event of a sale of the system, the requirement for contingent
payments will be eliminated.
(5) LONG-TERM DEBT
Strategic Partners has a loan agreement with 10 banks. Borrowings are
secured by the partnership interests and assets of Strategic Partners (including
the assets of North Central) and interests in certain leases. Interest is
payable at a prime rate, Eurodollar rate, or certificate of deposit rate.
At June 30, 1996, total borrowings amounted to $86,278 and bear interest at
rates ranging from 6.44 percent to 6.50 percent (including a 1.00 percent margin
as provided in the loan agreement).
The effective weighted average rate of interest on the $86,278 outstanding
at June 30, 1996, was 6.5 percent.
At June 30, 1996, Strategic Partners estimated the fair value of its
long-term debt of $86,278 at its carrying value.
The loan agreement contains provisions which prohibit the payment of
distributions/dividends; place restrictions on additional investments, the
incurrence of additional debt, the payment of management fees, and other
activities; and require Strategic Partners to meet certain operating and
financial tests.
All borrowings outstanding under the loan agreement are due on the earliest
of December 31, 1996 or the date of the sale of North Central. Management of
Strategic Partners currently intends to sell North Central and has entered into
an agreement with a potential purchaser (see note 11). Accordingly, borrowings
under the loan agreement at June 30, 1996 have been classified as current.
Management of Strategic Partners, however, intends and believes it will be able
to execute an amendment to the loan agreement to extend the maturity date in the
event North Central is not sold before December 31, 1996, as similar amendments
were executed during the years ended June 30, 1996 and 1995.
F-67
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
($ IN THOUSANDS)
(6) INCOME TAXES
Deferred tax assets (liabilities) related to temporary differences between
the financial statements bases and income tax bases of assets and liabilities of
North Central at June 30, 1996, were as follows:
<TABLE>
<CAPTION>
Deferred tax assets:
<S> <C>
Net operating loss carryforwards................................. $ 22,600
Amortization of noncompetition agreements, principally due to
differences in lives............................................ 5,270
Trade and other receivables, principally due to allowance for
doubtful accounts............................................... 55
Compensated absences, principally due to accrual for financial
reporting purposes.............................................. 83
Future deductible amounts, principally due to nondeductible
accruals........................................................ 132
---------
Total deferred tax assets.................................... 28,140
Less valuation allowance......................................... 11,640
---------
Net deferred tax assets...................................... 16,500
Deferred tax liability:
Property and equipment depreciation, principally due to
differences in methods and lives................................ 16,500
---------
Net deferred taxes........................................... $ --
---------
---------
</TABLE>
The net increase in the valuation allowance for deferred tax assets for the
year ended June 30, 1996 was $740.
North Central has total tax net operating loss carryforwards at June 30,
1996 of approximately $56,500 available to reduce future taxable income through
2009, with a tax benefit of $22,600. Of the $22,600 tax benefit, $11,640 has not
been recognized since it is more likely than not that a portion of the tax
benefit will not be realized. Of the tax benefit not recognized, approximately
$6,500 represents tax benefits from net operating loss carryforwards at the date
of acquisition of North Central. To the extent the unrecognized tax net
operating loss carryforwards at the date of acquisition are recognized in the
future, the tax benefits of such recognition will reduce goodwill. To the extent
the tax net operating loss carryforward since acquisition is recognized in the
future, the tax benefit of such recognition will be reflected in the
consolidated statement of operations.
Tax net operating loss carryforwards at June 30, 1996 expire as follows:
<TABLE>
<CAPTION>
2002............................................... $ 15,100
<S> <C>
2003............................................... 17,000
2004............................................... 13,000
2005............................................... 4,600
2007............................................... 1,200
2008............................................... 1,100
2009............................................... 4,500
---------
$ 56,500
---------
---------
</TABLE>
F-68
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
($ IN THOUSANDS)
(7) LEASES AND FRANCHISE AGREEMENTS
CAPITAL LEASES
North Central leases certain computer and transportation and other equipment
under capital leases at variable interest rates. The net book value of the
equipment under these leases is approximately $1,240 at June 30, 1996. Future
obligations under capital leases as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
1997................................................ $ 508
<S> <C>
1998................................................ 439
1999................................................ 223
2000................................................ 153
---------
Total minimum lease payments........................ 1,323
Less amount representing interest................... 113
---------
Present value of net minimum lease payments......... 1,210
Less current portion................................ 448
---------
$ 762
---------
---------
</TABLE>
OPERATING LEASES
North Central leases certain real property and transportation and other
equipment under noncancelable operating leases with original terms varying from
1 to 15 years. Additionally, North Central leases microwave signals and utility
poles under leases with original terms of up to 25 years.
