<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1995
REGISTRATION NO. 33-59315
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
U S WEST, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4811 84-0926774
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification
incorporation or Classification Code No.)
organization) Number)
</TABLE>
U S WEST, INC.
7800 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(303) 793-6500
(Address, including ZIP code, and telephone number, including
area code, of registrant's principal executive offices)
STEPHEN E. BRILZ, ESQ.
U S WEST, INC.
7800 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(303) 793-6500
(Name, address, including ZIP code, and telephone number, including
area code, of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
DENNIS J. BLOCK, ESQ. RAYMOND W. WAGNER, ESQ.
WEIL, GOTSHAL & MANGES SIMPSON THACHER & BARTLETT
767 FIFTH AVENUE 425 LEXINGTON AVENUE
NEW YORK, NEW YORK 10153 NEW YORK, NEW YORK 10017
(212) 310-8000 (212) 455-2000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after approval by shareholders.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT TO MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) PER UNIT PRICE (2) FEE (2)
<S> <C> <C> <C> <C>
U S WEST Communications Group Common
Stock, par value $.01 per share (3).... -- -- -- --
U S WEST Media Group Common Stock, par
value $.01 per share (3)............... -- -- -- --
Total................................... -- -- $100 $100
</TABLE>
(1) If the Recapitalization Proposal described herein is approved by the
shareholders and the reincorporation merger of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), with and into U S WEST, Inc., a Delaware
corporation ("U S WEST Delaware"), becomes effective, each share of Common
Stock, without par value ("Existing Common Stock"), of U S WEST Colorado
outstanding at the effective time of the merger will be converted into one
share of U S WEST Communications Group Common Stock, par value $.01 per
share ("Communications Stock"), and one share of U S WEST Media Group Common
Stock, par value $.01 per share ("Media Stock"), of U S WEST Delaware. The
number of shares of Communications Stock and Media Stock being registered is
based on the number of shares of Existing Common Stock outstanding at such
effective time. In accordance with Rule 457(o) under the Securities Act of
1933, as amended, the number of shares being registered is not included in
the table.
(2) The shares will be distributed to shareholders without consideration.
Accordingly, pursuant to Section 6(b) of the Securities Act of 1933, as
amended, the amount of the registration fee is $100, which was previously
paid by the Registrant.
(3) Includes Preferred Stock Purchase Rights which, prior to the occurrence of
certain events, will not be exercisable or evidenced separately from the
Communications Stock or Media Stock, as applicable.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
U S WEST, INC.
Cross Reference Sheet Pursuant to Rule 404(a) under the Securities Act and
Item 501(b) of Regulation S-K, showing the location in the Proxy Statement and
Prospectus of the information required by Part I of Form S-4.
<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT AND PROSPECTUS
- ------------------------------------------------------------------------ ---------------------------------------------------
<C> <C> <S> <C>
A. Information About the Transaction
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................... Facing Page of Registration Statement; Outside
Front Cover of Proxy Statement and Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Available Information; Incorporation of Certain
Documents by Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information............................ Proxy Statement Summary; Risk Factors; General;
Incorporation of Certain Documents by Reference
4. Terms of the Transaction.......................... Proposal 1 -- The Recapitalization Proposal
5. Pro Forma Financial Information................... *
6. Material Contacts with the Company Being
Acquired......................................... *
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters.... *
8. Interests of Named Experts and Counsel............ Experts; Legal Opinions
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... *
B. Information About the Registrant
10. Information with Respect to S-3 Registrants....... Incorporation of Certain Documents by Reference;
Annex V -- U S WEST, Inc.; Annex VI --
Communications Group; Annex VII -- Media Group
11. Incorporation of Certain Information by
Reference........................................ Incorporation of Certain Documents by Reference
12. Information with Respect to S-2 or S-3
Registrants...................................... *
13. Incorporation of Certain Information by
Reference........................................ *
14. Information with Respect to Registrants Other Than
S-2 or S-3 Registrants........................... *
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies......... Incorporation of Certain Documents by Reference
16. Information with Respect to S-2 or S-3
Companies........................................ *
17. Information with Respect to Companies Other Than
S-2 or S-3 Companies............................. *
D. Voting and Management Information
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT AND PROSPECTUS
- ------------------------------------------------------------------------ ---------------------------------------------------
18. Information if Proxies, Consent of Authorizations
are to be Solicited.............................. Outside Front Cover Page of Proxy Statement and
Prospectus; Proxy Statement Summary; General;
Proposal 1 -- The Recapitalization Proposal;
Solicitation Statement; Shareholder Proposals for
1996 Annual Meeting
<C> <C> <S> <C>
19. Information if Proxies, Consents or Authorizations
are not be Solicited, or in an Exchange Offer.... *
<FN>
- ------------------------
*Omitted because not required or inapplicable.
</TABLE>
<PAGE>
PRELIMINARY COPY, DATED JUNE 30, 1995
[U S WEST LOGO]
, 1995
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders of U S
WEST, Inc., a Colorado corporation ("U S WEST"), to be held at : a.m.,
Mountain Time, on , 1995 at the .
At this Special Meeting, you will be asked to consider and approve a
proposal (the "Recapitalization Proposal") being recommended by U S WEST's Board
of Directors to create two classes of common stock that are intended to reflect
separately the performance of U S WEST's communications and multimedia
businesses and to change the state of incorporation of U S WEST from Colorado to
Delaware. If the Recapitalization Proposal is approved, U S WEST will be
reincorporated as a Delaware corporation and each outstanding share of U S
WEST's existing common stock will be automatically converted into one share of U
S WEST Communications Group Common Stock, which is intended to reflect the
performance of U S WEST's communications businesses ("Communications Stock"),
and one share of U S WEST Media Group Common Stock, which is intended to reflect
the performance of U S WEST's multimedia businesses ("Media Stock"). The
conversion of U S WEST's existing common stock into Communications Stock and
Media Stock is intended to be tax free.
If approved, the Recapitalization Proposal will permit separate market
valuations of the Communications Stock and the Media Stock based upon the
separate operating results of U S WEST's communications and multimedia
businesses. It will enable investors to gain a better understanding of these
businesses and to invest in either or both securities depending upon their
investment objectives. The Recapitalization Proposal would also allow U S WEST
to preserve the strategic, financial and operational benefits it currently
enjoys as a single, integrated corporation.
If the Recapitalization Proposal is approved by shareholders, the Board of
Directors currently intends to pay dividends on the Communications Stock
initially at a quarterly rate of $0.535 per share, which is the current
quarterly dividend on U S WEST's existing common stock. With regard to the Media
Stock, the Board currently intends to retain future earnings, if any, for the
development of the Company's multimedia businesses and does not anticipate
paying dividends on the Media Stock in the foreseeable future.
At the Special Meeting, you will also be asked to consider and approve other
related Proposals which would amend the U S WEST, Inc. 1994 Stock Plan and the U
S WEST, Inc. Deferred Compensation Plan to reflect the new capital structure of
U S WEST.
The Board of Directors has carefully considered the terms of the
Recapitalization Proposal and the related proposals, believes their adoption is
in the best interests of U S WEST and its shareholders and unanimously
recommends that the shareholders approve their adoption. In arriving at its
recommendation, the Board of Directors gave careful consideration to a number of
factors, including those described in the accompanying Proxy Statement and
Prospectus. Shareholders of U S WEST have the right to dissent from the
Recapitalization Proposal and have the fair value of their shares paid to them
in cash by submitting a written notice prior to the Special Meeting and
following the other procedures outlined in the accompanying Proxy Statement and
Prospectus.
<PAGE>
The Recapitalization Proposal will not result in a distribution or spin-off
of any assets or liabilities of U S WEST or its subsidiaries. After
implementation of the Recapitalization Proposal, holders of Communications Stock
and Media Stock will continue to be common stockholders of U S WEST and subject
to the risks associated with an investment in U S WEST and all of its
businesses, assets and liabilities. U S WEST cannot assure that the combined
market values of the Communications Stock and the Media Stock after
implementation of the Recapitalization Proposal will equal or exceed the market
value of U S WEST's existing common stock. The implementation of the
Recapitalization Proposal will also, to an extent, make the capital structure of
U S WEST more complex and may give rise to occasions when the interests of the
holders of Communications Stock and the holders of Media Stock may diverge or
appear to diverge.
Please give these proxy materials careful attention. IT IS IMPORTANT THAT
YOUR SHARES BE REPRESENTED AND VOTED AT THE SPECIAL MEETING REGARDLESS OF THE
SIZE OF YOUR HOLDINGS. Accordingly, whether or not you plan to attend the
Special Meeting, please promptly mark, sign and date the enclosed proxy and
return it in the enclosed postage-paid envelope to assure that your shares will
be represented at the Special Meeting. If you plan to be present in person,
please mark the box provided on the proxy card, and you will be sent an
attendance card which will expedite your admission to the meeting.
Sincerely,
Richard D. McCormick
CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
PRELIMINARY COPY, DATED JUNE 30, 1995
[LOGO]
7800 East Orchard Road
Englewood, Colorado 80111
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 1995
A Special Meeting of Shareholders of U S WEST, Inc., a Colorado corporation
("U S WEST"), will be held at the on , 1995, at : a.m.,
Mountain Time, for the following purposes:
1. To consider and vote upon a proposal to approve an Agreement and
Plan of Merger, a copy of which is attached as Annex I to the accompanying
Proxy Statement and Prospectus, pursuant to which (a) U S WEST would be
merged with and into U S WEST, Inc., a Delaware corporation ("U S WEST
Delaware"), with U S WEST Delaware continuing as the surviving corporation,
(b) each outstanding share of Common Stock of U S WEST would be converted
into one share of U S WEST Communications Group Common Stock of U S WEST
Delaware and one share of U S WEST Media Group Common Stock of U S WEST
Delaware, and (c) each outstanding share of Series B Preferred Stock of U S
WEST would be converted into one share of Series C Preferred Stock of U S
WEST Delaware, all as more fully described in the accompanying Proxy
Statement and Prospectus;
2. To consider and vote upon a proposal to approve the related
amendments to the U S WEST, Inc. 1994 Stock Plan described in Annex IX to
the accompanying Proxy Statement and Prospectus;
3. To consider and vote upon a proposal to approve the related
amendments to the U S WEST, Inc. Deferred Compensation Plan described in
Annex X to the accompanying Proxy Statement and Prospectus; and
4. To transact any such other business as may properly come before the
meeting.
Proposals 2 and 3 are conditioned upon approval of Proposal 1 and will not
be implemented if Proposal 1 is not approved by shareholders and implemented by
the Board. Accordingly, a vote against Proposal 1 will have the effect of a vote
against Proposals 2 and 3.
Only shareholders of record on the books of U S WEST on the close of
business on , 1995 will be entitled to vote at the Special Meeting of
Shareholders.
By order of the Board of Directors,
Charles P. Russ, III
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Englewood, Colorado
, 1995
YOUR VOTE IS IMPORTANT. PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND
THE SPECIAL MEETING.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Proxy Statement and Prospectus.............. 1
Available Information..................... 4
Incorporation of Certain Documents by
Reference................................ 5
Summary Comparison of Terms of Existing
Common Stock with Terms of Communications
Stock and Media Stock.................... 6
Proxy Statement Summary................... 14
Price Ranges of Existing Common Stock..... 29
Risk Factors.............................. 29
General................................... 35
Proposal 1 -- The Recapitalization
Proposal................................. 37
General................................. 37
Recommendation of the Board............. 38
Exchange Procedures; Odd-Lot Program.... 38
Background and Reasons for the
Recapitalization Proposal.............. 38
Certain Management Policies............. 41
Accounting Matters and Policies......... 43
Dividend Policy......................... 45
Description of Communications Stock and
Media Stock............................ 46
Future Inter-Group Interest............. 58
Stock Transfer Agent and Registrar...... 59
Stock Exchange Listings................. 60
Financial Advisors...................... 60
Comparison of Shareholder Rights........ 60
Certain Federal Income Tax
Considerations......................... 67
Restated Rights Agreement............... 70
Convertible Securities.................. 72
Preferred Stock......................... 73
Anti-Takeover Considerations............ 74
Dissenters' Rights...................... 76
Proposal 2 -- Amendment of the U S WEST,
Inc. 1994 Stock Plan..................... 79
Proposal 3 -- Amendment of the U S WEST,
Inc. Deferred Compensation Plan.......... 79
Solicitation Statement.................... 80
<CAPTION>
PAGE
---------
<S> <C>
Shareholder Proposals for 1996 Annual
Meeting.................................. 80
Experts................................... 80
Legal Opinions............................ 81
Annex I -- Agreement and Plan of Merger... I-1
Annex II -- Restated Certificate of
Incorporation of U S WEST, Inc........... II-1
Annex III -- By-Laws of U S WEST, Inc..... III-1
Annex IV -- Colorado Business Corporation
Act -- Article 113....................... IV-1
Annex V -- U S WEST, Inc.................. V-1
Selected Financial Data................. V-2
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. V-4
Consolidated Financial Statements....... V-26
Annex VI -- Communications Group.......... VI-1
Description of Business................. VI-2
Selected Financial Data................. VI-9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. VI-11
Combined Financial Statements........... VI-28
Annex VII -- Media Group.................. VII-1
Description of Business................. VII-2
Selected Financial Data................. VII-14
Unaudited Pro Forma Combined Statement
of Operations.......................... VII-19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. VII-20
Combined Financial Statements........... VII-45
Annex VIII -- Illustrations of Inter-Group
Interest................................. VIII-1
Annex IX -- Proposed Amendments to the U S
WEST, Inc. 1994 Stock Plan............... IX-1
Annex X -- Proposed Amendments to the U S
WEST, Inc. Deferred Compensation Plan.... X-1
</TABLE>
i
<PAGE>
GLOSSARY OF DEFINED TERMS
Set forth below is a list of certain defined terms used in this Proxy
Statement and Prospectus and the Annexes thereto.
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------- ---------
<S> <C>
Acquiring Person 66
Acquisition Trigger Date 67
Advance/Newhouse VII-5
Advanced Technologies VI-7
Affinity Group VII-5
AirTouch 6
AirTouch -- U S WEST PCS Partnership VII-7
Announcement Date 73
Article 113 71
Articles 2
ATI VII-3
AT&T VI-3
Atlanta Systems 6
Available Dividend Amount
Bell Atlantic VII-2
Bellcore VI-7
Board 1
Broadband Applications
Broadband Network VI-4
CAPs VI-6
CableComms
CBCA 19
CEIT VI-2
Code 63
Commission 4
Common Stock 1
Communications Group 2
Communications Group Available Dividend
Amount 43
Communications Group Region 6
Communications Group Subsidiaries 46
Communications Right 66
Communications Stock 1
Company 1
Compensation Plan 75
Composite Tape 26
Convertible Security 68
Cox
D.C. District Court VI-3
DBS VII-12
DGCL 28
Disposition 44
Dissenter 72
Dissenter's Notice 72
Dissenter's Responsive Notice 74
Distribution Date 66
EBITDA 22
Effective Time 34
<CAPTION>
TERM PAGE
- ------------------------------------------- ---------
<S> <C>
Exchange Act 4
Existing By-Laws 18
Existing Certificates 35
Existing Common Stock 1
Existing Preferred Stock 42
Existing Rights 66
Existing Series A Preferred Stock 42
Existing Series B Preferred Stock 1
Expiration Date 67
Fair Value II-
FCC 31
Flextech
FSA 69
GAAP 23
Fund American 69
Foreign Exchanges 2
Full Service Network VII-3
Group 2
Home Box Office VII-9
Inter-Group Interest 18
Inter-Group Interest Fraction 54
Junior Stock 70
LATAs V-II
LECs VII-11
Liquidation Unit 1
LYONs 68
LYONs Indenture 68
Mailing Date 35
Management Committee VII-4
Market Capitalization II-
Market Value II-
Market Value Ratio of the Communications
Stock to the Media Stock II-
Market Value Ratio of the Media Stock to
the Communications Stock.................. II-
Marketing Resources 38
Media Group 2
Media Group Available Dividend Amount 43
Media Group Subsidiaries 47
Media Right 66
Media Stock 1
Mercury One-2-One V-10
Merger 1
Merger Agreement 1
MFJ VI-3
MMDS VII-12
MSA VII-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------- ---------
Mountain Bell VI-3
<S> <C>
Net Proceeds 45
New By-Laws 1
NewVector 12
1992 Cable Act VII-10
Non-Competition Restrictions VII-10
Northwestern Bell VI-3
Number of Shares Issuable with Respect to
the Inter-Group Interest 54
Non-Regulated Communication Businesses 39
NYNEX VII-2
NYSE 2
ONA VI-21
Outside Activities Restrictions VII-7
Outstanding Media Fraction 54
Ownership Trigger Date 66
Pacific Northwest Bell VI-3
Parity Stock 69
Payment Demand 72
Payment Demand Date 72
PCS 13
PCS Primeco V-23
POPs 27
Preferred Stock 42
Proxy Statement 1
PSC VI-8
PSE 2
Publicly Traded II-
PUCs 31
RBOCs VI-7
Recapitalization Proposal 1
Redemption Price 68
Registration Statement 4
Related Business Transaction 45
Restated Certificate 1
<CAPTION>
TERM PAGE
- ------------------------------------------- ---------
<S> <C>
Restated Rights Agreement 66
Restructuring Plan VI-2
Rights 66
Rights Agreement 66
Rights Redemption Date 68
SBC
Series A Preferred Stock 42
Series B Preferred Stock 42
Series C Preferred Stock 1
Series A Purchase Price 67
Series B Purchase Price 67
Service 19
SFAS V-2
Shareholder's Notice of Intent to Dissent 72
Six Flags VII-9
SMATV VII-12
Special Committee 35
Special Meeting 1
Stock Plan 75
TCI International VII-5
TeleWest 6
Thomson Directories V-6
TITUS VII-6
Trading Day II-
TWE - A/N Partnership VII-5
TWE General Partners VII-9
TWE Japan VII-6
TWE 6
U S WEST 1
U S WEST Communications 2
U S WEST Delaware 1
U S WEST International VII-5
U S WEST Multimedia VII-3
VDT VI-22
WMC Partners VII-7
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 30, 1995
---------------------
U S WEST, INC.
A COLORADO CORPORATION
PROXY STATEMENT
---------------------
U S WEST, INC.
A DELAWARE CORPORATION
PROSPECTUS
---------------------
SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT A.M.,
MOUNTAIN TIME, ON , 1995
This Proxy Statement and Prospectus (the "Proxy Statement") is being
furnished to the shareholders of U S WEST, Inc., a Colorado corporation ("U S
WEST"), in connection with the solicitation of proxies by the Board of Directors
of U S WEST (the "Board") from holders of outstanding shares of U S WEST's
Common Stock, without par value (the "Existing Common Stock"), for use at the
Special Meeting of Shareholders of U S WEST to be held at : a.m., Mountain
Time, on , 1995, and at any adjournment or postponement thereof (the
"Special Meeting"). This Proxy Statement and the accompanying form of proxy are
first being mailed to shareholders of U S WEST on or about , 1995.
For an index indicating the pages on which certain terms used in this Proxy
Statement are defined, see "Glossary of Defined Terms" located immediately
following the Table of Contents of this Proxy Statement.
Holders of Existing Common Stock and Series B Cumulative Redeemable
Preferred Stock, par value $1.00 per share, of U S WEST (the "Existing Series B
Preferred Stock") will be asked at the Special Meeting to consider and approve
Proposal 1 (the "Recapitalization Proposal") that would create two classes of
common stock which are intended to reflect separately the performance of U S
WEST's communications and multimedia businesses and change the state of
incorporation of U S WEST from Colorado to Delaware. Under the Recapitalization
Proposal, shareholders of U S WEST will be asked to approve an Agreement and
Plan of Merger (the "Merger Agreement"), dated as of , 1995, between
U S WEST and U S WEST, Inc., a Delaware corporation and wholly-owned subsidiary
of U S WEST ("U S WEST Delaware"), pursuant to which U S WEST would be merged
(the "Merger") with and into U S WEST Delaware with U S WEST Delaware continuing
as the surviving corporation. Immediately prior to the effective time of the
Merger, the Certificate of Incorporation of U S WEST Delaware would be amended
and restated (as so amended and restated, the "Restated Certificate") to, among
other things, create two classes of common stock, the U S WEST Communications
Group Common Stock, par value $.01 per share ("Communications Stock"), and the U
S WEST Media Group Common Stock, par value $.01 per share ("Media Stock"). The
Communications Stock and Media Stock are sometimes referred to herein
collectively as "Common Stock" and individually as a class of "Common Stock."
Upon consummation of the Merger, each share of Existing Common Stock would be
automatically converted into one share of Communications Stock and one share of
Media Stock and each share of Existing Series B Preferred Stock would be
automatically converted into one share of Series C Cumulative Redeemable
Preferred Stock, par value $1.00 per share, of U S WEST Delaware (the "Series C
Preferred Stock"), having substantially the same rights, preferences and
limitations as the Existing Series B Preferred Stock. The conversion of the
Existing Common Stock into Communications Stock and Media Stock is intended to
be tax free. See "Proposal 1 -- The Recapitalization Proposal -- Certain Federal
Income Tax Considerations." As used herein, the term the "Company" refers to U S
WEST prior to the Merger and to U S WEST Delaware following the Merger. The full
text of the Merger Agreement, the Restated Certificate and the By-Laws
<PAGE>
of U S WEST Delaware (the "New By-Laws") are set forth in Annexes I, II and III
hereto, respectively. This Proxy Statement also constitutes a prospectus of U S
WEST Delaware with respect to the shares of Communications Stock and Media Stock
to be issued in the Merger.
The Communications Stock and Media Stock are designed to provide
stockholders with securities that are intended to reflect separately the
performance of the communications business of U S WEST Communications, Inc. ("U
S WEST Communications") and certain other subsidiaries of the Company (the
"Communications Group") and the Company's multimedia businesses (the "Media
Group"), respectively, without diminishing the benefits of remaining a single,
integrated corporation. The Communications Group and Media Group are sometimes
referred to herein collectively as the "Groups" and individually as a "Group".
The Recapitalization Proposal will permit separate market valuations of the
Communications Stock and the Media Stock based upon the separate operating
results of the Communications Group and Media Group, respectively. This will
enable investors to gain a better understanding of these businesses and to
invest in either or both securities depending upon their investment objectives.
The Recapitalization Proposal is also intended to provide the Company with
greater flexibility in raising capital. The Recapitalization Proposal will not
result in a distribution or spin-off to shareholders of any assets or
liabilities of U S WEST or any of its subsidiaries. See "Proposal 1 -- The
Recapitalization Proposal -- Background and Reasons for the Recapitalization
Proposal."
The reincorporation of the Company in Delaware will not result in any change
in the business, management, board of directors, assets, liabilities or net
worth of the Company, and the business of the Company will continue to be
managed from its corporate headquarters in Englewood, Colorado. It will,
however, allow the Company to benefit from Delaware's well-developed corporate
laws, which are periodically updated and revised to meet changing business
needs. Delaware courts have developed considerable expertise in dealing with
corporate issues and a substantial body of case law has been established
construing Delaware law and establishing public policies with respect to
Delaware corporations. As a consequence, a greater measure of predictability is
possible in Delaware with respect to corporate legal affairs than is available
in other states. In addition, the Company believes that Delaware law will offer
clearer guidance with respect to legal issues that may arise as a result of the
existence of separate classes of Common Stock of the Company. For a further
discussion of the benefits of Delaware law, see "Proposal 1 -- The
Recapitalization Proposal -- Background and Reasons for the Recapitalization
Proposal."
If the Recapitalization Proposal is approved, subject to the legal
restrictions on the payment of dividends described in this Proxy Statement, the
Board currently intends to pay regular quarterly dividends on the Communications
Stock in an amount equal to $0.535 per share, which is the current quarterly
dividend rate on the Existing Common Stock. With regard to the Media Stock, the
Board currently intends to retain future earnings, if any, for the development
of the Media Group's businesses and does not anticipate paying dividends on the
Media Stock in the foreseeable future. Future dividends on the Communications
Stock and the Media Stock will be payable when, as and if declared by the Board
out of the lesser of (i) all funds of the Company legally available therefor and
(ii) the Available Dividend Amount with respect to the relevant Group. Subject
to certain conditions, the Communications Stock and the Media Stock may be
redeemed or converted into shares of the other class of Common Stock. The
relative voting power of shares of Communications Stock and Media Stock will
fluctuate 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 Media Stock and one share of
Communications Stock. The rights of the holders of Communications Stock and
Media Stock upon liquidation of the Company will be in proportion to the
respective per share liquidation units of such class of Common Stock (each, a
"Liquidation Unit"). Each share of Communications Stock will have one
Liquidation Unit and each share of Media Stock will have . of a Liquidation
Unit. These features, as well as other considerations, are discussed under "Risk
Factors" and "Proposal 1 -- The Recapitalization Proposal -- Description of
Communications Stock and Media Stock."
2
<PAGE>
The Restated Certificate provides for the authorization of 4 billion shares
of Common Stock, as compared to 2 billion shares of Existing Common Stock which
are currently authorized under U S WEST's Articles of Incorporation (the
"Articles"). Of such 4 billion shares, 2 billion would be shares of
Communications Stock and 2 billion would be shares of Media Stock. The
authorized but unissued shares of Communications Stock and Media Stock would be
available for issuance by the Company from time to time, as determined by the
Board, for any proper corporate purpose, which could include raising capital,
payment of stock dividends, stock splits, providing compensation or benefits to
employees or acquiring or investing in other companies or businesses.
There has been no prior market for the Communications Stock or Media Stock.
Applications will be made with the New York Stock Exchange (the "NYSE"), the
Pacific Stock Exchange (the "PSE") and the foreign exchanges on which the
Existing Common Stock is listed (the "Foreign Exchanges") to amend the Company's
current listing agreements to provide for the redesignation of the Existing
Common Stock as Communications Stock and the listing of the Media Stock. See
"Proposal 1 -- The Recapitalization Proposal -- Stock Exchange Listings."
HOLDERS OF COMMUNICATIONS STOCK AND MEDIA STOCK WILL BE COMMON STOCKHOLDERS
OF THE COMPANY AND WILL BE SUBJECT TO THE RISKS ASSOCIATED WITH AN INVESTMENT IN
A SINGLE COMPANY AND ALL OF THE COMPANY'S BUSINESSES, ASSETS AND LIABILITIES.
FINANCIAL EFFECTS ARISING FROM EITHER GROUP THAT AFFECT THE COMPANY'S RESULTS OF
OPERATIONS OR FINANCIAL CONDITION COULD, IF SIGNIFICANT, AFFECT THE RESULTS OF
OPERATIONS OR FINANCIAL POSITION OF THE OTHER GROUP OR THE MARKET PRICE OF THE
CLASS OF COMMON STOCK RELATING TO THE OTHER GROUP AND REDUCE THE FUNDS OF THE
COMPANY LEGALLY AVAILABLE FOR PAYMENT OF FUTURE DIVIDENDS ON SUCH CLASS OF
COMMON STOCK. WHEN EVALUATING THE RECAPITALIZATION PROPOSAL, SHAREHOLDERS OF U S
WEST SHOULD BE AWARE OF CERTAIN RISK FACTORS RELATING THERETO. SEE "RISK
FACTORS."
Shareholders will also be asked to consider and approve Proposal 2 to amend
the U S WEST, Inc. 1994 Stock Plan to authorize the granting of stock awards in
either Communications Stock or Media Stock, or both, and Proposal 3 to amend the
U S WEST, Inc. Deferred Compensation Plan to provide for . If Proposal 1
is approved, it will be implemented whether or not Proposals 2 and 3 are
approved. If Proposal 1 is not approved, Proposals 2 and 3 will not be
implemented.
The Recapitalization Proposal will require the affirmative vote of (i) the
holders of a majority of the outstanding shares of Existing Common Stock, voting
as a separate class, (ii) the holders of two-thirds of the outstanding shares of
Series B Preferred Stock, voting as a separate class, and (iii) the holders of a
majority of all outstanding shares of Existing Common Stock and Existing Series
B Preferred Stock, voting together as a single class. Shareholders of U S WEST
have the right to dissent from the Recapitalization Proposal and have the fair
value of their shares of Existing Common Stock paid to them in cash by
submitting a written notice prior to the Special Meeting and following the other
procedures described under "Proposal 1 -- The Recapitalization Proposal --
Dissenters' Rights."
THE BOARD HAS UNANIMOUSLY ADOPTED EACH PROPOSAL AND BELIEVES THAT THEIR
APPROVAL IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
APPROVAL OF EACH PROPOSAL.
------------------------
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.
Dated: , 1995
3
<PAGE>
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 THE
COMPANY SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
U S WEST is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files 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 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. Such reports, proxy statements and
other information concerning the Company may also be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005 and the PSE, 301 Pine
Street, San Francisco, California 94104, the securities exchanges on which
shares of the Existing Common Stock are listed.
U S WEST Delaware has filed with the Commission a registration statement on
Form S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act, covering shares of
Communications Stock and shares of Media Stock issuable in connection with the
Recapitalization Proposal. This Proxy Statement, which also constitutes the
Prospectus of U S WEST Delaware 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.
4
<PAGE>
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, 1994, (ii) Quarterly Report
on Form 10-Q for the quarter ended March 31, 1995 and (iii) Current Reports on
Form 8-K dated January 19, 1995, April 10, 1995, April 18, 1995, May 23, 1995
and June 20, 1995. 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 AND 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 WHICH 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 THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BEFORE , 1995 [FIVE BUSINESS DAYS
PRIOR TO THE SPECIAL MEETING].
Questions concerning the Proposals to be acted upon at the Special Meeting
should be directed to the Company's Information Agent, Beacon Hill Associates,
Inc., toll-free at . Additional copies of this Proxy Statement or
the Proxy Card may be obtained from the Information Agent or the Company's
Investor Relations Department at its principal office.
5
<PAGE>
SUMMARY COMPARISON OF TERMS OF EXISTING
COMMON STOCK WITH TERMS OF
COMMUNICATIONS STOCK AND MEDIA STOCK
THE FOLLOWING IS A COMPARISON OF THE EXISTING COMMON STOCK AND THE PROPOSED
COMMUNICATIONS STOCK AND MEDIA STOCK. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY THE MORE DETAILED INFORMATION CONTAINED IN THIS PROXY STATEMENT AND THE
ANNEXES HERETO. SEE "PROXY STATEMENT SUMMARY," "RISK FACTORS," "PROPOSAL 1 --
THE RECAPITALIZATION PROPOSAL -- DESCRIPTION OF COMMUNICATIONS STOCK AND MEDIA
STOCK" AND "-- COMPARISON OF SHAREHOLDER RIGHTS." UNLESS OTHERWISE DEFINED
HEREIN, CAPITALIZED TERMS USED IN THIS SUMMARY HAVE THE RESPECTIVE MEANINGS
ASCRIBED TO THEM ELSEWHERE IN THIS PROXY STATEMENT. SEE "GLOSSARY OF DEFINED
TERMS" LOCATED IMMEDIATELY FOLLOWING THE TABLE OF CONTENTS OF THIS PROXY
STATEMENT. SHAREHOLDERS ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT AND THE
ANNEXES HERETO IN THEIR ENTIRETY.
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Governing Law: Colorado Delaware Delaware
Business: All businesses of the The Communications Group is The Media Group is
Company comprised of businesses comprised of:
which provide regulated - the Company's cable and
communications services to telecommunications
customers in the Company's businesses outside of the
14 state region (the Communications Group
"Communications Group Region, including its
Region"), including local cable systems in the
telephone services, Atlanta, Georgia
exchange access services metropolitan area (the
and certain long distance "Atlanta Systems") and
services, as well as its investments in Time
various new services, Warner Entertainment
including Caller ID, voice Company, L.P. ("TWE") and
messaging and high-speed TeleWest Communications
data networking services. plc ("TeleWest");
The Communications Group - the Company's wireless
plans to build an communications
interactive broadband businesses, including its
telecommunications network proposed joint venture
in its region, capable of with AirTouch
providing a broader range Communications, Inc.
of products and services to ("AirTouch") and Mercury
its customers. One-2-One, its personal
communications services
joint venture in the
United Kingdom; and
- the Company's multimedia
content and services
businesses, including its
directory publishing
operations.
Issuance: -- Each share of Existing Each share of Existing
Common Stock will be Common Stock will be
converted into one share of converted into one share of
Communications Stock and Communications Stock and
one share of Media Stock. one share of Media Stock.
The Communications Stock is The Media Stock is intended
intended to reflect to reflect separately the
separately the performance performance of the Media
of the Communications Group.
Group.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Number of Shares 470,718,261 470,718,261 470,718,261
Outstanding (based on
number of shares of
Existing Common Stock
outstanding as of June 28,
1995):
Listing: NYSE, PSE and the Foreign Application will be made to Application will be made to
Exchanges under the symbol the NYSE, the PSE and the the NYSE, the PSE and the
"USW." Foreign Exchanges for the Foreign Exchanges for
redesignation of the approval of the listing of
Existing Common Stock as the Media Stock under the
Communications Stock, which symbol "UMG."
would continue to trade
under the symbol "USW."
Management Policies: -- The Company intends to The Company intends to
follow certain policies follow certain policies
with respect to the with respect to the
businesses of the businesses of the Media
Communications Group and Group and the
the Media Group, including Communications Group,
(i) the requirement that, including (i) the
subject to certain requirement that, subject
exceptions, all to certain exceptions, all
transactions between the transactions between the
Communications Group and Media Group and the
the Media Group be Communications Group be
consistent with arm's- consistent with arm's-
length terms and (ii) the length terms and (ii) the
use by the Board of its use by the Board of its
good faith business good faith business
judgment to allocate judgment to allocate
corporate opportunities corporate opportunities
between the two Groups. between the two Groups.
The Company does not intend The Company does not intend
to transfer funds between to transfer funds between
the Groups, except for the Groups, except for
certain short-term ordinary certain short-term ordinary
course advances of funds at course advances of funds at
market rates associated market rates associated
with the Company's with the Company's
centralized cash centralized cash
management. The Board may, management. The Board may,
however, in its sole however, in its sole
discretion, determine to discretion, determine to
transfer funds between the transfer funds between the
Groups as an arm's-length Groups as an arm's-length
loan or, in the case of loan or, in the case of
transfers from the transfers from the
Communications Group to the Communications Group to the
Media Group, an equity Media Group, an equity
contribution. contribution.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Dividends: The Company's quarterly The Company currently The Company currently does
dividend rate is presently intends to pay dividends on not intend to pay dividends
$0.535 per share of the Communications Stock on the Media Stock.
Existing Common Stock. initially at a quarterly
Dividends are payable out rate of $0.535 per share.
of all assets of the
Company legally available
for dividends.
Dividends on the Existing Dividends on the Dividends on the Media
Common Stock are limited to Communications Stock will Stock will be paid at the
legally available funds be paid at the discretion discretion of the Board
under Colorado law and are of the Board based based primarily upon the
payable at the discretion primarily upon the financial condition,
of the Board based financial condition, results of operations and
primarily upon the results of operations and business requirements of
financial condition, business requirements of the Media Group and the
results of operations and the Communications Group Company as a whole.
business requirements of and the Company as a whole. Dividends, if any, will be
the Company. Dividends will be payable payable out of the lesser
out of the lesser of (i) of (i) the funds of the
the funds of the Company Company legally available
legally available for the for the payment of
payment of dividends and dividends and (ii) the
(ii) the Communications Media Group Available
Group Available Dividend Dividend Amount.
Amount.
The Communications Group The Media Group Available
Available Dividend Amount Dividend Amount is intended
is intended to be similar to be similar to the amount
to the amount of assets of assets that would be
that would be available for available for payment of
payment of dividends on the dividends on the Media
Communications Stock under Stock under Delaware law if
Delaware law if the the Media Group were a
Communications Group were a separate company.
separate company.
The Board, subject to the The Board, subject to the
limitations set forth limitations set forth
above, may, in its sole above, may, in its sole
discretion, declare and pay discretion, declare and pay
dividends exclusively on dividends exclusively on
the Communications Stock, the Media Stock,
exclusively on the Media exclusively on the
Stock or on both such Communications Stock or on
classes, in equal or both such classes, in equal
unequal amounts, or unequal amounts,
notwithstanding the notwithstanding the
relative amounts of the relative amounts of the
Communications Group Media Group Available
Available Dividend Amount Dividend Amount and the
and the Media Group Communications Group
Available Dividend Amount, Available Dividend Amount,
the amount of prior the amount of prior
dividends declared on each dividends declared on each
class, the respective class, the respective
voting or liquidation voting or liquidation
rights of each class or any rights of each class or any
other factor. other factor.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Voting Rights: One vote per share. Except as otherwise Except as otherwise
described herein, the described herein, the
holders of Communications holders of Media Stock and
Stock and Media Stock will Communications Stock will
vote together as a single vote together as a single
class. The Communications class. Prior to March 1,
Stock will have one vote 1996, each share of Media
per share. Stock will have . of a
vote. Thereafter, each
share of Media Stock will
have a variable number of
votes equal to the
time-weighted average daily
ratio of the Market Value
of one share of Media Stock
to one share of
Communications Stock,
calculated over the
20-Trading Day period
ending ten Trading Days
prior to the record date,
and may have more than,
less than or exactly one
vote per share.
Because each share of Media Because each share of Media
Stock will have a variable Stock will have a variable
number of votes based upon number of votes, the
an average daily ratio of relative voting power per
the Market Value of one share of Media Stock and
share of Media Stock to one Communications Stock will
share of Communications fluctuate. Market Value
Stock, the relative voting could be influenced by many
power per share of factors, including the
Communications Stock and results of operations of
Media Stock will fluctuate. the Company and each of the
Market Value could be Groups, the regulatory
influenced by many factors, environment, trading
including the results of volume, share issuances and
operations of the Company repurchases and general
and each of the Groups, the economic and market
regulatory environment, conditions.
trading volume, share
issuances and repurchases
and general economic and
market conditions.
Preemptive Rights: The holders of Existing The holders of The holders of Media Stock
Common Stock do not have Communications Stock will will not have any
any preemptive rights or not have any preemptive preemptive rights or any
any rights to convert their rights or any rights to rights to convert their
shares into any other convert their shares into shares into any other
securities of the Company. any other securities of the securities of the Company.
Company.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Rights on Disposition: None. If the Company disposes of If the Company disposes of
all or substantially all of all or substantially all of
the properties and assets the properties and assets
attributed to the attributed to the Media
Communications Group (i.e., Group (i.e., 80% or more on
80% or more on a current a current market value
market value basis), other basis), other than in a
than in a transaction in transaction in which the
which the Company receives Company receives primarily
primarily equity securities equity securities of an
of an entity engaged or entity engaged or proposing
proposing to engage to engage primarily in a
primarily in a business business similar or
similar or complementary to complementary to the
the business of the business of the Media
Communications Group, the Group, the Company must
Company must either (i) either (i) distribute to
distribute to holders of holders of Media Stock an
Communications Stock an amount in cash and/or
amount in cash and/or securities or other
securities or other property equal to their
property equal to the Fair proportionate interest in
Value of the Net Proceeds the Fair Value of the Net
of such disposition, either Proceeds of such
by special dividend or by disposition, either by
redemption of all or part special dividend or by
of the outstanding shares redemption of all or part
of Communications Stock, or of the outstanding shares
(ii) convert each share of of Media Stock, or (ii)
Communications Stock into a convert each share of Media
number of shares of Media Stock into a number of
Stock equal to % of the shares of Communications
average daily ratio of the Stock equal to % of the
Market Value of one share average daily ratio of the
of Communications Stock to Market Value of one share
one share of Media Stock, of Media Stock to one share
calculated over the of Communications Stock,
ten-Trading Day period calculated over the ten-
beginning on the 16th Trading Day period
Trading Day after beginning on the 16th
consummation of the Trading Day after
disposition transaction. consummation of the
disposition transaction.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
The Company may, at any The Company may, at any
time prior to the first time prior to the first
anniversary of a dividend anniversary of a dividend
on, or partial redemption on, or partial redemption
of, shares of of, shares of Media Stock
Communications Stock following a disposition of
following a disposition of all or substantially all of
all or substantially all of the properties and assets
the properties and assets attributed to the Media
attributed to the Group, convert each
Communications Group, remaining outstanding share
convert each remaining of Media Stock into a
outstanding share of number of shares of
Communications Stock into a Communications Stock equal
number of shares of Media to % of the time-
Stock equal to % of the weighted average daily
time-weighted average daily ratio of the Market Value
ratio of the Market Value of one share of Media Stock
of one share of to one share of
Communications Stock to one Communications Stock,
share of Media Stock, calculated over the
calculated over the 20-Trading Day period
20-Trading Day period ending five Trading Days
ending five Trading Days prior to the date of the
prior to the date of the notice of such conversion.
notice of such conversion.
Sales of Less than The proceeds from any The proceeds from any
Substantially All of the disposition of assets that disposition of assets that
Assets of a Group: do not comprise all or do not comprise all or
substantially all of the substantially all of the
properties and assets properties and assets
attributed to the attributed to the Media
Communications Group will Group will be assets
be assets attributed to the attributed to the Media
Communications Group and Group and used for its
used for its benefit, benefit, subject to the
subject to the management management policies
policies described under described under "Proposal 1
"Proposal 1 -- The -- The Recapitalization
Recapitalization Proposal Proposal -- Certain
-- Certain Management Management Policies."
Policies."
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Conversion at Option of None. At any time following the The Company may at any time
Company: ninth anniversary of the convert each share of Media
Effective Time, the Company Stock into a number of
may convert each share of shares of Communications
Communications Stock into a Stock equal to % of the
number of shares of Media time-weighted average daily
Stock equal to % of the ratio of the Market Value
time-weighted average daily of one share of Media Stock
ratio of the Market Value to one share of
of one share of Communications Stock,
Communications Stock to one calculated over the
share of Media Stock, 20-Trading Day period
calculated over the ending five Trading Days
20-Trading Day period prior to the date of notice
ending five Trading Days of such conversion, for the
prior to the date of notice first five years following
of such conversion. the Effective Time and
thereafter declining
annually to % on the ninth
anniversary of the
Effective Time.
The ratio of the Market The ratio of the Market
Value of one share of Value of one share of Media
Communications Stock to one Stock to one share of
share of Media Stock could Communications Stock could
be influenced by many be influenced by many
factors, including the factors, including the
results of operations of results of operations of
the Company and each of the the Company and each of the
Groups, the regulatory Groups, the regulatory
environment, trading environment, trading
volume, share issuances and volume, share issuances and
repurchases and general repurchases and general
economic and market economic and market
conditions. conditions.
Redemption in Exchange for None. The Company may redeem the The Company may redeem the
Stock of Subsidiary: Communications Stock for Media Stock for a number of
all of the shares of the shares of one or more
common stock of one or more wholly-owned subsidiaries
wholly-owned subsidiaries of the Company that hold
of the Company that hold all of the assets and
all of the assets and liabilities attributed to
liabilities attributed to the Media Group equal to
the Communications Group. the proportionate interest
in the Media Group
represented by the Media
Stock.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Liquidation: Holders of Existing Common In the event of the In the event of the
Stock are entitled to liquidation of the Company, liquidation of the Company,
receive the net assets of holders of Communications holders of Media Stock will
the Company, if any, Stock will be entitled to a be entitled to a portion of
remaining for distribution portion of the assets the assets remaining for
to holders of Existing remaining for distribution distribution to holders of
Common Stock. to holders of Common Stock Common Stock on a per share
on a per share basis in basis in proportion to the
proportion to the Liquidation Units per share
Liquidation Units per share of Media Stock. Each share
of Communications Stock. of Media Stock will have .
Each share of of a Liquidation Unit,
Communications Stock will subject to adjustment if
have one Liquidation Unit, shares of Media Stock are
subject to adjustment if subdivided, combined or
shares of Communications distributed as a dividend.
Stock are subdivided,
combined or distributed as
a dividend.
Stockholders of One -- Holders of Communications Holders of Media Stock will
Company: Stock will continue to be continue to be subject to
subject to the risks the risks associated with
associated with an an investment in a single
investment in a single company and all of the
company and all of the Company's businesses,
Company's businesses, assets and liabilities.
assets and liabilities. Financial effects arising
Financial effects arising from the Communications
from the Media Group that Group that affect the
affect the Company's Company's results of
results of operations or operations or financial
financial condition could, condition could, if
if significant, affect the significant, affect the
results of operations or results of operations or
financial position of the financial position of the
Communications Group or the Media Group or the market
market price of the price of the Media Stock.
Communications Stock.
Any net losses of the Any net losses of the Media
Communications Group or the Group or the Communications
Media Group, and dividends Group, and dividends or
or distributions on, or distributions on, or
repurchases of, repurchases of, Media
Communications Stock, Media Stock, Communications Stock
Stock or Preferred Stock, or Preferred Stock, will
will reduce the funds of reduce the funds of the
the Company legally Company legally available
available for payment of for payment of future
future dividends on the dividends on the Media
Communications Stock and Stock and the
the Media Stock. Communications Stock.
</TABLE>
13
<PAGE>
PROXY STATEMENT SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS PROXY STATEMENT AND THE ANNEXES HERETO. REFERENCE IS MADE TO, AND THIS
PROXY STATEMENT SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED
INFORMATION CONTAINED, OR INCORPORATED BY REFERENCE, IN THIS PROXY STATEMENT AND
THE ANNEXES HERETO. UNLESS OTHERWISE DEFINED HEREIN, CAPITALIZED TERMS USED IN
THIS PROXY STATEMENT SUMMARY HAVE THE RESPECTIVE MEANINGS ASCRIBED TO THEM
ELSEWHERE IN THIS PROXY STATEMENT. SEE "GLOSSARY OF DEFINED TERMS" LOCATED
IMMEDIATELY FOLLOWING THE TABLE OF CONTENTS OF THIS PROXY STATEMENT.
SHAREHOLDERS ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT AND THE ANNEXES
HERETO IN THEIR ENTIRETY.
THE SPECIAL MEETING
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DATE, TIME AND PLACE OF MEETING... A Special Meeting of Shareholders of the Company will be
held on , 1995, at a.m., Mountain Time, in
the .
MEETING RECORD DATE............... , 1995.
PROPOSALS TO BE CONSIDERED AT THE
MEETING.......................... The following Proposals of the Board will be considered
at the Special Meeting:
- Proposal 1 -- The Recapitalization Proposal.
- Proposal 2 -- A proposal to amend the U S WEST, Inc.
1994 Stock Plan to provide for the granting of stock
awards in Communications Stock and/or Media Stock and
to establish the number of shares of Media Stock
available for awards.
- Proposal 3 -- A proposal to amend the U S WEST, Inc.
Deferred Compensation Plan to provide for .
If Proposal 1 is approved by the shareholders, it will
be implemented whether or not Proposals 2 and 3 are
approved. If Proposal 1 is not approved by the
shareholders, Proposals 2 and 3 will not be implemented.
VOTE REQUIRED..................... The following shareholder votes are required for
approval of the Proposals, with each share of Existing
Common Stock and each share of Existing Series B
Preferred Stock having one vote:
- Proposal 1 -- The affirmative vote of (i) the holders
of a majority of the outstanding shares of Existing
Common Stock, voting as a separate class, (ii) the
holders of two-thirds of the outstanding shares of
Existing Series B Preferred Stock, voting as a
separate class, and (iii) the holders of a majority of
the outstanding shares of Existing Common Stock and
Existing Series B Preferred Stock, voting together as
a single class.
- Proposal 2 -- The affirmative vote of the holders of a
majority of the shares of Existing Common Stock
represented in person or by proxy at the Special
Meeting.
- Proposal 3 -- The affirmative vote of the holders of a
majority of the shares of Existing Common Stock
represented in person or by proxy at the Special
Meeting.
The directors and executive officers of U S WEST
beneficially own less than one percent of the
outstanding shares of Existing Common Stock.
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THE COMPANY
7800 East Orchard Road
Englewood, Colorado 80111
(303) 793-6500
THE COMMUNICATIONS GROUP.......... The Communications Group, through U S WEST Com-
munications, provides regulated communications services
to more than 25 million residential and business
customers in the Communications Group Region. The
Communications Group Region currently includes 7 of the
10 fastest growing states in the United States.
Communications services offered by U S WEST
Communications 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. U S WEST Communications
also offers its customers various new services, in-
cluding Caller ID, voice messaging and high-speed data
networking services. U S WEST Communications plans to
build an interactive broadband telecommunications
network capable of providing a broader range of products
and services to its customers in the Communications
Group Region.
The Communications Group also provides customer premises
equipment and certain communications services to
business customers and governmental agencies both inside
and outside the Communications Group Region. See "Annex
VI -- Communications Group -- Description of Business,"
"-- Selected Combined Financial Data," "-- Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and "-- Combined Financial
Statements."
THE MEDIA GROUP................... The Media Group is comprised of: (i) cable and
telecommunications network businesses outside of the
Communications Group Region and internationally, (ii)
domestic and international wireless communications
network businesses and (iii) domestic and international
multimedia content and services businesses.
The Media Group's cable and telecommunications
businesses include domestic cable and telecommunications
businesses and investments outside of the Communications
Group Region, including the Atlanta Systems and its
interest in TWE, the second largest provider of cable
television services in the United States, and
international cable and telecommunications investments,
including the Company's interest in TeleWest, the
largest provider of combined cable and
telecommunications services in the United Kingdom.
The Media Group, through U S WEST NewVector Group, Inc.
("NewVector"), provides domestic wireless communications
products and services, including cellular services, to a
rapidly growing customer base. U S WEST and AirTouch
have announced plans to combine their domestic cellular
properties
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15
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and create 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 a national wireless alliance,
which successfully bid on 11 personal communications
services ("PCS") licenses in March 1995, and have agreed
to coordinate the operations of their PCS and cellular
businesses. The Media Group also provides wireless
communications services internationally, including
through Mercury One-2-One, the world's first PCS
service, in the United Kingdom.
The Media Group's multimedia content and services
business develops and packages content and information
services, including telephone directories, database
marketing and other interactive services in domestic and
international markets. See "Annex VII -- Media Group --
Description of Business," "-- Selected Combined
Financial Data," "-- Management's Discussion and
Analysis of Financial Condition and Results of
Operations" and "-- Combined Financial Statements."
PROPOSAL 1 -- THE RECAPITALIZATION PROPOSAL
GENERAL........................... The shareholders of U S WEST are being asked to consider
and approve the Recapitalization Proposal which, if
approved, would constitute approval of the Merger
Agreement, pursuant to which:
(i) U S WEST would be merged with and into U S WEST
Delaware with U S WEST Delaware continuing as the
surviving corporation; and
(ii) each outstanding share of the Existing Common Stock
would be automatically converted into one share of
Communications Stock and one share of Media Stock and
each outstanding share of Existing Series B Preferred
Stock would be automatically converted into one share
of Series C Preferred Stock.
For a description of the procedures pursuant to which
the Media Stock and new certificates representing
Communications Stock will be distributed to
shareholders, see "Proposal 1 -- The Recapitalization
Proposal -- Exchange Procedures; Odd-Lot Program." The
conversion of the Existing Common Stock into
Communications Stock and Media Stock is intended to be
tax free. See "-- Tax Considerations" and "Proposal 1 --
The Recapitalization Proposal -- Certain Federal Income
Tax Considerations." No state or federal regulatory
approvals are required in connection with the
consummation of the Merger.
IF THE RECAPITALIZATION PROPOSAL IS NOT APPROVED BY THE
SHAREHOLDERS, THE MERGER WILL NOT BE CONSUMMATED AND THE
EXISTING COMMON STOCK WILL NOT BE CONVERTED INTO
COMMUNICATIONS STOCK AND MEDIA STOCK.
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RISK FACTORS...................... When evaluating the Recapitalization Proposal,
shareholders of U S WEST should be aware of certain risk
factors relating thereto. Such risk factors include: (i)
the risks associated with an investment in a single
company and all of the Company's businesses, assets and
liabilities; (ii) the potential diverging interests of
the two classes of Common Stock; (iii) the lack of legal
precedent with respect to the fiduciary duties of the
board of directors of a company with two classes of
common stock the rights of which are defined by
specified operations of the Company; (iv) limited
separate stockholder rights with respect to the two
classes of Common Stock; (v) the ability of the Board to
change certain management and accounting policies
without stockholder approval; (vi) the ability to trans-
fer funds between the Groups; (vii) the Company's
ability to issue authorized but unissued shares of
Communications Stock or Media Stock without stockholder
approval; (viii) limitations on potential unsolicited
acquisitions of either Group; (ix) certain anti-takeover
provisions; (x) the potential effects of a possible
Disposition of assets attributed to a Group; and (xi) no
assurances as to the market price of the Communications
Stock or the Media Stock following the Merger. For
additional information with respect to the foregoing
considerations, see "Risk Factors."
REASONS FOR THE RECAPITALIZATION
PROPOSAL......................... The Recapitalization Proposal is intended to enhance
shareholder value by providing shareholders with
securities that should reflect separately the
performance of the Company's communications and
multimedia businesses. It should enable investors to
gain a better understanding of the value inherent in
these businesses and allow shareholders to invest in
either or both securities depending upon their
investment objectives. The Recapitalization Proposal is
also intended to provide the Company with an additional
equity security that can be used to raise capital as
well as for issuance in connection with acquisitions and
investments. The Recapitalization Proposal would also
preserve for the Company the strategic, financial and
operational benefits of doing business as a single
corporation by enabling each Group to benefit from
synergies with the other. In addition, the
Recapitalization Proposal would permit the Company to
grant incentive awards to employees using the class of
Common Stock which reflects the performance of the Group
in which the employees work.
By reincorporating in Delaware, the Company will be able
to benefit from Delaware's comprehensive and
well-developed corporate laws. For many years Delaware
has followed a policy of encouraging incorporation in
that state. In furtherance of that policy, Delaware has
adopted a modern and comprehensive corporation statute
that has been periodically updated and revised to meet
changing business needs. As a result, many publicly held
corporations have initially chosen Delaware for their
domicile or have subsequently reincorporated in Delaware
in a manner similar to that proposed by the
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17
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Company. While the Company has not been impeded in oper-
ating its businesses, and while the creation of separate
classes of common stock would be permitted, under
Colorado law, the Company believes that Delaware law
will offer clearer guidance with respect to legal issues
that may arise as a result of the existence of separate
classes of Common Stock. See "Proposal 1 -- The
Recapitalization Proposal -- Background and Reasons for
the Recapitalization Proposal."
RECOMMENDATION OF THE BOARD....... THE BOARD HAS UNANIMOUSLY ADOPTED THE RECAPITALIZATION
PROPOSAL AND BELIEVES THAT ITS APPROVAL IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE IN FAVOR OF THE RECAPITALIZATION
PROPOSAL.
DIVIDEND POLICY................... The Company has historically paid dividends on the
Existing Common Stock, most recently at a quarterly rate
of $0.535 per share. If the Recapitalization Proposal is
adopted, the Board currently intends to pay dividends on
the Communications Stock initially at a quarterly rate
of $0.535 per share, the same dividend currently being
paid on the Existing Common Stock. With regard to the
Media Stock, the Board currently intends to retain
future earnings, if any, for the development of the
businesses of the Media Group and does not anticipate
paying dividends on the Media Stock in the foreseeable
future. While the Board does not currently intend to
change this dividend policy, it reserves the right to do
so at any time and from time to time.
Determinations of future dividends on the Communications
Stock and the Media Stock, if any, will reflect the
financial condition, results of operations and business
requirements of the Communications Group and the Media
Group, respectively, and the Company as a whole. For
information concerning restrictions on the funds out of
which dividends on the Communications Stock and the
Media Stock may be paid, see "Proposal 1 -- The
Recapitalization Proposal -- Dividend Policy" and "--
Description of Communications Stock and Media Stock --
Dividends."
DESCRIPTION OF COMMUNICATIONS
STOCK AND MEDIA STOCK............ For a summary description of the Communications Stock
and the Media Stock, see "Summary Comparison of Terms of
Existing Common Stock with Communications Stock and Me-
dia Stock." For a detailed description of the
Communications Stock and the Media Stock, see "Proposal
1 -- The Recapitalization Proposal -- Description of
Communications Stock and Media Stock."
FUTURE INTER-GROUP INTEREST....... The number of shares of Media Stock to be issued upon
implementation of the Recapitalization Proposal are
intended initially to represent 100% of the equity value
of the Company attributable to the Media Group. Under
management policies adopted by the Board, however, the
Board could, in its sole
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18
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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
in the equity value of the Company attributable to the
Media Group (an "Inter-Group Interest"). An Inter-Group
Interest would not constitute outstanding shares of
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. See "Proposal 1 -- The Recapitalization
Proposal -- Certain Management Policies," "--
Description of Communications Stock and Media Stock --
Voting Rights" and "-- Future Inter-Group Interest."
STOCK EXCHANGE LISTINGS........... Application will be made to amend the Company's current
stock exchange listing agreements with the NYSE, the PSE
and the Foreign Exchanges to provide for the
redesignation of the Existing Common Stock as
Communications Stock and the listing of the Media Stock
under the symbol "UMG." See "Proposal 1 -- The
Recapitalization Proposal -- Stock Exchange Listings."
COMPARISON OF SHAREHOLDER
RIGHTS........................... The rights of holders of the Existing Common Stock are
governed by the Articles, the By-Laws of U S WEST (the
"Existing By-Laws") and Colorado law. Upon approval of
the Recapitalization Proposal and consummation of the
Merger, the rights of holders of the Common Stock will
be governed by the Restated Certificate, the New By-Laws
and Delaware law. For a description of the material
differences between the rights of holders of the
Existing Common Stock and the Common Stock, see
"Proposal 1 -- The Recapitalization Proposal --
Comparison of Shareholder Rights."
TAX CONSIDERATIONS................ The Company has been advised by its counsel that the
Communications Stock and Media Stock should be treated
as common stock of the Company for federal income tax
purposes and that no income, gain or loss should be
recognized by the Company or the shareholders as a
result of the implementation of the Recapitalization
Proposal (except with respect to the receipt of cash by
shareholders who exercise their dissenters' rights).
However, there are no federal income tax regulations,
court decisions or published Internal Revenue Service
(the "Service") rulings bearing directly on transactions
similar to the Recapitalization Proposal. Moreover, the
Service
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19
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announced during 1987 that it was studying the federal
income tax consequences of stock similar to the
Communications Stock and the Media Stock and, earlier
this year, the Service included the issuance of stock
with similar characteristics among the transactions upon
which it would not issue advance rulings. See "Proposal
1 -- The Recapitalization Proposal -- Certain Federal
Income Tax Considerations."
ODD-LOT SHARES.................... Each holder of Existing Common Stock who receives fewer
than 100 shares of each of Communications Stock and
Media Stock in the Merger may elect to participate in
the Odd-Lot Program pursuant to which such holder may
have the exchange agent (i) sell all, but not less than
all, of the Communications Stock and/or Media Stock
which such holder receives in the Merger or (ii)
purchase additional shares of Communications Stock
and/or Media Stock for its account so as to "round up"
such stockholder's holdings to 100 shares of
Communications Stock and/or Media Stock. See "Proposal 1
-- The Recapitalization Proposal -- Exchange Proce-
dures; Odd-Lot Program."
DISSENTERS' RIGHTS................ Under the Colorado Business Corporation Act (the
"CBCA"), a holder of shares of the Existing Common Stock
will have the right to dissent from the Merger and elect
to have the fair value of such holder's shares paid to
such holder in cash. Each shareholder who wishes to
dissent must cause U S WEST to receive, prior to the
taking of the vote on the approval of the
Recapitalization Proposal, a written notice of the
shareholder's intent to demand payment if the Merger is
effectuated and must comply with the other requirements
of Article 113 of the CBCA, the full text of which is
attached to this Proxy Statement as Annex IV. A
shareholder's vote for the approval of the Merger, or
delivery of a proxy in connection with the Special
Meeting (unless the proxy specifies a vote against, or
expressly abstains from the vote on, the approval of the
Recapitalization Proposal), will constitute a waiver of
such shareholder's right to dissent and will nullify any
written notice of intent to demand payment. A deviation
from the detailed requirements of Article 113 may result
in a forfeiture of dissenters' rights. See "Proposal 1
-- The Recapitalization Proposal -- Dissenters' Rights."
OTHER PROPOSALS
DESCRIPTION....................... At the Special Meeting, shareholders will also be asked
to consider and approve (i) Proposal 2, which would,
among other things, amend the U S WEST, Inc. 1994 Stock
Plan to reflect the revised capital structure of the
Company and authorize the granting of awards in either
Communications Stock or Media Stock, or both and (ii)
Proposal 3, which would amend the U S WEST, Inc.
Deferred Compensation Plan to . If the
Recapitalization Proposal is approved by the
shareholders,
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it will be implemented whether or not Proposals 2 and 3
are approved. If the Recapitalization Proposal is not
approved, Proposals 2 and 3 will not be implemented.
RECOMMENDATION OF THE BOARD....... THE BOARD HAS UNANIMOUSLY ADOPTED EACH OF THE OTHER
PROPOSALS AND BELIEVES THEIR APPROVAL IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE IN FAVOR OF EACH PROPOSAL.
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21
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U S WEST, INC.
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. See "Annex V -- U S WEST, Inc. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"-- Consolidated Financial Statements." The Selected Financial Data at December
31, 1994, 1993, 1992, 1991 and 1990 and for each of the five years ended
December 31, 1994 are derived from the Consolidated Financial Statements of U S
WEST which have been audited by Coopers & Lybrand L.L.P., independent certified
public accountants. See "Experts." The Selected Financial Data at March 31, 1995
and 1994 and for the three months ended March 31, 1995 and 1994 are 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.
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<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- --------- --------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales and other revenues............... $ 2,828 $ 2,641 $ 10,953 $ 10,294 $ 9,823 $ 9,528 $ 9,369
Income from continuing operations
(1)................................... 330 324 1,426 476 1,076 840 1,145
Net income (loss) (2).................. 330 324 1,426 (2,806) (614) 553 1,199
Total assets........................... $ 23,599 $ 21,179 $ 23,204 $ 20,680 $ 23,461 $ 23,375 $ 22,160
Total debt (3)......................... 8,702 7,442 7,938 7,199 5,430 5,969 5,147
Shareowners' equity.................... 7,532 6,375 7,382 5,861 8,268 9,587 9,240
Earnings per common share (continuing
operations) (1)....................... 0.70 0.73 3.14 1.13 2.61 2.09 2.97
Earnings (loss) per common share....... 0.70 0.73 3.14 (6.69) (1.49) 1.38 3.11
Dividends per common share............. 0.535 0.535 2.14 2.14 2.12 2.08 2.00
Book value per common share............ 16.03 14.08 15.73 13.29 19.95 23.39 23.48
Return on common shareowners' equity
(4)................................... 17.6% 21.3% 21.6% -- 14.4% 5.7% 13.7%
Percentage of debt to total capital
(3)................................... 53.6% 53.9% 51.8% 55.1% 39.6% 38.4% 35.8%
Capital expenditures (3)............... $ 621 $ 600 $ 2,820 $ 2,441 $ 2,554 $ 2,425 $ 2,217
OPERATING DATA
EBITDA (5)............................. $ 1,226 $ 1,145 $ 4,559 $ 4,228 $ 3,963 $ 3,920 $ 3,889
Telephone network access lines in
service (thousands)................... 14,453 13,959 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use
(millions)............................ 13,839 12,631 52,275 48,123 44,369 41,701 38,832
Cellular subscribers................... 1,048,000 665,000 968,000 601,000 415,000 300,000 219,000
Cable television basic subscribers
served................................ 501,000 466,000 486,000 -- -- -- --
Employees.............................. 61,302 61,080 61,505 60,778 63,707 65,829 65,469
Number of common shareowners........... 807,409 844,939 816,099 836,328 867,773 899,082 935,530
Weighted average common shares
outstanding (thousands)............... 468,557 444,378 453,316 419,365 412,518 401,332 386,012
PRO FORMA INFORMATION
Earnings per share of Communications
Stock................................. $ 0.67 $ 2.53
Average shares of Communications Stock
outstanding (thousands)............... 468,557 453,316
Earnings per share of Media Stock...... $ 0.03 $ 0.61
Average shares of Media Stock
outstanding (thousands)............... 468,557 453,316
<FN>
- ------------------------------
(1) 1995 and 1994 first quarter income include gains of $39 ($.08 per share)
and $15 ($.05 per share), respectively, on the sale of rural telephone
exchanges. 1994 income from continuing operations includes a gain of $105
($.23 per share) on the sale of 24.4 percent of U S WEST's joint venture
interest in cable television/telephone operations in the United Kingdom
(TeleWest), a gain of $41 ($.09 per share) on the sale of the company's
paging unit and a gain of $51 ($.11 per share) on the sale of certain rural
telephone exchanges. 1993 income from continuing operations was reduced by
a restructuring charge of $610 ($1.46 per share) and $54 ($.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 $230 ($.57 per share).
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(2) 1993 net income was reduced by extraordinary charges of $3,123 ($7.45 per
share) for the discontinuance of Statement of Financial Accounting
Standards ("SFAS") No. 71 and $77 ($.18 per share) for the early
extinguishment of debt. 1993 net income also includes a charge of $120
($.28 per share) for U S WEST's decision to discontinue the operations of
its capital assets segment. 1992 income includes a charge of $1,793 ($4.35
per share) for the cumulative effect of change in accounting principles.
Discontinued operations provided net income (loss) of $38 ($.09 per share),
$103 ($.25 per share), $(287) ($.71 per share) and $54 ($.14 per share) in
1993, 1992, 1991 and 1990, respectively.
(3) Capital expenditures, debt and the percentage of debt to total capital
exclude discontinued operations.
(4) 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. 1992 return on shareowners' equity is based on
income before the cumulative effect of change in accounting principles.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA").
EBITDA excludes gains on sales of assets, restructuring charges and other
income. The Company considers EBITDA an important indicator of the
operational strength and performance of its businesses. EBITDA, however,
should not be considered as an alternative to operating or net income as an
indicator of the performance of the Company's businesses or as an
alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with generally accepted
accounting principles ("GAAP").
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COMMUNICATIONS GROUP
SELECTED FINANCIAL DATA
The following table sets forth Selected Combined Financial Data of the
Communications Group and should be read in conjunction with the Communications
Group Management's Discussion and Analysis of Financial Condition and Results of
Operations and Combined Financial Statements. See "Annex VI -- Communications
Group -- Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "-- Combined Financial Statements." The Selected Combined
Financial Data at December 31, 1994 and 1993, and for each of the three years in
the period ended December 31, 1994, have been derived from the Communications
Group Combined Financial Statements, which have been audited by Coopers &
Lybrand L.L.P., independent certified public accountants. See "Experts." At
December 31, 1992, 1991 and 1990 and March 31, 1995 and 1994 and for the years
ended December 31, 1991 and 1990 and for the three months ended March 31, 1995
and 1994, the Selected Combined Financial Data have been derived from unaudited
Communications Group Combined Financial Statements. The unaudited Combined
Financial Statements have been prepared on the same basis as the 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Operating revenues................................. $ 2,318 $ 2,253 $ 9,176 $ 8,870 $ 8,530 $ 8,345 $ 8,235
Net income (loss) (1).............................. 315 295 1,150 (2,809) (815) 771 935
Total assets....................................... 15,846 15,594 15,944 15,423 20,655 20,244 19,756
Total debt......................................... 6,404 5,883 6,124 5,673 5,181 5,287 5,029
Communications Group equity........................ 3,194 2,947 3,179 2,722 6,003 7,530 7,279
Return on Communications Group equity (2, 3)....... 31.7% 38.3% 39.0% 22.5% 13.7% 12.8% 12.8%
Percentage of debt to total capital (3)............ 66.7% 66.6% 65.8% 67.6% 46.3% 41.3% 40.9%
Capital expenditures............................... $ 545 $ 554 $ 2,477 $ 2,226 $ 2,385 $ 2,194 $ 2,022
OPERATING DATA
EBITDA (4)......................................... $ 1,050 $ 1,013 $ 4,026 $ 3,743 $ 3,553 $ 3,547 $ 3,500
Telephone network access lines in service
(thousands)....................................... 14,453 13,959 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use (millions)............ 13,839 12,631 52,275 48,123 44,369 41,701 38,832
Employees.......................................... 51,083 52,788 51,402 52,598 55,352 57,725 57,410
PRO FORMA INFORMATION
Earnings per share................................. $ 0.67 $ 2.53
Dividends per share................................ 0.535 2.14
Average shares outstanding (thousands)............. 468,557 453,316
<FN>
- ------------------------------
(1) Net income for the first quarter of 1995 and 1994 includes gains of $39 and
$15, respectively, on the sale of certain rural telephone exchanges. 1994
net income includes a gain of $51 on the sale of certain rural telephone
exchanges. 1993 net income was reduced by a $534 restructuring charge and
$54 for the cumulative effect on deferred taxes of the 1993 federally
mandated increase in income tax rates. 1993 net income was also reduced by
extraordinary charges of $3,123 for the discontinuance of SFAS No. 71 and
$77 for the early extinguishment of debt. 1992 net income was reduced by
$1,745 for the cumulative effect of change in accounting principles. 1991
net income was reduced by $173 for a restructuring charge.
(2) 1993 return on Communications Group equity is based on net income excluding
extraordinary items, a restructuring charge and the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates.
1992 return on Communications Group equity is based on income before
cumulative effect of change in accounting principles. 1991 return on
Communications Group equity is based on net income excluding the effects of
a restructuring charge.
(3) The increases in the percentage of debt to total capital and return on
Communications Group equity since 1992 are impacted by the effects of
discontinuing SFAS No. 71 in 1993 and the cumulative effect of change in
accounting principles in 1992.
(4) The Communications Group considers EBITDA an important indicator of the
operational strength and performance of its businesses. EBITDA, however,
should not be considered as an alternative to operating or net income as an
indicator of the performance of the Communications Group's businesses or as
an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with GAAP.
</TABLE>
24
<PAGE>
MEDIA GROUP
SELECTED FINANCIAL DATA
The Media Group uses consolidation and proportionate principles of
accounting to present certain financial information. Consolidation accounting
principles are used to prepare the Combined Financial Statements. See Note 1 to
the Media Group Combined Financial Statements included in Annex VII for a
complete description of the accounting principles used to prepare the Combined
Financial Statements. Proportionate financial information is not required by
GAAP, or intended to replace the Combined Financial Statements 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. Because significant assets attributed to the Media Group are not
consolidated, and because of the substantial effect of certain joint ventures on
the year-to-year comparability of the Media Group's combined financial results,
the Media Group believes that proportionate financial and operating data
facilitate the understanding and assessment of its 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. See "Annex VII -- Media Group -- Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"-- Combined Financial Statements." The Selected Combined Financial Data at
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994, have been derived from the Media Group Combined Financial
Statements audited by Coopers & Lybrand L.L.P. See "Experts." At December 31,
1992, 1991 and 1990 and March 31, 1995 and 1994 and for the years ended December
31, 1991 and 1990 and for the three months ended March 31, 1995 and 1994, the
Selected Combined Financial Data has been derived from unaudited Media Group
Combined Financial Statements. The unaudited Combined Financial Statements have
been prepared on the same basis as the 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales and other revenues........................ $ 536 $ 418 $ 1,908 $ 1,549 $ 1,384 $ 1,261 $ 1,210
Income from continuing operations (1)........... 15 29 276 85 146 69 210
Net income (loss)............................... 15 29 276 3 201 (218) 264
Total assets.................................... 7,908 5,690 7,394 5,446 3,130 3,235 2,555
Total debt (2).................................. 2,298 1,559 1,814 1,526 249 682 118
Media Group equity.............................. 4,338 3,428 4,203 3,139 2,265 2,057 1,961
Percentage of debt to total capital (2)......... 34.6% 31.3% 30.1% 32.7% 9.9% 24.9% 5.7%
Capital expenditures (2)........................ $ 76 $ 46 $ 343 $ 215 $ 169 $ 231 $ 195
OPERATING DATA
EBITDA (3)...................................... $ 176 $ 132 $ 533 $ 485 $ 410 $ 373 $ 388
Employees....................................... 10,219 8,292 10,103 8,180 8,355 8,104 8,059
PRO FORMA INFORMATION
Earnings per share.............................. $ 0.03 $ 0.61
Average shares outstanding (thousands).......... 468,557 453,316
<FN>
- ------------------------------
(1) 1994 income from continuing operations includes a gain of $105 on the sale
of 24.4 percent of the Company's joint venture interest, TeleWest, and a
gain of $41 from the sale of the Company's paging operations. 1993 income
from continuing operations was reduced by restructuring charges of $76.
1991 income from continuing operations was reduced by restructuring charges
of $57.
(2) Debt, the percentage of debt to total capital and capital expenditures
exclude discontinued operations. Including discontinued operations the
percentage of debt to total capital was 43.4% at March 31, 1995 and 42.4%,
49.1%, 61.9%, 67.2%, and 66.9% for each of the five years ended in 1994.
(3) The Media Group considers EBITDA an important indicator of the operational
strength and performance of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of
the performance of the Media Group's businesses or as an alternative to
cash flows from operating activities as a measure of liquidity, in each
case determined in accordance with GAAP.
</TABLE>
25
<PAGE>
SELECTED PROPORTIONATE FINANCIAL DATA
The following table shows the entities included in the Media Group Combined
Financial Statements and the percent ownership by industry segment. The
proportionate financial and operating data for these entities are summarized in
the proportionate data table below.
<TABLE>
<CAPTION>
MULTIMEDIA CONTENT AND
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS SERVICES
------------------------------ ------------------------------ ------------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
C
O
N
S Thomson
O U S WEST Directories
L Atlanta NewVector Marketing 100%
I Systems 84% (1) Resources, U S WEST
D 100% Inc. Polska
A 100% 100%
T
E
D
Mercury
One-2-One
50%
E TeleWest Westel
Q 37.8% Radiotelefon
U TWE TeleWest 49%
I 25.51% Europe Westel 900
T 50% 44%
Y EuroTel Czech
& Slovak
24.5%
<FN>
- ------------------------------
The above table and the selected proportionate financial data that follows
exclude certain international and domestic investments (collectively not
material) for which the Media Group does not receive timely detailed financial
statements.
(1) Proportionate information reflects an approximate 16 percent minority
interest in NewVector's underlying operations.
</TABLE>
26
<PAGE>
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
The following table is not required by GAAP or intended to replace the
Combined Financial Statements prepared in accordance with GAAP. It is presented
supplementally because the Company believes that proportionate financial and
operating data facilitate the understanding and assessment of its Combined
Financial Statements. The following table includes allocations of Media Group
corporate activity. The table does not reflect financial data of the capital
assets segment, which had net assets of $414 at March 31, 1995 and $302 at
December 31, 1994. THE FINANCIAL INFORMATION INCLUDED BELOW DEPARTS MATERIALLY
FROM GAAP BECAUSE IT AGGREGATES THE REVENUES AND OPERATING INCOME OF ENTITIES
NOT CONTROLLED BY THE MEDIA GROUP WITH THOSE OF THE CONSOLIDATED OPERATIONS OF
THE MEDIA GROUP.
<TABLE>
<CAPTION>
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS MULTIMEDIA CONTENT AND TOTAL
SERVICES --------
THREE MONTHS ENDED ---------------------------- ------------------------ ------------------------
MARCH 31, 1995 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $ 581 $ 24 $168 $ 60 $260 $ 14 $ 1,107
Operating expenses............... 453 35 116 72 150 18 844
Depreciation and amortization.... 95 10 24 9 7 3 148
Operating income................. 33 (21) 28 (21) 103 (7) 115
Income from continuing
operations...................... (16) (11) 12 (28) 62 (4) 15
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 128 $(11) $ 52 $ (12) $110 $ (4) $ 263
Subscribers/Customers............ 2,422 231 885 205 -- -- 3,743
Advertisers...................... -- -- -- -- 470 150 620
Homes passed..................... 3,960 605 -- -- -- -- 4,565
POPs (4)......................... -- -- 19,100 38,300 -- -- 57,400
Telephone lines.................. -- 81 -- -- -- -- 81
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1994
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $ 495 $ 18 $132 $ 30 $244 -$- $ 919
Operating expenses............... 389 28 105 36 139 1 698
Depreciation and amortization.... 72 7 18 8 6 -- 111
Operating income................. 34 (17) 9 (14) 99 (1) 110
Income from continuing
operations...................... (5) (8) 2 (21) 62 (1) 29
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 106 $(10) $ 27 $ (6) $105 $ (1) $ 221
Subscribers/Customers............ 1,851 218 563 52 -- -- 2,684
Advertisers...................... -- -- -- -- 462 25 487
Homes passed..................... 3,078 551 -- -- -- -- 3,629
POPs (4)......................... -- -- 18,500 38,300 -- -- 56,800
Telephone lines.................. -- 49 -- -- -- -- 49
(see footnotes on following page)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS MULTIMEDIA CONTENT AND
SERVICES TOTAL
---------------------------- ------------------------ ------------------------ --------
YEAR ENDED 1994 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $2,386 $ 85 $634 $ 186 1$,005 $ 79 $ 4,375
Operating expenses............... 1,854 127 485 254 592 77 3,389
Depreciation and amortization.... 383 31 80 35 24 10 563
Operating income................. 149 (73) 69 (103) 389 (8) 423
Income from continuing operations
(5)............................. (53) (40) 30 (68) 251 (4) 116
Debt (6)......................... -- -- -- -- -- -- 3,865
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 532 $(42) $149 $ (68) $413 $ 2 $ 986
Subscribers/Customers............ 2,407 226 817 169 -- -- 3,619
Advertisers...................... -- -- -- -- 468 147 615
Homes passed..................... 3,952 576 -- -- -- -- 4,528
POPs (4)......................... -- -- 18,900 38,300 -- -- 57,200
Telephone lines.................. -- 69 -- -- -- -- 69
<CAPTION>
YEAR ENDED 1993
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $2,048 $ 59 $432 $ 78 $958 $ 7 $ 3,582
Operating expenses............... 1,611 101 331 126 540 10 2,719
Depreciation and amortization.... 301 22 76 5 21 -- 425
Operating income................. 136 (64) 25 (53) 397 (3) 438
Income from continuing operations
(5)............................. (6) (49) (2) (22) 252 (3) 170
Debt (6)......................... -- -- -- -- -- -- 3,492
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 437 $(42) $101 $ (48) $418 (3) $ 863
Subscribers/Customers............ 1,837 215 509 41 -- -- 2,602
Advertisers...................... -- -- -- -- 459 25 484
Homes passed..................... 3,061 524 -- -- -- -- 3,585
POPs (4)......................... -- -- 18,200 38,300 -- -- 56,500
Telephone lines.................. -- 44 -- -- -- -- 44
<FN>
- ------------------------------
(1) The proportionate results are based on the Media Group's 25.51 percent pro
rata priority and residual equity interests in reported TWE results. The
reported TWE results are prepared in accordance with GAAP and have not been
adjusted to report TWE investments accounted for under the equity method on
a proportionate basis. The Media Group's share of TWE results on a
proportionate basis do not necessarily reflect the Media Group's recorded
share of income due to special allocations of income stipulated by the TWE
Partnership Agreement and the amortization of the excess of fair market
value over the book value of the partnership net assets. As a result of
this special income allocation and amortization, the Media Group's recorded
pretax share of TWE operating results was ($13) and ($12) for the three
months ended March 31, 1995 and 1994 respectively, and ($18) and ($20) for
1994 and 1993, respectively.
(2) Although the TWE and Atlanta Systems acquisitions occurred within 1993 and
1994, for comparability in reporting, 1993 proportionate results include 12
months of TWE activity and 1994 proportionate results include 12 months of
activity for the Atlanta Systems. First quarter 1994 results include 3
months of activity for the Atlanta Systems.
(3) Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entities' EBITDA. As such, proportionate EBITDA
does not represent cash available to the Media Group. The Media Group
considers EBITDA an important indicator of the operational strength and
performance of its businesses. EBITDA, however, should not be considered as
an alternative to operating or net income as an indicator of the
performance of the Media Group's businesses or as an alternative to cash
flows from operating activities as a measure of liquidity, in each case
determined in accordance with GAAP.
(4) Potential customers ("POPs"). Wireless Communications -- International
includes 29,000 POP's representing the total POP's to be achieved upon
completion of the build-out of Mercury One-2-One's PCS network. As of March
31, 1995, Mercury One-2-One's network reached 30% of the population.
(5) See the Supplementary Selected Proportionate Financial Data schedule to the
Media Group Combined Financial Statements for a reconcilation of the
proportionate amount of income from continuing operations to the amount
reported on a GAAP basis.
(6) See Note 5 to the Media Group Combined Financial Statements for additional
information regarding the obligations inherent in the capital structure of
the TWE partnership. Included in debt is the Company's proportionate share
of TWE external debt of $1,835 and $1,824 in 1994 and 1993, respectively.
</TABLE>
28
<PAGE>
PRICE RANGES OF EXISTING COMMON STOCK
The following table sets forth the high and low sales prices of the Existing
Common Stock on the New York Stock Exchange Composite Tape (the "Composite
Tape") and the dividends paid per share of the Existing Common Stock during the
periods indicated.
<TABLE>
<CAPTION>
SALE PRICES
-------------------- DIVIDENDS
HIGH LOW PAID
--------- --------- -----------
<S> <C> <C> <C>
1993
First Quarter............................................ $ 43.875 $ 37.750 $ 0.535
Second Quarter........................................... 46.00 40.625 0.535
Third Quarter............................................ 49.375 44.50 0.535
Fourth Quarter........................................... 50.750 45.750 0.535
1994
First Quarter............................................ $ 46.25 $ 38.50 $ 0.535
Second Quarter........................................... 43.75 38.25 0.535
Third Quarter............................................ 43.125 38.25 0.535
Fourth Quarter........................................... 38.875 34.625 0.535
1995
First Quarter............................................ $ 41.375 $ 35.125 $ 0.535
Second Quarter (through June 29, 1995)................... 39.125 42.875 0.535
</TABLE>
On April 7, 1995, the trading day prior to the Company's announcement of the
Recapitalization Proposal, and on June 29, 1995, the closing sales price of the
Existing Common Stock, as reported on the Composite Tape, was $41.875 and
$40.625, respectively. As of June 28, 1995, there were 470,718,261 shares of
Existing Common Stock outstanding and 798,850 holders of record of Existing
Common Stock.
RISK FACTORS
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 will
continue to be subject to risks associated with an investment in a single
company and all of the Company's businesses, assets and liabilities. Such
allocation of assets and liabilities and change in the equity structure of the
Company will not result in a distribution or spin-off to shareholders of any
assets or liabilities of the Company or any of its subsidiaries or otherwise
affect responsibility for the liabilities of the Company or such subsidiaries.
As a result, the rights of holders of the Company's or any of its subsidiaries'
debt will not be affected thereby. Financial effects arising from either Group
that affect the Company's results of operations or financial condition could, if
significant, affect the results of operations or financial position of the other
Group or the market price of the class of Common Stock relating to the other
Group. In addition, the incurrence of significant indebtedness by the Company or
one of its subsidiaries on behalf of a Group, including indebtedness incurred or
assumed in connection with acquisitions of or investments in businesses, would
continue to affect the credit ratings of the Company and its subsidiaries and
therefore could increase the borrowing costs of the other Group and the Company
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 the Company legally available
for payment of future dividends on the Communications Stock and the Media Stock.
Accordingly, the Company's consolidated financial information should be read in
conjunction with the Communications Group's and the Media Group's combined
financial information.
If the Recapitalization Proposal is approved by the shareholders and
implemented by the Board, the Company will provide to holders of Communications
Stock and Media Stock financial statements,
29
<PAGE>
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 would reflect
the financial position, results of operations and cash flows of the businesses
included therein. Consistent with the Restated Certificate and relevant
policies, such Group's financial statements would also include allocated
portions of the Company's corporate assets and liabilities (including contingent
liabilities) that are not separately identified with the operations of a
specific Group. See "Proposal 1 -- The Recapitalization Proposal -- Accounting
Matters and Policies" and the financial information of the Company, the
Communications Group and the Media Group set forth in Annexes V, VI, and VII
hereto, respectively.
LIMITED SEPARATE STOCKHOLDER RIGHTS; NO ADDITIONAL RIGHTS WITH RESPECT TO
THE GROUPS; EFFECTS ON VOTING POWER. Under the Recapitalization Proposal,
holders of Communications Stock and Media Stock would have only the rights
customarily held by common stockholders of the Company and would 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 "Proposal I -- The Recapitalization Proposal
- -- Description of Communications Stock and Media Stock -- Conversion and
Redemption -- Mandatory Dividend, Redemption or Conversion of Common Stock" and
(ii) separate voting rights in limited circumstances under the Delaware General
Corporation Law (the "DGCL"). Separate meetings for the holders of
Communications Stock and Media Stock would not be 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
would 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 time-weighted average daily ratio, over a specified period, of
the Market Value of one share of Media Stock to the Market Value of one share of
Communications Stock. This formula is intended to equate the proportionate
voting rights of each class of Common Stock to their respective Market Values at
the time of any vote. The Company anticipates that the Communications Stock will
initially represent a majority of the voting power of all the Company's stock
entitled to vote in the election of directors. Market Value could be influenced
by many factors, including the results of operations of the Company and each of
the Groups, the regulatory environment, trading volume, share issuances and
repurchases and general economic and market conditions. See "Proposal 1 -- The
Recapitalization Proposal -- Description of 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 the Company's management or Board that is perceived to
disparately affect one class of Common Stock in comparison to another.
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
Restated Certificate and the DGCL do not require that a merger or consolidation
of the Company be approved by a separate vote of holders of any class of Common
Stock. As a result, if the holders of Common Stock having a majority of the
voting power of all shares of Common Stock outstanding approved a merger or
consolidation of the Company, then (a) the merger or consolidation could be
consummated even if the holders of a majority of any class of Common Stock had
voted against the merger or consolidation and (b) the amount to be received by
the holders of such class of Common Stock in the merger or consolidation might
be materially less than
30
<PAGE>
the amount such holders would have received had the approval of the holders of a
majority of such class of Common Stock been required. See "-- Potential
Diverging Interests -- Allocation of Proceeds of Mergers or Consolidations."
POTENTIAL DIVERGING INTERESTS. The existence of separate classes of 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 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 Common Stock in connection with a merger or
consolidation involving the Company among holders of Communications Stock and
Media Stock, (iii) convert one class of Common Stock into shares of the other
class of 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 the Company 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 Board would act
in accordance with the terms of the Restated Certificate, the management and
accounting policies described in "Proposal 1-- The Recapitalization Proposal --
Certain Management Policies" and "-- Accounting Matters and Policies," to the
extent applicable, and its fiduciary duties, which require the Board to consider
the impact of such decisions on all stockholders. The 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 New By-Laws and applicable law. Each of the foregoing
potential conflicts of interest is discussed below:
NO ASSURANCE OF PAYMENT OF DIVIDENDS. The Board currently intends that
the dividend policy applicable to the Communications Stock would be the same
as the dividend policy applicable to the Existing Common Stock and believes
that implementation of the Recapitalization Proposal would not adversely
affect the Company's ability to pay dividends on the Communications Stock.
The Board currently does not intend to pay dividends on the Media Stock.
Determinations as to the future dividends on the Communications Stock and
the Media Stock would be based primarily upon the financial condition,
results of operations and business requirements of the relevant Group and
the Company as a whole. Dividends on the Communications Stock and the Media
Stock, if any, would be payable out of the lesser of (i) all funds of the
Company 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 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 Common Stock or Preferred Stock would reduce the assets of the
Company legally available for future dividends on the Communications Stock
and the Media Stock. See "Proposal 1 -- The Recapitalization Proposal --
Dividend Policy" and "-- Description of Communications Stock and Media Stock
-- Dividends."
ALLOCATION OF PROCEEDS OF MERGERS OR CONSOLIDATIONS. The Restated
Certificate does not contain any provisions governing how consideration to
be received by holders of Common Stock in connection with a merger or
consolidation involving the entire Company is to be allocated among holders
of different classes of Common Stock. In any such merger or consolidation,
the percentage of the consideration to be allocated to holders of any class
of Common Stock will be determined by
31
<PAGE>
the Board and may be materially more or less than that which might have been
allocated to such holders had the Board chosen a different method of
allocation. See "-- Limited Separate Stockholder Rights; No Additional
Rights with respect to the Groups; Effects on Voting Power" below.
OPTIONAL CONVERSION OF CLASS OF COMMON STOCK. The 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 % for the first five
years and thereafter declining annually to by the ninth anniversary of
the Effective Time and could also, following the ninth anniversary of the
Effective Time, in its sole discretion, determine to convert shares of
Communications Stock into shares of Media Stock at no premium. In addition,
the Board could, in its sole discretion, determine to convert shares of the
class of Common Stock of one Group into shares of the class of Common Stock
of the other Group at a % 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 the Company of the holders of
the class of Common Stock not subject to conversion and would preclude
holders of both classes of Common Stock from retaining their investment in a
security that is intended to reflect separately the performance of the
relevant Group. See "Proposal 1 -- The Recapitalization Proposal --
Description of Communications Stock and Media Stock -- Conversion and
Redemption" below.
DISPOSITIONS OF GROUP ASSETS. Assuming the assets attributed to any
Group represent less than substantially all of the properties and assets of
the Company, the 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
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 "Proposal 1 -- The Recapitalization Proposal --
Certain Management Policies." The 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 the Company to either (i) distribute to holders of the class of
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 Common Stock, or (ii) convert the
outstanding shares of such Common Stock into a number of shares of the class
of Common Stock relating to the other Group equal to % of the average
daily ratio, calculated over a period of time, of the Market Value of one
share of the Common Stock relating to the Group subject to such Disposition
to the Market Value of one share of Common Stock relating to the other
Group. See "Proposal 1 -- The Recapitalization Proposal -- Description of
Communications Stock and Media Stock -- Conversion and Redemption." The
terms of the Common Stock do not require the Board to select the option
which would result in the distribution with the highest value to the holders
of the Common Stock relating to the Group subject to such Disposition or
with the smallest effect on the Common Stock relating to the other Group.
The Board would select an option based upon its good faith business judgment
that such option is in the best interests of the Company and all of its
stockholders. See "-- Fiduciary Duties of the Board."
ALLOCATION OF PROCEEDS UPON ISSUANCE OF MEDIA STOCK. If the
Communications Group, at the time the Company issues any shares of Media
Stock, holds an Inter-Group Interest representing an interest in the equity
value of the Media Group, the 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
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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 the Company 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. In resolving any such conflict,
the Board would make its decision in accordance with its good faith business
judgment of the best interests of the Company and all of its stockholders.
OPERATIONAL AND FINANCIAL DECISIONS. The Board could, it its sole
discretion, from time to time, make operational and financial decisions 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. The Board will make any such decision in
accordance with its good faith business judgment of the best interests of
the Company and all of its stockholders. For further discussion of potential
divergences of interests, see "-- Fiduciary Duties of the Board," "--
Transfer of Funds Between Groups; Equity Contributions" and "Proposal 1 --
The Recapitalization Proposal -- Certain Management Policies." Many of the
foregoing conflicts exist today with respect to decisions that affect
disproportionately U S WEST Communications and the rest of the Company's
businesses.
FIDUCIARY DUTIES OF THE BOARD. Although the Company 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, 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 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 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 Board without approval of
the stockholders, although there is no present intention to do so. The Board may
also adopt additional policies depending upon the circumstances. Any
determination of the Board to
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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 the Company and
all the Company's stockholders, including the holders of Communications Stock
and the holders of Media Stock. In making such determination, the Board may also
consider regulatory requirements 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
"Proposal 1 -- The Recapitalization Proposal -- Certain Management Policies" and
"-- Accounting Matters and Policies."
TRANSFER OF FUNDS BETWEEN GROUPS; EQUITY CONTRIBUTIONS. The Company does
not intend to transfer funds between the Groups, except for certain short-term
ordinary course advances of funds at market rates associated with the Company's
centralized cash management. The 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 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 Board, as
either a market rate interest bearing loan or, as described in the next
paragraph, an equity contribution. No loans will be made by the regulated
businesses of the Communications Group to the Media Group. See "Proposal 1 --
The Recapitalization Proposal -- Certain Management Policies."
Under management policies adopted by the Board, the 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 in the equity value of the Company attributable to the Media Group.
Similarly, the 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 "Proposal 1
- -- The Recapitalization Proposal -- Future Inter-Group Interest."
ABSENCE OF APPROVAL RIGHTS OF FUTURE ISSUANCES OF AUTHORIZED SHARES. The
approval of the stockholders of the Company will not be solicited by the Company
for the issuance of authorized but unissued shares of Communications Stock or
Media Stock, unless such approval is deemed advisable by the Board or is
required by applicable law, regulation or stock exchange listing requirements.
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 management could
seek control of the outstanding stock of such corporation by means of a tender
offer or proxy contest. Although the Recapitalization Proposal would create two
classes of Common Stock that are intended to reflect the separate performance of
the Groups, a person interested in acquiring only one Group without negotiation
with the Company's management would still be required to seek control of the
voting power represented by all of the outstanding capital stock of the Company
entitled to vote on such acquisition, including the class of 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
"Proposal 1 -- The Recapitalization Proposal -- Description of Communications
Stock and Media Stock -- Voting Rights."
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ANTI-TAKEOVER CONSIDERATIONS. As a result of the reincorporation of the
Company in Delaware, certain provisions of Delaware law could have the potential
to make an attempted takeover of the Company by a third party more difficult.
See "Proposal 1 -- The Recapitalization Proposal -- Anti-Takeover
Considerations."
POTENTIAL EFFECTS OF POSSIBLE DISPOSITION OF ASSETS ATTRIBUTED TO A
GROUP. The terms of the Common Stock provide that upon a Disposition of all or
substantially all of the properties and assets attributed to any Group, the
Company would be required, subject to certain exceptions, either to pay a
special dividend on or redeem the outstanding shares of the class of Common
Stock relating to such Group or convert such Common Stock into shares of the
class of 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 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 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 Common Stock prior
to or after announcement of such Disposition. See "-- No Assurance as to Market
Price" and "Proposal 1 -- The Recapitalization Proposal -- Description of
Communications Stock and Media Stock -- Conversion and Redemption -- Mandatory
Dividends, Redemption or Conversion of Common Stock."
NO ASSURANCE AS TO MARKET PRICE. Because there has been no prior market for
the Communications Stock or the Media Stock, there can be no assurance as to
their market price following the Merger. Moreover, there can be no assurance
that the combined market values of the Communications Stock and the Media Stock
held by a stockholder after the Merger will equal or exceed the market value of
the Existing Common Stock held by such stockholder prior to the Merger. See
"Price Ranges of Existing Common Stock."
The market prices of the Communications Stock and the Media Stock would be
determined in the trading markets and could be influenced by many factors,
including the consolidated results of the Company, as well as the respective
performances of the Communications Group and the Media Group, investors'
expectations for the Company as a whole, the Communications Group and the Media
Group, the regulatory environment, trading volume, share issuances and
repurchases and general economic and market conditions. There can be no
assurance that investors would assign values to the Communications Stock and
Media Stock based on the reported financial results and prospects of the
relevant Group or the dividend policies established by the Board with respect to
such Group. Accordingly, financial effects of either Group that affect the
Company's consolidated results of operations or financial condition could affect
the market price of shares of both the Communications Stock and the Media Stock.
In addition, the Company cannot predict the impact on their market prices of
certain terms of the securities, such as the redemption and conversion rights
applicable upon the disposition of substantially all the assets attributed to
either Group, the ability of the Company to convert shares of one class of
Common Stock into shares of the other class of Common Stock or the discretion of
the Board to make various determinations. There is no assurance that the Media
Stock will be included in any stock market index in which the Existing Common
Stock is now included, or that the Communications Stock will continue to be
included in such index. Not being included in an index could adversely affect
demand for the Media Stock or the Communications Stock and, consequently, the
market price thereof.
GENERAL
This Proxy Statement is furnished to the shareholders of U S WEST in
connection with the solicitation of proxies by the Board for use at the Special
Meeting to be held on , 1995. This Proxy Statement is first being
mailed to shareholders on or about , 1995. At the Special
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Meeting, holders of Existing Common Stock will consider and vote upon approval
of the Recapitalization Proposal and Proposals 2 and 3. Such stockholders will
also consider and vote upon such other matters as may properly be brought before
the meeting.
Only holders of record of shares of the Existing Common Stock and the
Existing Series B Preferred Stock at the close of business on , 1995
will be eligible to vote at the Special Meeting. As of , 1995, the
Company had issued and outstanding shares of Existing Common Stock and
50,000 shares of Series B Preferred Stock. The shares of Existing Common
Stock held in the Company's treasury will not be voted. Each share of Existing
Common Stock is entitled to one vote on all Proposals and each share of Existing
Series B Preferred Stock is entitled to one vote only with respect to the
Recapitalization Proposal. The presence of a majority of the outstanding shares
of the Existing Common Stock and a majority of the outstanding shares of the
Existing Series B Preferred Stock represented in person or by proxy at the
Special Meeting will constitute a quorum. Shares represented by properly
executed proxies in time for the Special Meeting will be voted at such meeting
in the manner specified by the holders thereof. Proxies which are properly
executed but which do not contain voting instructions will be voted in favor of
approval and adoption of the Recapitalization Proposal and Proposals 2 and 3.
Shares represented by proxies which are marked "abstain" will be counted as
shares present for purposes of determining the presence of a quorum. Proxies
relating to "street name" shares that are voted by brokers on one or more but
less than all the proposals will nevertheless be treated as shares present for
purposes of determining the presence of a quorum, but will not be treated as
shares entitled to vote at the Special Meeting as to the proposal as to which
authority to vote is withheld by the broker ("broker non-votes"). It is not
expected that any matter other than those referred to herein will be brought
before the Special Meeting. If, however, other matters are properly presented,
the persons named as proxies will vote in accordance with their judgment with
respect to such matters. The grant of a proxy on the enclosed form does not
preclude a shareholder from voting in person. A shareholder may revoke a proxy
at any time prior to its exercise by submitting a new proxy at a later date, by
filing with the Secretary of the Company a duly executed revocation of proxy
bearing a later date or by voting in person at the Special Meeting. Attendance
at the Special Meeting will not of itself constitute revocation of a proxy.
The Recapitalization Proposal will require the affirmative vote of (i) the
holders of a majority of the outstanding shares of Existing Common Stock, voting
as a separate class, (ii) the holders of two-thirds of the outstanding shares of
Existing Series B Preferred Stock, voting as a separate class, and (iii) the
holders of a majority of all outstanding shares of Existing Common Stock and
Existing Series B Preferred Stock, voting together as a single class.
Accordingly, with respect to the Recapitalization Proposal, abstentions and
broker non-votes will have the same effect as negative votes. Proposals 2 and 3
will each be decided by the affirmative vote of a majority of the shares present
in person or represented by proxy at the meeting and entitled to vote thereon.
Accordingly, with respect to Proposals 2 and 3, an abstention will have the same
effect as a negative vote but, because shares held by brokers will not be
considered entitled to vote on matters as to which such brokers withhold
authority, a broker non-vote will not have the same effect as a negative vote.
The directors and executive officers of U S WEST beneficially own less than
one percent of the outstanding shares of Existing Common Stock.
A PROXY CARD IS ENCLOSED FOR YOUR USE. YOU ARE SOLICITED ON BEHALF OF THE
BOARD TO COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ACCOMPANYING
ENVELOPE, WHICH IS POSTAGE-PAID IF MAILED IN THE UNITED STATES.
U S WEST Delaware is a wholly-owned subsidiary of U S WEST and is not
engaged in any business activity unrelated to the Merger. The principal
executive offices of U S WEST and U S WEST Delaware are located at 7800 East
Orchard Road, Englewood, Colorado 80111 (telephone number (303) 793-6500).
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PROPOSAL 1 -- THE RECAPITALIZATION PROPOSAL
GENERAL
The holders of the Existing Common Stock are being asked to consider and
approve the Recapitalization Proposal which, if approved, would constitute
approval of the Merger Agreement, pursuant to which:
(i) U S WEST would be merged with and into U S WEST Delaware with U S
WEST Delaware continuing as the surviving corporation; and
(ii) each outstanding share of Existing Common Stock would be
automatically converted into one share of Communications Stock and one share
of Media Stock and each outstanding share of Existing Series B Preferred
Stock would be automatically converted into one share of Series C Preferred
Stock.
The ratio of one share of Media Stock for each share of Existing Common
Stock was determined by the Board in consultation with Lehman Brothers Inc., the
Company's lead financial advisor, and Morgan Stanley & Co. Incorporated, the
Company's co-advisor in connection with the Recapitalization Proposal, and is
based upon the desired initial trading range of the Media Stock and the common
stockholders' equity value of the Company attributable to the Media Group. This
equity value was established by taking into account, among other factors, the
initial level of the Company's debt and equity capitalization to be assigned to
the Media Group, the Media Group's recent historical financial performance
relative to its competitors that are publicly traded and the current state of
the markets for public offerings and other stock transactions. The conversion of
the Existing Common Stock into Communications Stock and Media Stock is intended
to be tax free. See "-- Certain Federal Income Tax Considerations."
IF THE RECAPITALIZATION PROPOSAL IS NOT APPROVED BY THE SHAREHOLDERS, THE
MERGER WILL NOT BE CONSUMMATED AND THE EXISTING COMMON STOCK WILL NOT BE
CONVERTED INTO COMMUNICATIONS STOCK AND MEDIA STOCK.
If the Recapitalization Proposal is approved by shareholders, the Company
anticipates that the Merger will become effective at the close of business on
the date on which a certificate of merger is filed with the Secretary of State
of Delaware and articles of merger are filed with the Secretary of State of
Colorado. The time of such effectiveness is referred to herein as the "Effective
Time." It is presently anticipated that such filings will be made as promptly as
practicable after the Special Meeting. No state or federal regulatory approvals
are required in connection with the consummation of the Merger.
The authorized but unissued shares of Communications Stock and Media Stock
would be available for issuance from time to time by the Company at the
discretion of the Board for any proper corporate purpose, which could include
raising capital, payment of dividends, providing compensation or benefits to
employees or acquiring companies or businesses. The issuance of such additional
shares would not be subject to approval by the stockholders of the Company
unless deemed advisable by the Board or required by applicable law, regulation
or stock exchange listing requirements.
The Merger Agreement may be terminated at any time prior to the Effective
Time, either before or after shareholder approval, by the Board for any reason,
including if the Board determines that the amount required to be paid to holders
of Existing Common Stock who exercise their dissenters' rights with respect to
the Merger will adversely affect the Company's financial condition. In addition,
the terms of the Merger Agreement may be amended prior to the Effective Time,
provided that the Merger Agreement may not be amended after the Merger has been
approved by U S WEST's shareholders if, in the judgment of the Board, such
amendment would have a material adverse effect on the rights of shareholders.
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RECOMMENDATION OF THE BOARD
THE BOARD HAS UNANIMOUSLY ADOPTED THE RECAPITALIZATION PROPOSAL AND BELIEVES
THAT ITS APPROVAL IS IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF
THE RECAPITALIZATION PROPOSAL.
EXCHANGE PROCEDURES; ODD-LOT PROGRAM
Upon consummation of the Merger, the Existing Common Stock share
certificates ("Existing Certificates") will represent shares of Communications
Stock. On a date (the "Mailing Date") as soon as practicable following the
Effective Time, holders of Existing Common Stock of record as of the Effective
Time will be mailed (i) certificates representing shares of Media Stock, (ii)
information with respect to the Odd-Lot Program described below and (iii)
instructions pursuant to which each holder may, at its option, forward its
Existing Certificates to , as exchange agent, for surrender and
exchange for certificates representing shares of Communications Stock.
Pursuant to the terms of the Odd-Lot Program, each holder of Existing Common
Stock who receives fewer than 100 shares of each of Communications Stock and
Media Stock pursuant to the Merger and elects to participate therein may
instruct the exchange agent, acting as agent for such shareholder, (i) to sell
all, but not less than all, of such stockholder's shares of Communications Stock
and/or Media Stock on the NYSE for its account for cash or (ii) to purchase for
its account additional shares of Communications Stock and/or Media Stock so as
to "round up" such stockholder's holdings to 100 shares of Communications Stock
and/or Media Stock. The Odd-Lot Program will commence shortly after the Mailing
Date and remain open for 90 days thereafter. During this period, the exchange
agent will periodically offset requests from stockholders who participate in the
Odd-Lot Program who wish to sell their odd-lot holdings of Communications Stock
and/or Media Stock against requests from other participants who wish to purchase
additional shares to "round-up" their odd-lot holdings of Communications Stock
and/or Media Stock to 100 shares. The exchange agent will sell or arrange the
sale of any shares not taken up in such off-setting process, or purchase any
shares needed to satisfy requests for "rounding up" that cannot be satisfied
through such off-setting process, in the open market. A stockholder buying or
selling shares of Communications Stock and/or Media Stock under the Odd-Lot
Program will pay or receive, as the case may be, the weighted average price for
all shares of Communications Stock and/or Media Stock purchased or sold under
the Odd-Lot Program in open-market transactions on the day the participant's
sale occurs, less a small fee to cover administrative fees and brokerage
transactions. In the event, however, that sales and purchases of Communications
Stock and/or Media Stock under the Odd-Lot Program are evenly matched for any
given processing interval, so that requested "rounding up" purchases are exactly
satisfied by requested sales, the price at which shares shall be deemed to be
purchased or sold under the Odd-Lot Program will be the average of the high and
low sale price for the applicable class of Common Stock on the day on which the
participating stockholder's request was offset against that of another
participating stockholder, as reported on the Composite Tape.
More detailed information and a form for use in the Odd-Lot Program will be
mailed to stockholders shortly after the Mailing Date. A completed form must be
postmarked for receipt by, or delivered to, the exchange agent on or before
, 1995 for a stockholder to elect to participate in the Odd-Lot
Program. The Company will not solicit or make any recommendations to
stockholders to either sell or purchase shares of Common Stock in the Odd-Lot
Program. See "-- Certain Federal Income Tax Considerations" for a discussion of
the federal income tax treatment of the sale of shares in the Odd-Lot Program.
BACKGROUND AND REASONS FOR THE RECAPITALIZATION PROPOSAL
The Recapitalization Proposal was adopted by the Board following its review
of various alternatives for enhancing shareholder value, creating flexibility
for the future growth of the Company and advancing the Company's strategic
objectives.
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The Company's strategic objective is to become a leading provider of
integrated communications, entertainment, information and transaction services
to its customers over wired broadband and wireless networks in the
Communications Group Region and in other selected domestic and foreign markets
worldwide. Implementation of this strategy will require, among other things, the
upgrade of existing networks as well as acquisitions of selected new networks in
domestic and foreign markets in order to create a footprint for the delivery of
such services. The Company anticipates that it will have extensive capital
requirements for such upgrades and acquisitions. For a discussion of the
strategies of the Communications Group and the Media Group, see "Annex VI --
Communications Group -- Description of Business -- Communications Group
Strategy" and "Annex VII -- Media Group -- Description of Business -- Media
Group Strategy," respectively.
At a meeting held on February 3, 1995, the Board, after receiving a
preliminary report from management on its analysis of capital restructuring
alternatives, formed a special committee (the "Special Committee") to facilitate
the review of the Recapitalization Proposal as well as various alternative
proposals. The Special Committee met on February 9, 1995, March 8, 1995 and
March 20, 1995, together with the Company's financial advisors, Lehman Brothers
Inc. and Morgan Stanley & Co. Incorporated, and its legal advisors, to evaluate
the alternatives available to the Company in view of the Company's strategic
objectives and capital requirements. These alternatives included (i) the
preservation of the Company's current capital structure, (ii) an exchange offer
pursuant to which a new series of dividend-paying preferred stock would be
offered in exchange for a portion of the Existing Common Stock, with the Board
eliminating the payment of a dividend on the remaining Existing Common Stock,
(iii) the segmentation of the businesses of the Communication Group and the
Media Group through a distribution of all or a portion of those businesses in a
spin-off to shareholders and (iv) the creation of two classes of common stock
intended to reflect separately the businesses of the Communications Group and
the Media Group.
At meetings held on March 27, 1995, April 6 and 7, 1995 and May 5, 1995, the
Board reviewed these alternatives and, with the assistance of its financial and
legal advisors, considered the following factors in arriving at its
determination that the Recapitalization Proposal is in the best interests of the
Company and its shareholders:
- The Company's current capital requirements for the upgrade of its
networks and future acquisitions and the limitations of its existing
capital structure to finance such capital requirements.
- The Company's long-term strategic objectives to become a leading
provider of integrated communications, entertainment, information and
transaction services in view of the changing business environment and
opportunities for the Company's regulated local exchange operations and
multimedia operations.
- The Existing Common Stock trades at a discount to its theoretical public
market trading value (the estimated stand-alone public trading value of
the component businesses that comprise the Company), primarily due to
the relatively low value that dividend yield and income oriented
investors attribute to the businesses that comprise the Media Group.
- The use by other companies of equity securities intended to reflect
separately the performance of specific businesses and the market
performance of such securities.
- Corporate governance issues, such as the Board's fiduciary obligation to
holders of different classes of capital stock, particularly in view of
the convergence of the telecommunications, cable and wireless industries
and the changing regulatory environment.
- The Company's strategic flexibility after implementation of the
Recapitalization Proposal, including the ability to engage in mergers,
acquisitions, divestitures, spin-offs, split-offs and recombinations.
- The ability to separate the Company's businesses into two distinct
groups under the Recapitalization Proposal.
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Following deliberation over and consideration of the advantages and
disadvantages of the various alternatives, the Board determined that the
Recapitalization Proposal was the best alternative for the Company and its
shareholders. The Board determined that neither the preservation of the
Company's current capital structure nor an exchange offer for a dividend-paying
preferred stock would result in investors properly valuing the businesses of the
Communications Group and the Media Group. Moreover, the Board determined that
the issuance of preferred stock in an exchange offer would restrict the
financial flexibility of the Company and therefore its borrowing costs, which
could result in a downgrade of the Company's credit rating and an increase in
its borrowing costs. In addition, the Board determined that a spin-off of
certain assets of the Company to shareholders would not enable the Company to
retain the advantages of conducting business as a single corporation and would
also significantly increase the borrowing costs of the spun-off entity.
The Board identified the following as the principal advantages of the
Recapitalization Proposal:
- The creation of two classes of common stock intended to reflect
separately the performance of the Communications Group and the Media
Group should increase shareholder value. The Recapitalization Proposal
creates investment vehicles that meet the requirements of distinct
investor groups -- those looking for yield and income of a relatively
more mature business, in the case of the Communications Stock, and those
looking for the growth potential of less mature businesses, in the case
of Media Stock -- which should encourage proper valuation of the assets
in each of the Groups.
- The Media Stock should provide the Company with an additional equity
security that can be used to raise capital and can be issued in
connection with acquisitions and investments. Because the Board does not
expect to declare a dividend on the Media Stock for the foreseeable
future, any issuance of such stock, in connection with an acquisition or
otherwise, would not reduce cash flow that would otherwise be available
for capital investments. In addition, the Company should be able to
reduce its cost of capital because of the improved equity valuation that
should result from the implementation of the Recapitalization Proposal.
- The Recapitalization Proposal will retain for the Company the advantages
of doing business as a single corporation. As part of a single entity,
each Group would be in a position to benefit from synergies with the
other, including synergies that may result from the eventual convergence
of the telecommunications, cable and wireless industries as well as
synergies between access providers and information and content
suppliers. In addition, by remaining a single entity, the Company will
continue to enjoy certain strategic, financial and operational benefits
that would not be available if the Communications Group and Media Group
were separate legal entities.
In addition, the Board considered the following other advantages of the
Recapitalization Proposal:
- Implementation of the Recapitalization Proposal should not be taxable to
the Company or its shareholders.
- The Recapitalization Proposal retains future restructuring flexibility
by preserving the Company's ability to undertake future capital
restructuring and asset segmentation as well as to modify the Company's
capital structure.
- The creation of two classes of stock that are intended to reflect
separately distinct businesses increases the Company's ability to focus
the management of the respective Groups and provide incentives for
employees of each Group that are tied directly to the stock price
performance of the Group in which they are employed.
- The implementation of the Recapitalization Proposal is not expected to
have any adverse impact on the Company's credit rating and cost of
borrowing.
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The Board also considered the following potential adverse consequences of
the Recapitalization Proposal:
- The confusion which could result from a more complex capital structure
may inhibit the efficient valuation of either or both classes of Common
Stock.
- The risks associated with an investment in a single company and all of
the Company's businesses, assets and liabilities to which holders of
Communications Stock and Media Stock will continue to be subject . See
"Risk Factors -- Stockholders of One Company; Financial Impacts on One
Group Could Affect the Other."
- The potential diverging interests of the two Groups and the issues that
could arise in resolving such conflicts. See " -- Certain Management
Policies" and "Risk Factors -- Potential Diverging Interests."
- The potential negative effects of using Media Stock in connection with
an acquisition, such as the limitation on using the pooling method of
accounting for, and the policy of the Service not to issue a revenue
ruling in connection with the structuring of, an acquisition using an
equity security intended to reflect separately the performance of
specific businesses.
The Board determined, however, that, on balance, the positive aspects of the
Recapitalization Proposal outweighed any potentially adverse consequences and
concluded that the Recapitalization Proposal is in the best interests on the
Company and its shareholders.
Finally, the Board considered that, by reincorporating in Delaware, the
Company will be able to benefit from Delaware's comprehensive and well developed
corporate laws. For many years Delaware has followed a policy of encouraging
incorporation in that state. In furtherance of that policy, Delaware has adopted
a modern and comprehensive corporation statute that has been periodically
updated and revised to meet changing business needs. As a result, many publicly
held corporations have initially chosen Delaware for their domicile or have
subsequently reincorporated in Delaware in a manner similar to that proposed by
the Company. Because of Delaware's historic significance as the state of
incorporation for many publicly held corporations, the Delaware judiciary has
become particularly familiar with matters of corporate law and corporate
financial and business transactions and a substantial body of court decisions
has developed construing Delaware corporate law and establishing public policy
with respect to Delaware corporations. As a consequence, a greater measure of
predictability is possible in Delaware with respect to corporate legal affairs
than is available in other states. While the Company has not been impeded in
operating its business, and while the creation of separate classes of common
stock would be permitted, under Colorado law, the Company believes that Delaware
law will offer clearer guidance with respect to issues that may arise as a
result of the existence of separate classes of Common Stock of the Company. The
reincorporation of the Company in Delaware will not result in any change in the
business, management, board of directors, assets, liabilities or net worth of
the Company, and the business of the Company will continue to be managed from
its corporate headquarters in Englewood, Colorado.
CERTAIN MANAGEMENT POLICIES
In connection with the Recapitalization Proposal, the Company intends to
follow 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 will 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
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described below, all transactions between the Communications Group and the
Media Group are intended 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 currently provides and, following the
implementation of the Recapitalization Proposal, will continue to provide
certain customer lists and billing and collection and other services to U S
WEST Marketing Resources Group, Inc. ("Marketing Resources"), a business to
be included in the Media Group, for use in the directory publications and
other businesses of Marketing Resources. Such data and 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 the Company's
Technology Fair Compensation Policy. Pursuant to this policy, if one Group
funds the research and development of technology (whether within the Company
or not), such Group shall 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. The Company does not intend to
transfer funds between the Groups, except for certain short-term ordinary
course advances of funds at market rates associated with the Company's
centralized cash management. The 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 "-- Future
Inter-Group Interest." Any such determination to transfer funds between
Groups would be made by the 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. No loans will be
made by the regulated businesses of the Communications Group to the Media
Group. See "-- Accounting Matters and Policies -- Financing Activities."
CORPORATE OPPORTUNITIES. To the extent a business opportunity arises
which could be undertaken by either Group, the Board will use its good faith
business judgment to allocate such opportunity to a Group or permit both
Groups jointly to pursue such opportunity. In making any such determination,
the Board may consider a number of factors, including whether the business
opportunity is principally within the existing scope of a Group's business,
whether the business
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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 the Company and AirTouch, subject
to certain exceptions, the Company may generally only offer wireless
services through the Company's joint venture with AirTouch, which will be
included in 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, the Company, subject to certain
exceptions, may only engage in programming, filmed entertainment and
out-of-region cable through TWE, which will be included in the Media Group.
See "Annex VI -- Communications Group -- Description of Business" and "Annex
VII -- Media Group -- Description of Business."
These policies may be modified or rescinded without the approval of the
stockholders, although the Company has no present intention to do so. Any
determination by the 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 Board in its good faith business judgment of the Company's
best interests. In making such determination, the Board may also consider
regulatory requirements imposed on U S WEST Communications by the PUCs and the
FCC. See "Risk Factors -- Potential Diverging Interests."
ACCOUNTING MATTERS AND POLICIES
If the Recapitalization Proposal is approved by shareholders and implemented
by the Board, the Company will prepare 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 the
Company. 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 Restated Certificate and relevant
policies, such Group financial statements also include allocated portions of the
Company's corporate assets and liabilities (including contingent liabilities)
that are not separately identified with the operations of a specific Group.
U S WEST Communications, the principal subsidiary of the Communications
Group, is subject to regulation by the PUCs and the FCC and has historically
been operated as a separate business unit for which separate audited financial
statements have been prepared on an annual basis. U S WEST Communications has
also conducted its own borrowing activities, and none of the other debt of the
Company and its subsidiaries is for the benefit of or attributable to U S WEST
Communications. Financing activities for the businesses included in the Media
Group and the businesses of the Communications Group other than U S WEST
Communications (the "Non-Regulated Communications Businesses") have historically
been conducted independently from the financing activities of U S WEST
Communications. Accordingly, many of the accounting and management policies
described below have historically been employed by the Company in managing the
businesses conducted by the two Groups, particularly in light of the regulation
of U S WEST Communications by the PUCs and the FCC.
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 the Company's
businesses, assets and liabilities. See "Risk Factors -- Stockholders of One
Company; Financial Impacts on One Group Could Affect the Other."
If the Recapitalization Proposal is approved by the shareholders and
implemented by the Board, upon the Effective Time, cash management, tax sharing
and allocation of principal corporate activities
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between the Communications Group and the Media Group would be based upon
policies that management of the Company believes to be reasonable. These
policies are reflected in the combined financial statements included in Annexes
VI and VII hereto, 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, will be managed by the Company on a
centralized basis. Notwithstanding such centralized management, financing
activities for U S WEST Communications will be separately identified and
accounted for in the Company's records and U S WEST Communications will
continue to conduct its own borrowing activities. All debt incurred and
investments made by the Company and its subsidiaries would be specifically
allocated to and reflected on the financial statements of the Media Group
except that debt incurred and investments made by the Company and its
subsidiaries on behalf of the Non-Regulated Communications Businesses 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 the Company or a subsidiary on behalf
of a Group would be charged to such Group at the borrowing rate of the
Company or such subsidiary.
The Company does not intend to transfer funds between the Groups, except
for certain short-term ordinary course advances of funds at market rates
associated with the Company's centralized cash management. Such short-term
transfers of funds will be 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 Board,
in its sole discretion, determines that a transfer of funds between the
Groups should be accounted for as a long-term loan, the 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 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 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 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 "-- 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, will be reflected in
their entirety in the financial statements of the Media Group. See "--
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 the Company 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
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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 the Company 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 the Company 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 the Company's general
and administrative services (including certain executive management, legal,
accounting and auditing, tax, treasury, strategic planning and public policy
services) would be 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. The
Company will charge each Group for such services at fully distributed cost.
The above policies and agreements could be modified or rescinded by the
Board, in its sole discretion, without approval of stockholders, although there
is no present intention to do so. The Board could also adopt additional policies
depending upon the circumstances. Any determination of the 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 common stock of the
Company, would be made by the Board based on its good faith business judgment
that such decision is in the best interests of the Company and all the Company's
stockholders. In making such determination, the Board may also consider
regulatory requirements imposed on U S WEST Communications by the PUCs and the
FCC. See "-- Certain 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.
DIVIDEND POLICY
The Company's quarterly dividend rate is presently $0.535 per share of
Existing Common Stock. The Board currently intends that the dividend policy
applicable to the Communications Stock would be the same as the dividend policy
applicable to the Existing Common Stock, with the initial dividend rate on the
Communications Stock being the rate in effect for the Existing Common Stock at
the time of conversion of the Existing Common Stock into Communications Stock
and Media Stock. The Board believes that implementation of the Recapitalization
Proposal would not adversely affect the Company's ability to pay dividends on
the Communications Stock.
While the Board does not currently intend to change the dividend policies
referred to above, it reserves the right to do so at any time and from time to
time. Under the Recapitalization Proposal and Delaware law, the Board would not
be required to pay dividends in accordance with the foregoing dividend policies.
Determinations as to future dividends on the Communications Stock would be
based primarily upon the financial condition, results of operations and business
requirements of the Communications Group and the Company as a whole. Under the
terms of the Communications Stock, dividends would be payable in the sole
discretion of the Board out of the lesser of (i) funds of the Company legally
available for dividends and (ii) the Communications Group Available Dividend
Amount. See
"-- Description of Communications Stock and Media Stock -- Dividends."
With regard to the Media Stock, the Board currently intends to retain future
earnings, if any, for the development of its multimedia businesses and does not
anticipate paying cash dividends on the Media Stock in the foreseeable future.
Future determinations by the 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 the Company as a whole. Under
the terms of the Media Stock, dividends, if any, would be payable in the sole
discretion of the Board out of the lesser of (i) the funds of the Company
legally available therefor and (ii) the Media Group Available Dividend Amount.
See "-- Description of Communications Stock and Media Stock -- Dividends."
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Subject to the restrictions on the funds out of which dividends on the
Communications Stock and the Media Stock may be paid, as described under "--
Description of Communications Stock and Media Stock -- Dividends," the Board
would be able, in its sole discretion, to declare and pay dividends exclusively
on either the Communications Stock or 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.
DESCRIPTION OF COMMUNICATIONS STOCK AND MEDIA STOCK
THE FOLLOWING DESCRIPTION IS QUALIFIED BY REFERENCE TO -- GLOSSARY OF
DEFINED TERMS AND TO ANNEX II TO THIS PROXY STATEMENT, WHICH CONTAINS THE FULL
TEXT OF THE PROPOSED RESTATED CERTIFICATE.
GENERAL
The Articles currently provide that the Company is authorized to issue
2,050,000,000 shares of capital stock, including 50,000,000 shares of preferred
stock, par value $1.00 per share ("Existing Preferred Stock"), and 2,000,000,000
shares of Existing Common Stock. The Existing Preferred Stock consists of
2,000,000 shares designated as Series A Junior Participating Cumulative
Preferred Stock ("Existing Series A Preferred Stock") and 50,000 shares
designated as Existing Series B Preferred Stock. As of May 10, 1995, the Company
had issued and outstanding 470,564,209 shares of Existing Common Stock, no
shares of Existing Series A Preferred Stock and 50,000 shares of Existing Series
B Preferred Stock. If the Recapitalization Proposal is adopted, pursuant to the
Restated Certificate, the Company will be authorized to issue 4,200,000,000
shares of capital stock, including (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 would be designated as Series A Junior Participating
Cumulative Preferred Stock, par value $1.00 per share ("Series A Preferred
Stock"), 10,000,000 shares would be designated as Series B Junior Participating
Cumulative Preferred Stock, par value $1.00 per share ("Series B Preferred
Stock"), and 50,000 shares would be designated as Series C Preferred Stock.
The authorized but unissued shares of Communications Stock, Media Stock and
Preferred Stock will be available for issuance by the Company from time to time,
as determined by the 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 the Company unless deemed advisable by the Board or required by
applicable law, regulation or stock exchange listing requirements. Any net
proceeds from, or other effects of, the issuance by the Company of
Communications Stock or Media Stock (other than shares of Media Stock which may
be issued with respect to the Inter-Group Interest, if any) will be attributed
to the Communications Group or the Media Group, respectively.
DIVIDENDS
Dividends on the Communications Stock and the Media Stock will be subject to
substantially the same limitations as dividends on the Existing Common Stock,
which are limited to legally available funds of the Company under applicable law
and subject to the prior payment of dividends on outstanding shares of Preferred
Stock. See "-- Comparison of Shareholder Rights -- Dividends."
Dividends on the Communications Stock and the Media Stock will further be
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.
There can be no assurance that there would be an Available Dividend Amount with
respect to either Group.
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The "Communications Group Available Dividend Amount," on any date, shall
mean 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 of 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.
The "Media Group Available Dividend Amount," on any date, shall mean the
excess, if any, of (i) the product of (x) the Outstanding Media Fraction as of
such date and (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 of 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. 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.
At March 31, 1995, based on their respective financial statements, the funds
of the Company legally available for the payment of dividends under Delaware law
would have been at least $7.522 billion, the Communications Group Available
Dividend Amount would have been at least $3.189 billion and the Media Group
Available Dividend Amount would have been at least $4.333 billion.
Delaware law limits the amount of distributions on capital stock to the
legally available funds of the Company, which are determined on the basis of the
entire Company, and not just the respective Groups. Consequently, the amount of
legally available funds would reflect 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 was met.
Subject to the prior payment of dividends on outstanding shares of Preferred
Stock and the foregoing limitations, the 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.
At the time of any dividend or other distribution on the outstanding shares
of Media Stock (including any dividend of Net Proceeds from the Disposition of
all or substantially all of the properties and assets attributed to the Media
Group), the Communications Group's financial statements would be credited with,
and the Media Group's financial statements would be charged with, an amount
equal to the product of (i) the aggregate amount of such dividend or
distribution paid or distributed in respect of the outstanding shares of Media
Stock times (ii) a fraction, the numerator of which is the Number of Shares
Issuable with Respect to the Inter-Group Interest, if any, and the denominator
of which is the number of shares of Media Stock outstanding.
See Annex VIII for illustrations of the calculation of the Inter-Group
Interest and the related effects of dividends on shares of Media Stock.
CONVERSION AND REDEMPTION
The Articles currently do not provide for either mandatory or optional
conversion or redemption of the Existing Common Stock. The Recapitalization
Proposal will permit the conversion and redemption of the Communications Stock
and the Media Stock upon the terms described below.