At June 30, 1996, minimum commitments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
1997................................................ $ 451
<S> <C>
1998................................................ 318
1999................................................ 45
---------
$ 814
---------
---------
</TABLE>
Leases and rental expense payments under cancelable and noncancelable
operating leases included in the statement of operations for the year ended June
30, 1996, amounted to $558.
FRANCHISE AGREEMENTS
North Central has nonexclusive franchise agreements with the various
communities in which it provides cable television services. These franchise
agreements require the payment of fees (generally 5 percent of operating
revenues) and require North Central to provide public access and local community
cable television programming. North Central has entered into programming
agreements with three cable commissions, whereby the cable commission has
assumed the responsibility to provide public access programming. These
programming agreements require annual payments of approximately $1,300
(generally adjusted by a flat percentage increase or a Consumer Price Index,
whichever is greater). North Central has also entered into agreements with 3
other cable commissions, whereby North Central continues to provide public
access programming but is allowed to recover its expenses (approximately $800
annually) from the subscriber base. All of these agreements are effective for
the term of the existing franchise agreements and renewal terms, or a maximum
term of 15 years.
F-69
<PAGE>
MEREDITH/NEW HERITAGE STRATEGIC PARTNERS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
($ IN THOUSANDS)
(8) RELATED PARTY TRANSACTIONS
In accordance with the partnership agreement, New Heritage Associates
provides financing, accounting, marketing, and engineering management services
to Strategic Partners and its cable television systems. During the year ended
June 30, 1996, Strategic Partners paid New Heritage Associates $1,637 for
management services.
(9) EMPLOYEE BENEFIT PLAN
Strategic Partners participates in a multiple employer profit sharing plan
covering substantially all employees who have reached 21 years of age and
completed 1 year of service. Under the terms of the plan, employees may
contribute between 1 percent and 15 percent of their annual salary. Strategic
Partners matches employee contributions at a 50 percent rate of contributions up
to 10 percent. Strategic Partners made contributions of $169 to the profit
sharing plan for the year ended June 30, 1996.
(10) COMMITMENTS AND CONTINGENCIES
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the 1992 Cable Act). In 1993, the
Federal Communications Commission (the FCC) adopted certain rate regulations
required by the 1992 Cable Act and imposed a moratorium on certain rate
increases. Such rate regulations became effective on September 1, 1993. The rate
increase moratorium, which began on April 5, 1993, continued through May 15,
1994. On May 15, 1994, additional rate regulations were enacted as required by
regulation. The revised rates were presented to the local franchising
authorities on August 15, 1994 for review within 30 days. As a result of such
actions, Strategic Partners' basic and tier service rates and its equipment and
installation charges (the Regulated Services) are subject to the jurisdiction of
local franchising authorities and the FCC. Basic and tier service rates are
evaluated against competitive benchmark rates as published by the FCC, and
equipment and installation charges are based on actual costs. Any rates for
Regulated Services that exceeded the benchmarks were reduced as required by the
1993 rate regulations. Subsequent to September 1, 1993, any cable system
charging basic cable rates that exceeded the FCC's benchmark rate may be
required to substantiate its rates by demonstrating its costs of providing basic
cable services to subscribers. If, as a result of this process, a system cannot
substantiate its rates, it could be required to retroactively reduce its rates
to the appropriated benchmark and refund the excess portion of rates received
since September 1, 1993.
Strategic Partners believes that it has complied in all material respects
with the provisions of the 1992 Cable Act, including its rate setting
provisions. However, since Strategic Partners' rates for Regulated Services are
subject to review, Strategic Partners may be subject to a refund liability. The
amounts of refunds, if any, which could be payable by Strategic Partners in the
event that systems' rates are successfully challenged by franchising authorities
is not currently estimable. However, Strategic Partners believes the ultimate
settlement of any potential refunds, if any, will not have a material adverse
effect on Strategic Partners' financial position or results of operations.