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For the definitions of "Fair Value," "Market Capitalization," "Market
Value," "Market Value Ratio of the Communications Stock to the Media Stock,"
"Market Value Ratio of the Media Stock to the Communications Stock," and
"Publicly Traded," as used below, see Glossary of Defined Terms.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF 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 the Company 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 the Company of all
or substantially all of the Company's properties and assets in one transaction
or a series of related transactions in connection with the liquidation,
dissolution or winding up of the Company, (x) on a pro rata basis to the holders
of all outstanding shares of the class of Common Stock relating to such Group
and in the case of a Disposition of the properties and assets attributed to the
Media Group, the Company for the benefit of the Communications Group with
respect to the Inter-Group Interest, if any, (y) any person or entity controlled
by the Company (as determined by the Board), or (z) in connection with a Related
Business Transaction), the Company 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 the Company legally available
therefor:
(i) declare and pay a dividend in cash and/or securities (other than
Common Stock) or other property to the holders of outstanding shares of the
class of Common Stock relating to the Group subject to such Disposition
having, on a fully distributed basis, 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) provided that the Communications Group Available Dividend Amount or
the Media Group Available Dividend Amount, as applicable, would have been
sufficient to permit a dividend in lieu thereof to be paid pursuant to
clause (i) above:
(A) if such Disposition involves all (not merely substantially all)
of the properties and assets attributed to such Group, redeem all
outstanding shares of Common Stock relating to the Group subject to such
Disposition in consideration for cash and/or securities (other than
Common Stock) or other property having, on a fully distributed basis, a
Fair Market Value as of the date of such consummation 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 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 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
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for cash and/or securities (other than Common Stock) or other property
having, on a fully distributed basis, a Fair Value in the aggregate equal
to such Fair Value of the Net Proceeds or such product, as applicable; or
(2) convert each outstanding share of the class of Common Stock relating
to the Group subject to such Disposition into a number of fully paid and
nonassessable shares of the class of Common Stock relating to the other
Group (or, if the 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
the Company (other than the class of Common Stock relating to the Group
subject to such Disposition) are then Publicly Traded, of such other class
or series of common stock as then has the largest Market Capitalization as
of the close of business on the Trading Day immediately preceding the date
notice of such conversion is mailed to holders), equal to % of the
average daily ratio (calculated to the nearest five decimal places) of the
Market Value of one share of Common Stock relating to the Group subject to
such Disposition to the Market Value of one share of Common Stock relating
to the other Group (or such other class or series of Common Stock, as the
case may be) during the ten-Trading Day period beginning on the 16th Trading
Day following such consummation.
The Board may, within one year after a dividend or redemption described
above in this section, convert each outstanding share of the class of Common
Stock relating to the Group subject to such Disposition into a number of fully
paid and nonassessable shares of the class of Common Stock relating to the other
Group (or, if the 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 the
Company (other than the class of Common Stock relating to the Group subject to
such Disposition) are then Publicly Traded on the Trading Day immediately
preceding the date on which notice of such conversion is mailed to holders, of
such other class or series of common stock as then has the largest Market
Capitalization) equal to % 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 the Company of holders of the class of Common Stock
relating to the Group not subject to Disposition and would preclude holders of
either class of 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 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 Common Stock
relating to such Group remaining issued and outstanding, the per share market
price of such Common Stock and the cost of maintaining stockholder accounts.
For these purposes, "substantially all of the properties and assets" of any
Group means a portion of such properties and assets that represents at least 80%
of the then current market 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 the Company
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 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 Board. The purpose of the Related Business
Transaction exception is to enable the Company to
49
<PAGE>
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 Common Stock of such Group.
The "Net Proceeds" of a Disposition of any of the properties and assets of
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 the Company 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 the Company 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. The Company 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 Board determines
will have an aggregate market value, on a fully distributed basis, of not less
than the amount of the Fair Value of the Net Proceeds.
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
aggregate amount paid in respect of such dividend multiplied by (ii) a fraction,
the numerator of which is the Number of Shares Issuable with Respect to the
Inter-Group Interest and the denominator of which is the number of shares of
Media Stock then outstanding.
CONVERSION AT OPTION OF THE COMPANY. At any time following the ninth
anniversary of the Effective Time, the Board may convert each of the outstanding
shares of Communications Stock into a number of fully paid and nonassessable
shares of Media Stock (or, if Media Stock is not Publicly Traded and shares of
another class or series of common stock of the Company (other than
Communications Stock) are then Publicly Traded on the Trading Day immediately
preceding the date on which notice of such conversion is mailed to holders, of
such other class or series of common stock as then has the largest Market
Capitalization), equal to ___% 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 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 and shares of another class or
series of common stock of the Company (other than Media Stock) are then Publicly
Traded on the Trading Day immediately preceding the date on which notice of such
conversion is mailed to holders, of such other class or series of common stock
as then has the largest Market Capitalization), 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>
12 MONTH PERIOD PRIOR TO PERCENTAGE OF
ANNIVERSARY OF EFFECTIVE TIME MARKET VALUE RATIO
- ------------------------------------------------------------------------------------ -------------------
<S> <C>
First through Fifth................................................................. %
Sixth............................................................................... %
Seventh............................................................................. %
Eighth.............................................................................. %
Ninth............................................................................... %
thereafter.......................................................................... %
</TABLE>
50
<PAGE>
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. At any time after the date
on which all of the assets and liabilities attributed to the Communications
Group (and no other assets or liabilities of the Company or any subsidiary
thereof) are held directly or indirectly by one or more wholly-owned
subsidiaries of the Company (the "Communications Group Subsidiaries"), the Board
may, in its sole discretion, provided that there are funds of the Company
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.
Any time after the date on which all of the assets and liabilities
attributed to the Media Group (and no other assets or liabilities of the Company
or any subsidiary thereof) are held directly or indirectly by one or more
wholly-owned subsidiaries of the Company (the "Media Group Subsidiaries"), the
Board may, in its sole discretion, provided that there are funds of the Company
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. The Company 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.
After any conversion date or redemption date on which all outstanding shares
of any class of Common Stock were converted or redeemed, any share of such class
of Common Stock that is to be issued on conversion, exchange or exercise of any
Convertible Securities will, immediately upon such conversion, exchange or
exercise and without any notice or any other action on the part of, the Company
or its Board or the holder of such Convertible Security:
(i) in the event shares of such class of Common Stock outstanding on such
conversion date were converted into shares of the class of Common Stock relating
to the other Group (or another class or series of common stock of the Company)
pursuant to the provisions described under "-- Mandatory Dividend, Redemption or
Conversion of Media Stock" or "-- Conversion at Option of the Company," be
converted into the number of shares of the kind of capital stock of the Company
that the number of shares of such class of Common Stock that were to be issued
upon such conversion, exchange or exercise would have been received had such
shares been outstanding on such conversion date; or
(ii) in the event shares of such class of Common Stock were redeemed
pursuant to the provisions described under "-- Mandatory Dividend, Redemption or
Conversion of Media 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 the Company legally available therefor,
for $.01 per share in cash for each share of such class of 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 Common Stock," the Company
will announce publicly by press release (i) the Net Proceeds of such
Disposition, (ii) the number of outstanding shares of the class of Common Stock
relating to the Group subject to such Disposition, (iii) the number of shares of
such Common Stock into or for which Convertible Securities are then convertible
or exercisable and the conversion 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
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<PAGE>
Trading Day and not later than the 30th Trading Day following the consummation
of such Disposition, the Company 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 Common Stock" it has
irrevocably determined to take.
If the Company determines to pay a dividend as described in clause (1)(i) of
such paragraph, the Company is required, not later than the 30th Trading Day
following the consummation of such Disposition, to cause to be given to each
holder of outstanding shares of the class of Common Stock relating to the Group
subject to such Disposition and to each holder of Convertible Securities
convertible into or exchangeable or exercisable for such 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 shall 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
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 Common Stock and the number of shares of such 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
appropriately 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 such holder at such holder's address as
the same appears on the transfer books of the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii)(A) of the first paragraph under "-- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company 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 outstanding shares of such class of
Common Stock, and to each holder of Convertible Securities convertible into or
exchangeable or exercisable for shares of such class of 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 Common Stock
outstanding on the redemption date will be redeemed, (2) the redemption date
(which shall not be more than 85 Trading Days following the consummation of such
Disposition), (3) the type of property to be paid as a redemption price in
respect of outstanding shares of such class of Common Stock, (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 Common Stock, properly endorsed or assigned for transfer (unless the
Company 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 Common Stock and the number of shares of such class of 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 appropriately 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,
52
<PAGE>
except as otherwise provided below, dividends on such shares of such Common
Stock shall cease to be paid as of such redemption date. 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 the Company.
If the Company determines to undertake a redemption pursuant to clause
(1)(ii) (B) of the first paragraph under " -- Mandatory Dividend, Redemption or
Conversion of Common Stock," the Company 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 outstanding shares of the
class of 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 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 Common Stock will be
selected for redemption, (ii) the anticipated redemption date (which shall not
be more than 85 Trading Days following the consummation of such Disposition),
(iii) the type of property to be paid as a redemption price in respect of shares
of such Common Stock outstanding on the redemption date, (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 Common Stock and the number of shares of such
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 participate in such redemption only
if such holder appropriately converts, exchanges or 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. Promptly, but not
earlier than 40 Trading Days nor more than 50 Trading Days following the
consummation of such Disposition, the Company is required to cause to be given
to each holder of shares of such Common Stock to be so redeemed a notice setting
forth (1) the number of shares of such Common Stock held by such holder to be
redeemed, (2) a statement that such shares of such Common Stock shall 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 Common Stock to be redeemed, including details as to the
calculation thereof, (5) the place or places where certificates for shares of
such Common Stock, properly endorsed or assigned for transfer (unless the
Company shall waive 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 the Company after the redemption date and (7) a statement to
the effect that, except as otherwise provided below, dividends on such shares of
such Common Stock shall cease to be paid as of such redemption date. Such
notices 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 the Company.
If less than all of the outstanding shares of such Common Stock are to be
redeemed as described above under "-- Mandatory Dividend, Redemption or
Conversion of Common Stock," such shares will be redeemed by the Company pro
rata among the holders of outstanding shares of such Common Stock or by such
other method as may be determined by the Board to be equitable.
In the event of any conversion as described above under "-- Conversion at
Option of the Company" or "-- Mandatory Dividend, Redemption or Conversion of
Common Stock," the Company will cause to be given to each holder of outstanding
shares of the class of 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 Common Stock (unless alternate provision for such notice to
the holders of such
53
<PAGE>
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 Common Stock will be converted, (ii) the conversion date (which, in the
case of a conversion after a Disposition, shall 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 the Company, as the case may be, to be received with respect to
each share of such Common Stock, including details as to the calculation
thereof, (iv) the place or places where certificates for shares of such Common
Stock, properly endorsed or assigned for transfer (unless the Company waives
such requirement) are to be surrendered for delivery of certificates for shares
of such Common Stock, (v) the number of outstanding shares of such Common Stock
and the number of shares of such 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
Common Stock shall 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 Common Stock upon such conversion only if such holder
appropriately 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 the Company.
If the Company determines to redeem shares of a class of Common Stock as
described above under "-- Redemption in Exchange for Stock of Subsidiary," the
Company will cause to be given to each holder of outstanding shares of such
Common Stock and to each holder of Convertible Securities convertible into or
exchangeable or exercisable for shares of such 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 shares of such 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 Common Stock properly endorsed or assigned
for transfer (unless the Company 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 Common Stock shall cease to be paid as of such redemption date, (vi) the
outstanding number of shares of such Common Stock and the number of shares of
such 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 appropriately 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 such holder at such holder's address as the same appears on the
transfer books of the Company.
54
<PAGE>
Neither the failure to mail any notice described above to any particular
holder of shares of any class of 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 Common Stock or of outstanding
Convertible Securities, or the validity of any such conversion or redemption.
The Company 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 Common Stock upon any conversion, redemption, dividend or other
distribution described above. If more than one share of such Common Stock is
held at the same time by the same holder, the Company may aggregate the number
of shares of any class of capital stock that is issuable or the amount of
securities that is deliverable 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 delivered to any holder of such Common
Stock is a fraction, the Company will, if such fraction is not issued or
delivered to such holder, pay a cash adjustment in respect of such fraction in
an amount equal to the fair market value of such fraction on the fifth Trading
Day prior to the date such payment is to be made (without interest). For
purposes of the preceding sentence, "fair market value" of any fraction will be
(i) in the case of any fraction of a share of capital stock of the Company, the
product of such fraction and the Market Value of one share of such capital stock
and (ii) in the case of any other fractional security, such value as is
determined by the Board.
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of such Common Stock; provided, however, that if such
shares are converted or redeemed by the Company after the record date for
determining holders of such 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.
Before any holder of Communications Stock or Media Stock will be entitled to
receive certificates representing shares of any capital stock, cash and/or other
securities or property to be distributed to such holder with respect to any
conversion or redemption of shares of such Common Stock, such holder is required
to surrender at such place as the Company specified certificates for shares of
such Common Stock, properly endorsed or assigned for transfer (unless the
Company waived such requirement). As soon as practicable after the Company's
receipt of certificates for such shares of such Common Stock, the Company will
deliver to the person for whose account such shares were so surrendered, or to
the nominee or nominees of such person, certificates representing the number of
whole shares of the kind of capital stock, cash and/or other securities or
property to which such person was entitled, together with any fractional payment
referred to below, in each case without interest. If less than all of the shares
of any Common Stock represented by any one certificate are to be converted or
redeemed, the Company will issue and deliver a new certificate for the shares of
such class of Common Stock not converted or redeemed.
From and after any conversion or redemption of shares of any class of Common
Stock, all rights of a holder of shares of such Common Stock that were converted
or redeemed will cease, except for the right, upon surrender of the certificates
representing such shares of such 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. No holder of a certificate that immediately prior
to the conversion or redemption of any Common Stock represented shares of such
Common Stock will be entitled to receive any dividend or other distribution with
respect to shares of any kind of capital stock into or in exchange for which
shares of such Common Stock were converted or redeemed until surrender of such
holder's certificate in exchange for a certificate or certificates representing
shares of such kind of capital stock. Upon such surrender, there will be paid to
the holder the amount of any dividends or other distributions (without interest)
which theretofore became payable with respect to a record date occurring after
the conversion or redemption, but which were not paid by reason of the
foregoing, with respect to the number of whole shares of the kind of capital
55
<PAGE>
stock represented by the certificate or certificates issued upon such surrender.
From and after a conversion or redemption, the Company will, however, be
entitled to treat the certificates for such Common Stock that have not yet been
surrendered for conversion or redemption as evidencing the ownership of the
number of whole shares of the kind of capital stock for which the shares of such
Common Stock represented by such certificates should have been converted or
redeemed, notwithstanding the failure to surrender such certificates.
The Company 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 or redemption of
shares of any class of Common Stock pursuant hereto. The Company will not,
however, be required to pay any tax that may be payable in respect of any
transfer involved in the issue and delivery of any shares of capital stock
and/or other securities in a name other than that in which the shares of such
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
the Company the amount of any such tax, or established to the satisfaction of
the Company that such tax had been paid.
VOTING RIGHTS
Currently, holders of Existing Common Stock have one vote per share on all
matters submitted to shareholders. In addition, holders of any series of
Existing Preferred Stock would have the right to vote as a separate voting group
under the CBCA in certain circumstances. See "-- Comparison of Shareholder
Rights." The Restated Certificate will provide that the holders of all classes
of Common Stock and any series of Preferred Stock outstanding at the time of
such vote and entitled to vote together with the holders of Common Stock will
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
Common Stock or any class thereof or the Preferred Stock or any series thereof
would be entitled to vote as a separate class. On all matters as to which both
classes of Common Stock would vote together as a single class, (i) each
outstanding share of Communications Stock shall have one vote, and (ii) each
outstanding share of Media Stock shall have a number of votes equal to . of
a vote prior to March 1, 1996 and, on or after March 1, 1996, 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 such record date, of
(A) the sum of (1) four times the average ratio of X to Y for the five-Trading
Day period ending on such tenth Trading Day, (2) three times the average ratio
of X to Y for the next preceding five-Trading Day period, (3) two times the
average ratio of X to Y for the next preceding five-Trading Day period and (4)
the average ratio of X to Y for the next preceding five-Trading Day period,
divided by (B) ten; where X is the Market Value of Media Stock and Y is the
Market Value of the Communications Stock. If shares of only one class of Common
Stock are outstanding, each share of that class shall be entitled to one vote.
If any class of 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.
To illustrate the foregoing, if the average ratio of the Market Value of
Media Stock to the Market Value of Communications Stock as determined in clauses
(1) to (4) using the above formula were 0.8, 0.9, 1.0 and 1.1, respectively,
each share of Communications Stock would have one vote and each share of Media
Stock would have 0.9 votes [(4 X 0.8) + (3 X 0.9) + (2 X 1.0) + (1.1)]/10. Based
on such number of votes, on any proposal where both classes of Common Stock vote
together as a single class (with no classes or series of Preferred Stocks, if
any, entitled to vote together with the holders of Common Stock) and assuming
there are issued and outstanding million shares of Communications Stock and
million shares of Media Stock, the shares of Communications Stock and Media
Stock would represent % and %, respectively, of the total voting power.
The Company anticipates that the Communications Stock would initially
represent a majority of the voting power of all classes and series entitled to
vote in the election of directors.
If the Recapitalization Proposal is approved by shareholders and implemented
by the Board, the Company will set forth the number of outstanding shares of
Communications Stock and Media Stock
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in its Annual and Quarterly Reports filed pursuant to the Exchange Act, and will
disclose 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 the
Company. 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 the Company, to acquire
such percentage of both classes of 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.
Following implementation of the Recapitalization Proposal, the holders of
Communications Stock or Media Stock would not have any rights to vote separately
as a class on any matter coming before stockholders of the Company, 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 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 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 Restated Certificate will provide that an amendment
to the Restated 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 Common Stock,
voting together as a single class, and will not require the approval of the
holders of the class of 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 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 --
Limited Separate Stockholder Rights; No Additional Rights with respect to the
Groups; Effects on Voting Power."
LIQUIDATION
Currently, in the event of a liquidation, dissolution or winding-up of the
Company, after payment, or provision for payment, of the debts and other
liabilities of the Company and the payment of full preferential amounts
(including any accumulated and unpaid dividends) to which the holders of the
Existing Preferred Stock are entitled, holders of Existing Common Stock would be
entitled to share ratably in the remaining net assets of the Company. Under the
Recapitalization Proposal, in the event of a dissolution, liquidation or winding
up of the Company, whether voluntary or involuntary, after payment or provision
for payment of the debts and other liabilities of the Company and after there
shall have been paid or set apart for the holders of Preferred Stock the full
preferential amounts (including any accumulated and unpaid dividends) to which
they 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 the Company remaining for
distribution to holders of Common Stock on a per share basis in proportion to
the respective per share Liquidation Units of each class. Each share of
Communications Stock will have one Liquidation Unit and each share of Media
Stock will have . 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. The Company
considers that its complete liquidation is a remote contingency, and its
financial advisors believe that, in general, these liquidation provisions are
immaterial to trading in Communications Stock and Media Stock.
If the Company subdivides (by stock split, stock dividend or otherwise) or
combines (by reverse stock split or otherwise) the outstanding shares of either
Communications Stock or Media Stock, the
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number of Liquidation Units of the Communications Stock or the number of
Liquidation Units of the Media Stock, as applicable, will be appropriately
adjusted so as to avoid any dilution in aggregate liquidation rights of either
class of Common Stock. For example, in case the Company 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 Communications Stock.
Neither the merger or consolidation of the Company into or with any other
corporation, nor the merger or consolidation of any other corporation into or
with the Company, nor any sale, transfer or lease of all or any part of the
assets of the Company, will be deemed to be a dissolution, liquidation or
winding-up for purposes of the liquidation provisions set forth above.
DETERMINATIONS BY THE BOARD
If the Recapitalization Proposal is approved by the shareholders and
implemented by the Board, any determinations made in good faith by the Board
under any provision described under
"-- Description of Communications Stock and Media Stock," and any determinations
with respect to any Group or the rights of holders of shares of either class of
Common Stock, would be final and binding on all stockholders of the Company,
subject to the rights of stockholders under applicable Delaware law and under
the federal securities laws.
OTHER RIGHTS
Neither the holders of the Communications Stock nor the holders of the Media
Stock will have any preemptive rights or any rights to convert their shares into
any other securities of the Company.
FUTURE INTER-GROUP INTEREST
The number of shares of Media Stock to be issued upon consummation of the
Recapitalization Proposal will represent 100% of the equity value of the Company
attributable to the Media Group. Under management policies adopted by the Board,
however, the 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 Inter-Group Interest, representing an
interest in the equity value of the Company attributable to the Media Group. The
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. See "-- Certain
Management Policies -- Inter-Group Financing Transactions." An Inter-Group
Interest, because it represents an interest between two business groups within
the Company, would not constitute outstanding shares of 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 the Company for the account of the Communications Group in
respect of the Inter-Group Interest.
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If there is an Inter-Group Interest and additional shares of Media Stock are
subsequently issued from time to time by the Company, the 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 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.
If there is an Inter-Group Interest and the Company 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 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 aggregate amount 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 Number of Shares Issuable with Respect
to the Inter-Group Interest and the denominator of which is the number of shares
of Media Stock then outstanding.
For further discussion of, and illustrations of the calculation of the
Inter-Group Interest Fraction, the Outstanding Media Fraction and the Number of
Shares Issuable with Respect to the Inter-Group Interest and the effects thereon
of dividends on, and issuances and repurchase of, shares of Media Stock, and
transfers of cash or other property between Groups, see Annex VIII hereto.
STOCK TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company is the registrar and transfer agent for
the Existing Common Stock. If the Recapitalization Proposal is approved by the
shareholders and implemented by the Board, State Street Bank and Trust Company
will be selected as the registrar and transfer agent for the Communications
Stock and the Media Stock.
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STOCK EXCHANGE LISTINGS
Application will be made to amend the Company's listing agreements with the
NYSE, PSE, the London Stock Exchange, the Amsterdam Stock Exchange, the Basel
Stock Exchange, the Geneva Stock Exchange and the Zurich Stock Exchange to
provide for the redesignation of the Existing Common Stock as Communications
Stock, which shall continue to trade under the symbol "USW," and the listing of
the Media Stock under the symbol "UMG."
FINANCIAL ADVISORS
Lehman Brothers Inc. is acting as lead financial advisor and Morgan Stanley
& Co. Incorporated is acting as co-advisor to the Company in connection with the
Recapitalization Proposal. Both advisors are assisting the Company in the
solicitation of proxies. The Company has paid Lehman Brothers Inc. $ for
its services and will pay Lehman Brothers Inc. an additional $ if the
Recapitalization Proposal is approved by the Company's shareholders. The Company
has agreed to pay Morgan Stanley & Co. Incorporated $ for its services. The
Company has also agreed to reimburse Lehman Brothers Inc. and Morgan Stanley &
Co. Incorporated for certain of their reasonable out-of-pocket expenses
(including fees and expenses of their legal counsel) and has agreed to indemnify
Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated against certain
liabilities, including liabilities under the Securities Act.
COMPARISON OF SHAREHOLDER RIGHTS
At the Effective Time, the shareholders of U S WEST will become stockholders
of U S WEST Delaware, a corporation governed by Delaware law and the Restated
Certificate and New By-Laws. The following discussion summarizes the material
differences between the rights of holders of the Existing Common Stock and
holders of the Common Stock of U S WEST Delaware, based on a comparison of the
Colorado and Delaware corporation laws and the charters and by-laws of U S WEST
and U S WEST Delaware. FOR ADDITIONAL INFORMATION REGARDING THE SPECIFIC RIGHTS
OF HOLDERS OF EXISTING COMMON STOCK AND HOLDERS OF COMMON STOCK OF U S WEST
DELAWARE, SEE "-- DESCRIPTION OF COMMUNICATIONS STOCK AND MEDIA STOCK." This
summary does not purport to be complete and is qualified in its entirety by
reference to the Articles and Existing By-Laws, the Restated Certificate and New
By-Laws and the relevant provisions of the CBCA and the DGCL. Except as provided
below, the relevant provisions of the Restated Certificate and the New By-Laws
are substantially similar to those of the Articles and Existing By-Laws.
VOTING GROUPS
Under the CBCA, U S WEST's shareholders are entitled to vote in voting
groups in certain circumstances. A voting group consists of all the shares of a
class or series that, under the Articles or under the CBCA, are entitled to vote
and be counted together collectively on a matter at a meeting of shareholders.
If multiple voting groups are entitled to vote on a matter, favorable action on
the matter is taken only when it is approved by each such voting group. Although
the Existing Common Stock is the only voting stock of U S WEST and the Articles
do not provide for voting by voting groups, the Existing Series B Preferred
Stock as well as any other class or series of capital stock that may be issued
by U S WEST in the future is entitled to vote separately as a voting group under
the CBCA in connection with certain amendments to the Articles and certain plans
of merger and share exchange. See "-- Amendments to Articles of Incorporation
and Certificate of Incorporation" and "-- Vote Required for Merger and Certain
Other Transactions."
The DGCL has no equivalent provisions for voting groups. Under the Restated
Certificate, until such time as the Board may designate a series of Preferred
Stock that has the right to vote together with the Communications Stock and the
Media Stock, the Communications Stock and the Media Stock will be the only
classes of voting stock of U S WEST Delaware. Under the DGCL, however, the
Series C Preferred Stock will have the right to vote separately as a class in
connection with certain amendments to the Restated Certificate. See "--
Amendments to Articles of Incorporation and Certificate of Incorporation."
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AMENDMENTS TO ARTICLES OF INCORPORATION AND CERTIFICATE OF INCORPORATION
Under the CBCA, an amendment to the Articles (with certain exceptions) must
be proposed by the Board or the holders of shares representing at least ten
percent of all of the votes entitled to be cast on the amendment, and must then
be approved by (i) the holders of two-thirds of the votes entitled to be cast on
the amendment by any voting group with respect to which the amendment would
create dissenters' rights, if any, under the CBCA and (ii) the holders of
two-thirds of all votes cast within each other voting group entitled to vote on
the amendment. In addition, the Articles require the approval of the holders of
80% of the outstanding shares of stock entitled to vote thereon to amend the
provisions thereof which deal with certain business combinations and the removal
of directors. If U S WEST were to remain a Colorado corporation and redesignate
the Existing Common Stock as the Communications Stock and create a new class of
Media Stock through an amendment of the Articles, such amendment would require
the approval of the holders of two-thirds of the outstanding shares of Existing
Common Stock but would not require the approval of holders of the outstanding
shares of Existing Series B Preferred Stock.
Under the CBCA, all of the holders of Existing Common Stock, and each holder
of shares of an affected class or series of stock, voting in separate voting
groups, are entitled to vote on any amendment of the Articles that would (i)
increase or decrease the aggregate number of authorized shares of the class or
series; (ii) effect an exchange or reclassification of all or part of the shares
of the class or series into shares of another class or series; (iii) effect an
exchange or reclassification, or create the right of exchange, of all or part of
the shares of another class or series into shares of the class or series; (iv)
change the designation, preferences, limitations, or relative rights of all or
part of the shares of the class or series; (v) change the shares of all or part
of the class or series into a different number of shares of the same class; (vi)
create a new class of shares having rights or preferences with respect to
distributions or dissolution that are prior, superior or substantially equal to
the shares of the class or series; (vii) increase the rights, preferences, or
number of authorized shares of any class or series that, after giving effect to
the amendment, have rights or preferences with respect to distributions or to
dissolutions that are prior, superior, or substantially equal to the shares of
the class or series; (viii) limit or deny an existing preemptive right of all or
part of the shares of the class or series; or (ix) cancel or otherwise affect
rights to distributions or dividends that have accumulated but have not yet been
declared on all or part of the shares of the class or series.
Under the DGCL and the Restated Certificate, amendments to the Restated
Certificate must be adopted by the Board and must then be approved 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 which deal
with certain business combinations and the removal of directors require the
approval of the holders of 80% of the voting power of the outstanding shares of
stock entitled to vote thereon. The DGCL requires the approval of a majority of
the outstanding shares of a class of stock, voting as a separate class, for any
amendment that increases or decreases the number of authorized shares of that
class, changes the par value of that class or adversely affects the powers,
preferences or special rights of that class. As permitted under the DGCL, the
Restated Certificate will provide that an amendment 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 Common Stock, voting together as a single class, and will not require
the approval of the holders of the class of Common Stock affected by such
amendment, voting as a separate class.
AMENDMENTS TO BY-LAWS
Under the CBCA and the Existing By-Laws, the Existing By-Laws may be
adopted, amended, altered, changed or repealed by either the affirmative vote of
the holders of 80% of the outstanding shares of stock entitled to vote thereon
or by the affirmative vote of two-thirds of the members of the Board.
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As permitted under the DGCL, the Restated Certificate and New By-Laws will
provide that by-laws 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 Board.
VOTE REQUIRED FOR MERGER AND CERTAIN OTHER TRANSACTIONS
Under the CBCA and the Articles, a plan of merger or share exchange or a
transaction involving the sale, lease, exchange or other disposition of all or
substantially all of U S WEST's property must be adopted by the Board and then
approved by each voting group entitled to vote separately on such plan, share
exchange or transaction by the holders of a majority of all the votes entitled
to be cast on such plan, share exchange or transaction by that voting group. The
CBCA requires separate voting by voting groups (i) on a plan of merger if the
plan contains a provision that, if contained in an amendment to the Articles,
would require action by separate voting groups, and (ii) on a plan of share
exchange by each class or series of shares included in the share exchange, with
each class or series constituting a separate voting group.
Under the DGCL, an agreement of merger or a sale, lease or exchange of all
or substantially all of U S WEST Delaware's assets must be approved by the Board
and then adopted by the holders of a majority of the voting power of the
outstanding shares of stock entitled to vote thereon. Under the Recapitalization
Proposal, the disposition of all the assets attributed to a Group requires
certain actions by the Company. See "-- Description of Communications Stock and
Media Stock -- Conversion and Redemption."
DIRECTORS
The Articles provide that the number of directors shall not be less than six
nor more than 17 and shall be fixed by the Existing By-Laws. The Existing
By-Laws currently fix the number of directors at 13. As permitted under the
CBCA, the Articles and Existing By-Laws divide the Board 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 shareholders of U S
WEST, one class of directors is elected for a three-year term or until their
resignation, removal or retirement, if earlier.
As permitted under the DGCL, the Restated Certificate and New By-Laws will
establish a classified board substantially similar to that established by the
Articles and Existing By-Laws.
REMOVAL OF DIRECTORS
Under the CBCA and the Articles, no member of the Board may be removed
unless such removal is approved by the holders of 80% of the outstanding shares
of stock entitled to vote thereon. In addition, a director may be removed by the
district court of the county in Colorado in which U S WEST's principal or
registered office is located, in a proceeding commenced either by U S WEST or by
shareholders holding at least ten percent of the outstanding shares of any
class, if the court finds that the director engaged in fraudulent or dishonest
conduct or gross abuse of authority or discretion with respect to U S WEST, and
that removal is in U S WEST's best interests.
Under the DGCL and the 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 Existing By-Laws, vacancies in the Board may be filled by the
affirmative vote of a majority of the directors then in office, even if less
than a quorum, and newly created directorships resulting from an increase in the
number of directors, including an increase effected by the Board, may be filled
by the affirmative vote of a majority of the directors then in office or by an
election at an annual meeting or special meeting of shareholders called for that
purpose.
Under the New By-Laws, vacancies and newly created directorships resulting
from any increase in the number of directors, including an increase effected by
the 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. Under the
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DGCL, if, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole Board
(as constituted immediately prior to any such increase), the Court of Chancery
may, upon application of stockholders holding at least 10% of the total number
of outstanding shares having the right to vote for such directors, order that an
election by the stockholders be held to fill any such vacancies or newly created
directorships or to replace the directors chosen by the directors then in
office.
CUMULATIVE VOTING
As permitted under the CBCA, the Articles expressly provide that there shall
be no cumulative voting in the election of directors.
Under the DGCL, stockholders are not entitled to cumulative voting in the
election of directors unless specifically provided for in the certificate of
incorporation. The Restated Certificate will not provide for cumulative voting
in the election of directors.
LIMITATION ON DIRECTOR'S LIABILITY
As permitted by both the CBCA and the DGCL, both the Articles and the
Restated Certificate eliminate or limit the personal liability of a director to
U S WEST and U S WEST Delaware, respectively, or its shareholders for monetary
damages based on such director's breach of fiduciary duty, provided that a
director's liability is not eliminated or limited for any breach of the
director's duty of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for certain excess or prohibited distributions, or for any
transaction for which the director derived an improper personal benefit.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The CBCA and the DGCL contain generally similar provisions for the
indemnification of directors and officers. The CBCA permits indemnification of a
director in connection with conduct in an official capacity only if the director
reasonably believed that his or her conduct was in the best interests of the
corporation. The DGCL permits such indemnification if the director reasonably
believed that such conduct was in or not opposed to the best interests of the
corporation. The CBCA generally precludes indemnification if there is an
adjudication of liability that the director obtained an improper personal
benefit. The DGCL does not specifically deal with cases of improper personal
benefit. Neither the CBCA nor the DGCL permits a corporation to indemnify
directors against judgments in actions brought by or in the right of the
corporation in which such director was adjudged liable to the corporation, and
the DGCL extends such limitation to indemnification of officers. However, both
the CBCA and the DGCL permit indemnification for reasonable expenses in such
situations if the indemnification is ordered by a court. Both the CBCA and the
DGCL permit the corporation to advance expenses upon an undertaking for their
repayment if the person receiving the advance is not ultimately entitled to
indemnification. The CBCA prohibits provisions in articles of incorporation, by-
laws, or contracts that are inconsistent with the statutory provisions, while
the DGCL specifies that the statutory provisions are not exclusive of other
rights to indemnification or advancement of expenses that may be provided by
by-laws, agreements, votes of stockholders or disinterested directors, or
otherwise.
The Existing By-Laws provide, and the New By-Laws will provide, that the
Company will indemnify any person against any damage, judgment, settlement,
penalty, fine, cost or expense (including attorneys' fees), incurred in
connection with any proceeding in which the person may be involved as a party or
otherwise, by reason of the fact that such person is or was serving as a
director, officer, employee, or agent of the Company or, at the request of the
Company, as a director, officer, employee, agent, fiduciary, or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan,
or other entity or enterprise, except to the extent that any such
indemnification against a particular liability is expressly prohibited by
applicable law or where a judgment or other final adjudication adverse to the
indemnified person establishes, or where the corporation determines, that such
person's acts or omission (i) were in breach of such person's duty of loyalty to
the corporation or its shareholders, (ii) were not in good faith or involved
intentional misconduct or a knowing violation
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of law, or (iii) resulted in receipt by such person of an improper personal
benefit. The Existing By-Laws require, and the New By-Laws will require, the
Company to pay reasonable expenses in advance of the final disposition of such
proceeding to the fullest extent permitted by law.
SPECIAL MEETINGS OF SHAREHOLDERS; ACTION BY CONSENT
Under the CBCA and the Existing By-Laws, a special meeting of the
shareholders of U S WEST may be called for any purpose by the Chairman of the
Board or by the Board, and must be called by the Chairman of the Board at the
request of the holders of not less than 10% of all votes entitled to be cast on
any issue proposed to be considered at such meeting. Under the CBCA, unless the
articles of incorporation require that action be taken at a shareholders'
meeting, any action required or permitted to be taken at a shareholders' meeting
may be taken without a meeting if all of the shareholders entitled to vote
thereon consent to such action in writing. The Articles do not contain
provisions regarding shareholder actions by written consent.
As permitted under the DGCL, the New By-Laws will provide that special
meetings of stockholders of U S WEST Delaware may be called only by the Chairman
of the Board or by the Board. No actions will be considered at a special meeting
other than those specified in the notice thereof. Additionally, under the
Restated Certificate, stockholder action will be permitted only at an annual or
special meeting of stockholders and not by written consent.
SHAREHOLDER PROPOSALS AND NOMINATIONS
The Existing By-Laws provide that no proposal for action may be presented by
any shareholder of U S WEST at an annual or special meeting of shareholders
unless such proposal has been submitted in writing to U S WEST and received by
the Secretary at least 30 days prior to the date of such annual or special
meeting and such proposal is an appropriate subject of shareholder action. In
addition, such shareholder must provide certain specified information regarding
such shareholder's shareownership and interest in such proposal.
The New By-Laws will provide that a stockholder may present a proposal for
action at an annual meeting of stockholders of U S WEST Delaware only if the
stockholder submitting such proposal has delivered a written notice on the
proposal, together with certain specified information relating to such
stockholder's stock ownership and identity, to the Secretary of U S WEST
Delaware at least 60 days before the annual meeting. In addition, the New
By-Laws will provide that a stockholder may nominate individuals for election to
the 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 Delaware 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 CBCA does not contain any special provisions for business combinations
following a change in control of U S WEST. The Articles, however, include a
"fair price provision" which requires the affirmative vote of the holders of 80%
of the outstanding shares of Existing 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
outstanding Existing Common Stock (a "related person"), unless either (i) such
business combination is approved by a majority of the directors unaffiliated
with the related person or (ii) the shareholders receive a "fair price" (as
defined therein) for their holdings and other procedural requirements are met.
Section 203 of the DGCL prohibits certain transactions between a Delaware
corporation, the shares of which are listed on a national securities exchange,
and an "interested stockholder," unless the certificate of incorporation of the
corporation contains a provision expressly electing not to be governed by
Section 203. The Restated Certificate will not contain such an election. An
"interested stockholder" includes a person that is directly or indirectly a
beneficial owner of fifteen percent or
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more of the voting power of the outstanding voting stock of the corporation and
such person's affiliates and associates. The provision prohibits certain
business combinations between an interested stockholder and a corporation for a
period of three years after the date the interested stockholder became an
interested stockholder, unless (i) the business combination is approved by the
corporation's board of directors prior to the date such stockholder became an
interested stockholder, (ii) the interested stockholder acquired at least 85% of
the voting stock of the corporation in the transaction in which such stockholder
became an interested stockholder or (iii) the business combination is approved
by a majority of the board of directors and the affirmative vote of two-thirds
of the outstanding stock that is not owned by the interested stockholder.
In addition, the Restated Certificate will contain the same "fair price
provision" as the provision in the Articles described above.
DISSENTERS' RIGHTS
Under the CBCA, a shareholder who complies with prescribed statutory
procedures, whether or not entitled to vote, is entitled to dissent and obtain
payment of the fair value of his or her shares in the event of (i) consummation
of a plan of merger to which U S WEST is a party, if approval by U S WEST's
shareholders is required for the merger or if U S WEST were a subsidiary that
was merged with its parent corporation, (ii) consummation of a plan of share
exchange to which U S WEST is a party as the corporation whose shares will be
acquired, (iii) consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of U S WEST's property if a shareholder vote is
required for such disposition, (iv) consummation of a sale, lease, exchange, or
other disposition of all, or substantially all, of the property of an entity
controlled by U S WEST if U S WEST's shareholders are entitled to vote on
whether U S WEST will consent to the disposition, (v) an amendment to the
Articles that materially and adversely affects rights in respect of the
shareholder's shares because it (a) alters or abolishes a preferential right of
the shares; or (b) creates, alters, or abolishes a right of redemption in the
shares, and (vi) an amendment to the Articles that affects rights of the
shareholder's shares because it (x) excludes or limits the right of the shares
to vote on any matter or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting rights; or
(y) reduces the number of shares owned by the shareholder to a fraction of a
share or to scrip if that fractional share or scrip is to be acquired for cash
or the scrip is to be voided. See "Proposal 1 -- The Recapitalization Proposal
- -- Dissenters' Rights" for a description of the procedures to be followed by a
shareholder who wishes to dissent from the Recapitalization Proposal.
Generally, stockholders of a Delaware corporation who object to certain
mergers or consolidations of the corporation are entitled to appraisal rights,
requiring the surviving corporation to pay the fair value of the dissenting
shares. There are, however, no statutory rights of appraisal with respect to
stockholders of a Delaware corporation whose shares of stock are either (i)
listed on a national securities exchange or (ii) held of record by more than
2,000 stockholders. In addition, no appraisal rights shall be available for any
shares of stock of a surviving corporation in a merger if the merger did not
require the approval of the stockholders of such corporation. Further, Delaware
Law does not provide appraisal rights to stockholders who dissent from the sale
of all or substantially all of the corporation's assets unless the certificate
of incorporation provides otherwise. The Restated Certificate will not provide
for appraisal rights upon the sale of all or substantially all of the assets of
U S WEST Delaware.
DIVIDENDS
Under the CBCA, a dividend may be paid on the Existing Common Stock unless,
after payment of the dividend, (i) U S WEST would not be able to pay its debt as
they become due in the usual course of business or (ii) U S WEST's total assets
would be less than the sum of its total liabilities plus the amount that would
be needed, if U S WEST were dissolved, to satisfy the preferential rights of
shareholders whose preferential rights are superior to those holders receiving
the dividend.
Under the DGCL, a dividend may be paid on the Common Stock out of either
surplus (defined as the excess of net assets over capital) or if no surplus
exists, out of net profits for the fiscal year in which
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the dividend is declared and/or the preceding fiscal year. Dividends may not be
paid on such stock out of surplus if the capital of U S WEST Delaware is less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets. The payment of dividends on each class of Common Stock will also be
restricted by provisions in the Restated Certificate. See "-- Description of
Communications Stock and Media Stock -- Dividends."
STOCK REPURCHASES
Under the CBCA, U S WEST may purchase, redeem or otherwise acquire its own
shares, unless after giving effect thereto, (i) U S WEST would not be able to
pay its debts as they become due in the usual course of business or (ii) U S
WEST's total assets would be less than the sum of its total liabilities plus the
amount that would be needed, if U S WEST were dissolved, to satisfy the
preferential rights of shareholders whose preferential rights are superior to
those holders whose shares are to be acquired.
Under the DGCL, U S WEST Delaware may purchase, redeem or otherwise acquire
its own shares. However, U S WEST Delaware may not (i) purchase or redeem its
own shares of capital stock for cash or other property when the capital of the
corporation is impaired or when such purchase or redemption would cause any
impairment of the capital of the corporation, except that a corporation may
purchase or redeem out of capital any of its own shares which are entitled upon
any distribution of its assets, whether by dividend or in liquidation, to a
preference over another class or series of its stock, if such shares will be
retired upon their acquisition and the capital of the corporation reduced; or
(ii) purchase, for more than the price at which they may then be redeemed, any
of its shares which are redeemable at the option of the corporation.
RELATED PARTY TRANSACTIONS
Under the CBCA, no contract or transaction between U S WEST and one or more
of its directors or officers, or between U S WEST and any other corporation,
partnership, association, or other organization in which one or more of U S
WEST's directors or officers are directors or officers, or have a financial
interest, is void or voidable solely for that reason, or solely because the
director or officer is present at or participates in the meeting of the Board or
committee thereof which authorizes the contract or transaction, or solely
because such director's votes are counted for that purpose, if: (i) the material
facts as to such director's relationship or interest and as to the contract or
transaction are disclosed or are known to the Board or the committee, and the
Board or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors constitute less than a quorum; (ii) the material facts
as to such director's relationship or interest and as to the contract or
transaction are disclosed or are known to the shareholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the shareholders; or (iii) the contract or transaction is fair to the
corporation as of the time it is authorized, approved or ratified by the Board,
a committee thereof, or the holders of the Existing Common Stock.
In addition, under the CBCA, the Board or a committee thereof may not
authorize a loan by U S WEST to a U S WEST director or to an entity in which a U
S WEST director is a director or officer or has a financial interest, or a
guaranty by U S WEST of an obligation of a U S WEST director or of an obligation
of an entity in which a U S WEST director is a director or officer or has a
financial interest, until at least ten days after written notice of the proposed
authorization of the loan or guaranty has been given to the holders of the
Existing Common Stock.
The DGCL contains provisions regarding transactions with directors that are
substantially similar to those of the CBCA. In addition, the DGCL provides that
U S WEST Delaware may loan money to, or guaranty any obligation incurred by, its
officers (including those who are also directors) if, in the judgment of the
Board, such loan or guarantee may reasonably be expected to benefit U S WEST
Delaware.
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CORPORATE RECORDS; SHAREHOLDER INSPECTION
Under the CBCA, a shareholder is entitled to inspect and copy, during
regular business hours at U S WEST's principal office, the Articles, the
Existing By-laws, minutes of all shareholders' meetings and records of all
action taken by shareholders without a meeting for the past three years, all
written communications within the past three years to shareholders as a group, a
list of the names and business addresses of current directors and officers, a
copy of the most recent corporate report delivered to the Colorado Secretary of
State, and certain financial statements of U S WEST prepared for periods ending
during the last three years. In addition, a shareholder who (i) has been a U S
WEST shareholder for at least three months or who is a holder of at least five
percent of all of the outstanding shares of any class of U S WEST's shares, (ii)
makes a demand in good faith and for a purpose reasonably related to the
shareholder's interest as a shareholder, (iii) describes with reasonable
particularity the purpose and the records the shareholder desires to inspect,
and (iv) requests records that are directly connected with the described
purpose, is entitled to inspect and copy: excerpts from minutes or records of
any Board meeting or action, excerpts from minutes or records of any
shareholders' meeting or action, excerpts of records of any action of a Board
committee, waivers of notices of any shareholder, Board or Borad Committee
meeting, accounting records of the corporation, and records of the names and
addresses of shareholders.
Under the DGCL, any stockholder of U S WEST Delaware, in person or by
attorney or other agent, may, during the usual hours for business, inspect for
any proper purpose, the corporation's stock ledger, a list of its stockholders,
and its other books and records, and to make copies or extracts therefrom.
PREEMPTIVE RIGHTS
As permitted by the CBCA, the Articles provide that shareholders shall have
no preemptive right to acquire additional unissued or treasury shares of U S
WEST or securities convertible into shares or carrying stock purchase warrants
or privileges.
Under the DGCL, the stockholders of U S WEST Delaware do not have preemptive
rights unless specifically granted in the certificate of incorporation. The
Restated Certificate will not grant stockholders preemptive rights.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Company has received an opinion from its counsel, Weil, Gotshal &
Manges, that, for federal income tax purposes, neither the Merger, nor the
distribution of the Communications Stock and the Media Stock pursuant to the
Merger, should be treated as taxable events to the shareholders or the Company.
The Company will not apply for an advance tax ruling from the Service because
the Service has announced that it will not issue advance rulings on the
classification of stock with characteristics similar to those of the
Communications Stock and the Media Stock.
The following general discussion summarizes the federal income tax
consequences of the Recapitalization Proposal. The discussion is based on the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Department
regulations, published positions of the Service, and court decisions now in
effect, all of which are subject to change. In particular, Congress could enact
legislation affecting the treatment of stock with characteristics similar to the
Communications Stock and the Media Stock, or the Treasury Department could
change the current law in future regulations, including regulations issued
pursuant to its authority under Section 337(d) of the Code. Any future
legislation or regulations could be enacted or promulgated to apply
retroactively to the Recapitalization Proposal. However, the Company believes,
based on the advice of counsel, that it is unlikely that such legislation or
regulations would apply retroactively.
This discussion addresses only those shareholders who hold their Existing
Common Stock and would hold their Communications Stock and Media Stock as a
capital asset within the meaning of Section 1221 of the Code and is included for
general information only. It does not discuss all aspects of federal income
taxation that may be relevant to a particular shareholder in light of his or her
personal
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tax circumstances and does not apply to certain types of shareholders which may
be subject to special treatment under the federal income tax laws, including,
without limitation, tax-exempt organizations, S corporations and other
pass-through entities, mutual funds, small business investment companies,
regulated investment companies, insurance companies and other financial
institutions, broker-dealers, and persons that hold their Existing Common Stock
as part of a straddle, hedging or conversion transaction. In addition, neither
foreign, state or local tax consequences nor estate and gift tax considerations
are discussed. SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH REGARD TO
THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATION, AS
WELL AS TO THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN TAX LAWS
TO WHICH THEY MAY BE SUBJECT.
TAX IMPLICATIONS OF THE RECAPITALIZATION PROPOSAL TO THE SHAREHOLDERS
RECEIPT OF COMMUNICATIONS STOCK AND MEDIA STOCK PURSUANT TO THE MERGER. In
counsel's opinion, the Merger will constitute a tax-free reorganization within
the meaning of Section 368 of the Code and each of the Communications Stock and
the Media Stock should, for federal income tax purposes, be treated as common
stock of the Company. Accordingly, a shareholder should not recognize any gain
or loss on the exchange of such shareholder's Existing Common Stock for
Communications Stock and Media Stock. As a result, the basis of the Existing
Common Stock held by a shareholder immediately before the Merger would be
allocated between the Communications Stock and the Media Stock received in
proportion to the fair market value of such Communications Stock and Media Stock
and, assuming that the Existing Common Stock was a capital asset in the hands of
the shareholder on the Effective Date, the holding period of the Communications
Stock and the Media Stock would include the holding period of the Existing
Common Stock. Any shareholders of the Company who exercise dissenters' rights
will recognize gain or loss equal to the difference between the amount of cash
received and their basis in the shares surrendered, which gain or loss will be
capital gain or loss if the Existing Common Stock was held as a capital asset.
Shareholders of the Company should be aware that there are no federal income
tax regulations, court decisions, or published Service rulings bearing directly
on the effect of the dividend and certain other features of the Communications
Stock and the Media Stock. In addition, the Service announced during 1987 that
it was studying the federal income tax consequences of stock which 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. Earlier this 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 Communications Stock or the Media Stock represents property
other than stock of the Company. Were the Communications Stock or the Media
Stock treated as property other than stock of the Company, the receipt of one or
both such classes of stock might be treated as a fully taxable dividend to the
shareholders in an amount equal to the fair market value of such stock. While
counsel recognizes that this matter cannot be viewed as free from doubt because
there is no conclusive authority dealing with the precise facts presented by the
Recapitalization Proposal, counsel believes that if the status of the
Communications Stock or the Media Stock as common stock of the Company for
federal income tax purposes were challenged, a court would agree with counsel's
conclusions.
RECEIPT OF RIGHTS PURSUANT TO THE RESTATED RIGHTS AGREEMENT. Pursuant to a
published ruling by the Service, the adoption of a plan similar to the Restated
Rights Agreement (as defined below) which provides a corporation's shareholders
with certain rights to purchase additional shares of stock upon the occurrence
of certain events does not constitute a distribution of stock or property by the
corporation, an exchange of property or stock, or any other event giving rise to
the realization of gross income by any shareholder. Based on this published
position, the proposed amendment and restatement of the Rights Agreement and the
conversion of the Existing Rights into a Communications Right and a Media Right
(with each such right attached to the certificate representing the share of
Common Stock to which it relates) will not result in recognition of income or
gain to the shareholders.
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SALE OR EXCHANGE OF COMMUNICATIONS STOCK OR MEDIA STOCK. Upon the taxable
sale or exchange of Communications Stock or Media Stock, including pursuant to
the Odd-Lot Program, a shareholder 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 tax basis of
the Communications Stock or the Media Stock, determined as described in " --
Receipt of Communications Stock and Media Stock Pursuant to the Merger" above,
that was sold or exchanged. Any gain or loss on the taxable sale or exchange of
the Communications Stock or the Media Stock would be a capital gain or loss,
assuming that such Communications Stock or Media Stock was held as a capital
asset by the shareholder on the date of the sale or exchange.
If the Company redeems the Communication Stock or the Media Stock for shares
of the Communications Group Subsidiaries or the Media Group Subsidiaries,
respectively, 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) the Company could recognize gain on the distribution of stock
of the Communications Group Subsidiaries or the Media Group Subsidiaries, as the
case may be, in an amount equal to the difference between the fair market value
of such stock distributed and the Company's tax basis in such stock, and (ii)
the holders of the Communications Stock or the Media Stock, as the case may be,
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 stockholders' 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.
Any conversion of one class of Common Stock into the other class of Common
Stock upon the Company's exercise of any of its rights to do so should
constitute a tax-free exchange to the exchanging shareholders, with a carryover
adjusted tax basis in their newly-received Common Stock and generally a tacked
holding period from the stock they previously held.
State Street Bank and Trust Company has indicated its willingness, on a best
efforts basis, to facilitate exchanges of shares of one class of Common Stock
for shares of the other class of Common Stock. Stockholders who have an interest
in such an exchange should contact State Street Bank and Trust Company at
_______ _______ or their broker. Although the Company believes that an exchange
by stockholders of shares of one class of Common Stock for shares of the other
class of Common Stock likely would qualify as a tax-free exchange under Section
1036 of the Code, stockholders should be aware that this conclusion is not free
from doubt. Accordingly, stockholders should consult their tax advisors
regarding the tax consequences of such an exchange.
ADJUSTMENTS TO CONVERTIBLE SECURITIES. In general, if a corporation has
outstanding convertible or exchangeable securities and distributes shares of its
stock with respect to the stock into which such securities are convertible or
exchangeable, the distribution may result in a taxable stock dividend to the
participating shareholders where the distribution results in an increase in the
shareholders' proportionate interest in the assets or earnings and profits of
the corporation. A distribution of stock, however, will not result in a taxable
stock dividend if the conversion price or conversion ratio of the convertible or
exchangeable securities is fully adjusted to compensate for the dilution caused
by the stock distribution.
If the Recapitalization Proposal is approved by stockholders, any
outstanding Convertible Securities convertible into Existing Common Stock will
become convertible into a combination of Communications Stock and Media Stock.
As a result, the shareholders of the Company should not be deemed to realize a
taxable stock dividend in the Recapitalization Proposal. Moreover, to the extent
that, in connection with such transaction, the right to convert such Convertible
Securities is adjusted only as necessary to prevent dilution, such adjustment
should not be deemed a taxable stock distribution to the holders of Convertible
Securities.
UNITED STATES ALIEN HOLDERS. Dividend payments received by a United States
Alien holder of the Communications Stock or Media Stock with respect to such
stock will be subject to United States federal withholding tax in the same
manner as such holder is subject to federal withholding tax on his,
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her or its Existing Common Stock. A United States Alien will not be subject to
United States federal income or withholding tax on any gain realized on the
taxable sale or exchange of Communications Stock or Media Stock, unless (a) the
gain is derived from sources within the United States and the United States
Alien is an individual who was present in the United States for 183 days or more
during the taxable year, (b) such gain is effectively connected with a United
States trade or business of the United States Alien or (c) the stock sold or
exchanged is a "United States Real Property Interest" as defined in Section
897(c)(1) of the Code at any time during the five years prior to the sale or
exchange of the stock or at any time during the time that the United States
Alien held such stock, whichever time is shorter. The Communications Stock and
the Media Stock will be a United States Real Property Interest only if, at any
time during such period, the Company is a "United States real property holding
corporation" as defined in Section 897(c)(2) of the Code and the United States
Alien directly or constructively owned more than 5% of that class of stock of
the Company being sold or exchanged. The Company believes that it is not, has
not been and will not become a "United States real property holding corporation"
for federal income tax purposes.
A "United States Alien" is any person who, for United States federal income
tax purposes, is a foreign corporation, a nonresident alien individual, a
nonresident alien fiduciary or a foreign estate or trust, or a foreign
partnership that includes as a member any of the foregoing persons.
BACKUP WITHHOLDING. Certain noncorporate holders of Communications Stock or
Media Stock may be subject to backup withholding at a rate of 31% on the payment
of dividends on such stock. Backup withholding will apply only if the holder (i)
fails to furnish its Taxpayer Identification Number ("TIN") which, for an
individual, would be his or her Social Security number, (ii) furnishes an
incorrect TIN, (iii) is notified by the Service that it has failed properly to
report payments of interest or dividends, or (iv) under certain circumstances,
fails to certify under penalties of perjury that it has furnished a correct TIN
and has not been notified by the Service that it is subject to backup
withholding for failure to report payments of interest or dividends.
Shareholders should consult their tax advisors regarding their qualification for
a tax exemption from backup withholding and the procedure for obtaining such an
exemption if applicable.
The amount of any backup withholding from a payment to a holder of
Communications Stock or Media Stock will be allowed as a credit against such
shareholder's federal income tax liability and may entitle such shareholder to a
refund, provided that the required information is furnished to the Service.
TAX IMPLICATIONS OF THE RECAPITALIZATION PROPOSAL TO THE COMPANY
In the opinion of counsel, the Communications Stock and the Media Stock
should be common stock of the Company and no gain or loss should be recognized
by the Company on the Merger. If, however, either the Communications Stock or
the Media Stock were treated as property other than stock of the Company, the
Company may recognize gain on the issuance of the Communications Stock or the
Media Stock, as the case may be, pursuant to the Merger in an amount equal to
the difference between the fair market value of such stock and its adjusted tax
basis in such stock. Furthermore, if the Communications Stock or the Media Stock
were treated as stock of a subsidiary of the Company, the Communications Group
or the Media Group, as the case may be, could not be included in a single
consolidated federal income tax return with the Company, and any dividends paid
or deemed to be paid to the Company by such Group could be taxable to the
Company.
RESTATED RIGHTS AGREEMENT
Pursuant to a Rights Agreement (the "Rights Agreement"), dated April 7,
1989, as previously amended, by and between the Company and State Street Bank
and Trust Company, as Rights Agent, preferred stock purchase rights (the
"Existing Rights") were initially issued by the Board to all holders of Existing
Common Stock. If the shareholders approve the Recapitalization Proposal, the
Rights Agreement will be assumed by U S WEST Delaware and amended and restated
in its entirety (as amended, the "Restated Rights Agreement"), to reflect the
reincorporation of the Company in Delaware and the conversion of the Existing
Common Stock into Communications Stock and Media
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Stock. Pursuant to the Merger Agreement and the Restated Rights Agreement, each
share of Existing Common Stock, together with the Existing Right thereon, will
be converted into one share of Communications Stock, together with a preferred
stock purchase right relating to the Communications Stock (a "Communications
Right"), and one share of Media Stock, together with a preferred stock purchase
right relating to the Media Stock (a "Media Right"). The Communications Rights
and the Media Rights are collectively referred to herein as the "Rights."
The Restated Rights Agreement will provide 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 Common Stock representing 20% or more of the
total voting rights of the outstanding shares of 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 Common
Stock representing 30% or more of the total voting rights of all outstanding
shares of 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 Common Stock shall
be determined based upon the fixed voting rights of holders of outstanding
shares of Communications Stock and Media Stock in effect at the time of any such
determination. See "Description of Communications Stock and Media Stock --
Voting."
Upon the close of business on the Distribution Date, the Rights will
separate from the 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
the Company as described below.
Following the Distribution Date, registered holders of Rights will be
entitled to purchase from the Company (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 $ , 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 $ , subject to adjustment (the "Series
B Purchase Price").
Following the Ownership Trigger Date, the Rights would "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.
In the event, following the Ownership Trigger Date, (a) the Company merges
or consolidates with another entity in which the Company is not the surviving
corporation or in which shares of the outstanding Common Stock are changed into
or exchanged for stock or assets of another person or (b) 50% or more of the
Company'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 would "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 the Company, 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
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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 the Company of such person's intention to make a cash tender offer for
all the outstanding shares of 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 the Company shall, with 15 business days, at their option, 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 the
Company's stockholders from a financial point of view, which opinion must be
delivered to the 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 Common Stock acquired pursuant to such tender offer shall 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 the
Company 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 the Company.
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 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 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 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 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.
A copy of the form of the Restated Rights Agreement (which includes as
Exhibit the Form of Rights Certificate for Communications Rights and as
Exhibit the Form of Rights Certificate for Media Rights) will be filed with
the Commission as an Exhibit to the Registration Statement of which this Proxy
Statement forms a part and is incorporated by reference herein. A copy of the
Restated Rights Agreement will be available free of charge from the Company.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Restated Rights Agreement.
CONVERTIBLE SECURITIES
Implementation of the Recapitalization Proposal will result in adjustment of
the conversion rights of any security of the Company that is convertible into,
or evidences the right to purchase, any shares of its common stock (a
"Convertible Security"). Currently, the only Convertible Securities of the
Company
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are its Liquid Yield Option Notes due 2011 ("LYONs"), which are convertible into
shares of Existing Common Stock. Upon the Effective Time, each LYON will, as a
result of the operation of adjustment provisions contained in the Indenture
relating thereto (the "LYONs Indenture"), be convertible into one share of
Communications Stock and one share of Media Stock for each share of Existing
Common Stock into which the LYONs were convertible immediately prior to the
Effective Time. A portion of the obligations represented by the LYONs will be
allocated to and reflected on the financial statements of the Communications
Group, with the remainder of such obligations allocated to and reflected on the
financial statements of the Media Group. See "Annex VI -- Communications Group
- -- Combined Financial Statements -- Note 4: Debt" and "Annex VII -- Media Group
- -- Combined Financial Statements -- Note 10: Debt." If, upon conversion of a
LYON into shares of Communications Stock and Media Stock, the ratio of the
Market Value of the Communications Stock issued upon such conversion to the
Market Value of the Media Stock issued upon such conversion is not equal to the
ratio of the proportionate obligations of the Communications Group to the Media
Group under the LYONS, then the financial statements of one Group will be
credited, and the financial statements of the other Group will be charged, as
applicable, with the amount of such difference.
Following the conversion of one class of Common Stock into the other class
of Common Stock in accordance with the procedures set forth under "--
Description of Communications Stock and Media Stock -- Conversion and
Redemption," each holder of a LYON will, upon conversion, pursuant to adjustment
provisions contained in the LYONs Indenture, be entitled to receive the number
of shares of capital stock of the Company which such holder would have owned
immediately following such conversion if such holder had converted the LYON
immediately prior to such conversion. Any redemption by the Company of either
class of Common Stock will have the effects on the LYONS set forth under "--
Description of Communications Stock and Media Stock -- Conversion and Redemption
- -- Effects on Convertible Securities."
For a description of the effect of any conversion or redemption by the
Company of either class of Common Stock on any future Convertible Securities
issued by the Company, see "-- Description of Communications Stock and Media
Stock -- Conversion and Redemption -- Effects on Convertible Securities."
PREFERRED STOCK
Under the Articles, U S WEST is currently authorized to issue up to
50,000,000 shares of Existing Preferred Stock, of which 2,000,000 shares have
been designated as the Existing Series A Preferred Stock and 50,000 shares have
been designated as the Existing Series B Preferred Stock. Shares of Existing
Series A Preferred Stock are reserved for issuance upon exercise of the
preferred stock purchase rights described under "-- Restated Rights Agreement."
As of June 28, 1995, 50,000 shares of Existing Series B Preferred Stock were
issued and outstanding, all of which were issued to Fund American Enterprises
Holdings, Inc. ("Fund American") in September 1994 in connection with the
Company's disposition of common stock of Financial Security Assurance Holdings,
Ltd. ("FSA"), a member of the Company's capital assets segment.
If the Recapitalization Proposal is adopted, the Company would be authorized
under the Restated Certificate to issue 200,000,000 shares of Preferred Stock,
of which 10,000,000 shares would be designated as Series A Junior Preferred
Stock, 10,000,000 shares would be designated as Series B Junior Preferred Stock
and 50,000 shares would be designated as Series C Preferred Stock. Pursuant to
the Merger Agreement, upon the Effective Time, each outstanding share of
Existing Series B Preferred Stock will be automatically converted into one share
of Series C Preferred Stock, which will have the same rights, preferences and
restrictions as the Existing Series B Preferred Stock. The Series C Preferred
Stock will be attributed to the Media Group. The Series A Junior Preferred Stock
and the Series B Junior Preferred Stock will be reserved for issuance pursuant
to the Restated Rights Agreement. See "-- Restated Rights Agreement."
Pursuant to the Articles, the Board may currently issue, without the
approval of the holders of Existing Common Stock, shares of Existing Preferred
Stock in one or more series, with each such series
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having such designations, relative rights, preferences and limitations,
including voting and conversion rights, as are authorized by the Board. The
Board will have the same rights under the Restated Certificate to issue shares
of Preferred Stock and to fix the terms thereof without the approval of the
holders of Common Stock.
The Existing Series B Preferred Stock entitles the holder to, and the Series
C Preferred Stock, when issued upon conversion of the Existing Series B
Preferred Stock in the Merger, will entitle the holder to, receive cumulative
quarterly dividends when, as and if declared by the Board out of funds of the
Company legally available therefor at the rate of $70.00 per annum per share.
Dividends accrue cumulatively, whether or not such dividends are declared or
funds are legally available for payments of dividends. The Existing Series B
Preferred Stock is, and after the Effective Time, the Series C Preferred Stock
will be, mandatorily redeemable on September 2, 2004 for $1000.00 per share plus
accrued and unpaid dividends. All or a portion of such preferred stock may also
be redeemed after September 2, 1999 at the option of the Company at specified
redemption prices greater than $1000 plus accrued and unpaid dividends and in
certain other circumstances. At the option of Fund American, the Existing Senior
B Preferred Stock is, and after the Effective Time, the Series C Preferred Stock
will be, redeemable for shares of common stock of FSA.
For so long as any dividends are in arrears on the Existing Series B
Preferred Stock or, following the Effective Time, on the Series C Preferred
Stock, and until all dividends accrued on such preferred stock shall have been
paid or declared and set apart so as to be available for payment in full
thereof, and for so long as the Company fails to discharge the mandatory
redemption obligations discussed above when such obligations are due, (i) the
Company may not declare or pay any dividend on or make any distribution with
respect to any class or series of preferred stock ranking on a parity with such
preferred stock as to dividends ("Parity Stock") or any class or series of
capital stock ranking junior to such preferred stock as to dividends, including
Existing Common Stock or Common Stock, as applicable ("Junior Stock") or any
warrants, rights, calls or options exercisable for or convertible into any
Parity Stock or Junior Stock or set aside any money or assets for any such
purpose (other than dividends in shares of Junior Stock) and (ii) neither the
Company nor any subsidiary thereof may redeem, purchase or otherwise acquire any
shares of Parity Stock or Junior Stock or any warrants, rights, calls or options
exercisable for or convertible into any Parity Stock or Junior Stock, or make
any payment to or make any amount available for any sinking or similar fund for
such purpose (except by conversion or exchange of Convertible Securities into
Junior Stock).
In the event of any liquidation, dissolution or winding up of the affairs of
the Company, whether voluntary or otherwise, the holders of Existing Series B
Preferred Stock and, after the Effective Time, the holders of Series C Preferred
Stock shall be entitled to receive, in cash, out of the assets of the Company
available for distribution to stockholders, $1,000 per share, plus accrued and
unpaid dividends, before any distribution shall be made to the holders of Junior
Stock.
Following the Effective Time, the Board may at any time and from time to
time, issue additional shares of Preferred Stock for any proper corporate
purpose, which could include capital raising, payment of stock dividends or
acquisition of businesses. In the event the Board decides to issue additional
shares of Preferred Stock, the proceeds of such shares and the related
obligations will be allocated to either the Communications Group or the Media
Group. See "-- Certain Management Policies" and "-- Accounting Matters and
Policies."
ANTI-TAKEOVER CONSIDERATIONS
If the Recapitalization Proposal is approved and implemented by the Board,
the DGCL, the Restated Certificate and the New By-Laws will contain provisions
which could serve to discourage or make more difficult a change in control of
the Company without the support of the 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 Delaware under Delaware
law, as well as a summary of the current rights of shareholders of U S WEST
under Colorado law, see "-- Comparison of Shareholder Rights."
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The Restated Certificate will provide for the issuance of Preferred Stock,
at the discretion of the Board, from time to time, in one or more series,
without further action by the stockholders of the Company, unless approval of
the stockholders is deemed advisable by the 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 will be available for
issuance from time to time at the discretion of the Board without the approval
of the stockholders of the Company, unless such approval is deemed advisable by
the Board or required by applicable law, regulation or stock exchange listing
requirements. One of the effects of the existence of authorized, unissued and
unreserved Common Stock and Preferred Stock could be to enable the Board to
issue shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management. Such additional shares also could be
used to dilute the stock ownership of persons seeking to obtain control of the
Company.
The Restated Certificate will provide for a classified Board under which
one-third of the total number of directors are elected each year and prohibit
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 Restated Certificate, only the Chairman of the Board
or the Board, and not the stockholders of the Company, will be 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 Restated Certificate will contain 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 to approve certain business
combinations involving the Company and certain significant stockholders. In
addition, Section 203 of the DGCL will prohibit the Company from engaging in
certain transactions with an "interested stockholder." See "-- Comparison of
Shareholder Rights -- Business Combinations Following a Change in Control."
The New By-Laws will establish an advance notice procedure for stockholders
to bring business before an annual or special meeting of stockholders of U S
WEST. The New By-Laws will 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
the Company at least 60 days before the annual meeting. In addition, the New
By-Laws will provide that a stockholder may nominate individuals for election to
the 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 the Company 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 will permit disinterested stockholders to
acquire additional shares of the Company 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 Board receives an unsolicited offer to
purchase all or a portion of the businesses of a Group, the Board would consider
such offer in accordance with its fiduciary duties.
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DISSENTERS' RIGHTS
Under Article 113 of the CBCA ("Article 113"), if the Recapitalization
Proposal is approved and the Merger is consummated, holders of the Existing
Common Stock and the Existing Series B Preferred Stock who exercise their
dissenter's rights in accordance with Article 113 will be entitled to have the
"fair value" of their shares paid to them in cash by complying with the
provisions of Article 113. The following brief summary of Article 113 summarizes
the procedures for demanding statutory dissenters' rights. This summary is
qualified in its entirety by reference to Article 113, a copy of the text of
which is attached to this Proxy Statement as Annex IV. The term "fair value" is
defined in Article 113 to mean the value of the shares immediately before the
Effective Time, excluding any appreciation or depreciation in anticipation of
the Merger except to the extent that exclusion would be inequitable. Reference
herein to "dissenters' rights" is a general reference to a shareholder's right
to dissent to the Merger and obtain payment for the shareholder's shares in
accordance with Article 113.
WHO MAY DISSENT
Each shareholder of Existing Common Stock and each shareholder of Existing
Series B Preferred Stock may dissent to the Merger and obtain payment of the
fair value of the shareholder's shares by following the procedures provided in
Article 113 and summarized here. The rights of the shareholder may differ
depending on whether the shareholder is a shareholder of record holding shares
for two or more beneficial shareholders or the shareholder is a beneficial
shareholder whose shares are held of record by one or more record shareholders,
as follows:
(a) A record shareholder may assert dissenters' rights as to fewer than
all the shares registered in the record shareholder's name only if the
record shareholder dissents with respect to all shares beneficially owned by
any one person and causes the Company to receive written notice which states
(1) such dissent and (2) the name, address, and federal taxpayer
identification number, if any, of each person on whose behalf the record
shareholder asserts dissenters' rights.
(b) A beneficial shareholder may assert dissenters' rights as to the
shares held on the beneficial shareholder's behalf only if (1) the
beneficial shareholder causes the Company to receive the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights, and (2) the beneficial
shareholder dissents with respect to all shares beneficially owned by the
beneficial shareholder.
The Company may require that, when a record shareholder dissents with respect to
the shares held by any one or more beneficial shareholders, each such beneficial
shareholder must certify to the Company that the beneficial shareholder and the
record shareholder or record shareholders of all shares owned beneficially by
the beneficial shareholder have asserted, or will timely assert, dissenters'
rights as to all such shares as to which there is no limitation on the ability
to exercise dissenters' rights. Any such requirement will be stated in the
"Dissenters' Notice" that is referred to below.
REQUIREMENTS TO BE MET BY A DISSENTER BEFORE THE VOTE ON THE RECAPITALIZATION
PROPOSAL IS TAKEN
A shareholder who wishes to assert dissenters' rights must (a) cause the
Company to receive, before the vote is taken on the Recapitalization Proposal,
written notice of the shareholders' intention to demand payment for the
shareholder's shares if the Recapitalization Proposal is implemented (the
"Shareholder's Notice of Intent to Dissent") and (b) not vote the shares in
favor of the Recapitalization Proposal. A shareholder who does not satisfy the
foregoing requirements is not entitled to demand payment for the shareholder's
shares under Article 113.
NOTICE REQUIRED TO BE GIVEN BY THE COMPANY TO DISSENTING SHAREHOLDERS IF THE
RECAPITALIZATION PROPOSAL IS APPROVED
If the Recapitalization Proposal is approved, the Company will give a
written dissenters' notice (the "Dissenters' Notice") to each shareholder who
has complied with the provisions summarized above and who is entitled to demand
payment for shares under Article 113. The Dissenters' Notice may be given before
the effective date of the Merger and will in any event be given no later than
ten days after the
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effective date of the Merger. The Dissenters' Notice will (a) state that the
Recapitalization Proposal was approved and state the effective date or the
proposed effective date of the Merger; (b) state an address at which the Company
will receive a Payment Demand (as defined below) and the address of a place
where certificates for certificated shares must be deposited; (c) inform holders
of uncertificated shares to what extent, if any, transfer of the shares will be
restricted after the Payment Demand is received; (d) supply a Payment Demand
form for demanding payment for shares, which form will request the shareholder
to state an address to which payment is to be made; (e) set the date (the
"Payment Demand Date") by which the Company must receive the Payment Demand and
certificates for certificated shares, which Payment Demand Date will not be less
than thirty days after the date the Dissenters' Notice is given; (f) if the
Company has chosen to impose such a requirement, state that, when a record
shareholder dissents with respect to the shares held by any one or more
beneficial shareholders, each such beneficial shareholder must certify to the
Company that the beneficial shareholder, and the record shareholder or record
shareholders of all shares owned beneficially by the beneficial shareholder,
have asserted, or will timely assert, dissenters' rights as to all such shares
as to which there is no limitation on the ability to exercise dissenters'
rights; and (g) be accompanied by a copy of Article 113.
DISSENTER'S PROCEDURES FOR DEMANDING PAYMENT
If the shareholder has given a Shareholder's Notice of Intent to Dissent in
accordance with the provisions summarized above and wishes to assert the
shareholder's dissenters' rights (such a person being referred to in this
summary as a "Dissenter"), the Dissenter must (a) cause the Company to receive a
payment demand (the "Payment Demand," which may, but need not, be on the Payment
Demand form provided by the Company with the Dissenter's Notice), duly
completed, and (b) deposit the Dissenter's certificates for certificated shares;
provided, however, that, if the shares are uncertificated shares, the Company
may, in lieu of deposit of certificates, restrict the transfer of the shares. A
Dissenter will have all rights of a shareholder, except the right to transfer
the shares, until the effective date of the Merger but will have, after the
effective date of the Merger, only the right to receive payment for the shares
as to which payment has been demanded.
The Payment Demand and deposit of certificates by a Dissenter will be
irrevocable unless (1) the effective date of the Merger has not occurred within
sixty days after the Payment Demand Date, or (2) the Company fails to make
payment to the Dissenter, within sixty days after the Payment Demand Date, of
the amount the Company estimates to be the fair value of the Dissenter's shares,
plus accrued interest. If the effective date of the Merger is more than sixty
days after the Payment Demand Date, then the Company will be required to send a
new Dissenters' Notice and the provisions summarized above will again be
applicable.
If a Dissenter fails to demand payment and deposit certificates representing
the shares as to which dissent is made, as required by the Dissenters' Notice,
by the Payment Demand Date, the Dissenter will not be entitled to payment for
the shares under Article 113 and will become a shareholder in U S WEST Delaware
as if the Dissenter has not exercised any dissenters' right.
PAYMENT FOR SHARES
Upon the effective date of the Merger, or upon receipt of a Payment Demand
given in accordance with the provisions of Article 113, whichever is later, the
Company will pay each Dissenter who has complied with the requirements for
demanding payment stated in Article 113, at the address stated in the Payment
Demand, or, if no such address is stated in the Payment Demand, at the address
shown on the Company's current record of shareholders for the record shareholder
holding the Dissenter's shares, the amount the Company estimates to be the fair
value of the Dissenter's shares, plus accrued interest. The payment will be
accompanied by: (a) the Company's balance sheet, statement of changes in
shareholders' equity, statement of cash flow and other financial statements
complying with the requirements of section 7-113-206(2)(a); (b) a statement of
the Company's estimate of the fair value of the shares; (c) an explanation of
how the interest was calculated; (d) a statement of the Dissenter's right to
demand payment in accordance with the provisions of Article 113 regarding the
Dissenter's Responsive Notice summarized below; and (e) a copy of Article 113.
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FAILURE TO EFFECT MERGER
If the effective date of the Merger does not occur within sixty days after
the Payment Demand Date, the Company will return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares. If the
effective date of the Merger occurs more than sixty days after Payment Demand
Date, then the Company shall send a new Dissenters' Notice, as provided in
section 7-113-203, and the appropriate provisions of Article 113 shall again be
applicable.
SHARES ACQUIRED AFTER ANNOUNCEMENT OF RECAPITALIZATION PROPOSAL
The Company may, in or with the Dissenters' Notice, state the date of the
first announcement to news media or to shareholders of the terms of the
Recapitalization Proposal (the "Announcement Date") and state that the Dissenter
must certify in writing, in or with the Payment Demand, whether or not the
Dissenter (or the person on whose behalf the Dissenter asserts dissenters'
rights) acquired beneficial ownership of the shares before the Announcement
Date. With respect to any Dissenter who does not so certify in writing, in or
with the Payment Demand, that the Dissenter or the person on whose behalf the
Dissenter asserts dissenters' rights acquired beneficial ownership of the shares
before the Announcement Date, the Company may, in lieu of making payment for the
shares, offer to make such payment if the Dissenter agrees to accept the payment
in full satisfaction of the demand. Any such offer will include: (a) the
Company's balance sheet, statement of changes in shareholders' equity, statement
of cash flow and other financial statements complying with the requirements of
section 7-133-206(2)(a); (b) a statement of the Company's estimate of the fair
value of the shares; (c) an explanation of how the interest was calculated; (d)
a statement of the Dissenter's right to demand payment in accordance with the
provisions of Article 113 regarding the Dissenter's Responsive Notice summarized
below; and (e) a copy of Article 113.
PROCEDURE FOR DISSENTER TO FOLLOW IF DISSENTER IS DISSATISFIED WITH PAYMENT
MADE OR OFFERED BY THE COMPANY
A Dissenter may give notice (the "Dissenter's Responsive Notice") to the
Company in writing of the Dissenter's estimate of the fair value of the
Dissenter's shares and of the amount of interest due and may demand payment of
such estimate (less any payment made by the Company as contemplated above) or
may reject the Company's offer made as contemplated above with respect to shares
acquired after the Announcement Date and may demand payment of the fair value of
the shares and interest due, if: (a) the Dissenter believes that the amount paid
or offered by the Company, as the case may be, is less than the fair value of
the shares or that the interest due was incorrectly calculated; (b) the Company
fails to make payment within sixty days after the Payment Demand Date, or (c)
the Company does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares as required if the effective date
of the Merger has not occurred within sixty days after the Payment Demand Date.
A Dissenter waives the right to demand payment as outlined above unless the
Dissenter causes the Company to receive the Dissenter's Responsive Notice within
thirty days after the Company made or offered payment for the Dissenter's
shares.
COURT ACTION FOR APPRAISAL
If the Dissenter's demand for payment pursuant to the Dissenter's Responsive
Notice remains unresolved, the Company may, within sixty days after receiving
the Dissenter's Responsive Notice, commence a proceeding and petition the
district court of Arapahoe county to determine the fair value of the Dissenter's
shares and accrued interest. If the Dissenter's demand for payment remains
unresolved within that sixty day period and the Company does not commence the
proceeding within that period, the Company must pay to the Dissenter the amount
demanded in the Dissenter's Responsive Notice.
The Company shall make all Dissenters whose demands remain thus unresolved
parties to the proceeding as in an action against their shares, and all parties
shall be served with a copy of the petition in the manner provided in Article
113. The court may appoint one or more persons as appraisers to receive evidence
and recommend a decision on the question of fair value. The appraisers have the
powers described in the order appointing them, or in any amendment to such
order. The parties to the proceeding are entitled to the same discovery rights
as parties in other civil proceedings. Each Dissenter
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made a party to the proceeding will be entitled to judgment for the amount, if
any, by which the court finds the fair value of the Dissenter's shares, plus
interest, exceeds the amount paid by the Company, or for the fair value, plus
interest, of the Dissenter's shares for which the Company elected to withhold
payment under the provisions outlined above. The court will determine all costs
of the proceeding, including the reasonable compensation and expenses of
appraisers appointed by the court, and will assess the costs against the
Company; except that the court may assess costs against all or some of the
Dissenters, in amounts the court finds equitable, to the extent the court finds
the Dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment. The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable, (a) against
the Company and in favor of any Dissenters if the court finds the Company did
not substantially comply with the requirements of part 2 of Article 113; or (b)
against either the Company or one or more Dissenters, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided in Article 113. If the court finds that the services of
counsel for any Dissenter were of substantial benefit to other Dissenters
similarly situated, and that the fees for those services should not be assessed
against the Company, the court may award to said counsel reasonable fees to be
paid out of the amounts awarded to the Dissenters who were benefitted.
U S WEST SAVINGS PLAN
Each participant in the U S WEST Savings Plan/ESOP (the "Savings Plan") may
assert dissenter's rights as a beneficial owner of the Existing Common Stock
allocated to his or her accounts under such plan. Any payment by the Company in
satisfaction of dissenter's rights with respect to Existing Common Stock held by
the Savings Plan will be invested: (i) in Communications Stock and Media Stock
in the case of Existing Common Stock allocated to a participant's Matching
Contributions Account, and (ii) in the _______ _______ in all other cases. There
are no assurances that a Savings Plan participant who exercises dissenter's
rights may not end up with fewer shares of Communications Stock and Media Stock
allocated to his or her Matching Contributions Account than the participant
would have been entitled to if dissenter's rights had not been exercised.
Any Savings Plan participant who wishes to assert dissenter's rights must
timely submit the Shareholder's Notice of Intent to Dissent directly to the
Company, and Bankers Trust, as the record shareholder of all shares owned by the
Savings Plan, must have previously delivered to the Company its written consent
to any such notice properly submitted by a Savings Plan participant.
PROPOSAL 2 -- AMENDMENT OF THE U S WEST, INC. 1994 STOCK PLAN
The holders of Existing Common Stock are being asked to consider and approve
a related proposal to amend the U S WEST, Inc. 1994 Stock Plan (the "Stock
Plan"), as set forth in Annex X hereto, to provide for the granting of stock
awards in either Communications Stock or Media Stock, or both.
If the Recapitalization Proposal is approved it is proposed that the Stock
Plan be amended to clarify that grants made after the Merger may be made with
respect to either the Communications Stock or the Media Stock, or both, in the
same manner and to the same extent as currently permitted with respect to the
Existing Common Stock. For the text of the Stock Plan as proposed to be amended,
see Annex IX hereto.
THE AFFIRMATIVE VOTE OF NOT LESS THAN A MAJORITY OF ALL THE SHARES OF THE
EXISTING COMMON STOCK REPRESENTED IN PERSON OR BY PROXY AT THE SPECIAL MEETING
IS REQUIRED FOR APPROVAL OF PROPOSAL 2. YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE
FOR PROPOSAL 2.
PROPOSAL 3 -- AMENDMENT OF THE U S WEST, INC. DEFERRED COMPENSATION PLAN
The holders of Existing Common Stock are being asked to consider and approve
a related proposal to amend the U S WEST, Inc. Deferred Compensation Plan (the
"Compensation Plan"), as set forth in Annex X hereto.
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THE AFFIRMATIVE VOTE OF NOT LESS THAN A MAJORITY OF ALL THE SHARES OF THE
EXISTING COMMON STOCK REPRESENTED IN PERSON OR BY PROXY AT THE SPECIAL MEETING
IS REQUIRED FOR APPROVAL OF PROPOSAL 3. YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE
FOR PROPOSAL 3.
SOLICITATION STATEMENT
The cost of this solicitation of proxies will be borne by the Company. In
addition to soliciting proxies by mail, directors, officers and employees of the
Company, without receiving additional compensation therefor, may solicit proxies
by telephone, telegram, in person or by other means. Arrangements also will be
made with brokerage firms and other custodians, nominees and fiduciaries to
forward proxy solicitation material to the beneficial owners of the Common Stock
held of record by such persons and the Company will reimburse such brokerage
firms, custodians, nominees and fiduciaries for reasonable out-of-pocket
expenses incurred by them in connection therewith. The Company has retained
Beacon Hill Associates, Inc. and Lehman Brothers Inc. and Morgan Stanley & Co.
Incorporated to perform various advisory and solicitation services. The Company
has agreed to pay Beacon Hill Associates, Inc. a fee of $ plus
reimbursement of out-of-pocket expenses. For information concerning compensation
to be paid to Lehman Brothers Inc. and Morgan Stanley & Co. Incorporated, see
"Proposal 1 -- The Recapitalization Proposal -- Financial Advisors."
SHAREHOLDER PROPOSALS FOR 1996 ANNUAL MEETING
Any shareholder proposal intended to be presented at the 1996 Annual Meeting
of Shareholders and to be included in the Company's proxy statement and form of
proxy for that meeting must be received by the Company, directed to the
attention of the Secretary, no later than November 17, 1995. Any such proposals
must comply in all respects with the rules and regulations of the Commission.
EXPERTS
The consolidated financial statements of U S WEST and the combined financial
statements of the Communications Group and the Media Group as of December 31,
1993 and 1994 and for each of the three years in the period ended December 31,
1994 included in this Proxy Statement have been audited by Coopers & Lybrand
L.L.P., independent certified public accountants, as stated in their reports
referred to herein given upon the authority of that firm as experts in
accounting and auditing.
The Consolidated Financial Statements and Consolidated Financial Statement
Schedule included in U S WEST's Annual Report on Form 10-K for the year ended
December 31, 1994 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.
Representatives of Coopers & Lybrand L.L.P. will attend the Special Meeting
and will have an opportunity to make a statement and to respond to appropriate
questions from shareholders.
The consolidated financial statements of Time Warner Entertainment Company,
L.P. as of December 31, 1994 and 1993 and for each of the three years in the
period ended December 31, 1994, which appear in the Current Report on Form 8-K
of U S WEST, dated May 23, 1995, are incorporated herein by reference in
reliance on the report of Ernst & Young LLP, independent certified public
accountants, given upon the authority of that firm as experts in accounting and
auditing.
The combined financial statements of Georgia Cable Holdings Limited
Partnership and Subsidiary Partnerships as of December 31, 1993 and 1992 and for
each of the years in the two-year period ended December 31, 1993, which appear
in the Current Report on Form 8-K of U S WEST, dated May 23, 1995, have been
incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The consolidated financial statements of Wometco Cable Corp. and
subsidiaries as of December 31, 1993 and 1992 and for each of the years in the
two-year period ended December 31, 1993, which appear
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in the Current Report on Form 8-K of U S WEST, dated May 23, 1995, have been
incorporated by reference herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing. The report on the 1993 consolidated financial statements of Wometco
Cable Corp. and subsidiaries refers to a change in the method of accounting for
income taxes in 1993 to adopt the provisions of Financial Accounting Standards
Board FASB No. 109 -- Accounting for Income Taxes.
LEGAL OPINIONS
The validity of the Communications Stock and the Media Stock and certain tax
matters will be passed upon for the Company by Weil, Gotshal & Manges (a
partnership including professional corporations), New York, New York.
By order of the Board,
Charles P. Russ, III
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
Dated , 1995
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ANNEX I
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of , 1995, between U S
WEST, INC., a Colorado corporation ("U S WEST"), and U S WEST, INC., a Delaware
corporation and wholly-owned subsidiary of U S WEST ("U S WEST Delaware").
WHEREAS, U S WEST's authorized capital stock consists of 2,000,000,000
shares of Common Stock, without par value ("Existing Common stock"), and
50,000,000 shares of Preferred Stock, par value $1.00 per share, of which
2,000,000 shares have been designated Series A Junior Participating Cumulative
Preferred Stock, par value $1.00 per share ("Existing Series A Preferred
Stock"), and 50,000 shares have been designated Series B Cumulative Redeemable
Preferred Stock, par value $1.00 per share ("Existing Series B Preferred
Stock");
WHEREAS, at the close of business on , 1995, shares of
Existing Common Stock and 50,000 shares of Existing Series B Preferred Stock
were issued and outstanding and 2,000,000 shares of Existing Series A Preferred
Stock were reserved for issuance upon exercise of preferred stock purchase
rights (the "Existing Rights") pursuant to the Rights Agreement, dated April 7,
1989, as amended, between U S WEST and State Street Bank and Trust Company, as
Rights Agent, (the "Rights Agreement");
WHEREAS, U S WEST Delaware's authorized capital stock consists of 1,000
shares of Common Stock, par value $0.01 per share, of which 100 shares are
issued and outstanding and held by U S WEST;
WHEREAS, immediately prior to the Effective Time (as defined herein), the
certificate of incorporation of U S WEST Delaware will be amended and restated
(as so amended and restated, the "Restated Certificate") to, among other things,
authorize (a) 2,000,000,000 shares of U S WEST Communications Group Common
Stock, par value $.01 per share ("Communications Stock"), (b) 2,000,000,000
shares of U S WEST Media Group Common Stock, par value $.01 per share ("Media
Stock"), and (c) 200,000,000 shares of Preferred Stock, par value $1.00 per
share, of which 10,000,000 shares will be designated Series A Junior
Participating Cumulative Preferred Stock, par value $1.00 per share, 10,000,000
shares will be designated Series B Junior Participating Cumulative Preferred
Stock, par value $1.00 per share, and 50,000 shares will be designated Series C
Cumulative Redeemable Preferred Stock, par value $1.00 per share ("New Series C
Preferred Stock");
WHEREAS, the Board of Directors of U S WEST has determined that it is
advisable and in the best interests of U S WEST that U S WEST merge with and
into U S WEST Delaware (the "Merger"), with U S WEST Delaware continuing as the
surviving corporation (the "Surviving Corporation"), and has adopted this
Agreement and has approved the transactions contemplated hereby and has
recommended the approval by the shareholders of U S WEST of this Agreement; and
WHEREAS, the Board of Directors of U S WEST Delaware has determined that the
Merger is advisable and in the best interests of U S WEST Delaware and has
approved this Agreement and the transactions contemplated hereby, and U S WEST,
as the sole stockholder of U S WEST Delaware, has adopted this Agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1. THE MERGER. Subject to the terms and conditions of this Agreement, U
S WEST shall be merged with and into U S WEST Delaware in accordance with the
Colorado Business Corporation Act (the "CBCA") and the Delaware General
Corporation Law (the "DGCL"). From and after the
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Effective Time, the separate corporate existence of U S WEST shall cease and U S
WEST Delaware shall continue as the Surviving Corporation and shall succeed to
and assume all the rights and obligations of U S WEST and U S WEST Delaware in
accordance with the DGCL.
1.2. EFFECTIVE TIME. The Merger shall become effective as of the close of
business on the date (the "Effective Time") when (i) articles of merger (the
"Articles of Merger") are duly filed with the Colorado Secretary of State in
accordance with the CBCA and (ii) this Agreement or a certificate of merger (the
"Certificate of Merger") is duly filed with the Delaware Secretary of State in
accordance with the DGCL, or at such later time as is specified in the Articles
of Merger and the Certificate of Merger.
1.3. CERTIFICATE OF INCORPORATION AND BY-LAWS. The Restated Certificate
shall be the Certificate of Incorporation of the Surviving Corporation after the
Effective Time, until thereafter changed or amended as provided therein or by
applicable law. The By-laws of U S WEST Delaware (the "By-Laws") shall be the
By-laws of the Surviving Corporation after the Effective Time, until thereafter
changed or amended as provided therein or by applicable law.
1.4. DIRECTORS AND OFFICERS. The directors and officers of U S WEST at the
Effective Time shall be the directors and officers, respectively, of the
Surviving Corporation after the Effective Time, until expiration of their
current terms as such, or prior resignation, removal or death, subject to the
Restated Certificate and the By-laws.
1.5. RIGHTS AGREEMENT. As of the Effective Date, the Rights Agreement
shall be amended and restated to provide for (i) the assumption by U S WEST
Delaware of all of the rights and obligations of U S WEST thereunder, (ii) the
creation of preferred stock purchase rights with respect to the Communications
Stock (the "Communications Rights") and (iii) the creation of preferred stock
purchase rights with respect to the Media Stock (the "Media Rights").
ARTICLE II
CONVERSION AND EXCHANGE OF STOCK
2.1. CONVERSION. As of the Effective Time, by virtue of the Merger and
without any action of the part of any stockholder of U S WEST:
(a) Each issued and outstanding share of Existing Common Stock, together
with the Existing Right thereon, other than Dissenting Shares (as defined
herein), shall be converted into and become (i) one validly issued, fully
paid and non-assessable share of Communications Stock, together with a
Communications Right thereon, and (ii) one validly issued, fully paid and
non-assessable share of Media Stock, together with a Media Right thereon.
(b) Each issued and outstanding share of Existing Series B Preferred
Stock shall be converted into and become one validly issued, fully paid and
non-assessable share of New Series C Preferred Stock.
(c) Each share of Existing Common Stock that is owned by U S WEST or by
any subsidiary of U S WEST shall be cancelled and retired and shall cease to
exist.
(d) Each share of Common Stock of U S WEST Delaware that is owned by U S
WEST at the Effective Time shall be cancelled and retired and shall cease to
exist.
2.2. EXCHANGE PROCEDURES. (a) As of the Effective Time, each certificate
theretofore representing issued and outstanding shares of Existing Common Stock,
other than the Dissenting Shares ("Existing Certificates"), shall be deemed for
all purposes to evidence ownership of, and to represent, the same number of
shares of Communications Stock. The registered owner on the books and records of
U S WEST Delaware or its transfer agents of any such Existing Certificate shall,
until such certificate is surrendered for transfer pursuant to this Section 2.2,
have and be entitled to exercise any and all voting and other rights with
respect to, and receive any and all dividend and other distributions upon, the
shares of Communications Stock evidenced by such Existing Certificate.
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(b) As soon as practicable after the Effective Time, such bank or trust
company as U S WEST Delaware may designate (the "Exchange Agent"), for the
benefit of the holders of Existing Certificates, shall mail to each holder of
record of Existing Certificates: (i) certificates representing the number of
shares of Media Stock ("Media Certificates") to which such holder is entitled
pursuant to Section 2.1 hereof and (ii) instructions pursuant to which such
holder may exchange Existing Certificates for certificates representing shares
of Communications Stock ("Communications Certificates"), which shall specify
that delivery shall be effected, and risk of loss and title to the Existing
Certificates shall pass, only upon delivery of the Existing Certificates to the
Exchange Agent.
(c) Upon surrender, in accordance with the instructions delivered pursuant
to Section 2.2(b)(ii), of Existing Certificates for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by U S WEST Delaware,
duly executed, the holder of such Existing Certificates shall be entitled to
receive in exchange therefor Communications Certificates representing a number
of shares of Communications Stock equal to the number of shares of Existing
Common Stock represented by such Existing Certificates. If any Communications
Certificate is to be issued in a name other than that in which the Existing
Certificate surrendered in exchange therefor is registered, it shall be a
condition of the issuance thereof that the Existing Certificate so surrendered
shall be properly endorsed and the signatures thereon properly guaranteed and
otherwise proper in form for transfer and that the person requesting such
exchange shall pay to the Exchange Agent any transfer or other taxes required by
reason of the issuance of a Communications Certificate in any name other than
that of the registered holder of the Existing Certificate surrendered, or
otherwise required, or shall establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not payable.
(d) At the Effective Time, the stock transfer books of U S WEST shall be
closed and no transfer of shares of Existing Common Stock shall thereafter be
made. If, after the Effective Time, Existing Certificates are presented for
transfer to the Surviving Corporation, they shall be cancelled and exchanged for
Communications Certificates representing the number of shares of Communications
Stock represented by such Existing Certificates.
2.3. DISSENTING SHARES. Each share of Existing Common Stock (i) as to
which a written notice of intent to demand payment was submitted to U S WEST
prior to the vote of U S WEST's shareholders taken on this Agreement at a
special meeting of the shareholders of U S WEST convened to consider and vote
upon the approval of this Agreement (the "Special Meeting"), (ii) which is not
voted in favor of adoption of this Agreement at the Special Meeting, and (iii)
as to which a written demand for payment of fair value shall have been or may
still be timely filed, and the Existing Certificates for such shares of Existing
Common Stock shall have been or may still be deposited, with the Surviving
Corporation ("Dissenting Shares"), shall not be converted into shares of
Communications Stock and Media Stock. Each holder of Dissenting Shares who
becomes entitled under the CBCA to receive payment of the fair value of such
holder's Dissenting Shares shall receive such payment from the Surviving
Corporation (but only after such fair value shall have been agreed upon or
finally determined) and such Dissenting Shares shall thereupon be cancelled.
Each Dissenting Share as to which dissenters' rights pursuant to the CBCA shall
be effectively withdrawn or lost shall thereupon be deemed to have been
converted into, at the Effective Time, one fully-paid and nonassessable share of
Communications Stock and one fully-paid and nonassessable share of Media Stock.
ARTICLE III
ASSUMPTION OF OBLIGATIONS
All corporate acts, plans, policies, agreements, arrangements, approvals and
authorizations of U S WEST, its shareholders, board of directors and committees
thereof, officers and agents which were valid and effective immediately prior to
the Effective Time shall be deemed for all purposes to be the acts, plans,
policies, agreements, arrangements, approvals and authorizations of U S WEST
Delaware and shall be as effective and binding on U S WEST Delaware as the same
were with respect to U S WEST.
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ARTICLE IV
CONDITIONS
Consummation of the Merger is subject to the satisfaction at or prior to the
Effective Time of the following conditions:
4.1. SHAREHOLDER APPROVAL. This Agreement shall have been approved at the
Special Meeting by the affirmative vote of (i) the holders of a majority of the
shares of Existing Common Stock outstanding on the record date fixed for
determining shareholders of U S WEST entitled to vote thereon (the "Record
Date"), voting as a separate class, (ii) the holders of two-thirds of the shares
of Existing Series B Preferred Stock outstanding on the Record Date, voting as a
separate class, and (iii) the holders of a majority of the shares of Existing
Common Stock and Existing Series B Preferred Stock outstanding on the record
date, voting together as a single class.
ARTICLE V
MISCELLANEOUS
5.1. TERMINATION. At any time prior to the consummation of the Merger,
this Agreement may be terminated and the Merger abandoned by the Board of
Directors of U S WEST.
5.2. AMENDMENT. This Agreement may be amended at any time prior to the
Effective Time with the mutual consent of the Boards of Directors of U S WEST
and U S WEST Delaware; PROVIDED, HOWEVER, that this Agreement may not be amended
after it has been adopted by the shareholders of U S WEST in any manner which,
in the judgment of the Board of Directors of U S WEST, would have a material
adverse effect on the rights of such shareholders or in any manner not permitted
under applicable law.
5.3. HEADINGS. The headings set forth herein are inserted for convenience
or reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
5.4. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, and all of which, when
taken together, shall constitute one and the same instrument.
5.5. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, except to the extent the laws
of the State of Colorado shall mandatorily apply to the Merger.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed by its respective officers thereunto duly authorized all as of the
date first above written.
U S WEST, INC.
(a Colorado Corporation)
By ___________________________________
Name:
Title:
U S WEST, INC.
(a Delaware Corporation)
By ___________________________________
Name:
Title:
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ANNEX II
RESTATED CERTIFICATE OF INCORPORATION
OF
U S WEST, INC.
(A DELAWARE CORPORATION)
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ANNEX III
BY-LAWS
OF
U S WEST, INC.
(A DELAWARE CORPORATION)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of U S WEST, Inc. (the
"Corporation") in the State of Delaware shall be at 1209 Orange Street, in the
City of Wilmington, County of New Castle, 19801 and its registered agent at such
address shall be The Corporation Trust Company, or such other office or agent as
the Board of Directors of the Corporation (the "Board") shall from time to time
select.
SECTION 2. OTHER OFFICES. The Corporation may also have an office or
offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board may from time to time determine or
the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the stockholders of the
Corporation shall be held at the office of the Corporation or at such other
places, within or without the State of Delaware, as may from time to time be
fixed by the Board.
SECTION 2. ANNUAL MEETINGS. The annual meeting of the stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on the first Friday of May in
each year, at an hour to be named in the notice of the meeting, unless such day
should fall on a legal holiday in the State of Colorado, in which event the
meeting shall be held on the next succeeding business day that is not a legal
holiday, or on such date and at such hour as shall from time to time be fixed by
the Board. Any previously scheduled annual meeting of the stockholders may be
postponed by action of the Board taken prior to the time previously scheduled
for such annual meeting of stockholders.
SECTION 3. SPECIAL MEETINGS. Except as otherwise required by law or the
Certificate of Incorporation of the Corporation (the "Certificate"), special
meetings of the stockholders for any purpose or purposes may be called by the
Chairman of the Board or a majority of the entire Board. Only such business as
is specified in the notice of any special meeting of the stockholders shall come
before such meeting.
SECTION 4. NOTICE OF MEETINGS. Except as otherwise provided by law,
written notice of each meeting of the stockholders, whether annual or special,
shall be given, either by personal delivery or by mail, not less than 10 nor
more than 60 days before the date of the meeting to each stockholder of record
entitled to notice of the meeting. If mailed, such notice shall be deemed given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
who shall attend such meeting in person or by proxy without protesting, prior to
or at the commencement of the meeting, the lack of proper notice to such
stockholder, or who shall sign a written waiver of notice thereof, whether
before
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or after such meeting. Notice of adjournment of a meeting of stockholders need
not be given if the time and place to which it is adjourned are announced at
such meeting, unless the adjournment is for more than 30 days or, after
adjournment, a new record date is fixed for the adjourned meeting.
SECTION 5. QUORUM. Except as otherwise provided by law or by the
Certificate, the holders of a majority of the votes entitled to be cast by the
stockholders entitled to vote generally, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders; PROVIDED, HOWEVER, that in the case of any vote to be taken by
classes, the holders of a majority of the votes entitled to be cast by the
stockholders of a particular class shall constitute a quorum for the transaction
of business by such class.
SECTION 6. ADJOURNMENTS. The chairman of the meeting or the holders of a
majority of the votes entitled to be cast by the stockholders who are present in
person or by proxy may adjourn the meeting from time to time whether or not a
quorum is present. In the event that a quorum does not exist with respect to any
vote to be taken by a particular class, the chairman of the meeting or the
holders of a majority of the votes entitled to be cast by the stockholders of
such class who are present in person or by proxy may adjourn the meeting with
respect to the vote(s) to be taken by such class. At such adjourned meeting at
which a quorum may be present, any business may be transacted which might have
been transacted at the meeting as originally called.
SECTION 7. ORDER OF BUSINESS. (a) At each meeting of the stockholders, the
Chairman of the Board or, in the absence of the Chairman of the Board, such
person as shall be selected by the Board shall act as chairman of the meeting.
The order of business at each such meeting shall be as determined by the
chairman of the meeting. The chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the Corporation, restrictions on entry to such
meeting after the time prescribed for the commencement thereof, and the opening
and closing of the voting polls.
(b) At any annual meeting of stockholders, only such business shall be
conducted as shall have been brought before the annual meeting (i) by or at the
direction of the chairman of the meeting, (ii) pursuant to the notice provided
for in this Section 7 or (iii) by any stockholder who is a holder of record at
the time of the giving of such notice provided for in this Section 7, who is
entitled to vote at the meeting and who complies with the procedures set forth
in this Section 7.
(c) For business properly to be brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation (the "Secretary"). To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days prior
to the date of an annual meeting of stockholders. To be in proper written form,
a stockholder's notice to the Secretary shall set forth in writing as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting; (ii) the name
and address of the stockholder proposing such business and all persons or
entities acting in concert with the stockholder; (iii) the class and number of
shares of the Corporation which are beneficially owned by the stockholder and
all persons or entities acting in concert with such stockholder; and (iv) any
material interest of the stockholder in such business. The foregoing notice
requirements shall be deemed satisfied by a stockholder if the stockholder has
notified the Corporation of his or her intention to present a proposal at an
annual meeting and such stockholder's proposal has been included in a proxy
statement that has been prepared by management of the Corporation to solicit
proxies for such annual meeting; PROVIDED, HOWEVER, that if such stockholder
does not appear or send a qualified representative to present such proposal at
such annual meeting, the Corporation need not present such proposal for a vote
at such meeting, notwithstanding that proxies in respect of such vote may have
been received by the Corporation. Notwithstanding anything in the By laws to the
contrary, no business shall be conducted at any
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annual meeting except in accordance with the procedures set forth in this
Section 7. The chairman of an annual meeting shall, if the facts warrant,
determine that business was not properly brought before the annual meeting in
accordance with the provisions of this Section 7 and, if the chairman should so
determine, the chairman shall so declare to the annual meeting and any such
business not properly brought before the annual meeting shall not be transacted.
SECTION 8. LIST OF STOCKHOLDERS. It shall be the duty of the Secretary or
other officer who has charge of the stock ledger to prepare and make, at least
10 days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote thereat, arranged in alphabetical order, and
showing the address of each stockholder and the number of shares registered in
such stockholder's name. Such list shall be produced and kept available at the
times and places required by law.
SECTION 9. VOTING. (a) Except as otherwise provided by law or by the
Certificate, each stockholder of record of any class or series of capital stock
of the Corporation shall be entitled at each meeting of stockholders to such
number of votes for each share of such stock as may be fixed in the Certificate
or in the resolution or resolutions adopted by the Board providing for the
issuance of such stock, registered in such stockholder's name on the books of
the Corporation:
(1) on the date fixed pursuant to Section 6 of Article VII of these By
laws as the record date for the determination of stockholders entitled to
notice of and to vote at such meeting; or
(2) if no such record date shall have been so fixed, then at the close
of business on the day next preceding the day on which notice of such
meeting is given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held.
(b) Each stockholder entitled to vote at any meeting of stockholders may
authorize not in excess of three persons to act for such stockholder by proxy.
Any such proxy shall be delivered to the secretary of such meeting at or prior
to the time designated for holding such meeting. No such proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period.
(c) At each meeting of the stockholders, all corporate actions to be taken
by vote of the stockholders (except as otherwise required by law and except as
otherwise provided in the Certificate or these By laws) shall be authorized by a
majority of the votes cast by the stockholders entitled to vote thereon who are
present in person or represented by proxy, and where a separate vote by class is
required, a majority of the votes cast by the stockholders of such class who are
present in person or represented by proxy shall be the act of such class.
(d) Unless required by law or determined by the chairman of the meeting to
be advisable, the vote on any matter, including the election of directors, need
not be by written ballot. In the case of a vote by written ballot, each ballot
shall be signed by the stockholder voting, or by such stockholder's proxy.
SECTION 10. INSPECTORS. The chairman of the meeting shall appoint one or
more inspectors to act at any meeting of stockholders. Such inspectors shall
perform such duties as shall be specified by the chairman of the meeting.
Inspectors need not be stockholders. No director or nominee for the office of
director shall be appointed such inspector.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board, which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by law or by the Certificate directed or required to be exercised or done by the
stockholders.
SECTION 2. NUMBER, QUALIFICATION AND ELECTION. (a) Except as otherwise
fixed by or pursuant to the provisions of Article IV of the Certificate relating
to the rights of the holders of any class or series of stock having preference
over the common stock of the corporation as to dividends or upon
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liquidation, the number of directors of the Corporation shall be determined from
time to time by the Board by the affirmative vote of directors constituting at
least a majority of the entire Board; provided that the number thereof may not
be less than six nor more than seventeen.
(b) The directors, other than those who may be elected by the holders of
shares of any class or series of stock having a preference over the common stock
of the Corporation as to dividends or upon liquidation pursuant to the terms of
Article IV of the Certificate or any resolution or resolutions providing for the
issuance of such stock adopted by the Board, shall be classified, with respect
to the time for which they severally hold office, into three classes as nearly
equal in number as possible, with each class to hold office until its successors
are elected and qualified. Subject to the rights of the holders of any class or
series of stock having a preference over the common stock of the Corporation as
to dividends or upon liquidation, at each such annual meeting of the
stockholders, the successors of the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election.
(c) Each director shall be at least 21 years of age. Directors need not be
stockholders of the Corporation.
(d) In any election of directors held at a meeting of stockholders, the
persons receiving a plurality of the votes cast by the stockholders entitled to
vote thereon at such meeting who are present or represented by proxy, up to the
number of directors to be elected in such election, shall be deemed elected.
SECTION 3. NOTIFICATION OF NOMINATION. Subject to the rights of the
holders of any class or series of stock having a preference over the common
stock as to dividends or upon liquidation, nominations for the election of
directors may be made by the Board or by any stockholder who is a stockholder of
record at the time of giving of the notice of nomination provided for in this
Section 3 of this Article III and who is entitled to vote for the election of
directors. Any stockholder of record entitled to vote for the election of
directors at a meeting may nominate persons for election as directors only if
timely written notice of such stockholder's intent to make such nomination is
given, either by personal delivery or by United States mail, postage prepaid, to
the Secretary. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation (i)
with respect to an election to be held at an annual meeting of stockholders, not
less than 60 days prior to the date of such annual meeting and (ii) with respect
to an election to be held at a special meeting of stockholders for the election
of directors, not less than 15 days following the public announcement of the
date of such special meeting. Each such notice shall set forth: (a) the name and
address of the stockholder who intends to make the nomination, of all persons or
entities acting in concert with the stockholder, and of the person or persons to
be nominated; (b) a representation that the stockholder is a holder of record of
stock of the Corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or entities acting in
concert with the stockholder (naming such person or entities) pursuant to which
the nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by the stockholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board; (e) the class and number of shares of
the Corporation that are beneficially owned by the stockholder and all persons
or entities acting in concert with the stockholder; and (f) the consent of each
nominee to being named in a proxy statement as nominee and to serve as a
director of the Corporation if so elected. The chairman of the meeting may
refuse to acknowledge the nomination of any person not made after compliance
with the foregoing procedure. Only such persons who are nominated in accordance
with the procedures set forth in this Section 3 of this Article III shall be
eligible to serve as directors of the Corporation.
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SECTION 4. QUORUM AND MANNER OF ACTING. Except as otherwise provided by
law, the Certificate or these By laws, a majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting of the Board,
and, except as so provided, the vote of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board. The
chairman of the meeting or a majority of the directors present may adjourn the
meeting to another time and place whether or not a quorum is present. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called.
SECTION 5. PLACE OF MEETING. The Board may hold its meetings at such place
or places within or without the State of Delaware as the Board may from time to
time determine or as shall be specified or fixed in the respective notice or
waivers of notice thereof.
SECTION 6. REGULAR MEETINGS. Regular meetings of the Board shall be held
at such times and places as the Chairman of the Board or the Board shall from
time to time by resolution determine. If any day fixed for a regular meeting
shall be a legal holiday under the laws of the place where the meeting is to be
held, the meeting which would otherwise be held on that day shall be held at the
same hour on the next succeeding business day.
SECTION 7. SPECIAL MEETINGS. Special meetings of the Board shall be held
whenever called by the Chairman of the Board or by a majority of the directors.
SECTION 8. NOTICE OF MEETINGS. Notice of regular meetings of the Board or
of any adjourned meeting thereof need not be given. Notice of each special
meeting of the Board shall be given by overnight delivery service or mailed to
each director, in either case addressed to such director at such director's
residence or usual place of business, at least two days before the day on which
the meeting is to be held or shall be sent to such director at such place by
telegraph or telecopy or be given personally or by telephone, not later than the
day before the meeting is to be held, but notice need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of such notice or who shall attend such meeting without protesting, prior to or
at its commencement, the lack of notice to such director. Every such notice
shall state the time and place but need not state the purpose of the meeting.
SECTION 9. RULES AND REGULATIONS. The Board may adopt such rules and
regulations not inconsistent with the provisions of law, the Certificate or
these By laws for the conduct of its meetings and management of the affairs of
the Corporation as the Board may deem proper.
SECTION 10. PARTICIPATION IN MEETING BY MEANS OF COMMUNICATION
EQUIPMENT. Any one or more members of the Board or any committee thereof may
participate in any meeting of the Board or of any such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at such meeting.
SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Board or any committee thereof may be taken without
a meeting if all of the members of the Board or of any such committee consent
thereto in writing and the writing or writings are filed with the minutes or
proceedings of the Board or of such committee.
SECTION 12. RESIGNATIONS. Any director of the Corporation may at any time
resign by giving written notice to the Board, the Chairman of the Board, the
President or the Secretary. Such resignation shall take effect at the time
specified therein or, if the time be not specified therein, upon receipt
thereof; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 13. REMOVAL OF DIRECTORS. Directors may be removed only as
provided in Section 4 of Article V of the Certificate.
SECTION 14. VACANCIES. Subject to the rights of the holders of any class
or series of stock having a preference over the common stock of the Corporation
as to dividends or upon liquidation, any
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vacancies on the Board resulting from death, resignation, removal or other cause
shall only be filled by the Board by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board,
or by a sole remaining director, and newly created directorships resulting from
any increase in the number of directors shall be filled by the Board, or if not
so filled, by the stockholders at the next annual meeting thereof or at a
special meeting called for that purpose in accordance with Section 3 of Article
II of these By laws. Any director elected in accordance with the preceding
sentence of this Section 14 of this Article III shall hold office for the
remainder of the full term of the class of directors in which the new
directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.
SECTION 15. COMPENSATION. Each director, in consideration of such person
serving as a director, shall be entitled to receive from the Corporation such
amount per annum and such fees for attendance at meetings of the Board or of
committees of the Board, or both, as the Board shall from time to time
determine. In addition, each director shall be entitled to receive from the
Corporation reimbursement for the reasonable expenses incurred by such person in
connection with the performance of such person's duties as a director. Nothing
contained in this Section 15 of this Article III shall preclude any director
from serving the Corporation or any of its subsidiaries in any other capacity
and receiving proper compensation therefor.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. ESTABLISHMENT OF COMMITTEES OF THE BOARD OF DIRECTORS; ELECTION
OF MEMBERS OF COMMITTEES OF THE BOARD OF DIRECTORS; FUNCTIONS OF COMMITTEES OF
THE BOARD OF DIRECTORS. The Board may, in accordance with and subject to the
General Corporation Law of the State of Delaware, from time to time establish
committees of the Board to exercise such powers and authorities of the Board,
and to perform such other functions, as the Board may from time to time
determine.
SECTION 2. PROCEDURE; MEETINGS; QUORUM. Regular meetings of committees of
the Board, of which no notice shall be necessary, may be held at such times and
places as shall be fixed by resolution adopted by a majority of the members
thereof. Special meetings of any committee of the Board shall be called at the
request of a majority of the members thereof. Notice of each special meeting of
any committee of the Board shall be given by overnight delivery service or
mailed to each member, in either case addressed to such member at such member's
residence or normal place of business, at least two days before the day on which
the meeting is to be held or shall be sent to such members at such place by
telegraph or telecopy or be given personally or by telephone, not later than the
day before the meeting is to be held, but notice need not be given to any member
who shall, either before or after the meeting, submit a signed waiver of such
notice or who shall attend such meeting without protesting, prior to it or at
its commencement, the lack of such notice to such member. Any special meeting of
any committee of the Board shall be a legal meeting without any notice thereof
having been given, if all the members thereof shall be present thereat. Notice
of any adjourned meeting of any committee of the Board need not be given. Any
committee of the Board may adopt such rules and regulations not inconsistent
with the provisions of law, the Certificate or these By laws for the conduct of
its meetings as such committee of the Board may deem proper. A majority of the
members of any committee of the Board shall constitute a quorum for the
transaction of business at any meeting, and the vote of a majority of the
members thereof present at any meeting at which a quorum is present shall be the
act of such committee. Each committee of the Board shall keep written minutes of
its proceedings and shall report on such proceedings to the Board.
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ARTICLE V
OFFICERS
SECTION 1. NUMBER; TERM OF OFFICE. The officers of the Corporation shall
be such officers, which may include a Chairman of the Board, Chief Executive
Officer, President, Chief Financial Officer, General Counsel and one or more
Vice Presidents (including, without limitation, Assistant, Executive and Senior
Vice Presidents) and a Treasurer, Secretary and Controller and such other
officers or agents with such titles and such duties as the Board may from time
to time determine, each to have such authority, functions or duties as provided
in these By laws or as the Board may from time to time determine, and each to
hold office for such term as may be prescribed by the Board and until such
person's successor shall have been chosen and shall qualify, or until such
person's death or resignation, or until such person's removal in the manner
hereinafter provided. One person may hold the offices and perform the duties of
any two or more of said officers; PROVIDED, HOWEVER, that no officer shall
execute, acknowledge or verify any instrument in more than one capacity if such
instrument is required by law, the Certificate or these By laws to be executed,
acknowledged or verified by two or more officers. The Board may from time to
time authorize any officer to appoint and remove any such other officers and
agents and to prescribe their powers and duties. The Board may require any
officer or agent to give security for the faithful performance of such person's
duties.
SECTION 2. REMOVAL. Any officer may be removed, either with or without
cause, by the Board at any meeting thereof or, except in the case of any officer
elected by the Board, by any superior officer upon whom such power may be
conferred by the Board.
SECTION 3. RESIGNATION. Any officer may resign at any time by giving
notice to the Board, the Chairman of the Board or the Secretary. Any such
resignation shall take effect at the date of receipt of such notice or at any
later date specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these By laws for election to such
office.
SECTION 5. CHAIRMAN OF THE BOARD; POWERS AND DUTIES. The Chairman of the
Board shall be the chief executive officer of the Corporation. Subject to the
control of the Board, the Chairman of the Board shall supervise and direct
generally all the business and affairs of the Corporation. The Chairman of the
Board shall preside at all meetings of the stockholders and the Board. Any
document may be signed by the Chairman of the Board or any other person who may
be thereunto authorized by the Board or the Chairman of the Board. The Chairman
of the Board may appoint such assistant officers as are deemed necessary.
SECTION 6. PRESIDENT, EXECUTIVE VICE PRESIDENTS, SENIOR VICE PRESIDENTS AND
VICE PRESIDENTS; POWERS AND DUTIES. The President shall be the chief operating
officer of the Corporation. The President and each Executive Vice President,
each Senior Vice President, and each Vice President shall have such powers and
perform such duties as may be assigned by the Board of Directors or the Chairman
of the Board. In case of the absence or disability of the Chairman of the Board
or a vacancy in the office, the President, an Executive Vice President, a Senior
Vice President, or a Vice President designated by the Chairman of the Board or
the Board shall exercise all the powers and perform all the duties of the
Chairman of the Board.
SECTION 7. SECRETARY AND ASSISTANT SECRETARIES; POWERS AND DUTIES. The
Secretary shall attend all meetings of the stockholders and the Board and shall
keep the minutes for such meetings in one or more books provided for that
purpose. The Secretary shall be custodian of the corporate records, except those
required to be in the custody of the Treasurer or the Controller, shall keep the
seal of the Corporation, and shall execute and affix the seal of the Corporation
to all documents duly
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authorized for execution under seal on behalf of the Corporation, and shall
perform all of the duties incident to the office of Secretary, as well as such
other duties as may be assigned by the Chairman of the Board or the Board.
The Assistant Secretaries shall perform such of the Secretary's duties as
the Secretary shall from time to time direct. In case of the absence or
disability of the Secretary or a vacancy in the office, an Assistant Secretary
designated by the Chairman of the Board or by the Secretary, if the office is
not vacant, shall perform the duties of the Secretary.
SECTION 8. CHIEF FINANCIAL OFFICER; POWERS AND DUTIES. The Chief Financial
Officer shall be responsible for maintaining the financial integrity of the
Corporation, shall prepare the financial plans for the Corporation, and shall
monitor the financial performance of the Corporation and its subsidiaries, as
well as performing such other duties as may be assigned by the Chairman of the
Board or the Board.
SECTION 9. TREASURER AND ASSISTANT TREASURERS; POWERS AND DUTIES. The
Treasurer shall have care and custody of the funds and securities of the
Corporation, shall deposit such funds in the name and to the credit of the
Corporation with such depositories as the Treasurer shall approve, shall
disburse the funds of the Corporation for proper expenses and dividends, and as
may be ordered by the
Board, taking proper vouchers for such disbursements. The Treasurer shall
perform all of the duties incident to the office of Treasurer, as well as such
other duties as may be assigned by the Chairman of the Board or the Board.
The Assistant Treasurers shall perform such of the Treasurer's duties as the
Treasurer shall from time to time direct. In case of the absence or disability
of the Treasurer or a vacancy in the office, an Assistant Treasurer designated
by the Chairman of the Board or by the Treasurer, if the office is not vacant,
shall perform the duties of the Treasurer.
SECTION 10. GENERAL COUNSEL; POWERS AND DUTIES. The General Counsel shall
be a licensed attorney at law and shall be the chief legal officer of the
Corporation. The General Counsel shall have such power and exercise such
authority and provide such counsel to the Corporation as deemed necessary or
desirable to enforce the rights and protect the property and integrity of the
Corporation, shall also have the power, authority, and responsibility for
securing for the Corporation all legal advice, service, and counseling, and
shall perform all of the duties incident to the office of General Counsel, as
well as such other duties as may be assigned by the Chairman of the Board or the
Board.
SECTION 11. CONTROLLER AND ASSISTANT CONTROLLERS; POWERS AND DUTIES. The
Controller shall be the chief accounting officer of the Corporation and shall
keep and maintain in good and lawful order all accounts required by law and
shall have sole control over, and ultimate responsibility for, the accounts and
accounting methods of the Corporation and the compliance of the Corporation with
all systems of accounts and accounting regulations prescribed by law. The
Controller shall audit, to such extent and at such times as may be required by
law or as the Controller may think necessary, all accounts and records of
corporate funds or property, by whomsoever kept, and for such purposes shall
have access to all such accounts and records. The Controller shall make and sign
all necessary and proper accounting statements and financial reports of the
Corporation, and shall perform all of the duties incident to the office of
Controller, as well as such other duties as may be assigned by the Chairman of
the Board or the Board.
The Assistant Controllers shall perform such of the Controller's duties as
the Controller shall from time to time direct. In case of the absence or
disability of the Controller or a vacancy in the office, an Assistant Controller
designated by the Chairman of the Board or the Controller, if the office is not
vacant, shall perform the duties of the Controller.
SECTION 12. SALARIES. The salaries of all officers of the Corporation
shall be fixed by or in the manner provided by the Board. If authorized by a
resolution of the Board, the salary of any officer
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other than the Chairman of the Board may be fixed by the Chairman of the Board
or a Committee of the Board. No officer shall be disqualified from receiving a
salary by reason of also being a director of the Corporation.
ARTICLE VI
INDEMNIFICATION
SECTION 1. SCOPE OF INDEMNIFICATION. (a) The Corporation shall indemnify
an indemnified representative against any liability incurred in connection with
any proceeding in which the indemnified representative may be involved as a
party or otherwise, by reason of the fact that such person is or was serving in
an indemnified capacity, except to the extent that any such indemnification
against a particular liability is expressly prohibited by applicable law or
where a judgment or other final adjudication adverse to the indemnified
representative establishes, or where the Corporation determines, that his or her
acts or omissions (i) were in breach of such person's duty of loyalty to the
Corporation or its stockholders, (ii) were not in good faith or involved
intentional misconduct or a knowing violation of law, or (iii) resulted in
receipt by such person of an improper personal benefit. The rights granted by
this Article shall not be deemed exclusive of any other rights to which those
seeking indemnification, contribution, or advancement of expenses may be
entitled under any statute, certificate of incorporation, agreement, contract of
insurance, vote of stockholders or disinterested directors, or otherwise. The
rights of indemnification and advancement of expenses provided by or granted
pursuant to this Article shall continue as to a person who has ceased to be an
indemnified representative in respect of matters arising prior to such time and
shall inure to the benefit of the heirs, executors, administrators and personal
representatives of such a person.
(b) If an indemnified representative is not entitled to indemnification with
respect to a portion of any liabilities to which such person may be subject, the
Corporation shall nonetheless indemnify such indemnified representative to the
maximum extent for the remaining portion of the liabilities.
(c) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the indemnified representative is not entitled
to indemnification.
(d) To the extent permitted by law, the payment of indemnification provided
for by this Article, including the advancement of expenses pursuant to Section 2
of this Article VI, with respect to proceedings other than those brought by or
in the right of the Corporation, shall be subject to the conditions that the
indemnified representative shall give the Corporation prompt notice of any
proceeding, that the Corporation shall have complete charge of the defense of
such proceeding and the right to select counsel for the indemnified
representative, and that the indemnified representative shall assist and
cooperate fully in all matters respecting the proceeding and its defense or
settlement. The Corporation may waive any or all of the conditions set forth in
the preceding sentence. Any such waiver shall be applicable only to the specific
payment for which the waiver is made and shall not in any way obligate the
Corporation to grant such waiver at any future time. In the event of a conflict
of interest between the indemnified representative and the Corporation that
would disqualify the Corporation's counsel from representing the indemnified
representative under the rules of professional conduct applicable to attorneys,
it shall be the policy of the Corporation to waive any or all of the foregoing
conditions subject to such limitations or conditions as the Corporation shall
deem to be reasonable in the circumstances.
(e) For purposes of this Article:
(1) "indemnified capacity" means any and all past, present, or future
services by an indemnified representative in one or more capacities as a
director, officer, employee, or agent of the Corporation or, at the request
of the Corporation, as a director, officer, employee, agent, fiduciary,
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or trustee of another corporation, partnership, joint venture, trust,
employee benefit plan, or other entity or enterprise; any indemnified
representative serving an affiliate of the Corporation in any capacity shall
be deemed to be doing so at the request of the Corporation;
(2) an "affiliate of the Corporation" means an entity that directly or
indirectly, through one or more intermediaries, controls, or is controlled
by, or is under common control with, the Corporation;
(3) "indemnified representative" means any and all directors, officers,
and employees of the Corporation and any other person designated as an
indemnified representative by the Board;
(4) "liability" means any damage, judgment, amount paid in settlement,
fine, penalty, punitive damage, excise tax assessed with respect to an
employee benefit plan, or cost or expense of any nature (including, without
limitation, expert witness fees, costs of investigation, litigation and
appeal costs, attorneys' fees, and disbursements); and
(5) "proceeding" means any threatened, pending, or completed action,
suit, appeal, or other proceeding of any nature, whether civil, criminal,
administrative, or investigative, whether formal or informal, whether
external or internal to the Corporation, and whether brought by or in the
right of the Corporation, a class of its security holders or otherwise.
SECTION 2. ADVANCING EXPENSES. All reasonable expenses incurred in good
faith by an indemnified representative in advance of the final disposition of a
proceeding described in Section 1 of this Article VI shall be advanced to the
indemnified representative by the Corporation. Before making any such advance
payment of expenses, the Corporation shall receive an undertaking by or on
behalf of the indemnified representative to repay such amount if it shall
ultimately be determined that such indemnified representative is not entitled to
be indemnified by the Corporation pursuant to this Article VI. No advance shall
be made by the Corporation if a determination is reasonably and promptly made by
a majority vote of disinterested directors, even if the disinterested directors
constitute less than a quorum, or (if such a quorum is not obtainable or, even
if obtainable, a quorum of disinterested directors so directs) by independent
legal counsel in a written opinion, that, based upon the facts known to the
Board or counsel at the time such determination is made, the indemnified
representative has acted in such a manner as to permit or require the denial of
indemnification pursuant to the provisions of Section 1 of this Article VI.
ARTICLE VII
CAPITAL STOCK
SECTION 1. SHARE OWNERSHIP. (a) Holders of shares of stock of each class
of the Corporation shall be recorded on the books of the Corporation and
ownership of such stock shall be evidenced by a certificate or other form as
shall be approved by the Board. Certificates representing shares of stock of
each class shall be signed by, or in the name of, the Corporation by the
Chairman of the Board or the President, any Vice President and by the Secretary
or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the
Corporation, and sealed with the seal of the Corporation, which may be a
facsimile thereof. Any or all such signatures may be facsimiles if countersigned
by a transfer agent or registrar. Although any officer, transfer agent or
registrar whose manual or facsimile signature is affixed to such a certificate
ceases to be such officer, transfer agent or registrar before such certificate
has been issued, it may nevertheless be issued by the Corporation with the same
effect as if such officer, transfer agent or registrar were still such at the
date of its issue.
(b) The stock ledger and blank share certificates shall be kept by the
Secretary or by a transfer agent or by a registrar or by any other officer or
agent designated by the Board.