Strategic Partners maintains a self-insurance program for health care and
dental costs. Strategic Partners is liable for claims up to $35 per individual
annually, and aggregate claims up to $1,000 annually. Self-insurance costs are
accrued based upon the aggregate of the liability for reported claims and an
estimated liability for claims incurred but not reported.
(11) SALE OF PARTNERSHIP INTERESTS
In March 1996, the General Partner entered into an agreement to sell its
general partnership interests in Strategic Partners to the Limited Partner for
approximately $219,200. The General Partner is to receive proceeds of
approximately $129,200 in cash, and the Limited Partner is to assume or repay
approximately $90,000 of the Strategic Partners' long-term debt.
F-70
<PAGE>
CONTINENTAL CABLEVISION, INC.
PROXY FOR SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF STOCKHOLDERS
The undersigned, revoking all prior proxies, hereby constitutes and appoints
AMOS B. HOSTETTER, JR., TIMOTHY P. NEHER and WILLIAM T. SCHLEYER, and each of
them, as the true and lawful attorneys and proxies for the undersigned, with
full power of substitution, to vote all shares of Class A Common Stock, Class B
Common Stock and Series A Participating Convertible Preferred Stock that the
undersigned is entitled to vote at the Special Meeting in Lieu of Annual Meeting
of Stockholders of Continental Cablevision, Inc. (the "Company") to be held at
the Hotel Meridien, 250 Franklin Street, Boston, Massachusetts 02110 on November
14, 1996 at 10:00 a.m., local time, or at any adjournment or postponement
thereof, upon such business as may properly come before the meeting or any
adjournment or postponement thereof including, without limiting such general
authorization, the following proposals described in the accompanying Proxy
Statement:
<TABLE>
<C> <S>
1. Approval of the Agreement and Plan of Merger, as amended to date (the "Merger Agreement"), pursuant to which the Company
will merge with and into U S WEST or a wholly owned subsidiary of U S WEST (the "Merger").
FOR / / AGAINST / / ABSTAIN / /
2. Approval of an amendment to the Company's Restated Certificate of Incorporation to permit holders of Class A Common Stock
to receive only stock consideration in the Merger, while holders of Class B Common Stock may receive cash or stock
consideration or a combination thereof.
FOR / / AGAINST / / ABSTAIN / /
3. Approval of an amendment to the Company's Restated Certificate of Incorporation that will, so long as the Merger
Agreement remains in effect, remove certain restrictions on the transfer of shares of Class B Common Stock and impose
certain restrictions on the conversion of shares of Class B Common Stock into shares of Class A Common Stock.
FOR / / AGAINST / / ABSTAIN / /
4. To elect Henry F. McCance, Roy F. Coppedge III, Michael J. Ritter and Robert B. Luick as the Company's Class A Directors.
FOR / / AGAINST / / ABSTAIN / /
To withhold authority to elect any Director nominee, write that person's name in the space provided below:
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
(CONTINUED, AND TO BE SIGNED ON REVERSE SIDE)
<PAGE>
(CONTINUED FROM OTHER SIDE)
<TABLE>
<C> <S>
5. To appoint Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending December 31,
1996.
FOR / / AGAINST / / ABSTAIN / /
</TABLE>
UNLESS OTHERWISE SPECIFIED ON THE REVERSE SIDE, THIS PROXY WILL BE VOTED FOR
THE DIRECTORS SPECIFIED ABOVE IN PROPOSAL 4 AND FOR PROPOSALS 1 THROUGH 3 AND 5.
THE PERSONS WHO HAVE BEEN NAMED PROXIES HAVE AUTHORITY, WHICH THEY INTEND TO
EXERCISE, TO VOTE IN FAVOR OF THE PROPOSALS REFERRED TO AND ANY OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
This Proxy should be dated, signed by
the shareholder exactly as printed at
the left and returned promptly in the
enclosed envelope. Persons signing in
a fiduciary capacity should so
indicate.
Dated: _________________________, 1996
______________________________________
(Signature)
________________________________________
(Signature)