SECTION 2. TRANSFER OF SHARES. Transfers of shares of stock of each class
of the Corporation shall be made only on the books of the Corporation by the
holder thereof, or by such holder's attorney thereunto authorized by a power of
attorney duly executed and filed with the Secretary or a transfer
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agent for such stock, if any, and on surrender of the certificate or
certificates, if any, for such shares properly endorsed or accompanied by a duly
executed stock transfer power (or by proper evidence of succession, assignment
or authority to transfer) and the payment of any taxes thereon; PROVIDED,
HOWEVER, that the Corporation shall be entitled to recognize and enforce any
lawful restriction on transfer. The person in whose name shares are registered
on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation; PROVIDED, HOWEVER, that whenever any
transfer of shares shall be made for collateral security and not absolutely, and
written notice thereof shall be given to the Secretary or to such transfer
agent, such fact shall be stated in the entry of the transfer. No transfer of
shares shall be valid as against the Corporation, its stockholders and creditors
for any purpose, except to render the transferee liable for the debts of the
Corporation to the extent provided by law, until it shall have been entered in
the stock records of the Corporation by an entry showing from and to whom
transferred.
SECTION 3. REGISTERED STOCKHOLDERS AND ADDRESSES OF STOCKHOLDERS. (a) The
Corporation shall be entitled to recognize the exclusive right of a person
registered on its records as the owner of shares of stock to receive dividends
and to vote as such owner, shall be entitled to hold liable for calls and
assessments a person registered on its records as the owner of shares of stock,
and shall not be bound to recognize any equitable or other claim to or interest
in such share or shares of stock on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
(b) Each stockholder shall designate to the Secretary or transfer agent of
the Corporation an address at which notices of meetings and all other corporate
notices may be delivered or mailed to such person, and, if any stockholder shall
fail to designate such address, corporate notices may be delivered to such
person by mail directed to such person at such person's post office address, if
any, as the same appears on the stock record books of the Corporation or at such
person's last known post office address.
SECTION 4. LOST, DESTROYED AND MUTILATED CERTIFICATES. The Corporation may
issue to any holder of shares of stock the certificate for which has been lost,
stolen, destroyed or mutilated a new certificate or certificates for shares,
upon the surrender of the mutilated certificate or, in the case of loss, theft
or destruction of the certificate, upon satisfactory proof of such loss, theft
or destruction. The Board, or a committee designated thereby, or the transfer
agents and registrars for the stock, may, in their discretion, require the owner
of the lost, stolen or destroyed certificate, or such person's legal
representative, to give the Corporation a bond in such sum and with such surety
or sureties as they may direct to indemnify the Corporation and said transfer
agents and registrars against any claim that may be made on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
SECTION 5. REGULATIONS. The Board may make such additional rules and
regulations as it may deem expedient concerning the issue and transfer of
certificates representing shares of stock of each class of the Corporation and
may make such rules and take such action as it may deem expedient concerning the
issue of certificates in lieu of certificates claimed to have been lost,
destroyed, stolen or mutilated.
SECTION 6. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
or any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board may fix, in advance, a record date, which shall not be more than 60
nor less than 10 days before the date of such meeting, nor more than 60 days
prior to any other action. A determination of stockholders entitled to notice of
or to vote at a meeting of the stockholders shall apply to any adjournment of
the meeting; PROVIDED, HOWEVER, that the Board may fix a new record date for the
adjourned meeting.
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SECTION 7. TRANSFER AGENTS AND REGISTRARS. The Board may appoint, or
authorize any officer or officers to appoint, one or more transfer agents and
one or more registrars.
ARTICLE VIII
SEAL
The Board shall provide a corporate seal, which shall be in the form of a
circle and shall bear the full name of the Corporation and the words and figures
of "Corporate Seal Delaware", or such other words or figures as the Board may
approve and adopt. The seal may be used by causing it or a facsimile thereof to
be impressed or affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of December in
each year.
ARTICLE X
AMENDMENTS
Any By law may be adopted, repealed, altered or amended by two-thirds of the
entire Board at any meeting thereof. The stockholders of the Corporation shall
have the power to amend, alter or repeal any provision of these By laws only to
the extent and in the manner provided in the Certificate.
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ANNEX IV
COLORADO BUSINESS CORPORATION ACT
ARTICLE 113
DISSENTERS' RIGHTS
PART 1
RIGHT OF DISSENT -- PAYMENT FOR SHARES
7-113-101 DEFINITIONS. -- For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares held in a
voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that right at the
time and in the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effective date of the corporate action to
which the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action expect to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101. C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent such owner is
recognized by the corporation as the shareholder as provided in section
7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
7-113-102 RIGHT TO DISSENT. -- (1) A shareholder, whether or not entitled
to vote, is entitled to dissent and obtain payment of the fair value of his or
her shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a part
if:
(I) Approval by the shareholders of that corporation is required for
the merger by section 7-111-103 or 7-111-104 or by the articles of
incorporation, or
(II) The corporation is a subsidiary that is merged with its parent
corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation is
a party as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of the corporation for which a
shareholder vote is required under section 7-112-102(1); and
IV-1
<PAGE>
(d) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote
upon the consent of the corporation to the disposition pursuant to section
7-112-102 (2).
(2) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event
of:
(a) An amendment to the articles of incorporation that materially and
adversely affects rights in respect of the shares because it:
(I) Alters or abolishes a preferential right of the shares; or
(II) Creates, alters, or abolishes a right in respect of redemption
of the shares, including a provision respecting a sinking fund for their
redemption or repurchase; or
(b) An amendment to the articles of incorporation that affects rights in
respect of the shares because it:
(I) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or
(II) Reduces the number of shares owned by the shareholder to a
fraction of a share or to scrip if the fractional share or scrip so
created is to be acquired for cash or the scrip is to be voided under
section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
7-113-103 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. -- (1) A record
shareholder may assert dissenter's rights as to fewer than all the shares
registered in the record shareholder's name only if the record shareholder
dissents with respect to all shares beneficially owned by any one person and
causes the corporation to receive written notice which states such dissent and
the name, address, and federal taxpayer identification number, if any, of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a record shareholder under this subsection (1) are determined as if
the shares as to which the record shareholder dissents and the other shares of
the record shareholder were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the shares
held on the beneficial shareholders' behalf only if:
(a) The beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time
the beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The Corporation may require that, when a shareholder dissents with
respect to the shares held by any one or more beneficial shareholders, each such
beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters'
IV-2
<PAGE>
rights as to all such shares as to which there is no limitation on the ability
to exercise dissenters' rights. Any such requirement shall be stated in the
dissenters' notice given pursuant to section 7-113-203.
PART 2
PROCEDURE FOR EXERCISE OF DISSENTER'S RIGHTS
7-113-201 NOTICE OF DISSENTERS' RIGHTS. -- (1) If a proposed corporate
action creating dissenters' rights under section 7-113-102 is submitted to a
vote at a shareholders' meeting, the notice of the meeting shall be given to all
shareholders, whether or not entitled to vote. The notice shall state that
shareholders are or may be entitled to assert dissenters' rights under this
article and shall be accompanied by a copy of this article and the materials, if
any, that, under articles 101 to 117 of this title, are required to be given to
shareholders entitled to vote on the proposed action at the meeting. Failure to
give notice as provided by this subsection (1) to shareholders not entitled to
vote shall not affect any action taken at the shareholders' meeting for which
the notice was to have been given.
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104, any written or oral solicitation of a shareholder to execute a
writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
to shareholders not entitled to vote shall not affect any action taken pursuant
to section 7-107-104 for which the notice was to have been given.
7-113-202 NOTICE OF INTENT TO DEMAND PAYMENT. -- (1) If a proposed
corporate action creating dissenters' rights under section 7-113-102 is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken, written
notice of the shareholder's intention to demand payment for the
shareholder's shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed action.
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104, a shareholder who wishes to assert dissenters' rights shall not
execute a writing consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection (1) or
(2) of this section is not entitled to demand payment for the shareholder's
shares under this article.
7-113-203 DISSENTERS' NOTICE. -- (1) If a proposed corporate action
creating dissenters' rights under section 7-113-102 is authorized, the
corporation shall give a written dissenters' notice to all shareholders who are
entitled to demand payment for their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section shall
be given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the
effective date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment
demands and the address of a place where certificates for certificated
shares must be deposited.
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<PAGE>
(c) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a
dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment
demand and certificates for certificated shares, which date shall not be
less than thirty days after the date the notice is required by subsection
(1) of this section is given;
(f) State the requirement contemplated in section 7-113-103(3), if such
requirement is imposed; and
(g) Be accompanied by a copy of this article.
7-113-204 PROCEDURE TO DEMAND PAYMENT. -- (1) A shareholder who is given a
dissenters' notice pursuant to section 7-113-203 and who wishes to assert
dissenters' rights shall, in accordance with the terms of the dissenters'
notice:
(a) Cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in section 7-113-203(2)(d), duly completed,
or may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1) of
this section retains all rights of a shareholder, except the right to transfer
the shares, until the effective date of the proposed corporate action giving
rise to the shareholder's exercise of dissenters' rights and has only the right
to receive payment for the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or 7-113-209(1)(b), the demand
for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.
7-113-205 UNCERTIFICATED SHARES. -- (1) Upon receipt of a demand for
payment under section 7-113-204 from a shareholder holding uncertificated
shares, and in lieu of the deposit of certificates representing the shares, the
corporation may restrict the transfer thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206 PAYMENT. -- (1) Except as provided in section 7-113-208, upon
the effective date of the corporate action creating dissenters' rights under
section 7-113-102 or upon receipt of a payment demand pursuant to section
7-113-204, whichever is later, the corporation shall pay each dissenter who
complied with section 7-113-204, at the address stated in the payment demand, or
if no such address is stated in the payment demand, at the address shown on the
corporation's current record of shareholders for the record shareholder holding
the dissenter's shares, the amount the corporation estimates to be the fair
value of the dissenter's shares, plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its most recent
fiscal year or, if that is not available, the corporation's balance sheet as
of the end of a fiscal year ending not more than sixteen months before the
date of payment, an income statement for that year, and, if the corporation
customarily provides such statements to shareholders, a statement of changes
in shareholders' equity for that year and a statement of cash flow for that
year, which balance sheet
IV-4
<PAGE>
and statements shall have been audited if the corporation customarily
provides audited financial statements to shareholders, as well as the latest
available financial statements, if any, for the interim or full-year period,
which financial statements need not be audited;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under section
7-113-209; and
(e) A copy of this article.
7-113-207 FAILURE TO TAKE ACTION. -- (1) If the effective date of the
corporate action creating dissenters' rights under section 7-113-102 does not
occur within sixty days after the date set by the corporation by which the
corporation must receive the payment demand as provided in section 7-113-203,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections
7-113-204 to 7-113-209 shall again be applicable.
7-113-208 SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER ANNOUNCEMENT
OF PROPOSED CORPORATE ACTION. -- (1) The corporation may, in or with the
dissenters' notice given pursuant to section 7-113-203, state the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action creating dissenters' rights under section 7-113-102 and state
that the dissenter shall certify in writing, in or with the dissenter's payment
demand under section 7-113-204, whether or not the dissenter (or the person on
whose behalf dissenters' rights are asserted) acquired beneficial ownership of
the shares before that date. With respect to any dissenter who does not so
certify in writing, in or with the payment demand, that the dissenter or the
person on whose behalf the dissenter asserts dissenters' rights acquired
beneficial ownership of the shares before such date, the corporation may, in
lieu of making the payment provided in section 7-113-206, offer to make such
payment if the dissenter agrees to accept it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206 (2).
7-113-209 PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER. --
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section 7-113-26
or offered under section 7-113-208 is less than the fair value of the shares
or that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206 within
sixty days after the date set by the corporation by which the corporation
must receive the payment demand; or
(c) The corporation does not return the deposited certificates or
release the transfer restrictions imposed on uncertificated shares as
required by section 7-113-207 (1).
(2) A dissenter waives the right to demand payment under this section unless
the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
IV-5
<PAGE>
PART 3
JUDICIAL APPRAISAL OF SHARES
7-113-301 COURT ACTION. -- (1) If a demand for payment under section
7-113-209 remains unresolved, the corporation may, within sixty days after
receiving the payment demand, commence a proceeding and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay to
each dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection
(1) of this section in the district court of the county in this state where the
corporation's principal office is located or, if it has no principal office in
this state, in the district court of the county in which its registered office
is located. If the corporation is a foreign corporation without a registered
office in this state, it shall commence the proceeding in the county in this
state where the registered office of the domestic corporation merged into, or
whose shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unresolved parties to the proceeding commenced
under subsection (2) of this section as in an action against their share, and
all parties shall be served with a copy of the petition. Service on each
dissenter shall be registered or certified mail, to the address stated in such
dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to such order. The parties to the
proceeding are entitled to the same discovery rights as parties in other civil
proceedings.
(5) Each dissenter made a party to the proceeding commenced under subsection
(2) of this section is entitled to judgment for the amount, if any, by which the
court finds the fair value of the dissenter's shares, plus interest, exceeds the
amount paid by the corporation, or for the fair value, plus interest, of the
dissenter's shares for which the corporation elected to withhold payment under
section 7-113-208.
7-113-302 COURT COSTS AND COUNSEL FEES. -- (1) The court in an appraisal
proceeding commenced under section 7-113-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation; except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the court
finds the corporation did not substantially comply with the requirements of
part 2 of this article; or
(b) Against either the corporation or one or more dissenters, in favor
of any other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefited.
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<PAGE>
ANNEX V
U S WEST, INC.
<TABLE>
<S> <C>
Selected Financial Data............................................................. V-2
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. V-4
Index to Consolidated Financial Statements.......................................... V-25
</TABLE>
V-1
<PAGE>
U S WEST, INC.
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. See "-- U S WEST, Inc. -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "--
Consolidated Financial Statements." The Selected Financial Data at December 31,
1994, 1993, 1992, 1991 and 1990 and for each of the five years ended December
31, 1994 are derived from the Consolidated Financial Statements of U S WEST
which have been audited by Coopers & Lybrand L.L.P., independent certified
public accountants. See "Experts." The Selected Financial Data at March 31, 1995
and 1994 and for the three months ended March 31, 1995 and 1994 are 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- --------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales and other revenues..... $2,828 $2,641 $10,953 $10,294 $ 9,823 $ 9,528 $ 9,369
Income from continuing
operations (1).............. 330 324 1,426 476 1,076 840 1,145
Net income (loss) (2)........ 330 324 1,426 (2,806) (614) 553 1,199
Total assets................. $23,599 $21,179 $23,204 $20,680 $23,461 $23,375 $22,160
Total debt (3)............... 8,702 7,442 7,938 7,199 5,430 5,969 5,147
Shareowners' equity.......... 7,532 6,375 7,382 5,861 8,268 9,587 9,240
Earnings per common share
(continuing operations)
(1)......................... 0.70 0.73 3.14 1.13 2.61 2.09 2.97
Earnings (loss) per common
share....................... 0.70 0.73 3.14 (6.69) (1.49) 1.38 3.11
Dividends per common share... 0.535 0.535 2.14 2.14 2.12 2.08 2.00
Book value per common share.. 16.03 14.08 15.73 13.29 19.95 23.39 23.48
Return on common shareowners'
equity (4).................. 17.6% 21.3% 21.6% -- 14.4% 5.7% 13.7%
Percentage of debt to total
capital (3)................. 53.6% 53.9% 51.8% 55.1% 39.6% 38.4% 35.8%
Capital expenditures (3)..... $621 $600 $ 2,820 $ 2,441 $ 2,554 $ 2,425 $ 2,217
OPERATING DATA
EBITDA (5)................... $ 1,226 $ 1,145 $ 4,559 $ 4,228 $ 3,963 $ 3,920 $ 3,889
Telephone network access
lines in service
(thousands)................. 14,453 13,959 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use
(millions).................. 13,839 12,631 52,275 48,123 44,369 41,701 38,832
Cellular subscribers......... 1,048,000 665,000 968,000 601,000 415,000 300,000 219,000
Cable television basic
subscribers served.......... 501,000 466,000 486,000 -- -- -- --
Employees.................... 61,302 61,080 61,505 60,778 63,707 65,829 65,469
Number of common
shareowners................. 807,409 844,939 816,099 836,328 867,773 899,082 935,530
Weighted average common
shares outstanding
(thousands)................. 468,557 444,378 453,316 419,365 412,518 401,332 386,012
PRO FORMA INFORMATION
Earnings per share of
Communications Stock........ $ 0.67 $ 2.53
Average shares outstanding of
Communications Stock
(thousands)................. 468,557 453,316
Earnings per share of Media
Stock....................... $ 0.03 $ 0.61
Average shares outstanding of
Media Stock (thousands)..... 468,557 453,316
<FN>
- ------------------------------
(1) 1995 and 1994 first quarter income include gains of $39 ($.08 per share)
and $15 ($.03 per share), respectively, on the sale of rural telephone
exchanges. 1994 income from continuing operations includes a gain of $105
($.23 per share) on the sale of 24.4 percent of U S WEST's joint venture
interest in cable television/telephone operations in the United Kingdom
(TeleWest), a gain of $41 ($.09 per share) on the sale of the company's
paging unit and a gain of $51 ($.11 per share) on the sale of certain rural
telephone exchanges. 1993 income from continuing operations was reduced by
a restructuring charge of $610 ($1.46 per share) and $54 ($.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 $230 ($.57 per share).
</TABLE>
V-2
<PAGE>
<TABLE>
<S> <C>
(2) 1993 net income was reduced by extraordinary charges of $3,123 ($7.45 per
share) for the discontinuance of Statement of Financial Accounting
Standards ("SFAS") No. 71 and $77 ($.18 per share) for the early
extinguishment of debt. 1993 net income also includes a charge of $120
($.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 cumulative effect of change in accounting
principles. Discontinued operations provided net income (loss) of $38 ($.09
per share), $103 ($.25 per share), $(287) ($.71 per share) and $54 ($.14
per share) in 1993, 1992, 1991 and 1990, respectively.
(3) Capital expenditures, debt and the percentage of debt to total capital
exclude discontinued operations.
(4) 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. 1992 return on shareowners' equity is based on
income before the cumulative effect of change in accounting principles.
(5) The Company considers EBITDA an important indicator of the operational
strength and performance of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of
the performance of the Company's businesses or as an alternative to cash
flows from operating activities as a measure of liquidity, in each case
determined in accordance with GAAP.
</TABLE>
V-3
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
U S WEST's operations consist of the Communications Group, which has
moderate, though consistent, growth and generates substantial income and cash
flows, and the Media Group. Most of the businesses in the Media Group are in a
stage of rapid customer and network expansion, which will result in near-term
earnings dilution.
COMMUNICATIONS GROUP.__The major component of the Communications Group is U
S WEST Communications, which provides telecommunications services in 14 western
and midwestern states, serving approximately 80 percent of the region's
population and approximately 40 percent of its geographic area. U S WEST
Communications offers local, exchange access and long-distance network services.
About 28 percent of the Company's access lines are devoted to providing services
to business customers. The access line growth rate for business customers, who
tend to be heavier users of the telephone network, has consistently exceeded the
growth rate for residential customers.
The majority of U S WEST Communications' revenues are derived from
traditional telephone services. U S WEST Communications will incur future
capital and operating expenditures for deployment of a broadband network. The
Company expects this network to generate new revenues through a variety of new
product and service offerings. However, the amount and timing of future revenues
related to multimedia service offerings are difficult to predict. The Company
believes the broadband network also will improve the quality of customer service
and result in greater network efficiency and lower maintenance costs.
MEDIA GROUP.__The Media Group is comprised of: (i) domestic and
international multimedia content and services businesses, (ii) domestic and
international wireless communications network businesses and (iii) cable and
telecommunications network businesses outside of the Communications Group Region
and internationally. The Media Group's multimedia content and services business
develops and packages content and information services, including telephone
directories, database marketing and other interactive services in domestic and
international markets. The Media Group, through NewVector, provides domestic
wireless communications services, including cellular services, to a rapidly
growing customer base. The Media Group also provides wireless communications
services internationally through its joint venture in Mercury Personal
Communications ("Mercury One-2-One"), the world's first PCS service. The Media
Group's cable and telecommunications businesses include the interests in TWE and
the Atlanta Systems, and international cable and telecommunications investments,
including TeleWest.While the Company's central European wireless ventures
generate positive net income and cash flow, most of the Company's international
equity investments are in start-up phases and will not show positive net income
or cash flow until they mature.
V-4
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1994
NET INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
PERCENT -------------------- INCREASE
OWNERSHIP 1995 1994 (DECREASE)
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
COMMUNICATIONS GROUP
U S WEST Communications, Inc........................................... 100 $ 323 $ 297 $ 26
Other.................................................................. 100 (8) (2) (6)
--------- --------- -----
Total Communications Group......................................... 315 295 20
--------- --------- -----
MEDIA GROUP:
Consolidated:
Multimedia content and services...................................... 100 59 60 (1)
Wireless communications.............................................. 100 15 -- 15
Cable and telecommunications......................................... 100 (3) -- (3)
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P. (1).......................... 25.5 (13) (12) (1)
TeleWest Communications plc.......................................... 37.8 (8) (7) (1 )
Mercury One-2-One.................................................... 50.0 (19) (10) (9 )
Other (2).............................................................. (16) (2) (14 )
--------- --------- -----
Total Media Group.................................................. 15 29 (14 )
--------- --------- -----
Net Income............................................................... $ 330 $ 324 $ 6
--------- --------- -----
--------- --------- -----
Earnings per common share................................................ $ .70 $ .73 $ (.03 )
--------- --------- -----
--------- --------- -----
<FN>
- ------------------------------
(1) Percent ownership represents pro-rata priority capital and residual equity
interests.
(2) Includes other unconsolidated equity investments and divisional expenses.
</TABLE>
U S WEST's net income for the first quarter of 1995 was $291, a decrease of
$18, or 5.8 percent, over the first quarter of 1994, excluding gains of $39
($.08 per share) and $15 ($.03 per share) on the sales of certain rural
telephone exchanges in the first quarter of 1995 and 1994, respectively. The
decrease in net income is primarily attributable to expansion of international
ventures, resulting in increased equity losses. Income of the Communications
Group decreased by $4, or 1.4 percent, as compared to first quarter of 1994,
excluding the effects of rural exchange sales.
Earnings per common share for the first quarter of 1995 were $.62 as
compared with $.70 in 1994, excluding the effects of rural exchange sales.
Earnings per share reflects approximately 24 million additional average shares
of Existing Common Stock outstanding at the end of the first quarter of 1995, of
which 12.8 million were issued in connection with the December 1994 purchase of
the Atlanta Systems.
Increased demand for the Company's services resulted in growth in EBITDA of
7.1 percent. The Company considers EBITDA an important indicator of the
operational strength and performance of its businesses. EBITDA, however, should
not be considered as an alternative to operating or net income as an indicator
of the performance of the Company's businesses or as an alternative to cash
flows from operating activities as a measure of liquidity, in each case
determined in accordance with GAAP.
V-5
<PAGE>
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE
(UNAUDITED) LOWER (DECREASE)
-------------------- PRICE (HIGHER) ---------
1995 1994 CHANGE REFUNDS DEMAND OTHER $
--------- --------- ------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
Local service..................... $ 1,050 $ 985 $ 2 $ 9 $ 54 $ -- $ 65
Interstate access................. 589 562 (8) (9) 44 -- 27
Intrastate access................. 188 174 (5) 2 11 6 14
Long-distance network............. 299 351 (9) -- (12) (31) (52)
Other services.................... 192 181 -- -- -- 11 11
--
--------- --------- --- --- --- ---------
Total Communications Group...... 2,318 2,253 (20) 2 97 (14) 65
--
--------- --------- --- --- --- ---------
MEDIA GROUP:
Multimedia content and services... 272 242 30
Wireless communications........... 202 168 34
Cable and telecommunications...... 54 -- 54
Other............................. 8 8 --
--------- --------- ---------
Total Media Group............... 536 418 118
--------- --------- ---------
Intergroup eliminations............. (26) (30) 4
--------- --------- ---------
Total revenues.................. $ 2,828 $ 2,641 $ (20) $ 2 $ 97 $ (14) $ 187
--
--
--------- --------- --- --- --- ---------
--------- --------- --- --- --- ---------
<CAPTION>
%
---------
<S> <C>
COMMUNICATIONS GROUP:
Local service..................... 6.6
Interstate access................. 4.8
Intrastate access................. 8.0
Long-distance network............. (14.8)
Other services.................... 6.1
---------
Total Communications Group...... 2.9
---------
MEDIA GROUP:
Multimedia content and services... 12.4
Wireless communications........... 20.2
Cable and telecommunications...... --
Other............................. --
---------
Total Media Group............... 28.2
---------
Intergroup eliminations............. 13.3
---------
Total revenues.................. 7.1
---------
---------
</TABLE>
The increase in sales and other revenues was primarily due to increased
demand for services at U S WEST Communications, the December 1994 acquisition of
the Atlanta Systems, and continued subscriber growth in the Company's cellular
and multimedia content and services businesses.
COMMUNICATIONS GROUP. Local service revenues at U S WEST Communications
increased in the first quarter of 1995 as compared to the first quarter of 1994
principally as a result of higher demand for services, as evidenced by an
increase of 494,000 access lines, or 3.5 percent, during the last 12 months.
Access line growth was 4.2 percent, as adjusted for the sale of approximately
91,000 rural telephone access lines during the last 12 months.
Higher revenues from interstate access services resulted from an increase of
9.2 percent in interstate billed access minutes of use in the first quarter of
1995 as compared to the first quarter of 1994, which more than offset the
effects of price reductions and refunds.
The impact on U S WEST Communications of multiple toll carrier plans in the
first quarter of 1995 was a decrease of $31 in long-distance revenues as
compared to the first quarter 1994, partially offset by an increase of $6 in
intrastate access revenue, and a decrease of $21 in other operating expenses
(i.e. access expense).
In addition to the effects of multiple toll carrier plans, intrastate access
charges increased as a result of higher demand, while long-distance network
revenues continued to be impacted by competition.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services.
MEDIA GROUP -- MULTIMEDIA CONTENT AND SERVICES. Domestic revenues related
to Yellow Pages directory advertising increased approximately $17, or 7 percent,
in the first quarter of 1995 as compared to the first quarter of 1994, due to
pricing and an increase in Yellow Pages advertising
V-6
<PAGE>
volume. Product enhancements and the effect of improved marketing programs on
business volume
also contributed to the increase in revenues. Non-Yellow Pages revenues
increased by $4 in the first quarter of 1995 as compared to the first quarter of
1994. Partially offsetting this increase was the effect of the sale of certain
software development and marketing operations, which had contributed
approximately $5 to revenues in the first quarter of 1994. International
directory publishing revenue increased by $14 in the first quarter of 1995 as
compared to the first quarter of 1994, primarily due to the May 1994 purchase of
Thomson Directories Limited ("Thomson Directories").
MEDIA GROUP -- WIRELESS COMMUNICATIONS. Cellular service revenues increased
by $53, or 40.2 percent, in the first quarter of 1995 as compared to the first
quarter of 1994 due to a 58 percent increase in subscribers during the last
twelve months, partially offset by an 11 percent decrease in average revenue per
subscriber to $62 per month at March 31, 1995. The increase in subscribers
relates to lower costs for cellular phone equipment and enhanced service
offerings, which has resulted in a shift in the wireless customer base from
businesses to consumers. The decrease in average revenue per subscriber is due
to the continuing effects of nonbusiness user market penetration.
Cellular equipment revenues decreased by $5, or 22.7 percent, in the first
quarter of 1995 as compared to the first quarter of 1994 primarily due to a 20
percent decrease in unit sales. Equipment sales in the first quarter of 1994
were unusually strong due to a shortage of available inventory in December 1993.
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $14 in the first quarter of 1994.
MEDIA GROUP -- CABLE AND TELECOMMUNICATIONS. Domestic cable and
telecommunications revenues reflect the December 1994 acquisition of the Atlanta
Systems.
COSTS AND EXPENSES
Consolidated employee-related expenses increased by $67, or 7.4 percent, for
the first quarter of 1995 as compared to the first quarter of 1994.
Approximately $45 of this increase is a result of overtime payments and contract
labor related to customer service and streamlining initiatives at U S WEST
Communications, partially offset by lower health-care and other employee benefit
costs. The remainder of the increase is primarily attributable to the 1994
acquisitions of the Atlanta Systems and Thomson Directories.
Consolidated other operating expenses increased by $33, or 6.9 percent, for
the first quarter of 1995 as compared to the first quarter of 1994. The 1994
acquisitions of the Atlanta Systems and Thomson Directories increased other
operating expenses by $31. An increase in selling costs of $13 related to
expansion of the cellular customer base also contributed to the increase in
other operating expenses. Partially offsetting these cost increases were the
multiple toll carrier plan effects on other operating expenses at U S WEST
Communications.
Increased depreciation and amortization expense was primarily attributable
to the effects of a higher depreciable asset base at U S WEST Communications and
the acquisition of the Atlanta Systems.
Equity losses in unconsolidated ventures increased primarily due to
increased network expansion costs at Mercury One-2-One.
Interest expense increased as a result of higher rates on short-term
commercial paper at U S WEST Communications and the acquistion of the Atlanta
Systems, which was partially financed through the issuance of short-term debt.
The effective tax rate was 38.7 percent in the first quarter of 1995 as
compared to an effective tax rate of 37.9 percent in the first quarter of 1994.
The increase is primarily attributable to the effects of the amortization of
intangible assets and goodwill associated with the Atlanta Systems acquisition.
V-7
<PAGE>
PROGRESS UNDER THE RESTRUCTURING PLAN:
The following is a schedule of progress under the 1993 Restructuring Plan
(the "Restructuring Plan") in the first quarter of 1995:
<TABLE>
<CAPTION>
RESERVE BALANCE RESERVE BALANCE
DECEMBER 31, 1994 1995 ACTIVITY MARCH 31, 1995
------------------- --------------- -----------------
<S> <C> <C> <C>
Employee separations
Managerial.................................................... $ 75 $ 4 $ 71
Occupational.................................................. 136 9 127
----- --- -----
Total separations........................................... 211 13 198
Systems development
Service delivery.............................................. 52 3 49
Service assurance............................................. 52 7 45
Capacity provisioning......................................... 122 24 98
All other..................................................... 47 3 44
----- --- -----
Total systems............................................... 273 37 236
Real estate..................................................... 80 22 58
Relocation...................................................... 89 5 84
Retraining and other............................................ 49 5 44
----- --- -----
Total........................................................... $ 702 $ 82 $ 620
----- --- -----
----- --- -----
</TABLE>
<TABLE>
<CAPTION>
TOTAL
1994 SEPARATIONS 1995 SEPARATIONS SEPARATIONS
---------------- ----------------- ----------------
<S> <C> <C> <C>
Employee separations
Managerial................................................ 497 125 622
Occupational.............................................. 1,683 491 2,174
------- ----- -------
Total....................................................... 2,180 616 2,796
------- ----- -------
------- ----- -------
</TABLE>
1994 COMPARED WITH 1993
NET INCOME (LOSS)
<TABLE>
<CAPTION>
1994 (1) 1993 (2) INCREASE
--------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations................................................. $ 1,426 $ 476 $ 950
Loss from discontinued operations................................................. -- (82) 82
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax....................................... -- (3,123) 3,123
Early extinguishment of debt, net of tax........................................ -- (77) 77
--------- --------- ---------
Net income (loss)................................................................. $ 1,426 $ (2,806) $ 4,232
--------- --------- ---------
--------- --------- ---------
Earnings per common share from continuing operations.............................. $ 3.14 $ 1.13 $ 2.01
Loss per common share from discontinued operations................................ -- (.19) .19
Extraordinary items:
Discontinuance of SFAS No. 71................................................... -- (7.45) 7.45
Early extinguishment of debt.................................................... -- (.18) .18
--------- --------- ---------
Income (loss) per common share.................................................... $ 3.14 $ (6.69) $ 9.83
--------- --------- ---------
--------- --------- ---------
<FN>
- ------------------------
(1) 1994 income from continuing operations includes a gain of $105, or $.23 per
share, from the sale of 24.4 percent of U S WEST's joint venture interest
in cable television/telephone operations in the United Kingdom (TeleWest),
a gain of $41, or $.09 per share, on the sale of the company's paging
operations and a gain of $51, or $.11 per share, on the sale of certain
rural telephone exchanges.
(2) 1993 income from continuing operations was reduced by $610, or $1.46 per
share, for a restructuring charge and $54, or $.13 per share, for the
cumulative effect on deferred taxes of the 1993 federally mandated increase
in income tax rates.
</TABLE>
V-8
<PAGE>
In 1994, U S WEST income from continuing operations and related earnings per
common share ("earnings per share") were $1,426 and $3.14, respectively.
Included in 1994 results are one-time, after-tax gains described in note (1) to
the table above. Excluding these gains, income from continuing operations and
related earnings per share were $1,229 and $2.71, respectively. In 1993, income
from continuing operations was $476, or $1.13 per share, including the effects
of one-time charges described in note (2) to the table above. Excluding the
one-time effects, 1993 income from continuing operations and related earnings
per share were $1,140 and $2.72, respectively. As normalized for one-time
effects, 1994 income from continuing operations increased $89, or 7.8 percent,
and related earnings per share decreased $.01 on an 8.1 percent increase in
average shares outstanding. The increase in normalized income from continuing
operations is primarily attributable to increased demand for telecommunications
and domestic wireless services, partially offset by increased start-up losses
associated with developing businesses.
In 1993, U S WEST discontinued the operations of its capital assets segment.
Also in 1993, the company incurred extraordinary charges for the discontinuance
of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," and
the early extinguishment of debt. See further discussion in "1993 Compared with
1992."
Revenue growth, partially offset by higher operating expenses, provided a
7.8 percent increase in the Company's EBITDA. EBITDA also excludes equity losses
in unconsolidated ventures, gains on sales of assets, restructuring charges and
other income. The Company considers EBITDA an important indicator of the
operational strength and performance of its businesses.
INCOME FROM CONTINUING OPERATIONS -- COMMUNICATIONS GROUP AND MEDIA GROUP
<TABLE>
<CAPTION>
PERCENT INCREASE
OWNERSHIP 1994(1) 1993(2) (DECREASE)
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
U S WEST Communications, Inc.................................... 100 $ 1,175 $ 435 $ 740
Other........................................................... 100 (25) (44) 19
----------- ----- -----
Total Communications Group.................................. 1,150 391 759
----------- ----- -----
MEDIA GROUP:
Consolidated:
Multimedia content and services............................... 100 247 220 27
Wireless communications....................................... 100 67 (43) 110
Cable and telecommunications.................................. 100 (2) -- (2)
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P. (3)................... 25.5 (30) (19) (11)
TeleWest Communications plc................................... 37.8 76 (21) 97
Mercury One-2-One............................................. 50.0 (58) (22) (36)
Other (4)....................................................... (24) (30) 6
----------- ----- -----
Total Media Group........................................... 276 85 191
----------- ----- -----
Income from continuing operations................................. $ 1,426 $ 476 $ 950
----------- ----- -----
----------- ----- -----
<FN>
- ------------------------
(1) 1994 income from continuing operations includes a gain of $105 from the
sale of 24.4 percent of U S WEST's joint venture interest in TeleWest, a
gain of $41 for the sale of the company's paging operations and a gain of
$51 for the sale of certain rural telephone exchanges.
(2) 1993 income from continuing operations was reduced by $610 for a
restructuring charge and $54 for the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates.
(3) Percent ownership represents pro-rata priority capital and residual equity
interests.
(4) Includes other unconsolidated equity investments and divisional expenses.
</TABLE>
V-9
<PAGE>
COMMUNICATIONS GROUP. During 1994, income from the Communications Group
increased to $1,099, excluding the gain on the sale of certain rural telephone
exchanges. This represents a 1994 increase of $120, or 12.3 percent, also
excluding the effects of a 1993 restructuring charge and the cumulative effect
in 1993 of higher income tax rates. As normalized, the increase is attributable
to higher demand for telephone services, including the effects of strong growth
in access lines. During 1994, business access lines grew by 4.6 percent compared
with 3.1 percent for consumer lines. Total access line growth in 1994 was 3.6
percent. Excluding the effects of the sale of certain rural telephone exchanges,
total access lines grew by 4.0 percent in 1994.
MEDIA GROUP -- MULTIMEDIA CONTENT AND SERVICES. Increased multimedia
content and services revenues were partially offset by higher costs for
developing new products. Funding of new products and other growth initiatives in
publishing and other marketing services operations offset growth in core Yellow
Pages operations. Income related to Yellow Pages operations continues to grow
due to increased business volume and higher prices. The Company anticipates that
accelerated investments in new products and services in 1995 will more than
offset expected income growth related to the Yellow Pages business.
MEDIA GROUP -- WIRELESS COMMUNICATIONS. Domestic cellular communications
income increased by $24 over 1993, excluding the gain on the sale of the
Company's paging operations and a $45 restructuring charge in 1993. The increase
is due to the addition of 367,000 subscribers in 1994, a 61 percent increase
over 1993. Additionally, cellular service EBITDA increased by $57, or 46
percent, over 1993. U S WEST anticipates continued growth in income and cash
flows from domestic wireless operations as the customer base expands.
MEDIA GROUP -- CABLE AND TELECOMMUNICATIONS. The December 1994 acquisition
of the Atlanta Systems did not have a material impact on 1994 income. The
Company anticipates that the acquisition will dilute 1995 earnings per share by
approximately 5 to 6 percent.
MEDIA GROUP -- UNCONSOLIDATED EQUITY INVESTMENTS. The majority of U S
WEST's international equity investments relates to ventures in the United
Kingdom. These include TeleWest and Mercury One-2-One. These businesses are
experiencing rapid growth, and will continue to incur near-term start-up losses
related to expansion of the customer base at Mercury One-2-One and build out of
the network at TeleWest.
Cable television subscribers of TeleWest and its affiliates increased 42
percent to 320,000 at year-end 1994, and telephone access lines increased 94
percent to 271,000. Subscribers to U S WEST's international wireless joint
venture operations in the United Kingdom, Hungary, the Czech Republic, Slovakia
and Russia grew to 367,000 in 1994, nearly three times the customer base of the
prior year. Subscribers to other European cable television ventures totaled
586,000 at December 31, 1994.
TWE partnership losses increased over the previous year primarily due to the
full-year impact (including financing costs) of the Company's investment, as
compared with three months in 1993. The effects of lower prices for cable
services also contributed to the higher loss in 1994.
In early 1995, Time Warner Inc. announced its intention to simplify its
corporate structure by establishing a separate, self-financing enterprise to
house its cable and telecommunications properties. Any change in the structure
of TWE would require the approval of U S WEST and its TWE partners.
V-10
<PAGE>
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------------
1994 1993 $ %
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
Local service..................................................... $ 4,067 $ 3,829 $ 238 6.2
Access charges -- interstate...................................... 2,269 2,147 122 5.7
Access charges -- intrastate...................................... 729 682 47 6.9
Long-distance network service..................................... 1,329 1,442 (113) (7.8)
Other services.................................................... 782 770 12 1.6
--------- --------- ----------- ---
Total Communications Group...................................... 9,176 8,870 306 3.4
MEDIA GROUP:
Multimedia content and services................................... 1,075 956 119 12.4
Wireless communications........................................... 781 561 220 39.2
Cable and telecommunications...................................... 18 -- 18 --
Other............................................................. 34 32 2 6.2
--------- --------- ----------- ---
Total Media Group............................................... 1,908 1,549 $ 359 23.2
--------- --------- ----------- ---
Intergroup eliminations........................................... (131) (125) (6) 4.8
--------- --------- ----------- ---
Total revenues...................................................... $ 10,953 $ 10,294 $ 659 6.4
--------- --------- ----------- ---
--------- --------- ----------- ---
</TABLE>
COMMUNICATIONS GROUP. U S WEST Communications accounts for approximately 98
percent of the Communications Group's business revenues and 82 percent of the
total revenues of U S WEST. Approximately 58 percent of U S WEST Communications'
revenues are derived in the states of Arizona, Colorado, Minnesota and
Washington. The primary factors that influence changes in revenues at U S WEST
Communications are customer demand for products and services (through access
line growth and new service offerings), and regulatory proceedings, including
price changes and customer refunds. The following is an analysis of the change
in U S WEST Communications' revenues:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
PRICE REFUND -----------
CHANGES ACTIVITY DEMAND OTHER $
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Local service.......................................... $ (12) $ 30 $ 216 $ 4 $ 238
Access charges -- interstate........................... (39) 18 148 (5) 122
Access charges -- intrastate........................... (10) (4) 51 10 47
Long-distance network service.......................... (8) 1 (43) (63) (113)
<CAPTION>
%
-----------
<S> <C>
Local service.......................................... 6.2
Access charges -- interstate........................... 5.7
Access charges -- intrastate........................... 6.9
Long-distance network service.......................... (7.8)
</TABLE>
Local service revenues include local telephone exchange, local private line
and public telephone services. The increase in local service revenues was
primarily attributable to access line growth, which exceeded 5 percent in the
states of Arizona, Colorado, Idaho and Utah.
Access charges are collected primarily from the interexchange carriers for
their use of the local exchange network. For interstate access services, there
is also a fee collected directly from telephone customers. Approximately 35
percent of U S WEST Communications' access revenues and 13 percent of its total
revenues are derived from providing access service to AT&T Corp. ("AT&T"). An
increase of 7.8 percent in interstate billed access minutes of use more than
offset the effects of price decreases. Interstate price reductions have been
phased in by the FCC over a number of years. In response to competitive pressure
and FCC orders, U S WEST Communications reduced its annual interstate access
prices by approximately $40 during 1994, in addition to $60, effective July 1,
1993. The Company believes access prices will continue to decline, whether
mandated by the FCC or as a result of an increasingly competitive market for
access services. Intrastate access charges increased primarily as a result of
higher demand. Intrastate minutes of use grew by 13 percent in 1994. Demand for
private line services, for which revenues are generally not usage-sensitive,
also increased.
V-11
<PAGE>
Long-distance network service revenues are derived from calls made within
the Local Access and Transport Areas ("LATAs") of U S WEST Communications.
Long-distance revenues decreased principally due to the effects of multiple toll
carrier plans implemented in Oregon and Washington in May and July 1994,
respectively. These regulatory arrangements allow independent telephone
companies to act as toll carriers. The impact on U S WEST Communications in 1994
was a loss of $68 in long-distance revenue, partially offset by a decrease of
$48 in other operating expenses (i.e. access expense otherwise paid to
independent companies) and an increase of $10 in intrastate access revenue.
These regulatory arrangements decreased net income by approximately $6 in 1994
and will decrease 1995 income by $10 to $12.
Competition from interexchange carriers continues to erode U S WEST
Communications' market share of intraLATA long-distance services such as Wide
Area Telephone Service and "800." These revenues have declined over the last
several years as customers have migrated to interexchange carriers that have the
ability to offer these services on both an intraLATA and interLATA basis. U S
WEST and its affiliates are prohibited from providing interLATA long-distance
services.
Other services revenues are derived from billing and collection services
provided to interexchange carriers, and new services such as voice messaging.
Other services revenues increased 1.6 percent in 1994 due to higher revenue from
these billing and collection services and continued market penetration of new
service offerings. Voice messaging, for example, is now four years old with an
installed customer base of approximately 885,000, compared with 690,000 in 1993.
Partially offsetting the increase in other services revenues was the 1993 sale
of telephone equipment distribution operations and completion of large telephone
network installation contracts.
MEDIA GROUP -- MULTIMEDIA CONTENT AND SERVICES. Revenue from multimedia
content and services operations increased 15 percent in 1994, excluding the
sales of certain publishing, and software development and marketing operations.
The increase is attributable to both price and volume increases and the
Company's May 1994 purchase of Thomson Directories.
____MEDIA GROUP -- CABLE AND TELECOMMUNICATIONS.__Domestic cable revenues
reflect the December 1994 acquisition of the Atlanta Systems.
MEDIA GROUP -- WIRELESS COMMUNICATIONS. Domestic wireless revenues
increased as a result of the 61 percent growth in the cellular customer base,
partially offset by the effects of the 1994 sale of the paging operations that
reduced revenues by $27. The customer growth reflects increased penetration and
a strengthening of the retail distribution network. The cellular customer base
is expected to continue its rapid growth, though rates of growth will be
affected by consumer demand, market positioning by the Company and increased
competition in coming years. Average cellular revenues declined by approximately
8 percent during 1994 to approximately $70 per subscriber, per month.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses...................................... $ 3,779 $ 3,584 $ 195 5.4
Other operating expenses....................................... 2,203 2,065 138 6.7
Taxes other than income taxes.................................. 412 417 (5) (1.2)
Depreciation and amortization.................................. 2,052 1,955 97 5.0
Restructuring charge........................................... -- 1,000 (1,000) --
Interest expense............................................... 442 439 3 0.7
Equity losses in unconsolidated ventures....................... 121 74 47 63.5
Other income (expense) -- net.................................. 25 (15) 40 --
</TABLE>
Employee-related expenses include basic salaries and wages, overtime,
contract labor, benefits (including pension and health care) and payroll taxes.
A reduction in the pension credit of approximately $80 contributed to the
increase in employee-related expenses. Actuarial assumptions, which
V-12
<PAGE>
include decreases in the discount rate and the expected long-term rate of return
on plan assets, contributed to the pension credit reduction. Approximately $150
for overtime payments, contract labor and basic salaries and wages, all related
to the implementation of major customer service and streamlining initiatives at
U S WEST Communications, also contributed to the increase. Additionally,
employee-related expenses at the Company's publishing operations increased in
connection with new product initiatives. Partially offsetting these increases
were the effects of employees leaving the company under the restructuring
program, lower health-care benefit costs, including a reduction in the accrual
for postretirement benefits, and lower incentive compensation payments to
employees.
During the summer of 1994, increased customer demand at U S WEST
Communications put additional stress on current processes and systems, and
affected the quality of customer service in certain markets. The pace of U S
WEST Communications' restructuring program also contributed to quality of
service issues. However, the issues pertaining to quality of service underscore
the need to re-engineer the business. The Company achieved target levels of
service at year end by implementing customer service initiatives and slowing the
pace of its restructuring program. To continue improving upon the level of
service quality achieved by year-end 1994, the Company will incur additional
near-term costs for temporary employees, overtime and contract labor. The
Company also will stretch out its 1993 Restructuring Plan an additional year, to
1997. As a result of these actions, the annual benefits related to restructuring
will not be fully realized until 1998. See "-- Restructuring Charges."
Other operating expenses include access charges (incurred by U S WEST
Communications for the routing of its long-distance traffic through the
facilities of independent companies), network software expenses, wireless
marketing and operating costs, and marketing and related costs associated with
publishing activities. Selling and other operating costs related to growth in
the cellular subscriber base increased approximately $166 in 1994. Partially
offsetting this increase was the $48 decrease in access expense related to the
effects of the new multiple toll carrier plan arrangements. See the long-
distance network service discussion in "-- Sales and Other Revenues."
The increase in depreciation and amortization expense was primarily a result
of a higher depreciable asset base and increased rates of depreciation at U S
WEST Communications. The Company's discontinuance of SFAS No. 71 in September
1993 has resulted in the use of shorter asset lives (for financial reporting
purposes) to more closely reflect the economic lives of telephone plant. U S
WEST Communications continues to pursue improved capital recovery within the
regulated environment.
Interest expense in 1994 was essentially unchanged from 1993. Incremental
financing costs associated with the September 1993 TWE investment were offset by
the effects of refinancing debt at lower rates in 1993 at U S WEST
Communications, and a reclassification of capitalized interest in 1994. Since
the discontinuance of SFAS No. 71, interest capitalized as a component of
telephone plant construction is recorded as an offset to interest expense,
rather than to other income (expense). U S WEST's average borrowing cost
decreased to 6.6 percent, from 6.7 percent in 1993.
Equity losses related to developing businesses increased over 1993,
primarily due to the build out of the network and the expansion of the customer
base at Mercury One-2-One.
Other income increased over 1993 primarily due to an increase in the
management fee associated with the Company's TWE investment and a gain on the
sale of certain publishing operations, partially offset by the reclassification
of capitalized interest to interest expense.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
--------------------
%
1994 1993 $ --
--------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes.............................................. $ 857 $ 269 $ 588 --
Effective tax rate...................................................... 37.5% 36.1% -- --
</TABLE>
V-13
<PAGE>
The increase in the effective tax rate resulted primarily from the effects
of discontinuing SFAS No. 71, an increase in 1994 income before income taxes and
the 1993 restructuring charge, partially offset by the cumulative effect on
deferred income taxes of the 1993 federally mandated increase in income tax
rates.
RESTRUCTURING CHARGES
The Company's 1993 results reflect a $1 billion restructuring charge
(pretax). The related Restructuring Plan is designed to provide faster, more
responsive customer services while reducing the costs of providing these
services. As part of the Restructuring Plan, the Company is developing new
systems that will enable it to monitor networks to reduce the risk of service
interruptions, activate telephone service on demand, provide automated inventory
systems and centralize its service centers so that customers can have their
telecommunications needs resolved with one phone call. The Company is
consolidating its existing 560 customer service centers into 26 centers in 10
cities and reducing its total work force by approximately 9,000 employees
(including the remaining employee reductions associated with the restructuring
plan announced in 1991).
Implementation of the Restructuring Plan is expected to extend into 1997,
rather than being completed in 1996 as originally scheduled. Implementation
schedules are driven by customer demand and related service issues, concerns
with system stability as major customer impacting systems are integrated, and
staffing agreements negotiated with the Company's unions. These changes do not
alter the Company's plan to fundamentally re-engineer the way it conducts
business in the emerging competitive environment. The total cash expenditures of
$935 under the Restructuring Plan remain unchanged.
The following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
-------------------- -------------------------------
1993 1994 1995 1996 1997 TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cash expenditures:
Employee separation......................................... $ -- $ 19 $ 62 $ 75 $ 74 $ 230
Systems development......................................... -- 127 144 129 -- 400
Real estate................................................. -- 50 80 -- -- 130
Relocation.................................................. -- 21 54 4 31 110
Retraining and other........................................ -- 16 19 10 20 65
--------- --------- --------- --------- --------- ---------
Total cash expenditures....................................... -- 233 359 218 125 935
Asset write-down.............................................. 65 -- -- -- -- 65
--------- --------- --------- --------- --------- ---------
Total Restructuring Plan...................................... 65 233 359 218 125 1,000
--------- --------- --------- --------- --------- ---------
Remaining 1991 plan employee costs............................ -- 56 -- -- -- 56
--------- --------- --------- --------- --------- ---------
Total (1)................................................. $65 $ 289 $ 359 $ 218 $ 125 $ 1,056
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
- ------------------------
(1) The Restructuring Plan also provides for capital expenditures of $490 over
the life of the Restructuring Plan. In 1994, capital expenditures related
to restructuring were $265.
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Systems development costs include the
replacement of existing, single-purpose systems with new systems designed to
provide integrated, end-to-end customer service. The work-force reductions would
not be possible without the development and installation of the new systems,
which will eliminate the current, labor-intensive interfaces between existing
processes. Real estate costs include preparation costs for the new service
centers. The relocation and retraining costs are related to moving employees to
the new service centers and retraining employees on the methods and systems
required in the new, restructured mode of operation.
V-14
<PAGE>
The Company estimates that full implementation of the Restructuring Plan
will reduce employee-related expenses by approximately $400 per year. These
savings are expected to be offset by the effects of inflation.
EMPLOYEE SEPARATION. The following estimates of employee separations and
related amounts reflect the extension of employee reductions into 1997.
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- -------------------------------
1994 1994 (2) 1995 1996 1997 TOTAL
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separations (1)
Managerial............................................. 1,061 497 814 580 559 2,450
Occupational........................................... 1,887 1,683 1,136 1,845 1,886 6,550
----- ----- --------- --------- --------- ---------
Total................................................ 2,948 2,180 1,950 2,425 2,445 9,000
----- ----- --------- --------- --------- ---------
----- ----- --------- --------- --------- ---------
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- -------------------------------
1994 1994 (2) 1995 1996 1997 TOTAL
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separation amounts (1)
Managerial............................................. $ 25 $ 5 $ 30 $ 24 $ 21 $ 80
Occupational........................................... 15 14 32 51 53 150
----- ----- --------- --------- --------- ---------
Total................................................ 40 19 62 75 74 230
Remaining 1991 reserve................................... 56 56 -- -- -- 56
----- ----- --------- --------- --------- ---------
Total................................................ $ 96 $ 75 $ 62 $ 75 $ 74 $ 286
----- ----- --------- --------- --------- ---------
----- ----- --------- --------- --------- ---------
<FN>
- ------------------------
(1) The "network" and "all other" categories previously displayed are no longer
used in this schedule due to the changes in organizational boundaries
occurring as a result of re-engineering. The new consolidated service
centers consist of employees grouped by processes rather than by
organization.
(2) Includes the remaining employees and the separation amounts associated with
the balance of the 1991 restructuring reserve at December 31, 1993.
</TABLE>
As a result of extending the Restructuring Plan into 1997, employee
separations and separation amounts shown above have been reduced by 1,519 and
$41 in 1995, and 175 and $12 in 1996, respectively, and increased by 2,445 and
$74, respectively, in 1997.
SYSTEMS DEVELOPMENT. U S WEST Communications' existing information
management systems were largely developed to support analog technology in a
monopoly environment. These systems are increasingly inadequate due to the
effects of increased competition, new forms of regulation and changing
technology that have driven consumer demand for new services that can be
delivered quickly, reliably and economically. The sequential systems currently
in place are slow, labor-intensive and costly to maintain, and often cannot be
adapted to support new product and service offerings, including future
multimedia services envisioned by U S WEST.
The systems re-engineering program in place involves development of new
systems for the following core processes:
Service delivery -- to support service on demand for all products and
services, including repair. These systems will permit one customer service
representative to handle all facets of a customer's requirements as contrasted
to the numerous points of customer interface required today.
Service assurance -- for performance monitoring from one location and remote
testing in the new environment, including identification and resolution of
faults prior to customer impact, and one-system dispatch environment.
Capacity provisioning -- for integrated planning of future network capacity,
including the installation of software controllable service components.
V-15
<PAGE>
The direct, incremental and non-recurring systems development costs
contained in the Restructuring Plan follow:
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- --------------------
1994 1994 1995 1996 TOTAL
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service delivery............................................ $ 35 $ 21 $ 15 $ 37 $ 73
Service assurance........................................... 45 12 17 35 64
Capacity provisioning....................................... 17 57 92 30 179
All other................................................... 28 37 20 27 84
----- ----- --------- --------- ---------
Total................................................... $ 125 $ 127 $ 144 $ 129 $ 400
----- ----- --------- --------- ---------
----- ----- --------- --------- ---------
</TABLE>
Original estimates of system expenditures in 1995 and 1996 were $150 and
$125, respectively. Though current estimates in total are not materially
different, the timing and amount of expenditures by category has changed.
The majority of systems development labor will be supplied through the use
of temporary employees, contractors and new employees with special skills. While
it is likely that a small number of the new employees will be retained after
completion of the Restructuring Plan due to their specialized skills, it is
planned that any related increase in headcount will be offset through other
employee reductions.
Systems expenses charged to current operations at U S WEST Communications
consist of all costs associated with the information management function,
including planning, developing, testing and maintaining databases for general
purpose computers, in addition to systems costs related to maintenance of
telephone network applications. The key related administrative (i.e. general
purpose) systems include customer service, order entry, billing and collection,
accounts payable, payroll, human resources and property records. Ongoing systems
costs comprised approximately six percent of total operating expenses at U S
WEST Communications in 1994, 1993 and 1992. U S WEST Communications expects
systems costs charged to current operations as a percent of total operating
expenses to approximate the current level throughout the life of the
Restructuring Plan. However, systems costs could increase relative to other
operating costs as the business becomes more technology dependent.
PROGRESS UNDER THE RESTRUCTURING PLAN. Following is a schedule of progress
achieved under the Restructuring Plan in 1994:
<TABLE>
<CAPTION>
EXPENDITURES ESTIMATE ACTUAL
- ------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Employee separation.................................................................. $ 96 $ 75
Systems development.................................................................. 125 127
Real estate.......................................................................... 119 50
Relocation........................................................................... 70 21
Retraining and other................................................................. 36 16
----- -----
Total............................................................................ $ 446 $ 289
----- -----
----- -----
</TABLE>
The Company anticipated Restructuring Plan expenditures of approximately
$446 in 1994. However, the Company slowed the pace of its restructuring
implementation to address issues pertaining to the quality of service.
The Company's 1991 restructuring plan included a pretax charge of $364 due
to planned work-force reductions and the write-off of certain intangible and
other assets. The portion of the 1991 restructuring charge related to work-force
reductions was $240, and covered approximately 6,000 employees. All expenditures
and work-force reductions associated with the 1991 plan were completed by the
end of 1994.
RECENT TRANSACTIONS
On July 25, 1994, AirTouch and U S WEST announced an agreement to combine
their domestic cellular operations. The joint venture will have a presence in
nine of the top 20 cellular markets in the
V-16
<PAGE>
country. The initial equity ownership of the wireless joint venture will be
approximately 70 percent AirTouch and 30 percent U S WEST. However, the
companies will share governance responsibilities. This joint venture will
provide U S WEST with an expanded wireless presence and economies of scale. The
transaction is expected to close in second quarter 1995 after obtaining federal
and state regulatory approvals. Each company's cellular operations initially
will continue operating as separate entities owned by the individual partners,
but will receive support services on a contract basis from a joint wireless
management company.
The merger of the two companies' domestic cellular operations will take
place upon the earlier of four years from July 25, 1994, the lifting of certain
MFJ restrictions, or at AirTouch's option. The agreement gives U S WEST
strategic flexibility, including the right to exchange its interest in the joint
venture for up to 19.9 percent of AirTouch common stock, with any excess amounts
to be received in the form of AirTouch non-voting preferred stock. A partnership
committee, led by the president and chief operating officer of AirTouch and
three other AirTouch representatives, three U S WEST representatives and one
mutually agreed upon independent representative will oversee the companies'
combined domestic cellular operations.
1993 COMPARED WITH 1992
NET INCOME (LOSS)
<TABLE>
<CAPTION>
INCREASE
1993 (1) 1992 (DECREASE)
--------- --------- -----------
<S> <C> <C> <C>
Income from continuing operations.............................................. $ 476 $ 1,076 $ (600)
Income (loss) from discontinued operations..................................... (82) 103 (185)
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax.................................... (3,123) -- (3,123)
Early extinguishment of debt, net of tax..................................... (77) -- (77)
Cumulative effect of change in accounting principles........................... -- (1,793) 1,793
--------- --------- -----------
Net loss....................................................................... $ (2,806) $ (614) $ (2,192)
--------- --------- -----------
--------- --------- -----------
Earnings per common share from continuing operations........................... $ 1.13 $ 2.61 $ (1.48)
Earnings (loss) per common share from discontinued operations.................. (.19) .25 (.44)
Extraordinary items:
Discontinuance of SFAS No. 71................................................ (7.45) -- (7.45)
Early extinguishment of debt................................................. (.18) -- (.18)
Cumulative effect of change in accounting principles........................... -- (4.35) 4.35
--------- --------- -----------
Loss per common share.......................................................... $ (6.69) $ (1.49) $ (5.20)
--------- --------- -----------
--------- --------- -----------
<FN>
- ------------------------
(1) 1993 income from continuing operations was reduced by $610, or $1.46 per
share, for a restructuring charge, and $54, or $.13 per share, for the
cumulative effect on deferred taxes of the 1993 federally mandated increase
in income tax rates.
</TABLE>
In 1993, income from continuing operations was $476, including the items in
note (1) to the table above. Excluding these one-time effects, 1993 income from
continuing operations and related earnings per share were $1,140 and $2.72,
respectively. As normalized, 1993 income from continuing operations increased
$64, or 6.0 percent, over 1992 and related earnings per share increased $.11, or
4.2 percent. The increase was primarily attributable to improvements in
telephone, domestic cellular and publishing operations, and lower financing
costs, partially offset by increased losses associated with developing
businesses.
During 1993, the Board approved a plan to dispose of the capital assets
segment, which includes activities related to financial services, financial
guarantee insurance operations and real estate. Prior to January 1, 1995, the
capital assets segment was accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30, which provides for
the reporting of the operating results of discontinued operations separately
from continuing operations. The Company recorded a provision of $100 (after
tax), or $.24 per share, for the estimated loss on disposal of the
V-17
<PAGE>
discontinued operations and an additional provision of $20 to reflect the
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates. Income from discontinued operations to June 1, 1993, was $38,
net of $15 in income taxes. Income from discontinued operations subsequent to
June 1, 1993, is being deferred and was included within the provision for loss
on disposal of the capital assets segment.
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93. issued by the Commission,
which requires discontinued operations not disposed of within one year of the
measurement date to be accounted for prospectively in continuing operations as a
net investment in assets held for sale. The net realizable value of the assets
will be reevaluated on an ongoing basis with adjustments to the existing
reserve, if any, being charged to continuing operations.
An extraordinary, non-cash charge of $3.1 billion (after tax) was incurred
in conjunction with U S WEST's decision to discontinue accounting for the
operations of U S WEST Communications in accordance with SFAS No. 71. SFAS No.
71 generally applies to regulated companies that meet certain requirements,
including a requirement that a company be able to recover its costs, competition
notwithstanding, by charging its customers at prices established by its
regulators. U S WEST's decision to discontinue the application of SFAS No. 71
was based on the belief that competition, market conditions and technological
advances, more than prices established by regulators, will determine the future
cost recovery by U S WEST Communications. As a result of this change, the
remaining asset lives of U S WEST Communications' telephone plant were shortened
to more closely reflect the useful (economic) lives of such plant. U S WEST
Communications' accounting and reporting for regulatory purposes were not
affected by the change.
During 1993, U S WEST Communications refinanced long-term debt issues
aggregating $2.7 billion in principal amount. These refinancings allowed the
Company to take advantage of favorable interest rates. Extraordinary costs
associated with the redemptions reduced 1993 income by $77 (after tax).
The accounting change in 1992 relates to two accounting standards issued by
the Financial Accounting Standards Board. The first is SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," which mandates that
employers reflect in their current expenses an accrual for the cost of providing
retirement medical and life insurance benefits to current and future retirees.
Prior to 1992, U S WEST, like most corporations, recognized these costs as they
were paid. U S WEST also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." SFAS No. 112 requires that employers accrue for the
estimated costs of benefits, such as workers' compensation and disability,
provided to former or inactive employees who are not eligible for retirement.
Adoption of SFAS Nos. 106 and 112 resulted in a one-time, non-cash charge
against 1992 earnings of $1,793, net of tax, including $53 related to SFAS No.
112.
Revenue growth and continued cost controls in 1993 resulted in a 6.7 percent
increase in EBITDA, excluding the effects of the 1993 restructuring charge.
V-18
<PAGE>
INCOME FROM CONTINUING OPERATIONS -- COMMUNICATIONS GROUP AND MEDIA GROUP
<TABLE>
<CAPTION>
PERCENT INCREASE
OWNERSHIP 1993 (1) 1992 (DECREASE)
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
U S West Communications, Inc....................................... 100 $ 435 $ 950 $ (515)
Other.............................................................. 100 (44 ) (20) (24 )
----- --------- -----------
Total Communications Group..................................... 391 930 (539 )
----- --------- -----------
MEDIA GROUP:
Consolidated:
Multimedia content and services.................................. 100 220 225 (5 )
Wireless communications.......................................... 100 (43 ) (17) (26 )
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P. (2)...................... 25.5 (19 ) -- (19 )
TeleWest Communications plc...................................... 50.0 (21 ) (13) (8 )
Mercury One-2-One................................................ 50.0 (22 ) (9) (13 )
Other (3).......................................................... (30 ) (40) 10
----- --------- -----------
Total Media Group.............................................. 85 146 (61 )
----- --------- -----------
Income from continuing operations.................................. $ 476 $ 1,076 $ (600 )
----- --------- -----------
----- --------- -----------
<FN>
- ------------------------
(1) 1993 income from continuing operations was reduced by $610 for a
restructuring charge, and $54 for the cumulative effect on deferred taxes
of the 1993 federally mandated increase in income tax rates.
(2) Percent ownership represents pro-rata priority capital and residual equity
interests.
(3) Includes other unconsolidated equity investments and divisional expenses.
</TABLE>
During 1993, Communications Group income increased to $979, excluding the
effects of the 1993 restructuring charge and the cumulative effect in 1993 of
the increase in income tax rates. This represents an increase of $49, or 5.3
percent, over 1992. The increase is attributable to higher demand for telephone
services, including the effects of growth in access lines, and continued cost
controls, partially offset by lower prices.
The loss from developing businesses increased as a result of the Company's
1993 TWE investment and higher losses associated with international ventures.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
Local service............................................................. $ 3,829 $ 3,674 $ 155 4.2
Access charges -- interstate.............................................. 2,147 2,047 100 4.9
Access charges -- intrastate.............................................. 682 673 9 1.3
Long-distance network service............................................. 1,442 1,420 22 1.5
Other services............................................................ 770 716 54 7.5
--------- --------- --------- ---
Total Communications Group.............................................. 8,870 8,530 340 4.0
--------- --------- --------- ---
MEDIA GROUP:
Multimedia content and services 956 949 7 0.7
Wireless communications................................................... 561 407 154 37.8
Other..................................................................... 32 28 4 14.3
--------- --------- --------- ---
Total Media Group....................................................... 1,549 1,384 165 11.9
--------- --------- --------- ---
Intergroup eliminations..................................................... (125) (91) (34) 37.4
--------- --------- --------- ---
Total revenues.............................................................. $ 10,294 $ 9,823 $ 471 4.8
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
V-19
<PAGE>
COMMUNICATIONS GROUP. The following is an analysis of the change in U S
WEST Communications' revenues:
<TABLE>
<CAPTION>
INCREASE
PRICE REFUND DEMAND ---------
CHANGES ACTIVITY CHANGES OTHER $
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Local service................................................ $ (6) $ (11) $ 176 $ (4) $ 155
Access charges -- interstate................................. (71) 6 175 (10) 100
Access charges -- intrastate................................. (18) 8 19 -- 9
Long-distance network service................................ (7) (1) 31 (1) 22
<CAPTION>
%
---
<S> <C>
Local service................................................ 4.2
Access charges -- interstate................................. 4.9
Access charges -- intrastate................................. 1.3
Long-distance network service................................ 1.5
</TABLE>
The increase in local service revenues was primarily attributable to access
line growth of 3.7 percent in 1993. Increased demand for interstate services, as
evidenced by an increase of 8.5 percent in interstate billed access minutes of
use, more than offset the effects of price decreases. U S WEST Communications
reduced its annual interstate access prices by approximately $60, effective July
1, 1993, in addition to $90, effective July 1, 1992, primarily due to
FCC-mandated changes that resulted in a cost shift to intrastate jurisdictions.
Intrastate access charges increased primarily as a result of increased demand
and lower refunds, largely offset by the effects of price decreases. The
increase in long-distance network service revenues reflects business growth,
partially offset by the impacts of competition, particularly in Wide Area
Telephone Service and "800" services, and price decreases. Other services
revenues increased 7.5 percent in 1993 due to increased revenue from billing and
collection services and continued market penetration in voice messaging
services, partially offset by the sale of telephone equipment distribution
operations.
MEDIA GROUP -- MULTIMEDIA CONTENT AND SERVICES. Revenue for multimedia
content and services operations was reduced by $45 in 1993 due to the sale of
certain publishing operations. Revenues from ongoing operations increased $52,
or 5.8 percent, primarily as a result of price increases related to Yellow Pages
directory publishing and the start-up of U S West Polska, a publisher of
directories in Poland. Volume of Yellow Pages directory advertising was
essentially flat in 1993.
MEDIA GROUP -- WIRELESS COMMUNICATIONS. Wireless communications revenues
increased as a result of an expanded cellular customer base, which grew by 45
percent during 1993. This growth reflects increased penetration and a migration
to the retail distribution channel. Average cellular revenue declined by 5.6
percent to approximately $76 per customer, per month.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses.................................... $ 3,584 $ 3,487 $ 97 2.8
Other operating expenses..................................... 2,065 1,995 70 3.5
Taxes other than income taxes................................ 417 378 39 10.3
Depreciation and amortization................................ 1,955 1,881 74 3.9
Restructuring charge......................................... 1,000 -- 1,000 --
Interest expense............................................. 439 453 (14) (3.1)
Equity losses in unconsolidated ventures..................... 74 43 31 72.1
Other income (expense) -- net................................ (15) (17) (2) (11.8)
</TABLE>
Employee-related expenses at U S WEST Communications increased by $41, or
1.4 percent, over 1992. This increase was attributable to basic wage increases,
increased overtime costs (affected by flood damage in the midwestern states) and
costs incurred for temporary employees in conjunction with customer service
initiatives. These factors were partially offset by the effects of work-force
reductions, primarily in conjunction with the Company's 1991 restructuring plan.
During 1993, U S WEST Communications reduced its employee level by 2,755
employees. The work-force reductions and the Company's emphasis on health-care
cost containment through managed care and other
V-20
<PAGE>
programs, and earnings on the amounts funded for postretirement benefit costs,
resulted in a decline in health-care costs of approximately $25 in 1993. Growth
in the Company's domestic wireless business also contributed to the increase in
employee-related expenses.
Other operating expenses increased by $56, or 3.5 percent, at U S WEST
Communications as a result of higher network software costs and increased
advertising expenses. Higher marketing costs related to an expanding domestic
cellular subscriber base also contributed to the increase in other operating
expenses, partially offset by lower expenses due to the sale of certain
publishing and telephone equipment distribution operations.
Taxes other than income taxes increased due in part to adjustments made in
1992 for resolution of certain longstanding appeals.
Depreciation and amortization expense increased $71, or 4.1 percent, at U S
WEST Communications as a result of a higher depreciable asset base and increased
rates of depreciation. These effects were partially offset by the completion of
depreciation reserve deficiency amortization programs in several jurisdictions.
Interest expense decreased principally due to the effects of lower interest
rates, partially offset by increased debt of approximately $1.8 billion used to
fund new initiatives, including the investment in TWE. U S WEST's average
borrowing cost decreased to 6.7 percent in 1993, from 7.7 percent in 1992.
Equity losses associated with developing businesses increased to $74,
compared with $43 in 1992. The increase in these losses is primarily due to new
investments in 1993, including the Company's investment in Mercury One-2-One.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
--------------------
1993 1992 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes...................................... $ 269 $ 493 $ (224) (45.4)
Effective tax rate.............................................. 36.1% 31.4% -- --
</TABLE>
The increase in the effective tax rate resulted primarily from the $54
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates and the effects of discontinuing SFAS No. 71, partially offset
by the tax effects of the restructuring charge.
See " -- Results of Operations -- 1994 Compared with 1993" for a discussion
of the 1993 restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operating activities decreased by $216 in the first quarter
of 1995 compared to the first quarter of 1994, primarily due to an increase of
$94 in postretirement benefit funding, an increase of $60 in Restructuring Plan
expenditures, and higher income tax payments related to prior periods, including
approximately $60 related to the sale of the Company's joint venture interest in
TeleWest.
Cash provided by operating activities of approximately $3.2 billion for 1994
was essentially unchanged as compared with 1993 and 1992. Improvement in
operations in 1994 was largely offset by cash payments for restructuring
activities of $289, compared with $120 in 1993 and $98 in 1992. Growth in cash
from operations will be limited in the near term as the Company continues to
implement its Restructuring Plan. Cash from operations is the primary source by
which U S WEST funds its capital expenditures and shareholder dividends. Further
details of cash provided by operating activities are provided in the
Consolidated Statements of Cash Flows.
The Company expects that cash from operations will fund a significant share
of expected future requirements for existing businesses. U S WEST will continue
to employ strategic alliances and also will make direct investments in assets or
businesses that are consistent with the Company's business strategies. Financing
for new investments will primarily come from a combination of new debt and
equity. In the event of a new investment of substantial magnitude, the Company
also may reevaluate
V-21
<PAGE>
its use of internally generated cash, the feasibility of further acquisitions,
the possibility of sales of assets and the capital structure. The incurrence of
indebtedness in connection with acquisitions, if significant, could result in a
downgrading of the credit rating of the Company and/or U S WEST Communications.
U S WEST consists of many different parts having different financial
characteristics. For this and other reasons, U S WEST believes that its stock
price has been undervalued. Consequently, the Company is evaluating a range of
actions it might take with regard to its capital structure to make the value of
its assets more apparent.
INVESTING ACTIVITIES
Total capital expenditures were $621 for the first quarter of 1995, $600 for
the first quarter of 1994, $2,820 in 1994, $2,441 in 1993 and $2,554 in 1992.
Capital expenditures of the Communications Group were $545 for the first quarter
of 1995, $554 for the first quarter of 1994, $2,477 in 1994, $2,226 in 1993 and
$2,385 in 1992. The 1994 capital expenditures of U S WEST Communications were
devoted substantially to the continued modernization of telephone plant,
including investments in fiber optic cable, in order to improve customer service
and network productivity. In 1995, capital expenditures are expected to
approximate $2.6 billion, including $2.1 billion at U S WEST Communications.
U S WEST's cash investment related to the December 1994 acquisition of the
Atlanta Systems was $745, obtained through short-term borrowing. U S WEST also
invested approximately $444 in developing international businesses in 1994,
including the acquisition of Thomson Directories. The Company anticipates
investments in international ventures to approximate $400 in 1995, of which
approximately $182 was invested during the first quarter of 1995, primarily in
Malaysia and the Czech Republic.
During the first quarter of 1995, proceeds from the sale of rural telephone
exchanges totaled $88. In 1994, U S WEST received cash proceeds of $143 from the
sale of its paging operations and $93 from the sale of certain rural telephone
exchanges. U S WEST did not receive cash from the partial sale of its joint
venture interest in TeleWest. All proceeds from the sale will be used by
TeleWest for general business purposes, including financing construction and
operations costs, and repaying debt.
In March 1995, PCS PrimeCo, L.P. ("PCS PrimeCo") was awarded PCS licenses in
11 markets. The Company's share of the cost of the licenses was approximately
$277, of which $55 was funded through the first quarter of 1995. The remainder
of the licensing costs will be funded through issuance of short-term debt in the
third quarter of 1995. Under the PCS PrimeCo partnership agreement, the Company
is required to fund 25% of PCS PrimeCo's operating and capital costs, including
licensing costs. The Company anticipates that its total funding obligations to
PCS PrimeCo during the next four years will be significant.
FINANCING ACTIVITIES
Debt increased by $764 at March 31, 1995 from December 31, 1994, and the
percentage of debt to total capital increased from 51.8 percent at December 31,
1994 to 53.6 percent at March 31, 1995. The increase in debt and the percentage
of debt to total capital was primarily related to the cash funding of a portion
of the Company's postretirement benefit obligation, the funding of international
investments and a reclassification of certain debt to continuing operations from
net assets held for sale.
Debt increased by $739 at December 31, 1994 as compared with December 31,
1993, primarily due to the acquisition of the Atlanta Systems. U S WEST's
year-end 1994 percentage of debt to total capital was 51.8 compared with 55.1 at
December 31, 1993. Including debt related to discontinued operations, the
percentage of debt to total capital was 55.5 and 59.7 at December 31, 1994 and
1993, respectively. The decrease in the percentage of debt to total capital is
primarily attributable to higher net income and the effects of an increase in
common shares outstanding. Debt increased by approximately $1.8 billion in 1993
compared with 1992 (including $1.2 billion of short-term debt), principally as a
result of the Company's investment in TWE.
V-22
<PAGE>
In the first quarter of 1995, U S WEST purchased 1,702,200 shares of
Existing Common Stock for $63, at an average price of $37.02 per share.
In conjunction with the acquisition of the Atlanta Systems, on December 6,
1994, 12,779,206 shares of Existing Common Stock valued at $459 were issued to,
or in the name of, the holders of Wometco Cable Corp. Subsequent to the
acquisition, the Company announced its intention to purchase Existing Common
Stock in the open market up to an amount equal to those issued in conjunction
with the acquisition, subject to market conditions. In December 1994, the
Company purchased 550,400 shares of Existing Common Stock for approximately $20.
In March 1994, the Company issued approximately 5.5 million shares of
Existing Common Stock for proceeds of $210 in conjunction with the settlement of
shareowner litigation. The Company also contributed 4.6 million shares of
Existing Common Stock to the Company's postretirement benefit fund in 1994.
During fourth quarter 1993, proceeds of $1,020 resulting from the sale of 22
million shares of Existing Common Stock were used to reduce short-term
indebtedness, including indebtedness incurred in conjunction with the TWE
investment, and for general corporate purposes.
The Company maintains short-term lines of credit aggregating approximately
$1.9 billion, all of which were available at December 31, 1994. Under
registration statements filed with the Commission, as of December 31, 1994, U S
WEST subsidiaries are permitted to issue up to approximately $1.8 billion of new
debt securities. U S WEST also maintains a commercial paper program to finance
short-term cash flow requirements, as well as to maintain a presence in the
short-term debt market.
Cash to the discontinued capital assets segment primarily reflects the
payment of debt, net of $154 in proceeds from the sale of 8.1 million shares of
FSA common stock. Debt related to discontinued operations decreased by
approximately $213 in 1994 and $1.9 billion in 1993. The 1993 decrease was
related to the 1993 sale of the assets and the business of U S WEST Financial
Services, Inc. to NationsBank Corporation. See " -- Disposition of the Capital
Assets Segment" and " -- U S WEST, Inc. -- Consolidated Financial Statements --
Note 18: Net Investment in Assets Held for Sale." For financial reporting
purposes this debt is netted against the related assets of net investment in
assets held for sale.
RISK MANAGEMENT
The Company is exposed to market risks arising from changes in interest
rates and foreign exchange rates. Derivative financial instruments are used by
the company to manage these risks.
INTEREST RATE RISK MANAGEMENT. The objective of the Company's interest rate
risk management program is to minimize the total cost of debt. To meet this
objective the Company uses risk-reducing and risk-adjusting strategies. Interest
rate forward contracts were used in 1993 to reduce the debt issuance risks
associated with interest rate fluctuations. Interest rate swaps are used to
adjust the risks of the debt portfolio on a consolidated basis by varying the
ratio of fixed- to floating-rate debt. The market value of the debt portfolio
and its risk-adjusting derivative instruments are monitored and compared to
predetermined benchmarks to evaluate the effectiveness of the risk management
program.
In 1993, the Company refinanced $2.7 billion of callable debt with new,
lower-cost fixed-rate debt. The Company achieved an annual interest expense
reduction of approximately $35 as a result of this refinancing. In conjunction
with the refinancing, the Company executed forward contracts to sell U.S.
Treasury securities to reduce debt issuance risks and to lock in the cost of
$1.5 billion of the future debt issue. At December 31, 1994, deferred credits of
$8 and deferred charges of $51 on closed interest rate forward contracts are
included as part of the carrying value of the underlying debt. The deferred
credits and charges are being recognized as a yield adjustment over the life of
the debt, which matures at various dates through 2043. The net deferred charge
is directly offset by the lower coupon rate achieved on the new debt.
V-23
<PAGE>
Notional amounts of interest rate swaps outstanding at December 31, 1994,
were $1.6 billion with various maturities that extend to 2004. The estimated
effect of the Company's interest rate derivative transactions was to adjust the
level of fixed-rate debt from 73.1 percent to 81.5 percent of the total debt
portfolio (including continuing and discontinued operations).
FOREIGN EXCHANGE RISK MANAGEMENT. The Company has entered into forward and
combination option contracts to manage the market risks associated with
fluctuations in foreign exchange rates after considering offsetting foreign
exposures among international operations. The use of forward and option
contracts allows the Company to fix or cap the cost of firm foreign investment
commitments in countries with freely convertible currencies. The market values
of the foreign exchange positions, including the hedging instruments, are
continuously monitored and compared to predetermined levels of acceptable risk.
Notional amounts of forward and combination option contracts in British
pounds outstanding at December 31, 1994, were $170, with maturities within one
year. Cumulative deferred credits and charges associated with forward and option
contracts of $7 and $25, respectively, are recorded in common shareowners'
equity at December 31, 1994.
At December 31, 1994, the Company also had a British pound-denominated
receivable from a wholly owned subsidiary in the translated principal amount of
$48 that is subject to foreign exchange risk. This position is hedged in 1995.
DISPOSITION OF THE CAPITAL ASSETS SEGMENT
In 1994, U S WEST continued to make progress in disposing of the capital
assets segment in accordance with its plan of disposition announced in June
1993. Further details on the disposal of the segment are provided in " --
Results of Operations -- 1993 Compared with 1992" and in Note 18 to the
Company's Consolidated Financial Statements.
During 1994, U S WEST reduced its ownership interest in FSA, a member of the
capital assets segment, to 60.9 percent, and its voting interest to 49.8 percent
through a series of transactions. In May and June 1994, U S WEST sold 8.1
million shares of FSA, including 2.0 million shares sold to Fund American, in an
initial public offering of FSA common stock at $20 per share. U S WEST received
$154 in net proceeds from the offering. On September 2, 1994, U S WEST issued to
Fund American 50,000 shares of cumulative redeemable preferred stock for a total
of $50. Fund American's voting interest in FSA is 21.0 percent, achieved through
a combination of direct share ownership of common and preferred FSA shares and a
voting trust agreement with U S WEST.
Fund American has a right of first offer and a call right to purchase from U
S WEST up to 9.0 million shares, or approximately 57 percent, of outstanding FSA
stock held by U S WEST. U S WEST anticipates its ownership will be further
reduced by 1996.
During 1994, U S WEST Real Estate, Inc. sold 12 buildings, six parcels of
land and other assets for approximately $327. Additional properties were sold in
the first quarter of 1995 for approximately $47. The sales were in line with
company estimates. U S WEST has completed all construction of existing buildings
in the commercial real estate portfolio and expects to substantially complete
the liquidation of its portfolio by 1998. The remaining balance of assets
subject to sale is approximately $596, net of reserves as of March 31, 1995.
The Company believes its reserves related to its disposal of the capital
assets segment are adequate.
During 1993, U S WEST sold $2.0 billion of finance receivables and the
business of U S WEST Financial Services, Inc. to NationsBank Corporation. The
sales price was in line with the Company's estimate. Proceeds from the sale of
$2.1 billion were used to repay related debt.
During 1993, U S WEST Real Estate, Inc. sold five properties for proceeds of
approximately $66.
V-24
<PAGE>
U S WEST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... V-26
Report of Management................................................................. V-27
Financial Statements for the Three Months Ended March 31, 1995 and 1994 (unaudited)
and for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Operations.............................................. V-28
Consolidated Balance Sheets........................................................ V-29
Consolidated Statements of Cash Flows.............................................. V-30
Consolidated Statements of Shareowners' Equity..................................... V-31
Notes to Consolidated Financial Statements......................................... V-32
</TABLE>
V-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners
of U S WEST Inc.:
We have audited the accompanying Consolidated Balance Sheets of U S WEST
Inc. as of December 31, 1994 and 1993 and the related Consolidated Statements of
Operations, Cash Flows and Shareowners' Equity for each of the three years in
the period ended December 31, 1994. 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 consolidated financial position of U S WEST Inc.
as of December 31, 1994 and 1993, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the Consolidated Financial Statements, the Company
discontinued accounting for the operations of U S WEST Communications Inc. in
accordance with Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation," in 1993. As discussed in Note
15 to the Consolidated Financial Statements, the company changed its method of
accounting for postretirement benefits other than pensions and other
postemployment benefits in 1992.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
January 18, 1995
V-26
<PAGE>
REPORT OF MANAGEMENT
The Consolidated Financial Statements of U S WEST have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis. The integrity and objectivity of information in these financial
statements, including estimates and judgments, are the responsibility of
management, as is all other financial information included in this report.
U S WEST maintains a system of internal accounting controls designed to
provide a reasonable assurance as to the integrity and reliability of financial
statements, the safeguarding of assets and the prevention and detection of
material errors or fraudulent financial reporting. Monitoring of such systems
includes an internal audit program designed to assess objectively the
effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based on the
recognition that the cost of the system should not exceed the benefits derived.
U S WEST believes that the Company's system provides reasonable assurance that
transactions are executed in accordance with management's general or specific
authorizations and is adequate to accomplish the stated objectives.
The independent certified public accountants, whose report is included
herein, are engaged to express an opinion on our Consolidated Financial
Statements. Their opinion is based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the Consolidated Financial
Statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
In an attempt to assure objectivity, the financial information contained in
this report is subject to review by the Audit Committee of the board of
directors. The Audit Committee is composed of outside directors who meet
regularly with management, internal auditors and independent auditors to review
financial reporting matters, the scope of audit activities and the resolution of
audit findings.
Richard D. McCormick
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
James M. Osterhoff
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
January 18, 1995
V-27
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------ -------------------------------
1995 1994 1994 1993 1992
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales and other revenues.................................. $ 2,828 $ 2,641 $ 10,953 $ 10,294 $ 9,823
Employee-related expenses................................. 978 911 3,779 3,584 3,487
Other operating expenses.................................. 510 477 2,203 2,065 1,995
Taxes other than income taxes............................. 114 108 412 417 378
Depreciation and amortization............................. 560 503 2,052 1,955 1,881
Restructuring charge...................................... -- -- -- 1,000 --
Interest expense.......................................... 128 109 442 439 453
Equity losses in unconsolidated ventures.................. 57 35 121 74 43
Gains on sales of assets:
Partial sale of joint venture interest.................. -- -- 164 -- --
Rural telephone exchanges............................... 63 24 82 -- --
Paging assets........................................... -- -- 68 -- --
Other income (expense) -- net............................. (6) -- 25 (15) (17)
----------- ----------- --------- --------- ---------
Income from continuing operations before income taxes..... 538 522 2,283 745 1,569
Provision for income taxes................................ 208 198 857 269 493
----------- ----------- --------- --------- ---------
Income from continuing operations......................... 330 324 1,426 476 1,076
Discontinued operations:
Estimated loss from June 1, 1993 through disposal, net
of tax................................................. -- -- -- (100) --
Income tax rate change.................................. -- -- -- (20) --
Income, net of tax (to June 1, 1993).................... -- -- -- 38 103
----------- ----------- --------- --------- ---------
Income before extraordinary items and cumulative effect of
change in accounting principles.......................... -- -- 1,426 394 1,179
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax............... -- -- -- (3,123) --
Early extinguishment of debt, net of tax................ -- -- -- (77) --
Cumulative effect of change in accounting principles:
Transition effect of change in accounting for
postretirement benefits other than pensions and other
postemployment benefits, net of tax.................... -- -- -- -- (1,793)
----------- ----------- --------- --------- ---------
Net income (loss)......................................... $ 330 $ 324 $ 1,426 $ (2,806) $ (614)
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Earnings (loss) per common share:
Continuing operations................................... $ 0.70 $ 0.73 $ 3.14 $ 1.13 $ 2.61
Discontinued operations:
Estimated loss from June 1, 1993 through disposal..... -- -- -- (0.24) --
Income tax rate change................................ -- -- -- (0.04) --
Income (to June 1, 1993).............................. -- -- -- 0.09 0.25
Extraordinary items:
Discontinuance of SFAS No. 71......................... -- -- -- (7.45) --
Early extinguishment of debt.......................... -- -- -- (0.18) --
Cumulative effect of change in accounting principles.... -- -- -- -- (4.35)
----------- ----------- --------- --------- ---------
Earnings (loss) per common share.......................... $ 0.70 $ 0.73 $ 3.14 $ (6.69) $ (1.49)
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Average common shares outstanding (thousands)............. 468,557 444,378 453,316 419,365 412,518
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
V-28
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
MARCH 31,
(UNAUDITED) DECEMBER 31,
----------- --------------------
ASSETS 1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 148 $ 209 $ 128
Accounts and notes receivable, less allowance for credit losses
of $62 and $54, respectively.................................. 1,664 1,693 1,570
Inventories and supplies....................................... 199 189 193
Deferred tax asset............................................. 343 352 336
Prepaid and other.............................................. 335 323 273
----------- --------- ---------
Total current assets......................................... 2,689 2,766 2,500
Property, plant and equipment -- net............................. 13,930 13,997 13,232
Investment in Time Warner Entertainment.......................... 2,509 2,522 2,552
Intangible assets -- net......................................... 1,887 1,858 514
Investment in international ventures............................. 994 881 477
Net investment in assets held for sale........................... 414 302 554
Other assets..................................................... 1,176 878 851
----------- --------- ---------
Total assets................................................. $ 23,599 $ 23,204 $ 20,680
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt................................................ $ 3,565 $ 2,837 $ 1,776
Accounts payable............................................... 729 944 977
Employee compensation.......................................... 316 367 386
Dividends payable.............................................. 252 251 236
Current portion of restructuring charges....................... 359 337 456
Other.......................................................... 1,364 1,278 1,150
----------- --------- ---------
Total current liabilities.................................... 6,585 6,014 4,981
Long-term debt................................................... 5,137 5,101 5,423
Postretirement and postemployment benefit obligations............ 2,281 2,502 2,699
Deferred income taxes............................................ 952 890 201
Unamortized investment tax credits............................... 220 231 280
Deferred credits and other....................................... 841 1,033 1,235
Preferred stock subject to mandatory redemption.................. 51 51 --
Common shareowners' equity:
Common shares -- no par, 2,000,000,000 authorized; 479,174,099,
476,880,420 and 448,126,801 issued; 469,934,527, 469,343,048
and 441,139,829 outstanding,
respectively.................................................. 8,092 8,056 6,996
Cumulative deficit............................................. (360) (458) (857)
LESOP guarantee................................................ (187) (187) (243)
Foreign currency translation adjustments....................... (13) (29) (35)
----------- --------- ---------
Total common shareowners' equity............................. 7,532 7,382 5,861
----------- --------- ---------
Total liabilities and shareowners' equity.................... $ 23,599 $ 23,204 $ 20,680
----------- --------- ---------
----------- --------- ---------
Contingencies (see Note 17 to the Consolidated Financial
Statements)
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
V-29
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------------- -------------------------------
1995 1994 1994 1993 1992
------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 330 $ 324 $ 1,426 $ (2,806) $ (614)
Adjustments to net income (loss):
Discontinuance of SFAS No. 71............................... -- -- -- 3,123 --
Cumulative effect of change in accounting principles...... -- -- -- -- 1,793
Restructuring charge...................................... -- -- -- 1,000 --
Depreciation and amortization............................. 560 503 2,052 1,955 1,881
Postretirement medical and life costs, net of cash
fundings................................................. (174) (75) (5) (122) 50
Gains on sales of assets:
Partial sale of joint venture interest.................. -- -- (164) -- --
Rural telephone exchanges............................... (63) (24) (82) -- --
Paging assets........................................... -- -- (68) -- --
Equity losses in unconsolidated ventures.................. 57 35 121 74 43
Discontinued operations................................... -- -- -- 82 (103)
Deferred income taxes and amortization of investment tax
credits.................................................. 20 75 373 (225) 4
Changes in operating assets and liabilities:
Restructuring payments.................................... (82) (22) (289) (120) (98)
Accounts and notes receivable............................. 32 26 (104) (90) 44
Inventories, supplies and other........................... (43) (59) (81) (56) (24)
Accounts payable and accrued liabilities.................. (103) (35) (10) 238 133
Other -- net................................................ 7 9 72 169 148
------ ----------- --------- --------- ---------
Cash provided by operating activities....................... 541 757 3,241 3,222 3,257
------ ----------- --------- --------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment.............. (617) (654) (2,597) (2,449) (2,250)
Investment in Time Warner Entertainment..................... -- -- -- (1,557) --
Investment in Atlanta Systems............................... -- -- (745) -- --
Investment in international ventures........................ (182) (70) (350) (230) (173)
Proceeds from disposals of property, plant and equipment.... 92 18 96 45 75
Proceeds from sale of paging assets......................... -- -- 143 -- --
Cash (to) net investment in assets held for sale............ (60) -- -- -- --
Other -- net................................................ (63) (6) (119) (10) 91
------ ----------- --------- --------- ---------
Cash (used for) investing activities........................ (830) (712) (3,572) (4,201) (2,257)
------ ----------- --------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term debt........................... 678 335 1,280 687 25
Proceeds from issuance of long-term debt.................... -- 182 251 2,282 344
Repayments of long-term debt................................ (168) (116) (526) (2,969) (770)
Dividends paid on common stock.............................. (230) (223) (886) (812) (796)
Proceeds from issuance of common stock...................... 11 256 364 1,150 92
Proceeds from issuance of preferred stock................... -- -- 50 -- --
Purchase of treasury stock.................................. (63) -- (20) -- --
------ ----------- --------- --------- ---------
Cash provided by (used for) financing activities............ 228 434 513 338 (1,105)
------ ----------- --------- --------- ---------
Cash provided by (used for) continuing operations........... (61) 479 182 (641) (105)
Cash (to) from discontinued operations...................... -- (161) (101) 610 (237)
------ ----------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease)......................................... (61) 318 81 (31) (342)
Beginning balance........................................... 209 128 128 159 501
------ ----------- --------- --------- ---------
Ending balance.............................................. $ 148 $ 446 $ 209 $ 128 $ 159
------ ----------- --------- --------- ---------
------ ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
V-30
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1995 1994 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COMMON SHARES
Beginning balance............................... $ 8,056 $ 6,996 $ 6,996 $ 5,770 $ 5,607
Issuance of common stock........................ 31 66 694 1,224 144
Settlement of litigation........................ -- 210 210 -- --
Benefit trust contribution (OPEB)............... 61 185 185 -- --
(Purchase) issuance of treasury stock........... (63) -- (20) 6 20
Other........................................... 7 -- (9) (4) (1)
---------- ---------- ---------- ---------- ----------
Ending balance.................................. 8,092 7,457 8,056 6,996 5,770
---------- ---------- ---------- ---------- ----------
(CUMULATIVE DEFICIT) RETAINED EARNINGS
Beginning balance............................... (458) (857) (857) 2,826 4,316
Net income (loss)............................... 330 324 1,426 (2,806) (614)
Dividends declared ($.535, $.535, $2.14, $2.14
and $2.12 per share, respectively)............. (252) (242) (980) (905) (876)
Market value adjustment for securities.......... 20 (40) (64) 35 --
Other........................................... -- -- 17 (7) --
---------- ---------- ---------- ---------- ----------
Ending balance.................................. (360) (815) (458) (857) 2,826
---------- ---------- ---------- ---------- ----------
LESOP GUARANTEE
Beginning balance............................... (187) (243) (243) (294) (342)
Activity........................................ -- -- 56 51 48
---------- ---------- ---------- ---------- ----------
Ending balance.................................. (187) (243) (187) (243) (294)
---------- ---------- ---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Beginning balance............................... (29) (35) (35) (34) 7
Activity........................................ 16 11 6 (1) (41)
---------- ---------- ---------- ---------- ----------
Ending balance.................................. (13) (24) (29) (35) (34)
---------- ---------- ---------- ---------- ----------
TOTAL COMMON SHAREOWNERS' EQUITY.................. $ 7,532 $ 6,375 $ 7,382 $ 5,861 $ 8,268
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
COMMON SHARES AUTHORIZED AT MARCH 31 AND DECEMBER
31 (THOUSANDS)................................... 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000
---------- ---------- ---------- ---------- ----------
COMMON SHARES OUTSTANDING (THOUSANDS)
Beginning balance............................... 469,343 441,140 441,140 414,462 409,936
Issuance of common stock........................ 794 1,580 18,647 26,516 3,948
Settlement of litigation........................ -- 5,506 5,506 -- --
Benefit trust contribution (OPEB)............... 1,500 4,600 4,600 -- --
(Purchase) issuance of treasury stock........... (1,702) -- (550) 162 578
---------- ---------- ---------- ---------- ----------
Ending balance.................................. 469,935 452,826 469,343 441,140 414,462
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
V-31
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Consolidated Financial Statements include the
accounts of U S WEST Inc. ("U S WEST" or "Company") and its majority-owned
subsidiaries, except for the Company's net investment in assets held for sale as
discussed in Note 18 to the Consolidated Financial Statements. All significant
intercompany amounts and transactions have been eliminated. Investments in less
than majority-owned ventures are accounted for using the equity method.
In the third quarter of 1993, U S WEST discontinued accounting for its
regulated telephone operations, hereafter referred to as U S WEST Communications
("U S WEST Communications"), under Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation."
(See Note 6 to the Consolidated Financial Statements.)
U S WEST consists of two groups -- the Communications Group and the Media
Group. The Communications Group operates in one industry segment (communications
and related services) and the Media Group operates in four industry segments
(multimedia content and services, wireless communications, cable and
telecommunications and the discontinued capital assets segment) as defined in
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise."
The largest volume of the Company's services are provided to AT&T. During
1994, 1993 and 1992, revenues related to those services provided to AT&T were
$1,130, $1,160 and $1,203, respectively. Related accounts receivable at December
31, 1994 and 1993 totaled $98 and $97, respectively.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES. New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Non-reusable material is carried
at its estimated salvage value. Inventories of U S WEST's non-telephone
operations are carried at the lower of cost or market on a first-in, first-out
basis.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is carried at cost, less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are charged to expense
as incurred.
U S WEST Communications' provision for depreciation of property, plant and
equipment is based on various straight-line group methods using remaining useful
(economic) lives based on industrywide studies. Prior to discontinuing SFAS No.
71, depreciation was based on lives specified by regulators. (See Note 6 to the
Consolidated Financial Statements.) When the depreciable property, plant and
equipment of U S WEST Communications is retired or sold, the original cost less
the net salvage value is generally charged to accumulated depreciation.
The non-telephone operations of U S WEST provide for depreciation using the
straight-line method. When such depreciable property, plant and equipment is
retired or sold, the resulting gain or loss is recognized currently as an
element of other income.
Depreciation expense was $2,029, $1,941 and $1,857 in 1994, 1993 and 1992,
respectively.
V-32
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest related to qualifying construction projects is capitalized and is
reflected as a reduction of interest expense. At U S WEST Communications, prior
to discontinuing SFAS No. 71, capitalized interest was included as an element of
other income. Amounts capitalized by U S WEST were $44, $20 and $29 in 1994,
1993 and 1992, respectively.
INTANGIBLE ASSETS. The costs of identified intangible assets and goodwill
are amortized by the straight-line method over periods ranging from five to 40
years. These assets are evaluated, with other related assets, for impairment
using a discounted cash flow methodology. Amortization expense was $23, $14 and
$24 in 1994, 1993 and 1992, respectively.
FOREIGN CURRENCY TRANSLATION. For international investments, assets and
liabilities are translated at year-end exchange rates, and income statement
items are translated at average exchange rates for the year. Resulting
translation adjustments are recorded as a separate component of common
shareowners' equity.
REVENUE RECOGNITION. Local telephone service, cellular access and cable
television revenues are generally billed monthly, in advance, and revenues are
recognized the following month when services are provided. Revenues derived from
other telephone services, including exchange access, long-distance and cellular
airtime usage, are billed and recorded monthly as services are provided.
Directory advertising revenues and related directory costs are generally
deferred and recognized over the period during which directories are utilized,
normally 12 months. The balance of deferred directory costs included in prepaid
and other is $217 and $197 at December 31, 1994 and 1993, respectively.
FINANCIAL INSTRUMENTS. Net interest income or expense on interest rate
swaps is recognized over the life of the swaps as an adjustment to interest
expense. Gains and losses on forward contracts, designated as hedges of interest
rate exposure on debt refinancings, are deferred and recognized as an adjustment
to interest expense over the life of the underlying debt. Gains and losses on
foreign exchange forward, option, and combination option contracts, designated
as hedges, are included in common shareowners' equity and recognized in income
on sale of the investment.
COMPUTER SOFTWARE. The cost of computer software, whether purchased or
developed internally, is charged to expense with two exceptions. Initial
operating systems software is capitalized and amortized over the life of the
related hardware, and initial network applications software is capitalized and
amortized over three years. Subsequent upgrades to capitalized software are
expensed. Capitalized computer software of $146 and $148 at December 31, 1994
and 1993, respectively, is recorded in property, plant and equipment. The
Company amortized capitalized computer software costs of $86, $51 and $24, in
1994, 1993 and 1992, respectively.
INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods in accordance with SFAS No. 109. U S WEST implemented SFAS No. 109,
"Accounting for Income Taxes," in 1993. Adoption of the new standard did not
have a material effect on the financial position or results of operations,
primarily because of the Company's earlier adoption of SFAS No. 96.
For financial statement purposes, investment tax credits of U S WEST
Communications are being amortized over the economic lives of the related
property, plant and equipment in accordance with the deferred method of
accounting for such credits.
V-33
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER COMMON SHARE. Earnings (loss) per common share are
computed on the basis of the weighted average number of shares of common stock
outstanding during each year.
INTERIM FINANCIAL STATEMENTS.__The interim financial statements have been
prepared in accordance with GAAP and in accordance with SEC rules and
regulations for interim reporting. In the opinion of the Company's management,
the interim financial statements include all adjustments, consisting of only
normal recurring adjustments, necessary to present fairly the interim financial
information set forth therein.
NOTE 2: ACQUISITION OF ATLANTA SYSTEMS
On December 6, 1994, U S WEST acquired the stock of Wometco Cable Corp. and
subsidiaries, and the assets of Georgia Cable Partners and Atlanta Cable
Partners L.P. (the "Atlanta Systems"), for cash of $745 and 12,779,206 U S WEST
common shares valued at $459, for a total purchase price of approximately $1.2
billion. The Atlanta Systems' results of operations have been included in the
consolidated results of operations since the date of acquisition.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated to assets acquired (primarily identified
intangibles) based on their estimated fair values.
The identified intangibles and goodwill are being amortized on a
straight-line basis over 25 years.
Following are summarized, consolidated, unaudited, pro forma results of
operations for U S WEST for the years ended December 31, 1994 and 1993, assuming
the acquisition occurred as of the beginning of the respective periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Revenue................................................................ $ 11,143 $ 10,494
Net income (loss)...................................................... 1,415 (2,817)
Earnings (loss) per common share....................................... 3.04 (6.52)
</TABLE>
NOTE 3: INDUSTRY SEGMENTS
In accordance with generally accepted accounting principles, industry
segment data is presented for the combined operations of the Communications
Group and the Media Group. The Company's equity method investments and
discontinued operations are excluded from segment data and are included in
"Corporate and other."
The Communications Group consists of the communications and related services
segment, which provides regulated communication services, customer premises
equipment and other communications services to residential and business
customers both inside and outside the Company's 14-state region. The Media Group
includes the multimedia content and services segment, which consists of the
publishing of White and Yellow Pages telephone directories, database marketing
services and interactive services in domestic and international markets. The
Media Group's wireless communications segment provides information products and
services over wireless networks in 13 western and midwestern states. The Media
Group's cable and telecommunications segment was created with the
V-34
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 3: INDUSTRY SEGMENTS (CONTINUED)
acquistion of the Atlanta Systems on December 6, 1994 (see Note 2 to the
Consolidated Financial Statements) and provides cable television services to the
metropolitan Atlanta area. Industry segment financial information follows:
<TABLE>
<CAPTION>
COMMUNICATIONS
GROUP
-------------- MEDIA GROUP
COMMUNICATIONS -----------------------------------------------------------
AND MULTIMEDIA CABLE AND CORPORATE
RELATED CONTENT AND WIRELESS TELECOMMUNICATIONS AND OTHER INTERSEGMENT
1994 SERVICES SERVICES (1) COMMUNICATIONS (2) (5) ELIMINATIONS CONSOLIDATED
- ------------------------- -------------- ------------ -------------- ------------------ --------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales and other
revenues................ $ 9,176 $ 1,075 $ 781 $ 18 $ 34 $ (131 ) $ 10,953
Operating income (loss)
from continuing
operations.............. 2,118 396 88 -- (95 ) -- 2,507
Identifiable assets...... 15,944 613 1,286 1,459 4,036 (134 ) 23,204
Depreciation and
amortization............ 1,908 30 102 6 6 -- 2,052
Capital expenditures..... 2,477 42 274 2 25 -- 2,820
1993
- -------------------------
Sales and other revenues
(3)..................... 8,870 956 561 -- 32 (125 ) 10,294
Operating income (loss)
from continuing
operations (4).......... 1,035 356 (29 ) -- (89 ) -- 1,273
Identifiable assets...... 15,423 450 1,175 -- 3,821 (189 ) 20,680
Depreciation and
amortization............ 1,828 16 104 -- 7 -- 1,955
Capital expenditures..... 2,226 32 175 -- 8 -- 2,441
1992
- -------------------------
Sales and other revenues
(3)..................... 8,530 949 407 -- 28 (91 ) 9,823
Operating income (loss)
from continuing
operations.............. 1,794 375 5 -- (92 ) -- 2,082
Identifiable assets...... 20,655 444 1,110 -- 1,576 (324 ) 23,461
Depreciation and
amortization............ 1,759 15 89 -- 18 -- 1,881
Capital expenditures..... 2,385 38 124 -- 7 -- 2,554
<FN>
- ------------------------------
(1) Includes revenue from directory publishing activities in Europe of $78 and
$7 and identifiable assets of $124 and $4 for 1994 and 1993, respectively.
(2) Results of operations have been included since date of acquisition,
December 6, 1994.
(3) In 1992, certain rural markets in the wireless communications segment were
accounted for under the equity method. Beginning in 1993, these markets
were consolidated. Wireless sales and other revenues would increase $35 if
these rural markets were consolidated in 1992.
(4) Includes pretax restructuring charges of $880, $50 and $70 for the
communications and related services, multimedia content and services and
wireless communications segments, respectively.
(5) The Company's equity method investments and discontinued operations are
included in "Corporate and other."
</TABLE>
V-35
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 3: INDUSTRY SEGMENTS (CONTINUED)
Operating income represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other income (expense) and income taxes. Identifiable assets are those
assets used in each segment's operations. Corporate and other assets consist
primarily of cash, marketable securities, investments in international ventures,
investment in Time Warner Entertainment Company, L.P. ("TWE"), net assets of
discontinued operations and assets not directly employed in revenue generation.
Corporate and other operating losses includes general corporate expenses and
administrative costs primarily associated with the Company's investments.
NOTE 4: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in TWE for an
aggregate purchase price of $2.553 billion, consisting of $1.532 billion in cash
and $1.021 billion in the form of a four-year promissory note bearing interest
at a rate of 4.391 percent per annum. TWE owns and operates substantially all of
the entertainment assets previously owned by Time Warner Inc., consisting
primarily of its filmed entertainment, programming-HBO and cable businesses. As
a result of U S WEST's admission to the partnership, certain wholly owned
subsidiaries of Time Warner Inc. ("General Partners") and subsidiaries of
Toshiba Corporation and ITOCHU Corporation hold equity interests of 63.27, 5.61
and 5.61 percent, respectively. In connection with the TWE investment, the
company acquired 12.75 percent of the common stock of Time Warner Entertainment
Japan Inc., a joint venture company established to expand and develop the market
for entertainment services in Japan.
The Company has an option to increase its equity interests in TWE from 25.51
up to 31.84 percent depending on cable operating performance, as defined in the
TWE Partnership Agreement. The option is exercisable, in whole or part, between
January 1, 1999, and May 31, 2005, for an aggregate cash exercise price of $1.25
billion to $1.8 billion, depending on the year of exercise. Either TWE or U S
WEST may elect that the exercise price for the option be paid with partnership
interests rather than cash.
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the General Partners); pro rata priority capital (A preferred-held pro rata
by all partners); junior priority capital (B preferred-all held by the General
Partners); and common (residual equity interests held pro rata by all partners).
Of the $2.553 billion contributed by U S WEST, $1.658 billion represents A
preferred capital and $895 represents common capital. The TWE Partnership
Agreement provides for special allocations of income and distributions of
partnership capital, which are based on the fair value of assets contributed to
the partnership. Partnership income, to the extent earned, is allocated as
follows: (1) to the partners so that the economic burden of the income tax
consequences of partnership operations is borne as though the partnership was
taxed as a corporation ("special tax income"); (2) to the partners' preferred
capital accounts in order of priority shown above, at various rates of return
ranging from 8 percent to 13.25 percent; and (3) to the partners' common capital
according to their residual partnership interests. To the extent partnership
income is insufficient to satisfy all special allocations in a particular
accounting period, the unearned portion is carried over until satisfied out of
future partnership income. Partnership losses generally will be allocated in
reverse order, first to eliminate prior allocations of partnership income,
except senior preferred and special tax income, next to reduce
V-36
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 4: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
initial capital amounts, other than senior preferred, then to reduce the senior
preferred account and finally, to eliminate special tax income. Also, the senior
preferred is scheduled to be distributed in three annual installments beginning
July 1, 1997.
A summary of the contributed capital and limitations on the allocation of
partnership income follows:
<TABLE>
<CAPTION>
TIME
INITIAL INCOME WARNER
CAPITAL ALLOCATIONS GENERAL U S
PRIORITY OF CONTRIBUTED CAPITAL AMOUNTS (A) LIMITED TO PARTNERS WEST ITOCHU TOSHIBA
- --------------------------------------------- ----------- ------------ -------- ------ ------ -------
(% PER ANNUM
COMPOUNDED
QUARTERLY)
(OWNERSHIP %)
<S> <C> <C> <C> <C> <C> <C>
Special tax allocations...................... $ 0 No limit * * * *
Senior Preferred............................. 1,400 8.00% 100.00% -- -- --
Pro rata priority capital.................... 5,600 13.00%(b) 63.27% 25.51% 5.61% 5.61%
Junior priority capital(d)................... 2,600 13.25%(c) 100.00% -- -- --
Residual equity interests.................... 3,300 No limit 63.27% 25.51% 5.61% 5.61%
<FN>
- ------------------------------
* as necessary
(a) Excludes partnership income or loss (to the extent earned) allocated
thereto.
(b) 11.0% to the extent concurrently distributed.
(c) 11.25% to the extent concurrently distributed.
(d) Junior priority capital is subject to retroactive adjustment based on TWE's
operating performance over five and ten year periods.
</TABLE>
Beginning July 1, 1994, the TWE Partnership Agreement generally permits cash
distributions to the partners to pay applicable taxes on their allocable taxable
income from TWE. In addition, beginning July 1, 1995, and subject to restricted
payment limitations and availability under the applicable financial ratios
contained in the TWE Credit Agreement, distributions other than tax-related
distributions also are permitted. For other than distributions related to taxes
or the senior preferred, the TWE Partnership Agreement requires certain cash
distribution thresholds be met to the limited partners before the General
Partners receive their full share of distributions. No cash distributions were
made to U S WEST in 1994.
The Company accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by the company's investment is $5.7 billion. This
excess is being amortized on a straight-line basis over 25 years. The Company's
recorded share of TWE operating results represents allocated TWE net income or
loss adjusted for the amortization of the excess of fair market value over the
book value of the partnership net assets. As a result of this amortization and
the special income allocations described above, U S WEST's recorded pretax share
of TWE's 1994 and 1993 operating results was $(13) and $(12) for the first
quarter of 1995 and 1994, respectively, and ($18) and ($20) for 1994 and 1993,
respectively.
As consideration for its expertise and participation in the cable operations
of TWE, the Company earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 and $8
were recorded to other income in 1994 and 1993, respectively.
V-37
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 4: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- --------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993
- ------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue................................... $ 2,046 $ 1,919 $ 8,460 $ 7,946
Operating expenses (1).................... 1,855 1,716 7,612 7,063
Interest and other expense, net (2)....... 176 151 647 611
--------- --------- --------- ---------
Income before income taxes and
extraordinary item....................... 15 52 201 272
Income before extraordinary item.......... 4 48 161 208
--------- --------- --------- ---------
Net income................................ $ 4 $ 48 $ 161 $ 198
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) Includes depreciation and amortization of $226 and $213 for the three
months ended March 31, 1995 and 1994, respectively, and $943 and $902 in
1994 and 1993, respectively.
(2) Includes corporate services of $15 for the three months ended March 31,
1995 and 1994, respectively, and $60 in 1994 and 1993.
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- ----------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Current assets (3)............................. $ 3,708 $ 3,573 $ 3,745
Non-current assets (4)......................... 15,050 15,089 14,218
Current liabilities............................ 2,820 2,857 2,265
Non-current liabilities........................ 7,963 7,909 8,162
Senior preferred capital....................... 1,696 1,663 1,536
Partners' capital (5).......................... 6,279 6,233 6,000
<FN>
- ------------------------
(3) Includes cash of $1,267 at March 31, 1995, $1,071 and $1,338 at December
31, 1994 and 1993, respectively.
(4) Includes loan receivable from Time Warner of $400 in 1995 and 1994.
(5) Net of a note receivable from U S WEST of $621 at March 31, 1995, and $771
and $1,005 at December 31, 1994 and 1993, respectively.
</TABLE>
In early 1995, Time Warner Inc. announced its intention to simplify its
corporate structure by establishing a separate, self-financing enterprise to
house its cable and telecommunications properties. Any change in the structure
of TWE would require the approval of U S WEST and its TWE partners.
NOTE 5: RESTRUCTURING CHARGES
The Company's 1993 results reflect a $1 billion restructuring charge
(pretax). The restructuring charge includes only the specific, incremental and
direct costs that can be estimated with reasonable accuracy and are clearly
identifiable with the related plan. The related Restructuring Plan is designed
to provide faster, more responsive customer services, while reducing the costs
of providing these services. As part of the restructuring, the Company is
developing new systems that will enable it to
V-38
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 5: RESTRUCTURING CHARGES (CONTINUED)
monitor networks to reduce the risk of service interruptions, activate telephone
service on demand, provide automated inventory systems and centralize its
service centers so customers can have their telecommunications needs met with
one phone call. The Company is consolidating its existing 560 customer service
centers into 26 centers in 10 cities and reducing its total work force by
approximately 9,000 employees (including the remaining employee reductions
associated with the Restructuring Plan announced in 1991). The Restructuring
Plan provides for the reduction of 2,450 management and 6,550 occupational
employees.
Following is a schedule of the costs included in the 1993 restructuring
charge:
<TABLE>
<S> <C>
Employee separation........................................ $ 230
Systems development........................................ 400
Real estate................................................ 130
Relocation................................................. 110
Retraining and other....................................... 65
Asset write-down........................................... 65
---------
Total.................................................. $ 1,000
---------
---------
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Systems development costs include the
replacement of existing, single-purpose systems with new systems designed to
provide integrated, end-to-end customer service. The work-force reductions would
not be possible without the development and installation of the new systems,
which will eliminate the current, labor-intensive interfaces between existing
processes. Real estate costs include preparation costs for the new service
centers. The relocation and retraining costs are related to moving employees to
the new service centers and retraining employees on the methods and systems
required in the new, restructured mode of operation.
During 1994, 497 management and 1,683 occupational employees left the
company under the Restructuring Plan. The following table shows amounts charged
to the restructuring reserve:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Employee separation (1).................................................... $ 75
Systems development........................................................ 127
Real estate................................................................ 50
Relocation................................................................. 21
Retraining and other....................................................... 16
-----
1994 restructuring reserve activity........................................ $ 289
-----
-----
<FN>
- ------------------------
(1) Includes $56 associated with work-force reductions under the 1991
restructuring plan.
</TABLE>
The Company's 1991 restructuring plan included a pretax charge of $364 due
to planned work-force reductions and the write-off of certain intangible and
other assets. The portion of the 1991 restructuring charge related to work-force
reductions was $240, and covered approximately 6,000 employees. The balance of
the unused reserve associated with work-force reductions at December 31, 1993,
was $56. All expenditures and work-force reductions under the 1991 plan were
completed by the end of 1994.
V-39
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Land and buildings......................................................................... $ 2,604 $ 2,521
Telephone network equipment and outside plant.............................................. 23,519 22,479
General purpose computer and other......................................................... 4,157 3,569
Construction in progress................................................................... 734 592
--------- ---------
31,014 29,161
--------- ---------
Less accumulated depreciation:
Buildings................................................................................ 698 656
Telephone network equipment and outside plant............................................ 14,175 13,389
General purpose computer and other....................................................... 2,144 1,884
--------- ---------
17,017 15,929
--------- ---------
Property, plant and equipment -- net....................................................... $ 13,997 $ 13,232
--------- ---------
--------- ---------
</TABLE>
In 1994, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $122. The Company received consideration for the sales of $93 in
cash and $81 in replacement property. The Company will receive an additional $30
of replacement property in 1995.
DISCONTINUANCE OF SFAS NO. 71. U S WEST incurred a non-cash, extraordinary
charge of $3.1 billion, net of an income tax benefit of $2.3 billion, in
conjunction with its decision to discontinue accounting for the operations of U
S WEST Communications in accordance with SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," as of September 30, 1993. SFAS No. 71
generally applies to regulated companies that meet certain requirements,
including a requirement that a company be able to recover its costs,
notwithstanding competition, by charging its customers at prices established by
its regulators. U S WEST's decision to discontinue application of SFAS No. 71
was based on the belief that competition, market conditions and the development
of multimedia technology, more than prices established by regulators, will
determine the future cost recovery by U S WEST Communications. As a result of
this change, the remaining asset lives of U S WEST Communications' plant were
shortened to more closely reflect the useful (economic) lives of such plant.
V-40
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 6: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
Following is a list of the major categories of telephone property, plant and
equipment and the manner in which depreciable lives were affected by the
discontinuance of SFAS No. 71:
<TABLE>
<CAPTION>
AVERAGE LIFE (YEARS)
--------------------------------
BEFORE AFTER
CATEGORY DISCONTINUANCE DISCONTINUANCE
- ---------------------------------------------------- --------------- ---------------
<S> <C> <C>
Digital switch...................................... 17-18 10
Digital circuit..................................... 11-13 10
Aerial copper cable................................. 18-28 15
Underground copper cable............................ 25-30 15
Buried copper cable................................. 25-28 20
Fiber cable......................................... 30 20
Buildings........................................... 27-49 27-49
General purpose computers........................... 6 6
</TABLE>
The Company employed two methods to determine the amount of the
extraordinary charge. The "economic life" method assumed that a portion of the
plant-related effect is a regulatory asset that was created by the
under-depreciation of plant under regulation. This method yielded the plant-
related adjustment that was confirmed by the second method, a discounted cash
flows analysis.
Following is a schedule of the nature and amounts of the after-tax charge
recognized as a result of the Company's discontinuance of SFAS No. 71:
<TABLE>
<S> <C>
Plant related.............................................. $ 3,124
Tax-related regulatory assets and liabilities.............. (208)
Other regulatory assets and liabilities.................... 207
---------
Total.................................................. $ 3,123
---------
---------
</TABLE>
NOTE 7: DEBT
SHORT-TERM DEBT. The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper........................................................................... $ 2,305 $ 1,029
Current portion of long-term debt, including $500 and $450 payable to TWE, in 1994 and 1993,
respectively................................................................................ 732 795
Allocated to discontinued operations -- net.................................................. (200) (48)
--------- ---------
Total.................................................................................... $ 2,837 $ 1,776
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.97 percent and
2.77 percent at December 31, 1994 and 1993, respectively.
U S WEST is permitted to borrow up to approximately $1.9 billion under
short-term formal lines of credit, all of which was available at December 31,
1994.
V-41
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 7: DEBT (CONTINUED)
LONG-TERM DEBT. Interest rates and maturities of long-term debt at December
31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1996 1997 1998 1999 THEREAFTER 1994 1993
- ------------------------------------------------ --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................ $ 271 $ -- $ 35 $ -- $ 240 $ 546 $ 844
Above 5% to 6%.................................. 13 25 300 -- 261 599 561
Above 6% to 7%.................................. -- -- -- 226 1,290 1,516 1,383
Above 7% to 8%.................................. 670 16 -- -- 2,507 3,193 3,248
Above 8% to 9%.................................. 28 -- -- 126 290 444 504
Above 9% to 10%................................. -- 29 -- 15 355 399 399
--------- --- --------- --------- ----------- --------- ---------
$ 982 $ 70 $ 335 $ 367 $ 4,943 6,697 6,939
--------- --- --------- --------- -----------
--------- --- --------- --------- -----------
Capital lease obligations and other............. 153 139
Unamortized discount -- net..................... (1,239) (1,288)
Allocated to discontinued operations -- net..... (510) (367)
--------- ---------
Total....................................... $ 5,101 $ 5,423
--------- ---------
--------- ---------
</TABLE>
Long-term debt consists principally of debentures and medium-term notes,
debt associated with the Company's Leveraged Employee Stock Ownership Plans
(LESOP), and zero coupon, subordinated notes convertible at any time into U S
WEST common shares. The zero coupon notes have a yield to maturity of
approximately 7.3 percent and are recorded at a discounted value of $498.
Long-term debt also includes a note payable to TWE of $271 in 1994 and $555 in
1993.
During 1993, U S WEST refinanced debt issues aggregating $2.7 billion in
principal amount. Expenses associated with the refinancing resulted in an
extraordinary charge to income of $77, net of a tax benefit of $48. The
refinancing allowed the Company to take advantage of favorable interest rates.
Interest payments, net of amounts capitalized, were $534, $680 and $704 for
1994, 1993 and 1992, respectively, of which $103, $212 and $220, respectively,
relate to discontinued operations.
NOTE 8: LEASING ARRANGEMENTS
U S WEST has entered into operating leases for office facilities, equipment
and real estate. Rent expense under operating leases was $288, $275 and $274 in
1994, 1993 and 1992, respectively.
Minimum future lease payments as of December 31, 1994, under non-cancellable
operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------
<S> <C>
1995...................................................................... $ 153
1996...................................................................... 140
1997...................................................................... 128
1998...................................................................... 123
1999...................................................................... 109
Thereafter................................................................ 853
---------
Total................................................................. $ 1,506
---------
---------
</TABLE>
V-42
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 9: DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risks arising from changes in interest
rates and foreign exchange rates. Derivative financial instruments are used by
the company to manage these risks.
INTEREST RATE RISK MANAGEMENT. The Company enters into interest rate swap
agreements to manage its market exposure to fluctuations in interest rates. Swap
agreements are primarily used to effectively convert existing commercial paper
to fixed-rate debt. This allows the Company to achieve interest savings over
issuing fixed-rate debt directly. Additionally, the Company has entered into
interest rate swaps to effectively terminate existing swaps.
Under an interest rate swap, the Company agrees with another party to
exchange interest payments at specified intervals over a defined term. Interest
payments are calculated by reference to the notional amount based on the fixed-
and variable-rate terms of the swap agreements. The net interest received or
paid as part of the interest rate swap is accounted for as an adjustment to
interest
expense. Gains or losses on swaps entered into to terminate existing swaps are
deferred and amortized over the remaining life of the swaps.
The Company also entered into a currency swap to convert Swiss
franc-denominated debt to dollar-denominated debt. This allowed the Company to
achieve interest savings over issuing fixed-rate, dollar-denominated debt. Under
the currency swap, the Company agreed with another party to exchange dollars for
francs within the terms of the loan, which include periodic interest payments
and principal upon origination and maturity. The currency swap and foreign
currency debt are combined and accounted for as if fixed-rate,
dollar-denominated debt were issued directly.
The following table summarizes terms of swaps pertaining to continuing
operations as of December 31, 1994. Variable rates are primarily indexed to the
30-day commercial paper rate.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
NOTIONAL ----------------------
CONTINUING OPERATIONS AMOUNT MATURITIES RECEIVE PAY
- -------------------------------------------------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Variable to fixed................................. $ 785 1995 - 2004 6.14 6.47
Fixed to variable................................. 5 1995 6.61 5.87
Currency.......................................... 71 1999 -- 6.53
</TABLE>
The following table summarizes terms of swaps pertaining to discontinued
operations as of December 31, 1994. Variable rates are indexed to three- and
six-month LIBOR.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
NOTIONAL ----------------------
DISCONTINUED OPERATIONS AMOUNT MATURITIES RECEIVE PAY
- -------------------------------------------------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Variable to fixed (1)............................. $ 380 1996 - 1997 5.69 9.03
Fixed to variable (1)............................. 380 1996 - 1997 7.29 5.80
Variable rate basis adjustment (2)................ 10 1997 5.89 7.04
<FN>
- ------------------------
(1) The fixed to variable swap has the same terms as the variable to fixed swap
and was entered into to terminate the variable to fixed swap. The net loss
on the swaps is deferred and amortized over the remaining life of the
swaps, and is included in the discontinued operations loss provision.
(2) Variable rate debt based on U. S. Treasury securities is swapped to a
LIBOR-based interest rate.
</TABLE>
In 1993, the Company executed forward contracts to sell U. S. Treasury
securities to reduce debt issuance risks by allowing the company to lock in the
Treasury rate component of the future debt
V-43
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 9: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
issue. At December 31, 1994, deferred credits of $8 and deferred charges of $51
on closed interest rate forward contracts are included as part of the carrying
value of the underlying debt. The deferred credits and charges are being
recognized as a yield adjustment over the life of the debt, which matures at
various dates through 2043. The net deferred charge is directly offset by the
lower coupon rate achieved on the debt issuance. At December 31, 1994, there
were no open forward contracts on interest rates.
The counterparties to these derivative contracts are major financial
institutions. The Company is exposed to credit loss in the event of
non-performance by these counterparties. The Company manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations that correspond to the respective credit rating of each
counterparty. The Company does not have significant exposure to an individual
counterparty and does not anticipate non-performance by any counterparty.
FOREIGN EXCHANGE RISK MANAGEMENT. The Company enters into forward and
option contracts to manage the market risks associated with fluctuations in
foreign exchange rates after considering offsetting foreign exposures among
international operations.
The Company enters into forward contracts to exchange foreign currencies at
agreed rates on specified future dates. This allows the Company to fix the cost
of firm foreign commitments. The commitments and the forward contracts are for
periods up to one year. The gain or loss on forward contracts designated as
hedges of firm foreign investment commitments are included in common
shareowners' equity and are recognized in income on sale of the investment.
The Company also enters into foreign exchange combination option contracts
to protect against adverse changes in foreign exchange rates. These option
contracts combine purchased options to cap the foreign exchange rate and written
options to finance the premium of the purchased options. The commitments and
combination option contracts are for periods up to one year. Gains or losses on
the contracts, designated as hedges of firm investment commitments, are included
in common shareowners' equity and are recognized in income on sale of the
investment.
The counterparties to these contracts are major financial institutions. The
Company is exposed to credit loss in the event of non-performance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate non-performance by any counterparty.
At December 31, 1994, the company has outstanding forward and combination
option contracts to purchase British pounds in the notional amounts of $135 and
$35, respectively. All contracts mature within one year.
Cumulative deferred credits on foreign exchange contracts of $7 and deferred
charges of $25, and deferred taxes (benefits) of $3 and ($10), respectively, are
included in common shareowners' equity at December 31, 1994.
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt, including discontinued operations, approximate
carrying values due to their short-term nature.
V-44
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of mandatorily redeemable preferred stock, foreign exchange
forward and combination option contracts approximate the carrying values.
The fair values of interest rate swaps are based on estimated amounts the
Company would receive or pay to terminate such agreements, taking into account
current interest rates and creditworthiness of the counterparties.
The fair value of long-term debt, including discontinued operations, is
based on quoted market prices where available or, if not available, is based on
discounting future cash flows using current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1994 1993
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
CONTINUING AND DISCONTINUED OPERATIONS VALUE VALUE VALUE VALUE
- ------------------------------------------------------------------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)...................................... $ 9,221 $ 8,700 $ 8,695 $ 8,940
Interest rate swap agreements -- assets................................. -- (15) -- (29)
Interest rate swap agreements -- liabilities............................ -- 20 -- 89
----------- --------- ----------- ---------
Debt -- net......................................................... $ 9,221 $ 8,705 $ 8,695 $ 9,000
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
NOTE 11: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
U S WEST has 50,000,000 authorized shares of preferred stock. On September
2, 1994, U S WEST issued to Fund American Enterprises Holdings, Inc. ("FFC")
50,000 shares of a class of newly created 7 percent Series B Cumulative
Redeemable Preferred Stock for a total of $50. (See Note 17 to the Consolidated
Financial Statements.) The preferred stock was recorded at fair market value of
$51.
U S WEST has the right, commencing five years from September 2, 1994, to
redeem the shares for one thousand dollars per share plus unpaid dividends and a
redemption premium. The shares are mandatorily redeemable in year 10 at face
value plus unpaid dividends. At the option of FFC, the preferred stock also can
be redeemed for common shares of Financial Security Assurance Holdings Ltd.
("FSA"), a member of the Capital Assets segment.
NOTE 12: SHAREOWNERS' EQUITY
COMMON STOCK. At December 31, 1994, the Company held 7,537,372 treasury
shares with a cost basis of $163, or $21.63 per share.
On December 6, 1994, 12,779,206 shares of U S WEST common stock were issued
to, or in the name of, the holders of Wometco Cable Corp. in accordance with a
merger agreement. (See Note 2 to the Consolidated Financial Statements.)
In connection with the settlement of shareowner litigation ("Rosenbaum v. U
S WEST Inc. et al."), the Company issued approximately 5.5 million shares of U S
WEST common stock in March 1994 to class members connected with this litigation.
U S WEST issued, to certified class members, non-transferable rights to
purchase shares of common stock directly from U S WEST, on a commission-free
basis, at a 3 percent discount from the
V-45
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 12: SHAREOWNERS' EQUITY (CONTINUED)
average of the high and low trading prices of such stock on the New York Stock
Exchange on February 23, 1994, the pricing date designated in accordance with
the settlement. U S WEST received net proceeds of $210 from the offering.
During fourth quarter 1993, the Company issued 22 million additional shares
of U S WEST common stock for net cash proceeds of $1,020. The company used the
net proceeds to reduce short-term indebtedness, including indebtedness incurred
from the TWE investment, and for general corporate purposes.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLANS (LESOP). U S WEST maintains
employee savings plans for management and occupational employees under which the
Company matches a certain percentage of eligible contributions made by the
employees with shares of company stock. The Company established two LESOPs in
1989 to provide the Company stock used for matching contributions to the savings
plans.
The long-term debt of the LESOP trusts, which is unconditionally guaranteed
by the Company, is included in the accompanying consolidated balance sheets and
corresponding amounts have been recorded as reductions to common shareowners'
equity. The trusts will repay the debt with Company contributions and certain
dividends received on shares of the Company's common stock held by the LESOP.
Total Company contributions to the trusts (excluding dividends) were $80, $75
and $78 in 1994, 1993 and 1992, respectively, of which $19, $24 and $28,
respectively, have been classified as interest expense. The Company recognizes
expense based on the cash payments method. Dividends on unallocated shares held
by the LESOP were $11, $14 and $17 in 1994, 1993 and 1992, respectively.
SHAREHOLDER RIGHTS PLAN. The board of directors of the Company has adopted
a shareholder rights plan which, in the event of a takeover attempt, would
entitle existing shareowners to certain preferential rights. The rights expire
on April 6, 1999, and are redeemable by the Company at any time prior to the
date they would become effective.
SHARE REPURCHASE. Subsequent to the acquisition of the Atlanta Systems (See
Note 2 to the Consolidated Financial Statements), the company announced its
intention to purchase U S WEST common shares in the open market up to an amount
equal to those issued in conjunction with the acquisition, subject to market
conditions. In December 1994, the Company purchased 550,400 shares of U S WEST
common stock at an average price per share of $36.30.
NOTE 13: PARTIAL SALE OF JOINT VENTURE INTEREST
TeleWest Communications plc ("TeleWest"), the cable television/telephone
joint venture in the United Kingdom owned by U S WEST and Tele-Communications
Inc., made an initial public offering of its ordinary shares in November 1994.
Following the offering, in which U S WEST sold 24.4 percent of its joint venture
interest, U S WEST owns approximately 37.8 percent of TeleWest. Net proceeds of
approximately $650 will be used by TeleWest to finance construction and
operations costs, invest in affiliated companies and repay debt. It is the
Company's policy to recognize as income any gains or losses related to the sale
of investee stock. U S WEST recognized a gain of $105 in 1994, net of $59 in
deferred taxes, for the partial sale of its joint venture interest in TeleWest.
NOTE 14: STOCK INCENTIVE PLANS
U S WEST maintains stock incentive plans for executives and key employees,
and non-employees. The 1994 Stock Plan was approved by shareowners on May 6,
1994. The 1994 Stock Plan is a successor
V-46
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 14: STOCK INCENTIVE PLANS (CONTINUED)
plan to the U S West Inc. Stock Incentive Plan and the U S WEST 1991 Stock
Incentive Plan (The "Predecessor Plans"). No further grants of options or
restricted stock may be made under the Predecessor Plans. The plan is
administered by the Human Resources Committee of the board of directors with
respect to officers, executive officers and outside directors and by a special
committee with respect to all other eligible employees and eligible
non-employees. The maximum aggregate number of shares of common stock of the
company that may be granted in any calendar year for all purposes under the plan
will be three-quarters of 1 percent of the shares of common stock outstanding
(excluding shares of such common stock held in the company's treasury) on the
first day of such calendar year. In the event that fewer than the full aggregate
number of shares of common stock available for issuance in any calendar year are
issued, the shares not issued will be added to the shares available for issuance
in any subsequent year or years. Options may be exercised no later than 10 years
after the date on which the option was granted. A total of 8,300,853 shares of U
S WEST common stock were reserved for issuance under the 1994 Stock Plan and the
Predecessor Plans at December 31, 1994.
Data for outstanding options under the plan is summarized as follows:
<TABLE>
<CAPTION>
AVERAGE
OPTION
NUMBER OF SHARES* PRICE
------------------ ---------
<S> <C> <C>
Outstanding January 1, 1992..................................... 3,420,406 $ 33.97
---------- ---------
Granted....................................................... 1,410,311 38.13
Exercised..................................................... (327,221) 26.15
Canceled or expired........................................... (53,346) 36.17
---------- ---------
Outstanding December 31, 1992................................... 4,450,150 35.81
---------- ---------
Granted....................................................... 1,486,106 48.83
Exercised..................................................... (412,444) 31.73
Canceled or expired........................................... (222,273) 36.87
---------- ---------
Outstanding December 31, 1993................................... 5,301,539 39.76
---------- ---------
Granted....................................................... 2,438,409 36.15
Exercised..................................................... (139,762) 33.72
Canceled or expired........................................... (214,149) 40.71
---------- ---------
Outstanding December 31, 1994................................... 7,386,037 $ 38.66
---------- ---------
---------- ---------
<FN>
- ------------------------
* Includes options granted in tandem with SARs.
</TABLE>
Options to purchase 2,374,394 and 1,412,791 shares were exercisable at
December 31, 1994 and 1993, respectively. A total of 914,816 and 8,649,750
shares of U S WEST common stock were available for grant under the plans in
effect at December 31, 1994 and 1993, respectively.
NOTE 15: EMPLOYEE BENEFITS
PENSION PLAN. Effective January 1, 1993, U S WEST merged its two defined
benefit pension plans, covering substantially all management and occupational
employees, in a single plan. Management benefits are based on a final pay
formula, while occupational benefits are based on a flat benefit
V-47
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 15: EMPLOYEE BENEFITS (CONTINUED)
formula. U S WEST uses the projected unit credit method for the determination of
pension cost for financial reporting purposes and the aggregate cost method for
funding purposes. No funding was required in 1994, 1993 or 1992.
The composition of the net pension credit and the actuarial assumptions of
the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Details of pension credit:
Service cost -- benefits earned during the period............. $ 197 $ 148 $ 141
Interest cost on projected benefit obligation................. 561 514 480
Actual return on plan assets.................................. 188 (1,320) (411)
Net amortization and deferral................................. (946) 578 (318)
--------- --------- ---------
Net pension credit.............................................. $ 0 $ (80) $ (108)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1994, 9.00 percent for 1993 and 9.25 percent
for 1992.
The funded status of the plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5,044 and
$5,286, respectively.................................................... $ 5,616 $ 5,860
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds.................... $ 8,388 $ 8,987
Less: Projected benefit obligation....................................... 7,149 7,432
--------- ---------
Plan assets in excess of projected benefit obligation.................... 1,239 1,555
Unrecognized net (gain) loss............................................. 161 (70)
Prior service cost not yet recognized in net periodic pension cost....... (67) (72)
Balance of unrecognized net asset at January 1, 1987..................... (785) (865)
--------- ---------
Prepaid pension asset.................................................... $ 548 $ 548
--------- ---------
--------- ---------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Discount rate.................................................................. 8.00 7.25
Average rate of increase in future compensation levels......................... 5.50 5.50
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. U S WEST and most of its
subsidiaries provide certain health care and life insurance benefits to retired
employees. Effective January 1, 1992, U S WEST adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which mandates that
employers reflect in their current expenses the cost of providing retirement
medical and life insurance benefits to current and future retirees. Prior to
1992, U S WEST
V-48
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 15: EMPLOYEE BENEFITS (CONTINUED)
recognized these costs as they were paid. Adoption of SFAS No. 106 resulted in a
one-time, non-cash charge against 1992 earnings of $1,741 net of a deferred
income tax benefit of $1,038, for the prior service of active and retired
employees. The effect on 1992 income from continuing operations of adopting SFAS
No. 106 was approximately $47, or $.11 per share.
In conjunction with the adoption of SFAS No. 106, for financial reporting
purposes, the Company elected to immediately recognize the accumulated
postretirement benefit obligation for current and future retirees, net of the
fair value of plan assets. However, the Federal Communications Commission and
certain state jurisdictions permit amortization of the transition obligation
over the average remaining service period of active employees for regulatory
accounting purposes.
U S WEST uses the projected unit credit method for the determination of
postretirement medical costs for financial reporting purposes. The composition
of net postretirement benefit costs and actuarial assumptions underlying plan
benefits follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1993 1992
--------------------------------- --------------------------------- -----------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL MEDICAL
----------- --- --------- ----------- --- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the
period......................................... $ 62 $ 13 $ 75 $ 60 $ 11 $ 71 $ 57
Interest on accumulated benefit obligation...... 221 39 260 235 36 271 223
Actual return on plan assets.................... 3 1 4 (73) (52) (125) (19)
Net amortization and deferral................... (68) (31) (99) 27 22 49 --
----- --- --------- ----- --- --------- -----
Net postretirement benefit costs................ $ 218 $ 22 $ 240 $ 249 $ 17 $ 266 $ 261
----- --- --------- ----- --- --------- -----
----- --- --------- ----- --- --------- -----
<CAPTION>
LIFE TOTAL
--- ---------
<S> <C> <C>
Service cost -- benefits earned during the
period......................................... $ 10 $ 67
Interest on accumulated benefit obligation...... 33 256
Actual return on plan assets.................... (29) (48)
Net amortization and deferral................... -- --
--- ---------
Net postretirement benefit costs................ $ 14 $ 275
--- ---------
--- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
postretirement benefit costs was 8.50 percent for 1994 and 9.00 percent in 1993
and 1992.
The funded status of the plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retirees.......................................... $ 1,733 $ 248 $ 1,981 $ 1,795 $ 311 $ 2,106
Fully eligible plan participants.................. 264 38 302 274 48 322
Other active plan participants.................... 940 135 1,075 983 170 1,153
--------- --------- --------- --------- --------- ---------
Total accumulated postretirement benefit
obligation..................................... 2,937 421 3,358 3,052 529 3,581
Unrecognized net gain (loss)........................ 243 90 333 65 (25) 40
Fair value of plan assets, primarily stocks, bonds
and life insurance (1)............................. (894) (374) (1,268) (613) (388) (1,001)
--------- --------- --------- --------- --------- ---------
Accrued postretirement benefit obligation........... $ 2,286 $ 137 $ 2,423 $ 2,504 $ 116 $ 2,620
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
- ------------------------
(1) Medical plan assets include U S WEST common stock of $164 in 1994.
</TABLE>
V-49
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 15: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Discount rate....................................................... 8.00 7.25
Medical trend*...................................................... 9.70 10.30
<FN>
- ------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 6 percent
in 2006.
</TABLE>
A 1-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1994 net postretirement benefit cost by approximately $50 and
increased the 1994 accumulated postretirement benefit obligation by
approximately $450.
For U S WEST Communications, the annual amount funded will generally follow
the amount of expense allowed in regulatory jurisdictions.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
OTHER POSTEMPLOYMENT BENEFITS. U S WEST adopted, effective January 1, 1992,
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112
requires that employers accrue for the estimated costs of benefits, such as
workers' compensation and disability, provided to former or inactive employees
who are not eligible for retirement. Adoption of SFAS No. 112 resulted in a one-
time, non-cash charge against 1992 earnings of $53, net of a deferred income tax
benefit of $32.
NOTE 16: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current............................................................ $ 418 $ 422 $ 427
Deferred........................................................... 351 (145) 46
Investment tax credits -- net...................................... (47) (56) (63)
--------- --------- ---------
722 221 410
--------- --------- ---------
State and local:
Current............................................................ 52 71 62
Deferred........................................................... 83 (23) 21
--------- --------- ---------
135 48 83
--------- --------- ---------
Provision for income taxes........................................... $ 857 $ 269 $ 493
--------- --------- ---------
--------- --------- ---------
</TABLE>
Amounts paid for income taxes were $313, $391 and $459 in 1994, 1993 and
1992, respectively, inclusive of discontinued operations.
V-50
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 16: INCOME TAXES (CONTINUED)
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate................................................................. 35.0 35.0 34.0
Investment tax credit amortization......................................................... (1.3) (3.0) (4.2)
State income taxes -- net of federal effect................................................ 3.9 4.0 3.5
Rate differential on reversing temporary differences....................................... -- (2.2) (3.1)
Depreciation on capitalized overheads -- net............................................... -- 1.4 2.1
Tax law change -- catch-up adjustment...................................................... -- 3.1 --
Restructuring charge....................................................................... -- (1.5) --
Other...................................................................................... (0.1) (0.7) (0.9)
--- --- ---
Effective tax rate......................................................................... 37.5 36.1 31.4
--- --- ---
--- --- ---
</TABLE>
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Property, plant and equipment............................................ $ 1,504 $ 1,340
Leases................................................................... 690 663
State deferred taxes -- net of federal effect............................ 395 277
Intangible assets........................................................ 164 --
Investment in partnerships............................................... 142 46
Other.................................................................... 84 94
--------- ---------
Deferred tax liabilities................................................. 2,979 2,420
--------- ---------
Postemployment benefits, including pension............................... 718 736
Restructuring, discontinued operations and other......................... 417 620
Unamortized investment tax credit........................................ 79 94
State deferred taxes -- net of federal effect............................ 232 220
Other.................................................................... 317 260
--------- ---------
Deferred tax assets...................................................... 1,763 1,930
--------- ---------
Net deferred tax liability............................................... $ 1,216 $ 490
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $352 and $336 at December
31, 1994 and 1993, respectively, resulting primarily from restructuring charges
and compensation-related items.
On August 10, 1993, federal legislation was enacted that increased the
corporate tax rate from 34 percent to 35 percent retroactive to January 1, 1993.
The cumulative effect on deferred taxes of the 1993 increase in income tax rates
was $74, including $20 for discontinued operations.
The net deferred tax liability includes $678 in 1994 and $607 in 1993
related to discontinued operations.
V-51
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 17: COMMITMENTS AND CONTINGENCIES
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for reconsideration, thereby establishing
two exceptions to the rule against retroactive ratemaking: 1) unforeseen and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request from interexchange carriers and other parties related to the Tax Reform
Act of 1986. This action is still in the discovery process. If a formal filing
- -- made in accordance with the remand from the Supreme Court -- alleges that the
exceptions apply, the range of possible risk to U S WEST Communications is $0 to
$140.
U S WEST has issued letters of credit, which expire in July 1995, in
conjunction with its investment in Binariang Sdn Bhd, a Malaysian
telecommunications company, totaling $110.
NOTE 18: NET INVESTMENT IN ASSETS HELD FOR SALE
During second quarter 1993, the U S WEST board of directors approved a plan
to dispose of the Capital Assets segment through the sale of segment assets and
businesses. Accordingly, the Company recorded an after-tax charge of $100, or
$.24 per share, for the estimated loss on disposition. An additional provision
of $20, or $.04 per share, is related to the effect of the 1993 increase in
federal income tax rates. The capital assets segment includes activities related
to financial services and financial guarantee insurance operations. Also
included in the segment is U S WEST Real Estate Inc., for which disposition was
announced in 1991 and a $500 valuation allowance was established to cover both
carrying costs and losses on disposal of related properties.
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a net investment in assets held for sale. The net
realizable value of the assets will be reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, being charged to continuing
operations. Prior to January 1, 1995, the entire capital assets segment was
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
During 1994, U S WEST reduced its ownership interest in FSA, a member of the
capital assets segment, to 60.9 percent, and its voting interest to 49.8 percent
through a series of transactions. In May and June 1994, U S WEST sold 8.1
million shares of FSA, including 2.0 million shares to Fund American Enterprises
Holdings Inc. ("FFC"), in an initial public offering of FSA common stock at $20
per share. U S WEST received $154 in net proceeds from the offering. On
September 2, 1994, U S WEST issued to FFC 50,000 shares of cumulative redeemable
preferred stock for a total of $50. (See Note 11 to the Consolidated Financial
Statements.) FFC's voting interest in FSA is 21.0 percent, achieved through a
combination of direct share ownership of common and preferred FSA shares, and a
voting trust agreement with U S WEST. The company retained certain risks in
asset-backed obligations related to the commercial real estate portfolio.
FFC has a right of first offer and a call right to purchase from U S WEST up
to 9.0 million shares, or approximately 57 percent, of outstanding FSA stock
held by U S WEST. U S WEST anticipates its ownership will be further reduced by
1996.
During 1994, U S WEST Real Estate sold 12 buildings, six parcels of land and
other assets for approximately $327. Additional properties were sold in the
first quarter of 1995 for approximately
V-52
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
$47. During 1993, five properties were sold for approximately $66. The sales
were in line with company estimates. Proceeds from building sales were primarily
used to pay related debt. U S WEST has completed all construction of existing
buildings in the commercial real estate portfolio and expects to substantially
complete the liquidation of its portfolio by 1998. The remaining balance of
assets subject to sale is approximately $596, net of reserves as of March 31,
1995.
In December 1993, the company sold $2.0 billion of finance receivables and
the business of U S WEST Financial Services to NationsBank Corporation. Sales
proceeds of $2.1 billion were used primarily to repay related debt. The pretax
gain on the sale of approximately $100, net of selling expenses, was in line
with management's estimate and was included in the Company's estimate of
provision for loss on disposal. The management team that previously operated the
entire Capital Assets segment transferred to NationsBank.
Building sales and operating revenues of the discontinued capital assets
segment were $75 and $305 for the three months ended March 31, 1995 and 1994,
respectively, and $553 in 1994, $710 in 1993, and $672 in 1992. Income from
discontinued operations for 1993 (to June 1) and 1992 totaled $38 and $103,
respectively. Income (loss) from discontinued operations subsequent to June 1,
1993 is being deferred and was included within the provision for loss on
disposal. The assets and liabilities of the discontinued capital assets segment
have been separately classified on the consolidated balance sheets as net
investment in assets held for sale.
NET INVESTMENT IN ASSETS HELD FOR SALE
<TABLE>
<CAPTION>
MARCH 31,
(UNAUDITED) DECEMBER 31,
----------- --------------------
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................................... $ 47 $ 7 $ 24
Finance receivables -- net.................................. 1,070 1,073 1,131
Investment in real estate -- net of valuation allowance..... 421 465 711
Bonds....................................................... 138 155 895
Investment in FSA........................................... 349 329 --
Other assets................................................ 264 362 600
----------- --------- ---------
Total assets................................................ $ 2,289 $ 2,391 $ 3,361
----------- --------- ---------
LIABILITIES:
Debt........................................................ $ 1,032 $ 1,283 $ 1,496
Deferred income taxes....................................... 713 693 681
Accounts payable, accrued liabilities and other............. 120 103 244
Unearned premiums........................................... -- -- 346
Minority interests.......................................... 10 10 40
----------- --------- ---------
Total liabilities........................................... 1,875 2,089 2,807
----------- --------- ---------
Net investment in assets held for sale...................... $ 414 $ 302 $ 554
----------- --------- ---------
----------- --------- ---------
</TABLE>
V-53
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
Finance receivables primarily consist of contractual obligations under
long-term leases that the company intends to run off. These long-term leases
primarily consist of investments in leveraged leases related to aircraft and
power plants. For leveraged leases, the cost of the assets leased is financed
primarily through non-recourse debt that is netted against the related lease
receivable.
The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Receivables.............................................................. $ 1,095 $ 1,208
Unguaranteed estimated residual values................................... 467 477
--------- ---------
1,562 1,685
Less: Unearned income.................................................... 459 490
Credit loss and other allowances....................................... 30 64
--------- ---------
Finance receivables -- net............................................... $ 1,073 $ 1,131
--------- ---------
--------- ---------
</TABLE>
Investments in securities, which are designated as available for sale, are
carried at market value. Any resulting unrealized gains or losses, net of
applicable deferred income taxes, are reflected as a component of common
shareowners' equity. The 1994 net unrealized loss of $64 (net of a deferred tax
benefit of $34) and the 1993 net unrealized gain of $35 (net of deferred taxes
of $19), are included in common shareowners' equity.
The amortized cost and estimated market value of investments in securities
follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
MARKETABLE SECURITIES AMOUNT GAINS LOSSES (1) VALUE
- ---------------------------------------------------------------------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Municipal............................................................. $113 -- $13 $100
Other................................................................. 65 -- 10 55
-------- ----- --- -----
Total................................................................. 178 -- $23 $155
-------- ----- --- -----
-------- ----- --- -----
<CAPTION>
DECEMBER 31, 1993
------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED FAIR
MARKETABLE SECURITIES AMOUNT GAINS LOSSES VALUE
- ---------------------------------------------------------------------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Municipal............................................................. $742 $ 51 $ 1 $792
Other................................................................. 99 4 -- 103
-------- ----- --- -----
Total................................................................. $841 $ 55 $ 1 $895
-------- ----- --- -----
-------- ----- --- -----
<FN>
- ------------------------------
(1) Common shareowners' equity at December 31, 1994, also includes a net
unrealized loss on marketable securities of $49 (net of a deferred tax
benefit of $26), associated with the company's equity investment in FSA.
</TABLE>
V-54
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
DEBT. Interest rates and maturities of debt associated with the
discontinued capital assets segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------------------ TOTAL TOTAL
INTEREST RATES 1995 1996 1997 1998 1999 THEREAFTER 1994 1993
- --------------------------------------- --------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Up to 5%............................... $ 50 $ -- $ -- $ -- $ -- $ 5 $ 55 $ 496
Above 5% to 6%......................... 5 -- 10 -- -- -- 15 5
Above 6% to 7%......................... 100 -- 54 -- -- -- 154 54
Above 7% to 8%......................... 7 5 5 -- -- -- 17 26
Above 8% to 9%......................... -- 35 -- -- 150 4 189 264
Above 9% to 10%........................ 61 -- 48 5 -- -- 114 177
Above 10%.............................. -- -- -- 29 -- -- 29 29
Commercial paper rates................. -- -- -- -- -- -- -- 30
--------- --------- --------- --------- --------- ----- --------- ---------
$ 223 $ 40 $ 117 $ 34 $ 150 $ 9 573 1,081
--------- --------- --------- --------- --------- -----
--------- --------- --------- --------- --------- -----
Allocated from continuing operations -- net................................................................ 710 415
--------- ---------
Total.................................................................................................... $ 1,283 $ 1,496
--------- ---------
--------- ---------
</TABLE>
Debt of $119 and $124 at December 31, 1994 and 1993, respectively, was
collateralized by first deeds of trust on associated real estate, assignment of
rents from leases, and operating and management agreements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK -- FINANCIAL
GUARANTEES. The Company retained certain risks in asset-backed obligations
related to the commercial real estate portfolio. The principal amounts insured
on the asset-backed and municipal obligations follow. The 1994 amounts do not
include the financial guarantees for FSA, which is now accounted for under the
equity method.
<TABLE>
<CAPTION>
ASSET-BACKED (1) MUNICIPAL (2)
-------------------- --------------------
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
TERM TO MATURITY 1994 1993 1994 1993
- ---------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
0 to 5 Years............................ $ 540 $ 5,955 -- $ 1,888
5 to 10 Years........................... 537 2,050 -- 2,771
10 to 15 Years.......................... 391 1,286 -- 2,176
15 to 20 Years.......................... -- 593 -- 2,346
20 and Above............................ -- 2,501 -- 4,606
--------- --------- --------- ---------
Total................................. $ 1,468 $ 12,385 -- $ 13,787
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) Excludes amounts ceded to other insurers of $6,210 in 1993 and includes $25
of assumed obligations in 1993.
(2) Excludes amounts ceded to other insurers of $5,576 in 1993 and includes
$1,218 of assumed obligations in 1993.
</TABLE>
V-55
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The principal amount of insured obligations in the municipal portfolio, net
of amounts ceded, include the following types of issues:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF ISSUE 1994 1993
- ------------------------------------------------------------- --------- ---------
<S> <C> <C>
General obligation........................................... $ -- $ 3,487
Tax-backed revenue........................................... -- 2,919
Housing revenue.............................................. -- 1,879
Municipal utility revenue.................................... -- 1,783
Health care revenue.......................................... -- 1,399
Transportation revenue....................................... -- 710
Other........................................................ -- 1,610
--------- ---------
Total...................................................... $ -- $ 13,787
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations, net of amounts ceded, follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1994 1993
- ----------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Residential mortgages.................................................. $ -- $ 3,874
Consumer receivable.................................................... -- 1,443
Securities:
Government debt...................................................... -- 2,039
Non-government securities............................................ -- 1,709
Commercial mortgages:
Commercial real estate............................................... 530 809
Corporate secured.................................................... 888 1,018
Investor-owned utility first mortgage bonds............................ -- 772
Other asset-backed..................................................... 50 721
--------- ---------
Total................................................................ $ 1,468 $ 12,385
--------- ---------
--------- ---------
</TABLE>
V-56
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 18: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
ADDITIONAL FINANCIAL INFORMATION. Information for U S WEST Financial
Services Inc., a member of the discontinued capital assets segment, follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31,
-------------------- -------------------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993 1992
- ------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $ 10 $ 17 $ 54 $ 410 $ 302
Income before parent support and income taxes.......... -- -- -- -- 83
Income before parent support........................... -- -- -- -- 55
Net income............................................. -- -- -- -- 55
<FN>
- ------------------------
* Results of Financial Services are included in net investment in assets held
for sale
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- --------------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- -------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Net finance receivables....................................... $ 976 $ 981 $ 1,020
Total assets.................................................. 1,293 1,331 1,797
Total debt.................................................... 486 533 957
Total liabilities............................................. 1,223 1,282 1,748
Shareowners' equity........................................... 70 49 49
</TABLE>
NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data, and per share market and dividend data, follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTERLY FINANCIAL DATA QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
1994
Sales and other revenues.............................................. $ 2,641 $ 2,708 $ 2,765 $ 2,839
Income from continuing operations before income taxes................. 522 609 514 638
Income from continuing operations and net income...................... 324 375 318 409
Earnings per common share............................................. 0.73 0.83 0.70 0.89
1993
Sales and other revenues.............................................. $ 2,510 $ 2,541 $ 2,577 $ 2,666
Income (loss) from continuing operations before income taxes.......... 449 436 (534) 394
Income (loss) from continuing operations.............................. 296 291 (375) 264
Net income (loss)..................................................... 316 159 (3,545) 264
Earnings (loss) per common share from continuing operations........... 0.71 0.70 (0.90) 0.62
Earnings (loss) per common share...................................... 0.76 0.38 (8.50) 0.62
</TABLE>
1994 first-quarter income from continuing operations includes $15 ($.03 per
share) for a gain on the sale of certain rural telephone exchanges. 1994
second-quarter net income includes gains of $16 ($.04 per share) and $41 ($.09
per share) for the sales of certain rural telephone exchanges and paging
operations, respectively. 1994 fourth-quarter net income includes gains of $105
($.23 per share) for the partial sale of a joint venture interest and $20 ($.04
per share) for the sale of certain rural telephone exchanges.
V-57
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
1993 second-quarter net income was reduced by $100 ($.24 per share) for a
charge related to discontinued operations and $50 ($.12 per share) for the early
extinguishment of debt. 1993 third-quarter net loss includes a restructuring
charge of $610 ($1.46 per share) and $74 ($.18 per share), including $20 ($.05
per share) related to discontinued operations, for the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates. 1993
third-quarter net loss also includes extraordinary charges of $3,123 ($7.49 per
share) for the discontinuance of SFAS No. 71, and $27 ($.06 per share) for the
early extinguishment of debt.
1993 net income (loss) related to discontinued operations was $20 ($.05 per
share) and ($82) ($.20 per share) for the first and second quarters,
respectively. Income (loss) subsequent to June 1, 1993, is being deferred and
was included within the provision for loss on disposal of the discontinued
capital assets segment.
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- ------------------------------------------- --------- --------- --------- -----------
(WHOLE DOLLARS)
<S> <C> <C> <C> <C>
1994
First.................................... $ 46.250 $ 38.500 $ 40.750 $ 0.535
Second................................... 43.750 38.250 41.875 0.535
Third.................................... 43.125 38.250 38.750 0.535
Fourth................................... 38.875 34.625 35.625 0.535
1993
First.................................... $ 43.875 $ 37.750 $ 43.625 $ 0.535
Second................................... 46.000 40.625 45.875 0.535
Third.................................... 49.375 44.500 49.250 0.535
Fourth................................... 50.750 45.750 45.875 0.535
</TABLE>
V-58
<PAGE>
ANNEX VI
COMMUNICATIONS GROUP
<TABLE>
<S> <C>
Description of Business............................................................. VI-2
Selected Financial Data............................................................. VI-9
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. VI-11
Index to Combined Financial Statements.............................................. VI-27
</TABLE>
VI-1
<PAGE>
COMMUNICATIONS GROUP
DESCRIPTION OF BUSINESS
The Communications Group, through U S WEST Communications, provides
regulated communications services to more than 25 million residential and
business customers in the Communications Group Region, which is comprised of
Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North
Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. The Communications
Group Region currently includes 7 of the 10 fastest growing states in the United
States. Communications services offered by U S WEST Communications 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 LATAs in the
Communications Group Region. U S WEST Communications also offers its customers
various new services, including Caller ID, voice messaging and high-speed data
networking services. U S WEST Communications plans to build an interactive
broadband telecommunications network capable of providing a broader range of
products and services to its customers in the Communications Group Region. The
Communications Group also provides customer premises equipment and certain
communications services to business customers and governmental agencies both
inside and outside the Communications Group Region. See "-- U S WEST
Communications" and "-- Related Businesses."
COMMUNICATIONS GROUP STRATEGY
The Communications Group's strategy is to become a leading provider of
integrated communications, entertainment, information and transaction ("CEIT")
services to its customers, primarily in the Communications Group Region.
Implementation of this strategy focuses on four key elements that take advantage
of growth opportunities while enabling the Communications Group to minimize the
impact of increasing competition:
- DEVELOPING NEW REVENUE SOURCES. The Communications Group intends to
continue offering a comprehensive set of new products and services that
are designed to meet its customers' changing communications needs. Many of
these new products and services, including Caller ID, voice messaging,
frame relay service, Transparent LAN Service and ATM Cell Relay Service,
are offered over the Communication Group's existing wireline networks.
Other new products and services, such as video programming, interactive
multimedia, PCS services and information services, will be offered over
planned broadband and wireless networks. See "-- U S WEST Communications
-- Development of Broadband Network" and "-- Development of Wireless
Capability." The Communications Group plans to jointly develop with or
obtain from the Media Group and other third parties some of the new
products and services to be offered over such networks. The Communications
Group also intends to offer interLATA long-distance services when
regulatory barriers are removed. See "-- Regulation -- Future Regulation
and Legislation."
- BUILDING CUSTOMER LOYALTY. The Communications Group intends to continue
to build customer loyalty to prepare for increasing competition resulting
from technological and regulatory changes. In order to build customer
loyalty, the Communications Group uses a variety of distribution channels
to meet the needs of its customers, including direct sales agents,
telemarketing and business centers. The Communications Group is also
focusing significant resources on upgrading its customer service and
improving its information systems and processes. As part of this effort,
the Communications Group is implementing the Restructuring Plan to provide
faster, more responsive customer service and improved repair capabilities.
See "-- U S WEST Communications -- The Restructuring Plan."
- REDUCING COSTS AND EXPENSES. The Communications Group plans to reduce
overall costs and expenses, including unit costs (defined as employee
related and other operating expenses divided by access lines in service).
As part of this effort, the Communications Group has implemented the
Restructuring Plan to consolidate its 560 customer service centers into 26
centers and reduce its total work force by approximately 9,000 employees.
See "-- U S WEST Communications -- The Restructuring Plan."
VI-2
<PAGE>
- REMOVING REGULATORY BARRIERS. The Communications Group is aggressively
pursuing a regulatory environment that will allow it to develop a broader
line of products and services and reduce costs and expenses. To achieve
such an environment, the Communications Group is working with state and
federal regulatory authorities and legislatures to gain approval of
initiatives to rebalance prices, adopt price and service quality
regulation (that will enable U S WEST Communications to set prices, enter
or exit markets and introduce new products without regulatory approvals)
and advance competitive parity. See "-- Regulation."
The Communications Group also expects to be able to benefit from synergies
with the Media Group, including achieving economies of scale through joint
purchasing of equipment, programming and services, and drawing upon the Media
Group's expertise.
U S WEST COMMUNICATIONS
U S WEST Communications was formed on January 1, 1991, when Northwestern
Bell Telephone Company ("Northwestern Bell") and Pacific Northwest Bell
Telephone Company ("Pacific Northwest Bell") were merged into The Mountain
States Telephone and Telegraph Company ("Mountain Bell"), which simultaneously
changed its name to U S WEST Communications, Inc. U S WEST acquired ownership of
Mountain Bell, Northwestern Bell and Pacific Northwest Bell on January 1, 1984,
when AT&T transferred its ownership interests in these three wholly owned
operating telephone companies to U S WEST. This divestiture was made pursuant to
a consent decree approved by the United States District Court for the District
of Columbia (the "D.C. District Court") entitled the "Modification of Final
Judgment" (the "MFJ"), which arose out of an antitrust action brought by the
United States Department of Justice against AT&T. See "-- Regulation -- The MFJ
Restrictions."
U S WEST Communications serves approximately 80 percent of the population in
the Communications Group Region. At December 31, 1994, U S WEST Communications
had approximately 14,336,000 telephone network access lines in service, a 3.6
percent increase over year-end 1993, or 4.0 percent excluding the sale of
certain rural telephone exchanges. At March 31, 1995, U S WEST Communications
had approximately 14,453,000 telephone network access lines in service, a 3.5
percent increase over the number of access lines at March 31, 1994, or 4.2
percent excluding the sale of certain rural telephone exchanges.
Under the terms of the MFJ, the Communications Group Region was divided into
29 LATAs, with each LATA generally including a metropolitan area or other
identifiable community of interest. The principal types of telecommunications
services offered by U S WEST Communications are (i) local exchange services,
(ii) exchange access services (which connects customers to the facilities of
carriers, including interLATA long distance-service providers and wireless
operators), and (iii) intraLATA long-distance network services. Local exchange
service, exchange access service and intraLATA long-distance network service
accounted for approximately 45 percent, 34 percent and 13 percent, respectively,
of the combined sales and other revenues of the Communications Group for the
three months ended March 31, 1995 and approximately 44 percent, 33 percent and
14 percent, respectively, for the fiscal year ended December 31, 1994. U S WEST
Communications provided approximately 98 percent and 98 percent of the
Communications Group's combined sales and other revenues for the three months
ended March 31, 1995 and for the fiscal year ended December 31, 1994,
respectively. In 1994, revenues from a single customer, AT&T, accounted for
approximately 12 percent of the sales and other revenues of the Communications
Group.
In recent years, U S WEST Communications has focused on developing new
communications products and services to meet its customers changing
communications needs. Such products include Caller ID and voice messaging
services. U S WEST Communications added approximately 380,000 new Caller ID
subscribers in 1994, bringing its total number of Caller ID subscribers to
665,000. In addition, U S WEST Communications added approximately 200,000 voice
messaging subscribers in 1994, bringing its total number of voice messaging
subscribers to approximately 885,000. U S WEST Communications has also
introduced "self healing" SONET-based network services, which provide redundant
fiber optic based high capacity services. Through !NTERPRISE Networking
Services, a group formed in 1993, U S WEST Communications provides high-speed
data communications and
VI-3
<PAGE>
network services, including frame relay service, Transparent LAN service, ATM
Cell Relay Service, network integration solutions and other data-related
services. U S WEST Communications intends to continue to develop and offer new
communications products and services to its customers, including, subject to the
removal of regulatory barriers, interLATA long-distance services. See "--
Regulation -- Future Regulation and Legislation." Some of these new
communications products and services may be offered outside of the
Communications Group Region.
U S WEST Communications incurred capital expenditures of approximately $2.45
billion in 1994 and expects to incur approximately $2.1 billion of capital
expenditures in 1995. These capital expenditures are used for the continuing
growth, maintenance and modernization of U S WEST Communication's telephone
plant, including investments in fiber optic cable, to improve customer services
and network productivity and offer new services.
DEVELOPMENT OF BROADBAND NETWORK. In 1993, U S WEST announced its intention
to build an interactive multimedia telecommunications network (the "Broadband
Network") capable of providing voice, data and video services, to customers
within the Communications Group Region. The Communications Group expects to
ultimately deliver a variety of integrated CEIT products and services and other
high-speed digital services, including data applications, through the Broadband
Network in selected areas of the Communications Group Region. These integrated
services, including video-on-demand, targeted advertising, home shopping,
interactive games, high-definition broadcast television and two-way, video
telephony are expected to become available over time as the Broadband Network
develops. The Company began limited testing of the Broadband Network in Omaha,
Nebraska in December 1994. A market trial will begin later in 1995 in an Omaha
area that will cover up to 50,000 homes. The offering of interactive video
services over the Broadband Network is subject to FCC regulation. See "--
Regulation -- FCC Regulation."
In early 1994, U S WEST Communications filed applications with the FCC to
install Broadband Network architecture in Denver; Minneapolis-St. Paul; Salt
Lake City; Boise; and Portland, Oregon (collectively, the "Broadband
Applications"). In May 1995, however, in order to fully assess the results of
the Omaha trials and examine alternative technologies, including wireless cable
and direct broadcast satellite services, U S WEST Communications withdrew the
Broadband Applications. The Communications Group plans to incorporate the
results of the Omaha trials, as well as applicable new technologies, into its
Broadband Network architecture in order to develop an advanced Broadband Network
that is responsive to the needs of customers.
THE RESTRUCTURING PLAN. The Company announced in 1993 that U S WEST
Communications would implement the Restructuring Plan, which is designed to
provide faster, more responsive customer service and network monitoring and
service assurance capabilities, while reducing the costs of providing these
services. As part of this plan, U S WEST Communications is developing new
systems that will enable it to monitor networks to reduce the risk of service
interruptions, activate telephone service on demand, provide automated inventory
systems and centralize its service centers so that customers can have their
telecommunications needs resolved with one phone call. U S WEST Communications
also is gradually reducing its work force by approximately 9,000 employees and
consolidating the operations of its existing 560 customer centers into 26
customer centers in ten cities. Implementation of the Restructuring Plan is
expected to extend into 1997. See "-- Communications Group -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Results of Operations -- 1994 Compared with 1993 -- Restructuring Charges."
DEVELOPMENT OF WIRELESS CAPABILITY. In the future, the Communications Group
plans to include wireless services in its product packages. Though an agreement
between the Company and AirTouch generally prohibits the Company from offering
wireless services outside of its joint venture with AirTouch, such agreement
permits the Communications Group to bid on 10 megahertz PCS licenses in the
Communications Group Region being auctioned by the FCC and to offer wireless
services using such spectra. See "Annex VII -- Media Group -- Description of
Business -- Wireless Communications -- Domestic Operations -- Cellular." The
Communications Group is considering acquiring such spectra and using them to
build a wireless network in selected local markets in the Communications
VI-4
<PAGE>
Group Region. Obtaining such licenses would provide the Communications Group
with the opportunity to package wireless communications services with its other
services. Currently, FCC regulations do not permit the Communications Group to
resell the cellular services offered by the Media Group.
RELATED BUSINESSES
In addition to U S WEST Communications, the Communications Group provides
customer premise equipment and certain related communications services to
business customers and governmental agencies both inside and outside the
Communications Group Region through U S WEST Communications Services, Inc. and U
S WEST Federal Services, Inc. These companies provided approximately 2 percent
and 2 percent of the Communications Group's combined sales and other revenues
for the three months ended March 31, 1995 and for the fiscal year ended December
31, 1994, respectively.
REGULATION
The Communications Group is subject to federal regulation pursuant to the
MFJ and by the FCC and state regulation by the PUCs.
THE MFJ RESTRICTIONS. The MFJ currently limits the scope of the business
activities of U S WEST Communications. Under the MFJ, U S WEST Communications
may provide local exchange, exchange access, information access and toll
telecommunications services within its LATAs. U S WEST Communications is
prohibited from providing interLATA service. U S WEST Communications is
permitted to provide exchange access services that link a subscriber's telephone
or other equipment in one of its LATAs to the transmission facilities of
interexchange carriers which provide interLATA service. U S WEST Communications
may market, but not manufacture, customer premises equipment, which is defined
in the MFJ as equipment used on customers' premises to originate, route or
terminate telecommunications. A similar restriction applies to the manufacture
or provision of "telecommunications equipment," which is defined in the MFJ as
including equipment used by carriers to provide telecommunications services. In
addition, the MFJ requires U S WEST Communications to provide, upon a bona fide
request by an interexchange carrier or information service provider, exchange
access, information access and exchange services for such access that will be
equal to that provided to AT&T in quality, type and price. The foregoing MFJ
restrictions also apply to affiliates of U S WEST Communications, including the
other businesses of the Communications Group and the businesses of the Media
Group. Two additional consent orders require U S WEST to implement formal
procedures for the examination of all business activities to ensure compliance
with the MFJ restrictions.
The D.C. District Court has retained jurisdiction over construction,
implementation, modification and enforcement of the MFJ and has established
procedures for obtaining generic and specific waivers from the manufacturing and
interLATA restrictions of the MFJ, although the required filings with and review
by the Justice Department and the D.C. District Court usually result in lengthy
and uncertain proceedings. The MFJ restrictions present significant obstacles to
the provision of certain wireless, cable television and other communications
services and require that such business operations, even where waivers are
ultimately obtained, be conducted under burdensome arrangements or subject to
elaborate structural separation or other conditions. The Company is a party to
litigation and is advocating legislation intended to remove or relax the MFJ
restrictions.
FCC REGULATION. U S WEST Communications is subject to the jurisdiction of
the FCC with respect to interstate access tariffs (that specify the charges for
the origination and termination of interstate communications) and other matters.
U S WEST's interstate services have been subject to price-cap regulation since
January 1991. Price caps are an alternative form of regulation designed to limit
prices rather than profits. However, the FCC's price cap plan includes sharing
of earnings in excess of authorized levels. U S WEST Communications believes
that competition will ultimately be the determining factor in pricing
telecommunications services. See "-- Communications Group -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Regulation -- Federal Regulatory Issues."
VI-5
<PAGE>
The FCC also regulates the extent to which U S WEST Communications is
permitted to provide video programming and other integrated video services to
subscribers over the Broadband Network. Previously, local exchange telephone
companies were generally prohibited both by the Cable Communications Policy Act
of 1984 and by FCC cross-ownership rules from providing video programming
directly to subscribers in their local exchange telephone service areas. Six
U.S. District Courts and two U.S. Courts of Appeals recently held the statutory
cross-ownership prohibition to be unconstitutional, and in light of these
decisions, the FCC announced on March 17, 1995 that it will not enforce its
cross-ownership ban. The FCC has also instituted a rulemaking proceeding to
determine the scope of its regulation over the offering of video programming in
the wake of these court decisions. The issues under consideration include
whether local exchange carriers must offer their video programming over a common
carrier platform, and whether they should be treated as cable operators subject
to local franchising requirements. The resulting rules could impact the ultimate
profitability of the Broadband Network.
The FCC also regulates the offering of wireless services by U S WEST
Communications. See "-- U S WEST Communications -- Development of Wireless
Capability." While the FCC does not regulate the rates of wireless services, it
does require that such services be offered on a common carrier basis and is
considering imposing equal access requirements similar to those to which
wireline access services are subject. U S WEST Communications is already subject
to equal access obligations pursuant to the MFJ.
STATE REGULATION. U S WEST Communications is subject to varying degrees of
regulation by state commissions with respect to intrastate rates and service,
and access charge tariffs. U S WEST Communications is currently working with
state regulators to gain approval of initiatives, including efforts to rebalance
prices, advance competitive parity and implement simplified forms of price and
service quality regulation. See "-- Communications Group -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Regulation -- State Regulatory Issues." State and local regulatory authorities
may also regulate certain terms and conditions of the offering of wireless
services, such as the siting and construction of transmitter towers, antennas
and equipment shelters and zoning and building permit approvals.
Transactions between U S WEST Communications and unregulated unaffiliated
third parties, including the businesses of the Media Group, are also subject to
the review and, in some cases, detailed accounting rules of both the PUCs and
the FCC. See "Proposal 1 -- The Recapitalization Proposal -- Certain Management
Policies -- Inter-Group Business Transactions."
FUTURE REGULATION AND LEGISLATION. As competitive pressures grow, there
will be increasing regulatory and legislative activity before both the PUCs and
the FCC concerning the terms and conditions pursuant to which competing
providers, such as competitive access providers ("CAPs"), local exchange
providers, and information service providers, are permitted to interconnect
with, and bypass portions of, U S WEST Communications' wireline network, as well
as other competition-related issues such as unbundling, local market entry,
intraLATA toll competition, number portability, and universal service support.
See "-- Competition." The ultimate resolution of such issues by regulators may
have a significant impact upon the future competitive position of the
communications service of U S WEST Communications.
Though Congress failed to pass telecommunications reform legislation in
1994, new telecommunications legislation has been introduced in both houses in
1995. The Senate passed a bill on June 16, 1995; two somewhat different bills
are currently under consideration in the Commerce and Judiciary Committees of
the House of Representatives. The thrust of all of these bills is to open up the
network of local exchange carriers to further competition, and to eliminate
certain prohibitions upon local exchange carriers entering into other lines of
business. The proposed legislation would (i) open local exchange service to
competition and preempt states from imposing barriers preventing such
competition, (ii) impose new unbundling and interconnection requirements on
local exchange carrier networks, (iii) remove MFJ prohibitions on interLATA
services and manufacturing if certain competitive conditions are met, (iv)
transfer any remaining MFJ requirements (including the MFJ's nondiscrimination
provisions) to the FCC's jurisdiction, (v) impose requirements to conduct
certain competitive
VI-6
<PAGE>
activities only through structurally separate affiliates and (vi) eliminate many
of the remaining cable and telephone company cross-ownership restrictions. There
is, however, uncertainty concerning the passage of a House bill and, if such a
bill passes, whether key differences between the House and Senate bills could be
resolved in Conference Committee. The passing of such legislation would
significantly change the competitive landscape of the telecommunications
industry as a whole.
The foregoing discussion does not purport to describe all present and
proposed federal, state and local regulations, legislation, and related judicial
or administrative proceedings relating to the telecommunications industry and
thereby affecting the businesses of the Communications Group.
COMPETITION
The Communications Group faces competition in the business, exchange access
and intraLATA long-distance markets, primarily from CAPs and interexchange
carriers. CAPs compete with the Communications Group by providing large business
customers with high-capacity network services that connect to interexchange
carrier facilities or other business locations within a serving LATA.
Interexchange carriers compete with the Communications Group by providing
intraLATA long-distance services. Such competition is eroding U S WEST
Communications' market share of intraLATA long-distance services, including Wide
Area Telephone Service and "800" services. Interexchange carriers are competing
in this area by offering lower prices and packaging these services on an
intraLATA and interLATA basis. U S WEST Communications and its affiliates are
prohibited from providing interLATA long-distance services under the terms of
the MFJ. See "-- Regulation -- The MFJ Restrictions."
Technological advancements and regulatory changes will increase competition
in the future. Current competitors, including CAPs and interexchange carriers,
are positioning themselves to offer local exchange services. New competitors
that are affiliates of cable television companies and power companies also are
expected to play a greater role in offering local exchange services. In addition
to local exchange services, competitors are expected to offer services that will
compete with those U S WEST Communications plans to offer over the Broadband
Network, including video programming and interactive multimedia services.
Services offered by cellular and PCS operators also will compete with existing
and future services of U S WEST Communications, including future wireless
services. AT&T's entrance into the wireless communications market through its
acquisition of McCaw Cellular Communications, Inc. may create increased
competition in local exchange as well as wireless services. The loss of local
exchange customers to competitors would affect multiple revenue streams of U S
WEST Communications.
The impact of increased competition on the operations of the Communications
Group will be influenced by the future actions of regulators and legislators who
are increasingly advocating competition. The Communications Group is working
with federal and state regulators to help ensure that public policies keep pace
with the rapidly changing industry and allow the Communications Group to bring
new services to the marketplace. See "-- Regulation."
RESEARCH AND DEVELOPMENT
U S WEST Advanced Technologies, Inc. ("Advanced Technologies") coordinates
the research and development and integration of new technologies for the
Communications Group. The majority of the research and development activities of
the Communications Group are currently conducted at Bell Communications Research
Inc. ("Bellcore"), one-seventh of which is owned by U S WEST Communications,
with the remainder owned by the other regional Bell operating companies
("RBOCs"). Bellcore provides research and development and other services to its
owners and is the central point of contact for coordinating the federal
government's telecommunications requirements relating to national security and
emergency preparedness. In April 1995, the RBOCs announced their intention to
dispose of their interests in Bellcore. Following such disposition, Bellcore and
other third parties will provide research and development services to the
Communications Group on a contract basis. In addition, certain research and
development activities are conducted internally by businesses of the
Communications Group. Advanced Technologies will also provide certain research
and development services to the Media Group on a fee-for-service, arm's-length
basis.
VI-7
<PAGE>
MANAGEMENT
The following executives of the Company will have primary operating
responsibility for the Communications Group:
SOLOMON D. TRUJILLO, President and Chief Executive Officer of the
Communications Group. Mr. Trujillo previously served as President and Chief
Executive Officer of Marketing Resources. Mr. Trujillo joined Mountain Bell in
1974 and has been affiliated with U S WEST and its predecessor companies since
that time, serving in various marketing, sales, finance and public policy
positions.
THOMAS A. BYSTRZYCKI, Executive Vice President -- Operations of U S WEST
Communications since 1995. Upon implementation of the Recapitalization Proposal,
Mr. Bystrzycki will become Executive Vice President -- Operations and
Technologies of the Communications Group. Mr. Bystrzycki has held various
operational and management positions with the Company and its predecessors for
over 20 years.
CATHERINE M. HAPKA, Executive Vice President -- Marketing of U S WEST
Communications since 1995. Upon implementation of the Recapitalization Proposal,
Ms. Hapka will become Executive Vice President -- Marketing of the
Communications Group. Ms. Hapka joined U S WEST Communications in 1990 and
became Vice President and General Manager of U S WEST Communications' Advanced
Communications Services in September 1991. Ms. Hapka was a manager at Control
Data Corporation from 1988 to 1990.
JAMES T. HELWIG, Vice President, Chief Financial Officer and Treasurer of U
S WEST Communications since January 1990. Upon implementation of the
Recapitalization Proposal, Mr. Helwig will become Vice President, Chief
Financial Officer and Treasurer of the Communications Group. Prior to joining U
S WEST Communications in 1990, Mr. Helwig held various financial and treasury
positions at General Electric Company, where he was employed for 25 years.
ROBERT C. HAWK, Vice President -- Carrier Division of U S WEST
Communications since 1991. Upon implementation of the Recapitalization Proposal,
Mr. Hawk will become Vice President -- Carrier Division of the Communications
Group. Mr. Hawk has held various operational and management positions at U S
WEST Communications since 1986.
EMPLOYEES
At March 31, 1995, the businesses of the Communications Group had 51,083
employees, of which 47,215 are employees of U S WEST Communications.
Approximately 70% of the employees of the Communications Group are represented
by unions. The Communications Group believes that its relations with the unions
in which its employees are members are good. Existing contracts with the
Communications Workers of America will expire on August 12, 1995. Negotiations
for the renewal of such contracts are expected to begin shortly. As part of the
Restructuring Plan, U S WEST Communications will reduce its work force by 9,000
employees by 1997. See "-- U S WEST Communications -- The Restructuring Plan."
LITIGATION
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for reconsideration, thereby establishing
two exceptions to the rule against retroactive ratemaking: 1) unforeseen and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request from interexchange carriers and other parties related to the Tax Reform
Act of 1986. At the current time, this action is still in the discovery process.
If a formal filing -- made in accordance with the remand from the Supreme Court
- -- alleges that the exceptions apply, the range of possible risk to U S WEST
Communications is $0 to $140.
VI-8
<PAGE>
COMMUNICATIONS GROUP
SELECTED FINANCIAL DATA
The following table sets forth Selected Combined Financial Data of the
Communications Group and should be read in conjunction with the Communications
Group Management's Discussion and Analysis of Financial Condition and Results of
Operations, and Combined Financial Statements. See " -- Communications Group --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "-- Combined Financial Statements." The Selected Combined
Financial Data at December 31, 1994 and 1993, and for each of the three years in
the period ended December 31, 1994, have been derived from the Communications
Group Combined Financial Statements, which have been audited by Coopers &
Lybrand L.L.P., independent certified public accountants. See "Experts." At
December 31, 1992, 1991 and 1990 and March 31, 1995 and 1994 and for the years
ended December 31, 1991 and 1990, and for the three months ended March 31, 1995
and 1994, the Selected Combined Financial Data have been derived from unaudited
Communications Group Combined Financial Statements. The unaudited Combined
Financial Statements have been prepared on the same basis as the 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- --------- --------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Operating revenues............ $ 2,318 $ 2,253 $ 9,176 $ 8,870 $ 8,530 $ 8,345 $ 8,235
Net income (loss) (1)......... 315 295 1,150 (2,809) (815) 771 935
Total assets.................. 15,846 15,594 15,944 15,423 20,655 20,244 19,756
Total debt.................... 6,404 5,883 6,124 5,673 5,181 5,287 5,029
Communications Group equity... 3,194 2,947 3,179 2,722 6,003 7,530 7,279
Return on Communications Group
equity (2, 3)................ 31.7% 38.3% 39.0% 22.5% 13.7% 12.8% 12.8%
Percentage of debt to total
capital (3).................. 66.7% 66.6% 65.8% 67.6% 46.3% 41.3% 40.9%
Capital expenditures.......... $ 545 $ 554 $ 2,477 $ 2,226 $ 2,385 $ 2,194 $ 2,022
OPERATING DATA
EBITDA (4).................... $ 1,050 $ 1,013 $ 4,026 $ 3,743 $ 3,553 $ 3,547 $ 3,500
Telephone network access lines
in service (thousands)....... 14,453 13,959 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use
(millions)................... 13,839 12,631 52,275 48,123 44,369 41,701 38,832
Employees..................... 51,083 52,788 51,402 52,598 55,352 57,725 57,410
PRO FORMA INFORMATION
Earnings per share............ $ 0.67 $ 2.53
Dividends per share........... 0.535 2.14
Average shares outstanding
(thousands).................. 468,557 453,316
<FN>
- ------------------------
(1) Net income for the first quarter of 1995 and 1994 includes gains of $39 and
$15, respectively, on the sale of certain rural telephone exchanges. 1994
net income includes a gain of $51 on the sale of certain rural telephone
exchanges. 1993 net income was reduced by a $534 restructuring charge and
$54 for the cumulative effect on deferred taxes of the 1993 federally
mandated increase in income tax rates. 1993 net income was also reduced by
extraordinary charges of $3,123 for the discontinuance of SFAS No. 71 and
$77 for the early extinguishment of debt. 1992 net income was reduced by
$1,745 for the cumulative effect of change in accounting principles. 1991
net income was reduced by $173 for a restructuring charge.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(2) 1993 return on Communications Group equity is based on net income excluding
extraordinary items, a restructuring charge and the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates.
1992 return on Communications Group equity is based on income before
cumulative effect of change in accounting principles. 1991 return on
Communications Group equity is based on net income excluding the effects of
a restructuring charge.
(3) The increases in the percentage of debt to total capital and return on
Communications Group equity since 1992 are impacted by the effects of
discontinuing SFAS No. 71 in 1993 and the cumulative effect of change in
accounting principles in 1992.
(4) The Communications Group considers EBITDA an important indicator of the
operational strength and performance of its businesses. EBITDA, however,
should not be considered as an alternative to operating or net income as an
indicator of the performance of the Communications Group's businesses or as
an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with GAAP.
</TABLE>
VI-10
<PAGE>
COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
The Communications Group, through U S WEST Communications, provides
regulated communications services to more than 25 million residential and
business customers in the Communications Group Region. The Communications Group
Region currently includes 7 of the 10 fastest growing states in the United
States. Communications services offered by U S WEST Communications 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 LATAs in the
Communications Group Region. U S WEST Communications also offers its customers
various new services, including Caller ID, voice messaging, and high-speed data
networking services. U S WEST Communications plans to build an interactive
broadband telecommunications network capable of providing a broader range of
products and services to its customers in the Communications Group Region. The
Communications Group also provides customer premise equipment and certain
communications services to business customers and governmental agencies both
inside and outside the Communications Group Region. The Communications Group's
strategy is to offer integrated CEIT to its customers, primarily in the
Communications Group Region. For a detailed discussion of the Communications
Group's strategy, see "-- Communications Group -- Description of Business."
The Board has adopted a proposal that would change the state of
incorporation of the Company from Colorado to Delaware and create two classes of
common stock, the Communications Stock and the Media Stock, which are intended
to reflect separately the performance of the Communications Group and the Media
Group.
The Combined Financial Statements of the Communications Group include: (i)
the combined historical balance sheets, results of operations and cash flows of
the businesses that comprise the Communications Group; (ii) corporate assets and
liabilities of the Company and related transactions identified with the
Communications Group; and (iii) an allocated portion of the corporate expense of
the Company. All significant intragroup financial transactions have been
eliminated; however, transactions between the Communications Group and the Media
Group have not been eliminated. For a more complete discussion of the Company's
corporate allocation policies, see "-- Communications Group -- Combined
Financial Statements --Note 1: Summary of Significant Accounting Policies."
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1994
NET INCOME
At March 31, 1995, the Communications Group's net income was $315, a $20, or
6.8 percent, increase over net income at March 31, 1994. Excluding gains on the
sale of certain rural telephone exchanges of $39 and $15 in the first quarter of
1995 and in the first quarter of 1994, respectively, net income decreased $4, or
1.4 percent, in the first quarter of 1995 as compared with the first quarter of
1994.
Volume growth resulted in a 3.7 percent increase in EBITDA in the first
quarter of 1995 as compared with the first quarter of 1994. The Communications
Group considers EBITDA an important indicator of the operational strength and
performance of its businesses. EBITDA, however, should not be considered as an
alternative to operating or net income as an indicator of the performance of the
Communications Group's businesses or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with GAAP.
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<PAGE>
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE
(UNAUDITED) LOWER (DECREASE)
-------------------- PRICE (HIGHER) ---------
1995 1994 CHANGES REFUNDS GROWTH OTHER $
--------- --------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service.......................... $ 1,050 $ 985 $ 2 $ 9 $ 54 $ -- $ 65
Interstate access...................... 589 562 (8) (9) 44 -- 27
Intrastate access...................... 188 174 (5) 2 11 6 14
Long-distance network.................. 299 351 (9) -- (12) (31) (52)
Other services......................... 192 181 -- -- -- 11 11
--
--------- --------- --- --- --- ---
Total revenues....................... $ 2,318 $ 2,253 $ (20) $ 2 $ 97 $ (14) $ 65
--
--
--------- --------- --- --- --- ---
--------- --------- --- --- --- ---
<CAPTION>
%
---------
<S> <C>
Local service.......................... 6.6
Interstate access...................... 4.8
Intrastate access...................... 8.0
Long-distance network.................. (14.8)
Other services......................... 6.1
---------
Total revenues....................... 2.9
---------
---------
</TABLE>
Total operating revenues were $2,318 in the first quarter of 1995, a $65, or
2.9 percent, increase over the first quarter of 1994. Local service revenues
increased principally as a result of higher demand for services, as evidenced by
an increase of 494,000 access lines, or 3.5 percent, during the last 12 months.
Excluding the effects of the sale of certain rural telephone exchanges, access
lines increased by 585,000 lines, or 4.2 percent, during the last 12 months.
Higher revenues from interstate access services resulted from an increase of
9.2 percent in interstate billed access minutes of use in the first quarter of
1995 as compared with the first quarter of 1994, which more than offset the
effects of price reductions and refunds. Intrastate access charges increased as
a result of higher demand and the effects of multiple toll carrier plans
implemented in Oregon and Washington in the second quarter of 1994. These
regulatory arrangements decreased long-distance network revenues by $31,
increased intrastate access revenues by $6 and decreased access fees (otherwise
paid to independent companies) by $21.
The increase in other services revenues is largely due to continued market
penetration of new service offerings and higher revenues from customer premise
equipment installations.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, INCREASE (DECREASE)
(UNAUDITED)
-------------------- --------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses.......................................................... $ 813 $ 778 $ 35 4.5
Other operating expenses........................................................... 349 363 (14) (3.9)
Taxes other than income taxes...................................................... 106 99 7 7.1
Depreciation and amortization...................................................... 499 470 29 6.2
Interest expense................................................................... 101 90 11 12.2
Other expense -- net............................................................... 13 10 3 30.0
Provision for income taxes......................................................... 185 172 13 7.6
</TABLE>
Overtime payments and contract labor, related to the implementation of
customer service and streamlining initiatives, increased employee-related
expenses by approximately $45 from the first quarter of 1994 to the first
quarter of 1995. Wage, salary and commission expenses also contributed to the
increase in employee-related expenses. Partially offsetting these increases were
lower health-care benefit costs, including a reduction in the accrual for
postretirement benefits, and a true-up of certain benefit costs.
The decrease in other operating expenses was mainly attributable to a $21
reduction in access expense related to the effects of multiple toll carrier
plans, partially offset by higher costs associated with the installation of
customer premise equipment. The increase in depreciation and amortization
VI-12
<PAGE>
expense was primarily a result of a higher depreciable asset base and increased
depreciation rates. Interest expense increased as a result of higher amounts of
short-term debt combined with the effects of higher interest rates.
Provision for income taxes increased primarily due to an increase in income
before income taxes.
PROGRESS UNDER THE RESTRUCTURING PLAN
The following is a schedule of progress under the Restructuring Plan in the
first quarter of 1995:
<TABLE>
<CAPTION>
RESERVE BALANCE RESERVE BALANCE
EXPENDITURES DECEMBER 31, 1994 1995 ACTIVITY MARCH 31, 1995
- ---------------------------------------------------------------- ------------------- --------------- -----------------
<S> <C> <C> <C>
Employee separations
Managerial.................................................... $ 70 $ 4 $ 66
Occupational.................................................. 136 9 127
----- --- -----
Total separations........................................... 206 13 193
Systems development
Service delivery.............................................. 52 3 49
Service assurance............................................. 52 7 45
Capacity provisioning......................................... 122 24 98
All other..................................................... 16 0 16
----- --- -----
Total systems............................................... 242 34 208
Real estate..................................................... 80 22 58
Relocation...................................................... 84 5 79
Retraining and other............................................ 52 3 49
----- --- -----
Total........................................................... $ 664 $ 77 $ 587
----- --- -----
----- --- -----
</TABLE>
<TABLE>
<CAPTION>
TOTAL
1994 SEPARATIONS 1995 SEPARATIONS SEPARATIONS
----------------- ------------------- ---------------
<S> <C> <C> <C>
Employee separations
Managerial.................................................. 497 125 622
Occupational................................................ 1,683 491 2,174
----- --- -----
Total......................................................... 2,180 616 2,796
----- --- -----
----- --- -----
</TABLE>
<TABLE>
<CAPTION>
1994 COMPARED WITH 1993
NET INCOME (LOSS)
1994(1) 1993(2) INCREASE
--------- --------- ---------
<S> <C> <C> <C>
Income before extraordinary items................................. $ 1,150 $ 391 $ 759
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax....................... -- (3,123) 3,123
Early extinguishment of debt, net of tax........................ -- (77) 77
--------- --------- ---------
Net income (loss)................................................. $ 1,150 $ (2,809) $ 3,959
--------- --------- ---------
--------- --------- ---------
<FN>
- ------------------------
(1) 1994 income before extraordinary items includes a gain of $51 on the sale
of certain rural telephone exchanges.
(2) 1993 income before extraordinary items was reduced by $534 for a
restructuring charge and $54 for the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates.
</TABLE>
In 1994, Communications Group net income was $1,099, excluding the gain
described in note (1) to the table above. In 1993, income before extraordinary
items was $979, excluding the effects of one-time charges described in note (2)
to the table above. Without the one-time effects, 1994 income before
extraordinary items increased by $120, or 12.3 percent. The increase was
primarily attributable to increased demand for telecommunications services.
VI-13
<PAGE>
In 1993, U S WEST Communications incurred extraordinary charges for the
discontinuance of SFAS No. 71, and the early extinguishment of debt. See "--
1993 Compared With 1992."
Revenue growth, partially offset by higher operating expenses, provided a
7.6 percent increase in EBITDA. EBITDA also excludes gains on sales of rural
telephone exchanges, restructuring charges and other income. The Communications
Group considers EBITDA an important indicator of the operational strength and
performance of its businesses.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
PRICE REFUND DEMAND ---------
1994 1993 CHANGES ACTIVITY CHANGES OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service......................... $ 4,067 $ 3,829 $ (12) $ 30 $ 216 $ 4 $ 238
Access charges -- interstate.......... 2,269 2,147 (39) 18 148 (5) 122
Access charges -- intrastate.......... 729 682 (10) (4) 51 10 47
Long-distance network service......... 1,329 1,442 (8) 1 (43) (63) (113)
Other services........................ 782 770 -- -- -- 12 12
--------- --------- --- --- ----- --- ---------
Total revenues...................... $ 9,176 $ 8,870 $ (69) $ 45 $ 372 $ (42) $ 306
--------- --------- --- --- ----- --- ---------
--------- --------- --- --- ----- --- ---------
<CAPTION>
%
---------
<S> <C>
Local service......................... 6.2
Access charges -- interstate.......... 5.7
Access charges -- intrastate.......... 6.9
Long-distance network service......... (7.8)
Other services........................ 1.6
---------
Total revenues...................... 3.4
---------
---------
</TABLE>
Approximately 98 percent of the revenues of the Communications Group are
attributable to the operations of U S WEST Communications. Approximately 58
percent of U S WEST Communications' revenues are derived from the states of
Arizona, Colorado, Minnesota and Washington. About 28 percent of U S WEST
Communications' access lines are devoted to providing services to business
customers. The access line growth rate for business customers, who tend to be
heavier users of the telephone network, has consistently exceeded the growth
rate for residential customers. During 1994, business access lines grew by 4.6
percent compared with 3.1 percent for consumer lines. Total access line growth
in 1994 was 3.6 percent. Excluding the effects of the sale of certain rural
telephone exchanges, total access lines grew by 4.0 percent in 1994.
The primary factors that influence changes in revenues at U S WEST
Communications are customer demand for products and services (through access
line growth and new service offerings), and regulatory proceedings, including
price changes and customer refunds.
Local service revenues include local telephone exchange, local private line
and public telephone services. The 6.2 percent increase in local service
revenues was primarily attributable to access line growth, which exceeded 5
percent in the states of Arizona, Colorado, Idaho and Utah.
Access charges are collected primarily from the interexchange carriers for
their use of the local exchange network. For interstate access services, there
is also a fee collected directly from telephone customers. Approximately 35
percent of U S WEST Communications' access revenues and 13 percent of its total
revenues are derived from providing access service to AT&T. An increase of 7.8
percent in interstate billed access minutes of use more than offset the effects
of price decreases. Interstate price reductions have been phased in by the FCC
over a number of years. In response to competitive pressure and FCC orders, U S
WEST Communications reduced its annual interstate access prices by approximately
$40 during 1994, in addition to $60, effective July 1, 1993. The Communications
Group believes access prices will continue to decline, whether mandated by the
FCC or as a result of an increasingly competitive market for access services.
See "-- Regulation -- Federal Regulatory Issues." Intrastate access charges
increased primarily as a result of higher demand. Intrastate minutes of use grew
by 13 percent in 1994. Demand for private line services, for which revenues are
generally not usage-sensitive, also increased.
Long-distance network service revenues are derived from calls made within
the LATAs of U S WEST Communications. Long-distance revenues decreased
principally due to the effects of multiple toll carrier plans implemented in
Oregon and Washington in May and July 1994, respectively. These regulatory
arrangements allow independent telephone companies to act as toll carriers. The
VI-14
<PAGE>
impact on U S WEST Communications in 1994 was a loss of $68 in long-distance
revenue, partially offset by a decrease of $48 in other operating expenses (i.e.
access expense otherwise paid to independent companies) and an increase of $10
in intrastate access revenue. These regulatory arrangements decreased net income
by approximately $6 in 1994 and will decrease 1995 net income by $10 to $12.
Competition from interexchange carriers also continued to erode U S WEST
Communications' market share of intraLATA long-distance services such as Wide
Area Telephone Service and "800" services. These revenues have declined over the
last several years as customers have migrated to interexchange carriers that
have the ability to offer these services on both an intraLATA and interLATA
basis. U S West Communications is prohibited from providing interLATA
long-distance services.
Revenues from other services are derived from billing and collection
services provided to interexchange carriers, services such as voice messaging
and the provision of customer premise equipment. Other services revenues also
include customer lists, billing and collection, and other services provided by U
S WEST Communications to the Media Group. These products and services are sold
at fully distributed cost or at a market price, in accordance with regulatory
requirements. U S WEST Communications charged the Media Group $27 and $26 for
these services in 1994 and 1993, respectively.
In 1994, other services revenues increased 1.6 percent due to higher revenue
from billing and collection services and continued market penetration of new
service offerings. Voice Messaging, for example, is four years old with an
installed customer base of approximately 885,000. Partially offsetting the
increase in other services revenues was the 1993 sale of telephone equipment
distribution operations, completion of large telephone network installation
contracts and lower revenue from customer premise equipment installations.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses............................. $ 3,215 $ 3,068 $ 147 4.8
Other operating expenses.............................. 1,547 1,671 (124) (7.4)
Taxes other than income taxes......................... 388 388 -- --
Depreciation and amortization......................... 1,908 1,828 80 4.4
Restructuring charge.................................. -- 880 (880) --
Interest expense...................................... 376 412 (36) (8.7)
Other expense -- net.................................. 21 24 (3) (12.5)
</TABLE>
Employee-related expenses include basic salaries and wages, overtime,
contract labor, benefits (including pension and health care) and payroll taxes.
Overtime payments, contract labor and basic salaries and wages, all related to
the implementation of major customer service and streamlining initiatives at U S
WEST Communications, increased by $150. A $71 reduction in the amount of pension
credit allocated to the Communications Group also contributed to the increase in
employee-related expenses. Actuarial assumptions, which include decreases in the
discount rate and the expected long-term rate of return on plan assets,
contributed to the pension credit reduction. See "-- Communications Group --
Combined Financial Statements --Note 10: Employee Benefits." for pension
allocation policy. Partially offsetting these increases were the effects of
employees leaving U S WEST Communications under the restructuring program, lower
health-care benefit costs, including a reduction in the accrual for
postretirement benefits, and lower incentive compensation payments to employees.
During the summer of 1994, increased customer demand at U S WEST
Communications put additional stress on current processes and systems, and
affected the quality of customer service in certain markets. The pace of U S
WEST Communications' restructuring program also contributed to quality of
service issues. However, the issues pertaining to quality of service underscore
the need to re-engineer the business. U S WEST Communications achieved target
levels of service at year end by implementing customer service initiatives and
slowing the pace of its restructuring program. To
VI-15
<PAGE>
continue improving upon the level of service quality achieved by year-end 1994,
the Communications Group will incur additional near term costs for temporary
employees, overtime and contract labor. U S WEST Communications also will extend
its 1993 Restructuring Plan an additional year, to 1997. As a result of these
actions, the annual benefits related to restructuring will not be fully realized
until 1998. See "-- Restructuring Charges."
Other operating expenses include access charges (incurred by U S WEST
Communications for the routing of its long-distance traffic through the
facilities of independent companies), network software expenses and other
Company general and administrative expenses. Partially contributing to the
decrease in other operating expenses was the $48 decrease in access expense
related to the effects of the new multiple toll carrier plan arrangements. See
the long-distance network service discussion in "-- Sales and Other Revenues."
Lower customer premise equipment installations and lower expenses at Bellcore
also contributed to the decrease.
Other operating expenses include certain costs relating to the Company's
general and administrative services (including certain executive management,
legal, accounting and auditing, tax, treasury, strategic planning and public
policy services) that are directly assigned to each Group based upon actual
utilization or are allocated based upon each Group's operating expenses, number
of employees, external revenues, average capital and/or average equity. The
Company charges each Group for such services at fully distributed cost. These
direct and indirect corporate allocations were $104 and $117 in 1994 and 1993,
respectively. The direct allocations comprise approximately 40 percent of the
total shared corporate services allocated to the Communications Group. It is not
practicable to provide a detailed estimate of the expenses which would be
recognized if the Communications Group were a separate legal entity. However,
the Company believes that under the Recapitalization Proposal, each Group would
benefit from synergies with the other, including having lower operating costs
than might be incurred if each Group was a separate legal entity.
The increase in depreciation and amortization expense was primarily the
result of a higher depreciable asset base and increased rates of depreciation at
U S WEST Communications. The discontinuance of SFAS No. 71 by U S WEST
Communications in September 1993 has resulted in the use of shorter asset lives
(for financial reporting purposes) to more closely reflect the economic lives of
telephone plant. U S WEST Communications continues to pursue improved capital
recovery within the regulated environment.
Interest expense decreased due to the effects of refinancing debt at lower
rates in 1993 at U S WEST Communications, and a reclassification of capitalized
interest in 1994. Since the discontinuance of SFAS No. 71, interest capitalized
as a component of telephone plant construction is recorded as an offset against
interest expense rather than to other expense. The Communications Group average
borrowing cost was 6.8 percent in 1994 compared to 6.9 percent in 1993. See
"-- Liquidity and Capital Resources."
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
----------------------
1994 1993 $ %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Provision for income taxes............................. $ 653 $ 208 $ 445 --
Effective tax rate..................................... 36.2% 34.7% -- --
</TABLE>
The increase in the effective tax rate resulted primarily from the effects
of discontinuing SFAS No. 71, an increase in 1994 income before income taxes and
the 1993 restructuring charge, partially offset by the cumulative effect on
deferred income taxes of the 1993 federally mandated increase in income tax
rates.
RESTRUCTURING CHARGES
The Communications Group's 1993 results reflect an $880 restructuring charge
(pretax) at U S WEST Communications. The related Restructuring Plan is designed
to provide faster, more responsive customer services while reducing the costs of
providing these services. As part of the
VI-16
<PAGE>
Restructuring Plan, U S WEST Communications is developing new systems that will
enable it to monitor networks to reduce the risk of service interruptions,
activate telephone service on demand, provide automated inventory systems and
centralize its service centers so that customers can have their
telecommunications needs resolved with one phone call. U S WEST Communications
is consolidating 560 customer service centers into 26 centers in 10 cities and
reducing its work force by approximately 9,000 employees (including the
remaining employee reductions associated with the restructuring plan announced
in 1991).
Implementation of the Restructuring Plan is expected to extend into 1997,
rather than being completed in 1996 as originally scheduled. Implementation
schedules are driven by customer demand and related service issues, concerns
with system stability as major customer impacting systems are integrated, and
staffing agreements negotiated with U S WEST Communications' unions. These
changes do not alter U S WEST Communications' plan to fundamentally re-engineer
the way it conducts business in the emerging competitive environment. The total
cash expenditures of $880 under the Restructuring Plan remain unchanged.
The following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
----------- -------------------------------
1994 1995 1996 1997 TOTAL
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash expenditures:
Employee separation................................................... $ 19 $ 61 $ 72 $ 73 $ 225
Systems development................................................... 118 128 114 -- 360
Real estate........................................................... 50 80 -- -- 130
Relocation............................................................ 21 54 4 26 105
Retraining and other.................................................. 8 19 10 23 60
----- --------- --------- --------- ---------
Total cash expenditures............................................. 216 342 200 122 880
Remaining 1991 plan employee costs.................................... 56 -- -- -- 56
----- --------- --------- --------- ---------
Total (1)........................................................... $ 272 $ 342 $ 200 $ 122 $ 936
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
<FN>
- ------------------------
(1) The Restructuring Plan also provides for capital expenditures of $440 over
the life of the Restructuring Plan. Capital expenditures related to
restructuring were $265 in 1994.
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Systems development costs include the
replacement of existing, single-purpose systems with new systems designed to
provide integrated, end-to-end customer service. The work-force reductions would
not be possible without the development and installation of the new systems,
which will eliminate the current, labor-intensive interfaces between existing
processes. Real estate costs include preparation costs for the new service
centers. The relocation and retraining costs are related to moving employees to
the new service centers and retraining employees on the methods and systems
required in the new, restructured mode of operation.
U S WEST Communications estimates that full implementation of the
Restructuring Plan will reduce employee-related expenses by approximately $400
per year. These savings are expected to be offset by the effects of inflation.
VI-17
<PAGE>
EMPLOYEE SEPARATION. The following estimates of employee separations and
related amounts reflect the extension of employee reductions into 1997.
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- -------------------------------
1994 1994 (2) 1995 1996 1997 TOTAL
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separations (1)
Managerial............................................. 1,061 497 814 580 559 2,450
Occupational........................................... 1,887 1,683 1,136 1,845 1,886 6,550
----- ----- --------- --------- --------- ---------
Total................................................ 2,948 2,180 1,950 2,425 2,445 9,000
----- ----- --------- --------- --------- ---------
----- ----- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- -------------------------------
1994 1994 (2) 1995 1996 1997 TOTAL
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separation amounts (1)
Managerial............................................. $ 22 $ 5 $ 29 $ 21 $ 20 $ 75
Occupational........................................... 15 14 32 51 53 150
--- --- --- --- --- ---------
Total................................................ 37 19 61 72 73 225
Remaining 1991 reserve................................. 56 56 -- -- -- 56
--- --- --- --- --- ---------
Total................................................ $ 93 $ 75 $ 61 $ 72 $ 73 $ 281
--- --- --- --- --- ---------
--- --- --- --- --- ---------
<FN>
- ------------------------
(1) The "network" and "all other" categories previously displayed are no longer
used in this schedule due to the changes in organizational boundaries
occurring as a result of re-engineering. The new consolidated service
centers consist of employees grouped by processes rather than by
organization.
(2) Includes the remaining employees and the separation amounts associated with
the balance of the 1991 restructuring reserve at December 31, 1993.
</TABLE>
As a result of extending the Restructuring Plan into 1997, employee
reduction and separation amounts shown above have been reduced by 1,519 and $41
in 1995, and 175 and $14 in 1996, respectively, and increased by 2,445 and $73,
respectively, in 1997.
SYSTEMS DEVELOPMENT. U S WEST Communications' existing information
management systems were largely developed to support analog technology in a
monopoly environment. These systems are increasingly inadequate due to the
effects of increased competition, new forms of regulation and changing
technology that have driven consumer demand for new services that can be
delivered quickly, reliably and economically. The sequential systems currently
in place are slow, labor-intensive, and costly to maintain and often cannot be
adapted to support new product and service offerings, including future
interactive broadband services envisioned by U S WEST Communications.
The systems re-engineering program in place involves development of new
systems for the following core processes:
Service delivery -- to support service on demand for all products and
services, including repair. These systems will permit one customer service
representative to handle all facets of a customer's requirements as
contrasted to the numerous points of customer interface required today.
Service assurance -- for performance monitoring from one location and
remote testing in the new environment, including identification and
resolution of faults prior to customer impact, and one-system dispatch
environment.
Capacity provisioning -- for integrated planning of future network
capacity, including the installation of software controllable service
components.
VI-18
<PAGE>
The direct, incremental and nonrecurring systems development costs contained
in the Restructuring Plan follow:
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- --------------------
1994 1994 1995 1996 TOTAL
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service delivery.................................. $ 35 $ 21 $ 15 $ 37 $ 73
Service assurance................................. 45 12 17 35 64
Capacity provisioning............................. 17 57 92 30 179
All other......................................... 8 28 4 12 44
----- ----- --------- --------- ---------
Total......................................... $ 105 $ 118 $ 128 $ 114 $ 360
----- ----- --------- --------- ---------
----- ----- --------- --------- ---------
</TABLE>
Original estimates of system expenditures in 1995 and 1996 were $140 and
$115, respectively. Though current estimates in total are not materially
different, the timing and amount of expenditures by category has changed.
The majority of systems development labor will be supplied through the use
of temporary employees, contractors and new employees with special skills. While
it is likely that a small number of the new employees will be retained after
completion of the Restructuring Plan due to their specialized skills, it is
planned that any related increase in headcount will be offset through other
employee reductions.
Systems expenses charged to current operations at U S WEST Communications
consist of all costs associated with the information management function,
including planning, developing, testing and maintaining data bases for general
purpose computers, in addition to systems costs related to maintenance of
telephone network applications. The key related administrative (i.e. general
purpose) systems include customer service, order entry, billing and collection,
accounts payable, payroll, human resources and property records. Ongoing systems
costs comprised approximately six percent of total operating expenses at U S
WEST Communications in 1994, 1993 and 1992. U S WEST Communications expects
systems costs charged to current operations as a percent of total operating
expenses to approximate the current level throughout the life of the
Restructuring Plan. However, systems costs could increase relative to other
operating costs as the business becomes more technology dependent.
PROGRESS UNDER THE RESTRUCTURING PLAN. The following is a schedule of
progress under the Restructuring Plan in 1994:
<TABLE>
<CAPTION>
EXPENDITURES ESTIMATE ACTUAL
- --------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Employee separation........................................................ $ 93 $ 75
Systems development........................................................ 105 118
Real estate................................................................ 119 50
Relocation................................................................. 70 21
Retraining and other....................................................... 34 8
----- -----
1994 restructuring reserve activity........................................ $ 421 $ 272
----- -----
----- -----
</TABLE>
U S WEST Communications anticipated Restructuring Plan expenditures of
approximately $421 in 1994. However, U S WEST Communications slowed the pace of
its restructuring implementation to address issues pertaining to quality of
service.
The 1991 Communications Group restructuring plan included a pretax charge of
$277, of which $240 related to planned work-force reductions covering
approximately 6,000 employees at U S WEST Communications. All expenditures and
work-force reductions associated with the 1991 plan were completed by the end of
1994.
VI-19
<PAGE>
1993 COMPARED WITH 1992
NET INCOME (LOSS)
<TABLE>
<CAPTION>
INCREASE
1993(1) 1992 (DECREASE)
------- ------- ----------
<S> <C> <C> <C>
Income before extraordinary items........................... $ 391 $ 930 $ (539)
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax................. (3,123) -- (3,123)
Early extinguishment of debt, net of tax.................. (77) -- (77)
Cumulative effect of change in accounting principles........ -- (1,745) 1,745
------- ------- ----------
Net loss................................................ $(2,809) $ (815) $(1,994)
------- ------- ----------
------- ------- ----------
<FN>
- ------------------------
(1) 1993 income before extraordinary items was reduced by $534 for a
restructuring charge, and $54 for the cumulative effect on deferred taxes
of the 1993 federally mandated increase in income tax rates.
</TABLE>
Excluding the one-time effects described in note (1) to the above table,
1993 income before extraordinary items was $979. As normalized, 1993 income
before extraordinary items increased by $49, or 5.3 percent, over 1992. The
increase was primarily attributable to improvements in telephone operations and
lower financing costs.
An extraordinary, non-cash charge of $3.1 billion (after tax) was incurred
in conjunction with the decision to discontinue accounting for the operations of
U S WEST Communications in accordance with SFAS No. 71. SFAS No. 71 generally
applies to regulated companies that meet certain requirements, including a
requirement that a company be able to recover its costs, competition
notwithstanding, by charging its customers at prices established by its
regulators. This decision to discontinue the application of SFAS No. 71 was
based on the belief that competition, market conditions and technological
advances, more than prices established by regulators, will determine the future
cost recovery by U S WEST Communications. As a result of this change, the
remaining asset lives of U S WEST Communications' telephone plant were shortened
to more closely reflect the useful (economic) lives of such plant. U S WEST
Communications' accounting and reporting for regulatory purposes were not
affected by the change.
During 1993, U S WEST Communications refinanced long-term debt issues
aggregating $2.7 billion in principal amount. These refinancings allowed U S
WEST Communications to take advantage of favorable interest rates. Extraordinary
costs associated with the redemptions reduced 1993 income by $77 (after tax).
The accounting change in 1992 relates to two accounting standards issued by
the Financial Accounting Standards Board. The first is SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," which mandates that
employers reflect in their current expenses an accrual for the cost of providing
retirement medical and life insurance benefits to current and future retirees.
Prior to 1992, the Communications Group , like most companies, recognized these
costs as they were paid. The Communications Group also adopted SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires that
employers accrue for the estimated costs of benefits, such as workers'
compensation and disability, provided to former or inactive employees who are
not eligible for retirement. Adoption of SFAS Nos. 106 and 112 resulted in a
one-time, non-cash charge against 1992 earnings of $1,745, net of tax, including
$50 related to SFAS No. 112.
Revenue growth and continued cost controls in 1993 resulted in a 5.3 percent
increase in EBITDA, excluding the effects of the 1993 restructuring charge.
VI-20
<PAGE>
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
PRICE REFUND DEMAND ---------
1993 1992 CHANGES ACTIVITY CHANGES OTHER $ %
------ ------ ----------- ----------- ----------- ----------- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local service................................ $3,829 $3,674 $ (6) $ (11) $ 176 $ (4) $155 4.2
Access charges -- interstate................. 2,147 2,047 (71) 6 175 (10) 100 4.9
Access charges -- intrastate................. 682 673 (18) 8 19 -- 9 1.3
Long-distance network service................ 1,442 1,420 (7) (1) 31 (1) 22 1.5
Other services............................... 770 716 -- -- -- 54 54 7.5
------ ------ ----------- --- ----- --- ---- ---
Total revenues........................... $8,870 $8,530 $ (102) $ 2 $ 401 $ 39 $340 4.0
------ ------ ----------- --- ----- --- ---- ---
------ ------ ----------- --- ----- --- ---- ---
</TABLE>
The increase in local service revenues was primarily attributable to access
line growth of 3.7 percent in 1993.
Increased demand for interstate services, as evidenced by an increase of 8.5
percent in interstate billed access minutes of use, more than offset the effects
of price decreases. U S WEST Communications reduced its annual interstate access
prices by approximately $60, effective July 1, 1993, in addition to $90,
effective July 1, 1992, primarily due to FCC-mandated changes that resulted in a
cost shift to intrastate jurisdictions. Intrastate access charges increased
primarily as a result of increased demand and lower refunds, largely offset by
the effects of price decreases. The increase in long-distance network service
revenues reflects business growth, partially offset by the impacts of
competition, particularly in Wide Area Telephone Service and "800" services, and
price decreases. Other service revenues increased 7.5 percent in 1993 due to
increased revenue from billing and collection services and continued market
penetration in voice messaging services, partially offset by the sale of
telephone distribution operations.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses................................................... $ 3,068 $ 3,011 $ 57 1.9
Other operating expenses.................................................... 1,671 1,612 59 3.7
Taxes other than income taxes............................................... 388 354 34 9.6
Depreciation and amortization............................................... 1,828 1,759 69 3.9
Restructuring charge........................................................ 880 -- 880 --
Interest expense............................................................ 412 438 (26) (5.9)
Other expense -- net........................................................ 24 38 (14) (36.8)
</TABLE>
The increase in employee-related expenses was attributable to basic wage
increases, increased overtime costs (affected by flood damage in the midwestern
states) and costs incurred for temporary employees in conjunction with customer
service initiatives, primarily at U S WEST Communications. These factors were
partially offset by the effects of work-force reductions, primarily in
conjunction with the Communications Group's 1991 restructuring plan. During
1993, U S WEST Communications reduced its employee level by 2,755 employees. The
work-force reductions and the Communications Group's emphasis on health-care
cost containment through managed care and other programs, and earnings on the
amounts funded for postretirement benefit costs, resulted in a decline in
health-care costs of approximately $25 in 1993.
Other operating expenses increased as a result of higher network software
costs and increased advertising expenses. Direct and indirect corporate
allocations included in other operating expenses were $117 in 1993 and $101 in
1992.
Taxes other than income taxes increased due in part to adjustments made in
1992 for resolution of certain long-standing appeals.
VI-21
<PAGE>
Depreciation and amortization expense increased $71, or 4.1 percent, at U S
WEST Communications. A higher depreciable asset base and increased rates of
depreciation were partially offset by the completion of depreciation reserve
deficiency amortization programs in several jurisdictions.
The 1993 restructuring charge is discussed in "-- Results of Operations --
1994 Compared With 1993."
Interest expense decreased principally due to the effects of lower interest
rates. The Communications Group average borrowing cost decreased to 6.9 percent
in 1993, from 8.2 percent in 1992.
Other expense decreased in 1993 primarily as a result of 1992 debt
refinancing costs and regulatory settlements, partially offset by the effects of
a 1992 settlement with the Service.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes...................................................... $ 208 $ 388 $ (180) (46.4)
Effective tax rate.............................................................. 34.7% 29.4% -- --
</TABLE>
The increase in the effective tax rate resulted primarily from the $54
cumulative effect on deferred taxes of the 1993 federally mandated increase in
income tax rates and the effects of discontinuing SFAS No. 71, partially offset
by the tax effects of the restructuring charge.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The Communications Group will utilize cash generated by its businesses
primarily to fund its capital expenditures and pay the dividend on the
Communications Stock.
Cash from operations decreased in the first quarter of 1995 compared with
the first quarter of 1994 primarily due to higher payments for restructuring
charges and a tax payment related to prior periods. Cash provided by operating
activities of approximately $2.5 billion in 1994 was lower by $168 and $313 as
compared with 1993 and 1992, respectively, largely due to cash payments for
restructuring activities of $279 in 1994, compared with $120 and $92 in 1993 and
1992, respectively. Growth in cash from operations will be limited in the near
term as the Communications Group continues to implement the Restructuring Plan.
Further details of cash provided by operating activities are provided in the
Combined Statements of Cash Flows.
INVESTING ACTIVITIES
Total capital expenditures were $545 and $554 in the first quarter of 1995
and 1994, respectively, and $2,477 in 1994, $2,226 in 1993 and $2,385 in 1992.
The 1994 capital expenditures were devoted to the continued modernization and
maintenance of telephone plant, including investments in fiber optic cable, to
improve customer service and network productivity. In 1995, capital expenditures
are expected to approximate $2.1 billion.
In the first quarter of 1995 and 1994, the Communications Group received
cash proceeds of $88 and $23, respectively, from the sale of certain rural
telephone exchanges. In 1994, the Communications Group received cash proceeds of
$93 for the sale of certain rural telephone exchanges.
FINANCING ACTIVITIES
During the first quarter of 1995, debt increased by $280 and the percentage
of debt to total capital increased from 65.8 percent to 66.7 percent, primarily
as a result of the funding by the Communications Group of post retirement
medical and life costs. In 1994, debt increased by $451 compared with 1993. In
1993, debt increased $492 compared with 1992. The Communications Group year-end
1994 percentage of debt to total capital was 65.8 compared with 67.6 at December
31, 1993. The decrease in the percentage of debt to total capital is primarily
attributable to higher net income and issuances of equity.
VI-22
<PAGE>
U S WEST Communications is permitted to borrow up to approximately $600
under short-term lines of credit, all of which were available at December 31,
1994. Additional lines of credit aggregating approximately $1.3 billion are
available to both the Media Group and the unregulated subsidiaries in the
Communications Group in accordance with their borrowing needs. Under
registration statements filed with the Commission, as of December 31, 1994, U S
WEST Communications is permitted to issue up to approximately $300 of new debt
securities. An additional $1.5 billion in securities are permitted to be issued
under registration statements filed with the SEC to support the requirements of
the Media Group and the unregulated subsidiaries in the Communications Group.
U S WEST also maintains a commercial paper program to finance short-term
cash flow requirements, as well as to maintain a presence in the short-term debt
market.
The Media Group from time to time engages in discussions regarding
acquisitions. The Company may fund such acquisitions with internally generated
funds, debt or equity. The incurrence of indebtedness to fund such acquisitions
and/or the assumption of indebtedness in connection with such acquisitions, if
significant, could result in a downgrading of the credit rating of the Company
or U S WEST Communications.
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
securities, will be managed by the Company on a centralized basis.
Notwithstanding such centralized management, financing activities for U S WEST
Communications will be separately identified and accounted for in the Company's
records and U S WEST Communications will continue to conduct its own borrowing
activities. All debt incurred and investments made by the Company and its
subsidiaries would be specifically allocated to and reflected on the financial
statements of the Media Group except that debt incurred and investments made by
the Company and its subsidiaries on behalf of the Non-Regulated Communications
Businesses 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 the Company or a subsidiary on behalf
of a Group would be charged to such Group at the borrowing rate of the Company
or such subsidiary.
During the first quarter of 1995, the Communications Group made a cash
equity infusion of $69 to the Media Group. Following implementation of the
Recapitalization Proposal, the Company does not intend to transfer funds between
the Groups, except for certain short-term, ordinary course advances of funds
associated with the Company's centralized cash management. Such short-term
transfers of funds will be 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 Board, in its sole
discretion, determines that a transfer of funds between the Groups should be
accounted for as a long-term loan, the 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 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 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 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.
VI-23
<PAGE>
INTEREST RATE RISK MANAGEMENT
The Communications Group is exposed to market risks arising from changes in
interest rates. Derivative financial instruments are used to manage this risk.
The Company does not use derivative financial instruments for trading purposes.
The objective of the interest rate risk management program is to minimize
the total cost of debt, fix the cost of future debt issues and take advantage of
major market trends by changing the percentage of floating rate debt. The market
value of the debt portfolio and its risk adjusting derivative instruments are
monitored and compared to pre-determined benchmarks to evaluate the
effectiveness of the risk management program. To meet the objectives of the
interest rate risk management program, the Communications Group uses risk
reducing and risk adjusting strategies. Interest rate forward contracts were
used in 1993 to reduce the debt issuance risks associated with interest rate
fluctuations. Interest rate swaps are used to adjust the risks of the debt
portfolio on a consolidated basis by varying the ratio of fixed to floating rate
debt.
In 1993, U S WEST Communications refinanced $2.7 billion of callable debt
with new, lower-cost fixed rate debt. U S WEST Communications achieved an annual
interest expense reduction of approximately $35 as a result of this refinancing.
In conjunction with the refinancing, forward contracts were executed to sell
U.S. Treasuries to reduce debt issuance risks and lock in the cost of $1.5
billion of the future debt issue. At December 31, 1994, deferred credits of $8
and deferred charges of $51 on closed interest rate forward contracts are
included as part of the carrying value of the underlying debt. The deferred
credits and charges are being recognized as a yield adjustment over the life of
the debt, which matures at various dates through 2043. The net deferred charge
is directly offset by the lower coupon rate achieved on the new debt.
Notional amounts on interest rate swaps outstanding at December 31, 1994,
were $781 with various maturities that extend to 1999. The estimated effect of U
S WEST Communications' interest rate derivative transactions was to adjust the
level of fixed rate debt from 75.5 percent to 87.1 percent of the total debt
portfolio.
REGULATION
FEDERAL REGULATORY ISSUES
The Communications Group supports regulatory reform at all levels. While
certain federal courts have recently ruled as unconstitutional some laws
governing local exchange carriers activities, the legal and regulatory framework
under which the Communications Group operates limits both competition and
consumer choice. The limitations include restrictions on equipment
manufacturing, the provisioning of cable television programming content, and
restrictions on the transport of communications, entertainment and information
across LATA boundaries. The Communications Group believes that national
telecommunications regulatory reform may be the only effective way to resolve
the related issues and satisfy competing interests.
During 1994 and early 1995, a number of federal regulatory issues were ruled
on in the courts:
- In January 1995, the 9th U.S. Circuit Court of Appeals in San Francisco
upheld the June 15, 1994, Seattle Federal District Court ruling that
affirmed U S WEST's challenge to the constitutionality of the telephone
company video programming restriction in the 1984 Cable Act. The Act
prevents telephone companies from providing video programming within their
regions. U S WEST argued, and the courts agreed, that the restriction
violates its First Amendment right to free speech. The decision would
allow the Company to provide video programming directly to its regional
telephone subscribers. The Federal Government can appeal to the U.S.
Supreme Court. The Communications Group is evaluating its options in light
of this ruling. In January 1995, the FCC instituted a proceeding to modify
and promulgate rules on the provision of video programming. In March 1995,
the FCC announced that it would not enforce its cross-ownership ban on
local exchange carriers providing video programming directly to
subscribers in their local telephone exchange service areas.
VI-24
<PAGE>
- In January 1995, the U.S. Circuit Court of Appeals for the District of
Columbia overruled the FCC's "range-of-rates" decision. This FCC decision
permitted non-dominant carriers to file ranges for rates rather than
specific price points. The Court of Appeals held that the Communications
Act requires all carriers to specify prices on their tariffs. The effect
of this decision will be to require non-dominant carriers (such as MCI
Communications or Time Warner Communications) to file tariffs with
considerably more price detail.
- In October 1994, the 9th U.S. Circuit Court of Appeals overruled the FCC's
Computer-III non-structural separation decision for the provision of
enhanced services on an integrated basis under the Open Network
Architecture ("ONA") regulatory structure. Under the ONA structure U S
WEST Communications is required to unbundle its telephone network services
in a manner that will accommodate the service needs of the growing number
of information service providers. The effect of the decision could be to
return to the provision of such service through a separate subsidiary,
which could make it more difficult for local exchange carriers to offer
enhanced services. In January 1995, the FCC granted a waiver allowing for
the continued integrated provision of enhanced services, pending further
proceedings by the FCC. The FCC is currently conducting a rulemaking
proceeding to determine whether separate subsidiary requirements will be
reinstated or whether integrated provisioning will be continued under an
ONA regulatory structure on a permanent basis.
- In August 1994, the U.S. Circuit Court of Appeals for the District of
Columbia upheld an FCC ruling that neither telephone companies nor
customer programmers need to obtain a franchise from local governments to
provide Video Dial Tone ("VDT") service. The decision means that local
telephone companies will avoid additional franchise fees related to the
provisioning of VDT services.
- In June 1994, the U.S. Circuit Court of Appeals for the District of
Columbia overturned the FCC's requirement that local telephone companies
allow physical collocation by third parties (competitive access
providers), within their central offices, for the installation and
operation of equipment that connects to the local telephone network. The
decision essentially affirms the private property rights of corporations.
The court also ordered the FCC to reconsider its requirement that allows
competitors to interconnect equipment to the local network from a point
outside a central office. In light of the rulings the Communications Group
is evaluating how it can provide future interconnection services.
On April 24, 1995, the RBOCs asked the D.C. District Court for a waiver of
the MFJ restriction on the provision by the RBOCs of information services on an
interexchange basis. The request for a waiver follows a recommendation by the
Department of Justice that the RBOCs be allowed to provide information services
on an interexchange basis.
U S WEST Communications' interstate services have been subject to price cap
regulation since January 1991. Price caps are an alternative form of regulation
designed to limit prices rather than profits. However, the FCC's price cap plan
includes sharing of earnings in excess of authorized levels. In March 1995, the
FCC issued an interim order on price cap regulation. This order increases the
productivity factor used in the price cap index, thus reducing the access prices
paid by interexchange carriers to local telephone companies. The interim order
also provides for a no-sharing productivity factor option and for increased
flexibility for adjusting prices downward in response to competition. During the
past several years U S WEST Communications has used the higher productivity
factor in determining its access prices. Consequently, U S WEST Communications
expects no significant impact in 1995 as a result of the interim order.
For a further discussion of federal regulatory issues, see "--
Communications Group -- Description of Business -- Regulation."
VI-25
<PAGE>
STATE REGULATORY ISSUES
U S WEST Communications is subject to varying degrees of regulation by state
commissions with respect to intrastate rates and service, and access charge
tariffs. U S WEST Communications is currently working with state regulators to
gain approval of initiatives, including efforts to rebalance prices, advance
competitive parity and implement simplified forms of price and service quality
regulation.
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price changes, refunds or both. In one
such instance, the Utah Supreme Court has remanded a PSC order to the PSC for
reconsideration, thereby establishing certain exceptions to the rule against
retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The PSC's initial order denied a refund request from an
interexchange carrier and other parties that relates to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -- made
in accordance with the remand from the Supreme Court -- alleges that the
exceptions apply, the range of possible risk is $0 to $140.
For further discussion of state regulatory issues, see "-- Communications
Group -- Description of Business -- Regulation."
VI-26
<PAGE>
COMMUNICATIONS GROUP
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants............................................. VI-28
Financial Statements for the Three Months Ended March 31, 1995 and 1994
(unaudited) and for the Years Ended December 31, 1994, 1993 and 1992
Combined Statements of Operations......................................... VI-29
Combined Balance Sheets................................................... VI-30
Combined Statements of Cash Flows......................................... VI-31
Notes to Combined Financial Statements.................................... VI-32
</TABLE>
VI-27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of U S WEST, Inc.
We have audited the Combined Balance Sheets of U S WEST Communications Group
(as described in Note 1) as of December 31, 1994 and 1993 and the related
Combined Statements of Operations and Cash Flows for each of the three years in
the period ended December 31, 1994. These financial statements are the
responsibility of U S WEST, Inc.'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 combined financial position of U S WEST
Communications Group as of December 31, 1994 and 1993, and the combined results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As more fully discussed in Note 1, the Combined Financial Statements of U S
WEST Communications Group should be read in connection with the audited
Consolidated Financial Statements of U S WEST, Inc.
As discussed in Note 3 to the Combined Financial Statements, U S WEST
Communications Group discontinued accounting for the operations of U S WEST
Communications, Inc. in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation,"
in 1993. As discussed in Note 10 to the Combined Financial Statements, U S WEST
Communications Group changed its method of accounting for postretirement
benefits other than pensions and other postemployment benefits in 1992.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
May 12, 1995
VI-28
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating Revenues
Local service................................................. $ 1,050 $ 985 $ 4,067 $ 3,829 $ 3,674
Interstate access service..................................... 589 562 2,269 2,147 2,047
Intrastate access service..................................... 188 174 729 682 673
Long-distance network services................................ 299 351 1,329 1,442 1,420
Other services................................................ 192 181 782 770 716
--------- --------- --------- --------- ---------
Total operating revenues.................................... 2,318 2,253 9,176 8,870 8,530
Operating Expenses
Employee-related expenses..................................... 813 778 3,215 3,068 3,011
Other operating expenses...................................... 349 363 1,547 1,671 1,612
Taxes other than income taxes................................. 106 99 388 388 354
Depreciation and amortization................................. 499 470 1,908 1,828 1,759
Restructuring charge.......................................... -- -- -- 880 --
--------- --------- --------- --------- ---------
Total operating expenses.................................... 1,767 1,710 7,058 7,835 6,736
Income from operations.......................................... 551 543 2,118 1,035 1,794
Interest expense................................................ 101 90 376 412 438
Gain on sales of rural telephone exchanges...................... 63 24 82 -- --
Other expense -- net............................................ 13 10 21 24 38
--------- --------- --------- --------- ---------
Income before income taxes...................................... 500 467 1,803 599 1,318
Provision for income taxes...................................... 185 172 653 208 388
--------- --------- --------- --------- ---------
Income before extraordinary items and cumulative effect of
change in accounting principles................................ 315 295 1,150 391 930
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax..................... -- -- -- (3,123) --
Early extinguishment of debt, net of tax...................... -- -- -- (77) --
Cumulative effect of change in accounting principles:
Transition effect of change in accounting for postretirement
benefits other than pensions and other postemployment
benefits, net of tax......................................... -- -- -- -- (1,745)
--------- --------- --------- --------- ---------
Net income (loss)............................................... $ 315 $ 295 $ 1,150 $ (2,809) $ (815)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma earnings per share of Communications Stock
(unaudited).................................................... $ 0.67 $ 2.53
Pro forma dividends per share of Communications Stock
(unaudited).................................................... $ 0.535 $ 2.14
Pro forma average shares of Communications Stock outstanding
(thousands) (unaudited)........................................ 468,557 453,316
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
VI-29
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 --------------------
(UNAUDITED) 1994 1993
----------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 37 $ 116 $ 56
Accounts receivable, less allowance for credit losses of $29 and $28 at
December 31, 1994 and 1993, respectively.................................. 1,469 1,500 1,439
Inventories and supplies................................................... 180 166 181
Deferred tax asset......................................................... 297 300 308
Other...................................................................... 69 56 64
----------- --------- ---------
Total current assets......................................................... 2,052 2,138 2,048
----------- --------- ---------
Property, plant and equipment, net........................................... 12,957 13,041 12,631
Other assets................................................................. 837 765 744
----------- --------- ---------
Total assets................................................................. $ 15,846 $ 15,944 $ 15,423
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt............................................................ $ 1,847 $ 1,608 $ 1,382
Accounts payable........................................................... 668 888 931
Employee compensation...................................................... 281 313 328
Dividends payable.......................................................... 251 250 236
Current portion of restructuring charges................................... 343 318 431
Advanced billing and customer deposits..................................... 215 211 198
Other...................................................................... 808 620 682
----------- --------- ---------
Total current liabilities.................................................... 4,413 4,208 4,188
----------- --------- ---------
Long-term debt............................................................... 4,557 4,516 4,291
Postretirement and postemployment benefit obligations........................ 2,203 2,427 2,628
Deferred income taxes........................................................ 572 547 256
Unamortized investment tax credits........................................... 220 231 280
Deferred credits and other................................................... 687 836 1,058
Communications Group equity.................................................. 3,194 3,179 2,722
----------- --------- ---------
Total liabilities and equity................................................. $ 15,846 $ 15,944 $ 15,423
----------- --------- ---------
----------- --------- ---------
Contingencies (see Note 13)
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
VI-30
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................. $ 315 $ 295 $ 1,150 $ (2,809) $ (815)
Adjustments to net income (loss):
Discontinuance of SFAS No. 71.................................... -- -- -- 3,123 --
Cumulative effect of change in accounting principles............. -- -- -- -- 1,745
Restructuring charge............................................. -- -- 880 --
Postretirement medical and life costs, net of cash fundings...... (238) (265) (197) (135) 58
Depreciation and amortization.................................... 499 470 1,908 1,828 1,759
Gain on sales of rural telephone exchanges....................... (63) (24) (82) -- --
Deferred income taxes and amortization of investment tax
credits......................................................... 47 26 226 (191) (1)
Changes in operating assets and liabilities:
Restructuring payments........................................... (77) (22) (279) (120) (92)
Accounts receivable.............................................. 28 37 (64) (78) 26
Inventories, supplies and other.................................. (34) (56) (29) (23) (23)
Accounts payable and accrued liabilities......................... (4) 13 (147) 153 103
Other -- net....................................................... (73) (18) 23 49 62
--------- --------- --------- --------- ---------
Cash provided by operating activities.............................. 400 456 2,509 2,677 2,822
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment..................... (541) (608) (2,254) (2,234) (2,081)
Proceeds from disposals of property, plant and equipment........... 92 18 96 42 52
Other -- net....................................................... -- -- 2 -- --
--------- --------- --------- --------- ---------
Cash (used for) investing activities............................... (449) (590) (2,156) (2,192) (2,029)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from short-term debt.................................. 242 87 344 687 21
Proceeds from issuance of long-term debt........................... -- 213 326 2,408 391
Dividends paid on common stock..................................... (231) (223) (886) (812) (796)
Repayment of long-term debt........................................ (18) (116) (285) (2,952) (670)
Proceeds from issuance of equity................................... -- 153 208 356 90
Advance from/(repayment to) Media Group............................ 46 -- -- (153) 153
Equity transfer to Media Group..................................... (69) -- -- -- --
--------- --------- --------- --------- ---------
Cash (used for) provided by financing activities................... (30) 114 (293) (466) (811)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)................................................ (79) (20) 60 19 (18)
Beginning balance.................................................. 116 56 56 37 55
--------- --------- --------- --------- ---------
Ending balance..................................................... $ 37 $ 36 $ 116 $ 56 $ 37
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
VI-31
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Board of Directors of U S WEST, Inc. ("U S WEST" or "Company"), a
Colorado corporation, has adopted a proposal (the "Recapitalization Proposal")
that would change the state of incorporation of U S WEST from Colorado to
Delaware and create two classes of common stock that are intended to reflect
separately the performance of the Company's communications and multimedia
businesses. Under the Recapitalization Proposal, shareholders of the Company
will be asked to approve an Agreement and Plan of Merger between the Company and
U S WEST, Inc., a Delaware corporation and wholly owned subsidiary of U S WEST
("U S WEST Delaware"), pursuant to which U S WEST would be merged (the "Merger")
with and into U S WEST Delaware with U S WEST Delaware continuing as the
surviving corporation. In connection with the Merger, the Certificate of
Incorporation of U S WEST Delaware would be amended and restated (as so amended
and restated, the "Restated Certificate") to, among other things, designate two
classes of common stock of U S WEST Delaware, one class of which would be
authorized as U S WEST Communications Group Common Stock ("Communications
Stock"), and the other class of which would be authorized as U S WEST Media
Group Common Stock ("Media Stock"). Upon consummation of the Merger, each share
of existing common stock of the Company would be automatically converted into
one share of Communications Stock and one share of Media Stock.
The Communications Stock and Media Stock are designed to provide
shareholders with separate securities that are intended to reflect separately
the communications businesses of U S WEST Communications, Inc. ("U S WEST
Communications") and certain other subsidiaries of the Company (the
"Communications Group") and the Company's multimedia businesses (the "Media
Group" and, together with the Communications Group, the "Groups").
The Communications Group is comprised of U S WEST Communications, U S WEST
Communications Services, Inc., U S WEST Federal Services, Inc., U S WEST
Advanced Technologies, Inc. and U S WEST Business Resources, Inc.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc., a
publisher of White and Yellow Pages telephone directories, and provider of
multimedia content and services, U S WEST NewVector Group, Inc., which provides
communications and information products and services over wireless networks, U S
WEST Multimedia Communications, Inc., which owns domestic cable television
operations and investments and U S WEST International Holdings, Inc., which
primarily owns investments in international cable and telecommunications,
wireless communications and directory publishing operations.
BASIS OF PRESENTATION
The Combined Financial Statements of the Groups comprise all of the accounts
included in the corresponding Consolidated Financial Statements of the Company.
Investments in less than majority-owned ventures are generally accounted for
using the equity method. The separate Group financial statements give effect to
the accounting policies that will be applicable upon implementation of the
Recapitalization Proposal. The separate Group Combined Financial Statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include: (i) the combined historical balance sheets, results of
operations and cash flows of the businesses that comprise each of the Groups,
with all significant intragroup amounts and transactions eliminated; (ii) in the
case of the Communications Group Combined Financial Statements, corporate assets
and liabilities of U S WEST and related transactions identified with the
Communications Group; (iii) in the case of the Media
VI-32
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Group Combined Financial Statements, all other corporate assets and liabilities
and related transactions of U S WEST; and (iv) an allocated portion of the
corporate expense of U S WEST. Transactions between the Communications Group and
the Media Group have not been eliminated.
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 will
continue to be subject to risks associated with an investment in a single
company and all of the Company's businesses, assets and liabilities. Such
allocation of assets and liabilities and change in the equity structure of the
Company will not result in a distribution or spin-off to shareholders of any
assets or liabilities of the Company or any of its subsidiaries or otherwise
affect responsibility for the liabilities of the Company or such subsidiaries.
As a result, the rights of the holders of the Company's or any of its
subsidiaries' debt will not be affected thereby. Financial effects arising from
either Group that affect the Company's results of operations or financial
condition could, if significant, affect the results of operations or financial
position of the other Group or the market price of the class of Common Stock
relating to the other Group. Any net losses of the Communications Group or the
Media Group, and dividends or distributions on, or repurchases of Communications
Stock, Media Stock or Preferred Stock, will reduce the funds of the Company
legally available for payment of dividends on both the Communications Stock and
Media Stock. Accordingly, the Company's Consolidated Financial Statements should
be read in conjunction with the Communications Group and the Media Group
Combined Financial Statements.
The accounting policies described herein applicable to the preparation of
the Combined Financial Statements of the Communications Group may be modified or
rescinded at the sole discretion of the Board of Directors of the Company (the
"Board") without approval of the stockholders, although there is no present
intention to do so. The Board may also adopt additional policies depending upon
the circumstances. Any determination of the 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 in good faith and in the honest belief that
such decision is in the best interests of all the Company's stockholders,
including the holders of Communications Stock and the holders of Media Stock. In
making such determination, the Board may also consider regulatory requirements
imposed on U S WEST Communications by the public utility commissions of various
states and the Federal Communications Commission. 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.
ALLOCATION OF SHARED SERVICES. Certain costs relating to the Company's
general and administrative services (including certain executive management,
legal, tax, accounting and auditing, treasury, strategic planning and public
policy services) are directly assigned to each Group based upon actual
utilization or are allocated based upon each Group's operating expenses, number
of employees, external revenues, average capital and/or average equity. The
Company charges each Group for such services at fully distributed cost. The
Communications Group share of these direct and indirect allocations was $104,
$117 and $101 in 1994, 1993 and 1992, respectively. In 1994, the direct
allocations comprised approximately 40 percent of the total shared corporate
services allocated to the Communications Group. It is not practicable to provide
a detailed estimate of the expenses which
VI-33
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
would be recognized if the Communications Group were a separate legal entity.
However, the Company believes that under the Recapitalization Proposal, each
Group would benefit from synergies with the other, including having lower
operating costs than might be incurred if each Group was a separate legal
entity.
ALLOCATION OF EMPLOYEE BENEFITS. A portion of U S WEST's employee benefit
costs, including pension and postretirement medical and life, are allocated to
the Communications Group. (See Note 10 to the Combined Financial Statements.)
ALLOCATION OF INCOME 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 the Company 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
the Company 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.
GROUP FINANCING. 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 securities, are managed by the Company on a centralized basis.
Notwithstanding such centralized management, financing activities for U S WEST
Communications are separately identified and accounted for in the Company's
records and U S WEST Communications conducts its own borrowing activities. All
debt incurred and investments made by the Company and its subsidiaries are
specifically allocated to and reflected on the financial statements of the Media
Group except that debt incurred and investments made by the Company and its
subsidiaries on behalf of the non-regulated Communications businesses and all
debt incurred and investments made by U S WEST Communications are specifically
allocated to and reflected on the financial statements of the Communications
Group. Debt incurred by the Company or a subsidiary on behalf of a Group is
charged to such Group at the borrowing rate of the Company or such subsidiary.
Following implementation of the Recapitalization Proposal, the Company does
not intend to transfer funds between the Groups, except for certain short-term
ordinary course advances of funds associated with the Company's centralized cash
management. Such short-term transfers of funds will be 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 Board, in its sole discretion, determines that a transfer of funds
between the Groups should be accounted for as a long-term loan, the 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.
VI-34
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINED)
DIVIDENDS. Under the Recapitalization Proposal, dividends to be paid to the
holders of Communications Stock will initially be at a quarterly rate of $0.535
per share. Dividends on the Communications Stock will be paid at the discretion
of the Board based primarily upon the financial condition, results of operations
and business requirements of the Communications Group and the Company as a
whole. Dividends will be payable out of the lesser of: 1) the funds of the
Company legally available for the payment of dividends; and 2) the
Communications Group Available Dividend Amount as defined in the Restated
Certificate.
INDUSTRY SEGMENT
The Communications Group operates in one industry segment (communications
and related services).
The largest volume of the Communications Group services is provided to AT&T.
During 1994, 1993 and 1992 revenues related to those services provided to AT&T
were $1,130, $1,159 and $1,191, respectively. Related accounts receivable at
December 31, 1994 and 1993 totaled $98 and $97, respectively.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less that are readily convertible into cash and
are not subject to significant risk from fluctuations in interest rates.
INVENTORIES AND SUPPLIES
New and reusable materials of U S WEST Communications are carried at average
cost, except for significant individual items that are valued based on specific
costs. Non-reusable material is carried at its estimated salvage value.
Inventories of the Communications Group non-telephone operations are carried at
the lower of cost or market on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
The investment in property, plant and equipment is carried at cost, less
accumulated depreciation. Additions, replacements and substantial betterments
are capitalized. Costs for normal repair and maintenance of property, plant and
equipment are charged to expense as incurred.
U S WEST Communications' provision for depreciation of property, plant and
equipment is based on various straight-line group methods using remaining useful
(economic) lives based on industry-wide studies. In the third quarter of 1993, U
S WEST Communications discontinued accounting for its regulated telephone
operations under Statement of Financial Accounting Standards ("SFAS") No. 71,
"Accounting for the Effects of Certain Types of Regulation." Prior to
discontinuing SFAS No. 71, depreciation was based on lives specified by
regulators. (See Note 3 to the Combined Financial Statements.) When the
depreciable property, plant and equipment of U S WEST Communications is retired
or sold, the original cost less the net salvage value is generally charged to
accumulated depreciation.
The non-telephone operations of the Communications Group provide for
depreciation using the straight-line method. When such depreciable property,
plant and equipment is retired or sold, the resulting gain or loss is recognized
currently as an element of other income.
VI-35
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINED) (CONTINUED)
Interest related to qualifying construction projects is capitalized and is
reflected as a reduction of interest expense. At U S WEST Communications, prior
to discontinuing SFAS No. 71, capitalized interest was included as an element of
other income. Amounts capitalized by the Communications Group were $36, $15 and
$23 in 1994, 1993, and 1992, respectively.
REVENUE RECOGNITION
Local telephone service revenues are generally billed monthly, in advance,
and revenues are recognized the following month when services are provided.
Revenues derived from other telephone services, including exchange access and
long-distance, are billed and recorded monthly as services are provided.
FINANCIAL INSTRUMENTS
Net interest income or expense on interest rate swaps is recognized over the
life of the swaps as an adjustment to interest expense. Gains and losses on
forward contracts, designated as hedges of interest rate exposure on debt
refinancings, are deferred and recognized as an adjustment to interest expense
over the life of the underlying debt.
COMPUTER SOFTWARE
The cost of computer software, whether purchased or developed internally, is
charged to expense with two exceptions. Initial operating system software is
capitalized and amortized over the life of the related hardware, and initial
network applications software is capitalized and amortized over three years.
Subsequent upgrades to capitalized software are expensed. Capitalized computer
software of $146 and $148 at December 31, 1994 and 1993, respectively, is
recorded in property, plant and equipment. The Communications Group amortized
capitalized computer software costs of $86, $51 and $24, in 1994, 1993 and 1992,
respectively.
INCOME TAXES
The provision for income taxes consists of an amount for taxes currently
payable and an amount for tax consequences deferred to future periods in
accordance with SFAS No. 109. The Communications Group implemented SFAS No. 109,
"Accounting for Income Taxes," in 1993. Adoption of the new standard did not
have a material effect on the financial position or results of operations,
primarily because of the Company's earlier adoption of SFAS No. 96.
For financial statement purposes, investment tax credits of U S WEST
Communications are being amortized over the economic lives of the related
property, plant and equipment in accordance with the deferred method of
accounting for such credits.
EARNINGS (LOSS) PER COMMON SHARE
Historical earnings per share is omitted from the statements of operations
because the Communications Stock was not part of the capital structure of the
Company for the periods presented. Communications Group pro forma earnings per
share, reflecting the Recapitalization Proposal, is presented in the Combined
Statements of Operations for the first quarter of 1995 and for 1994.
VI-36
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINED) (CONTINUED)
INTERIM FINANCIAL STATEMENTS
The interim financial statements have been prepared in accordance with GAAP
and in accordance with SEC rules and regulations for interim reporting. In the
opinion of the Company's management, the interim financial statements include
all adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the interim financial information set forth therein.
NOTE 2: RELATED PARTY TRANSACTIONS
Related party transactions for the Communications Group follow:
CUSTOMER LISTS, BILLING AND COLLECTION, AND OTHER SERVICES
U S WEST Communications sells customer lists, billing and collection, and
other services to the Media Group. These products and services are sold at fully
distributed cost or at a market price, in accordance with regulatory
requirements. U S WEST Communications charged $27, $26 and $25 for these
services in 1994, 1993 and 1992, respectively.
BELL COMMUNICATIONS RESEARCH, INC. ("BELLCORE")
Charges relating to research, development and maintenance of existing
technologies performed by Bellcore, of which U S WEST Communications has a 1/7
ownership interest, were $111, $113 and $120 in 1994, 1993 and 1992,
respectively.
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Land and buildings............................................................... $ 2,453 $ 2,408
Telephone network equipment...................................................... 11,622 11,093
Telephone outside plant.......................................................... 11,897 11,386
General purpose computers and other.............................................. 3,013 2,762
Construction in progress......................................................... 593 524
--------- ---------
29,578 28,173
--------- ---------
Less accumulated depreciation
Buildings...................................................................... 657 624
Telephone network equipment.................................................... 6,733 6,326
Telephone outside plant........................................................ 7,442 7,064
General purpose computers and other............................................ 1,705 1,528
--------- ---------
16,537 15,542
--------- ---------
Property, plant and equipment -- net............................................. $ 13,041 $ 12,631
--------- ---------
--------- ---------
</TABLE>
In 1994, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $122. U S WEST Communications received consideration for the
sales of $93 in cash and $81 in replacement property. U S WEST Communications
will receive an additional $30 of replacement property in 1995.
VI-37
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 3: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
DISCONTINUANCE OF SFAS NO. 71
U S WEST Communications incurred a non-cash, extraordinary charge of $3.1
billion, net of an income tax benefit of $2.3 billion, in conjunction with its
decision to discontinue accounting for the operations of U S WEST Communications
in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," as of September 30, 1993. SFAS No. 71 generally applies to
regulated companies that meet certain requirements, including a requirement that
a company be able to recover its costs, notwithstanding competition, by charging
its customers at prices established by its regulators. U S WEST Communications'
decision to discontinue application of SFAS No. 71 was based on the belief that
competition, market conditions and the development of broadband technology, more
than prices established by regulators, will determine the future cost recovery
by U S WEST Communications. As a result of this change, the remaining asset
lives of U S WEST Communications' plant were shortened to more closely reflect
the useful (economic) lives of such plant.
Following is a list of the major categories of telephone property, plant and
equipment and the manner in which depreciable lives were affected by the
discontinuance of SFAS No. 71:
<TABLE>
<CAPTION>
AVERAGE LIFE (YEARS)
------------------------------
BEFORE AFTER
CATEGORY DISCONTINUANCE DISCONTINUANCE
- ------------------------------------------------------------------------ -------------- --------------
<S> <C> <C>
Digital switch.......................................................... 17-18 10
Digital circuit......................................................... 11-13 10
Aerial copper cable..................................................... 18-28 15
Underground copper cable................................................ 25-30 15
Buried copper cable..................................................... 25-28 20
Fiber cable............................................................. 30 20
Buildings............................................................... 27-49 27-49
General purpose computers............................................... 6 6
</TABLE>
U S WEST Communications employed two methods to determine the amount of the
extraordinary charge. The "economic life" method assumed that a portion of the
plant-related effect is a regulatory asset that was created by the
under-depreciation of plant under regulation. This method yielded the
plant-related adjustment that was confirmed by the second method, a discounted
cash flow analysis.
Following is a schedule of the nature and amounts of the after-tax charge
recognized as a result of U S WEST Communications' discontinuance of SFAS No.
71:
<TABLE>
<S> <C>
Plant related...................................................... $ 3,124
Tax-related regulatory assets and liabilities...................... (208)
Other regulatory assets and liabilities............................ 207
---------
Total.............................................................. $ 3,123
---------
---------
</TABLE>
VI-38
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 4: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper....................................................... $ 1,321 $ 979
Other.................................................................. 116 113
Current portion of long-term debt........................................ 171 290
--------- ---------
Total.................................................................... $ 1,608 $ 1,382
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.92 percent and
2.73 percent at December 31, 1994 and 1993, respectively.
U S WEST Communications, which conducts its own borrowing activities, is
permitted to borrow up to approximately $600 under short-term formal lines of
credit, all of which were available at December 31, 1994. Additional lines of
credit aggregating approximately $1.3 billion are available to both the Media
Group and the unregulated subsidiaries of the Communications Group in accordance
with their borrowing needs.
LONG-TERM DEBT
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL
INTEREST RATES 1996 1997 1998 1999 THEREAFTER 1994
- --------------------------------------------------------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Up to 5%................................................. $ -- $ -- $ 35 $ -- $ 240 $ 275
Above 5% to 6%........................................... -- 25 300 -- 261 586
Above 6% to 7%........................................... -- -- -- 226 1,290 1,516
Above 7% to 8%........................................... 370 16 -- -- 1,750 2,136
Above 8% to 9%........................................... -- -- -- -- 250 250
Above 9% to 10%.......................................... -- -- -- -- 320 320
--------- --- --------- --------- ----------- ---------
$ 370 $ 41 $ 335 $ 226 $ 4,111 5,083
--------- --- --------- --------- -----------
--------- --- --------- --------- -----------
Capital lease obligations and other...................... 148
Unamortized discount -- net.............................. (715)
---------
Total.................................................... $ 4,516
---------
---------
<CAPTION>
TOTAL
INTEREST RATES 1993
- --------------------------------------------------------- ---------
<S> <C>
Up to 5%................................................. $ 276
Above 5% to 6%........................................... 561
Above 6% to 7%........................................... 1,383
Above 7% to 8%........................................... 1,909
Above 8% to 9%........................................... 250
Above 9% to 10%.......................................... 320
---------
4,699
Capital lease obligations and other...................... 165
Unamortized discount -- net.............................. (573)
---------
Total.................................................... $ 4,291
---------
---------
</TABLE>
Long-term debt consists principally of debentures, medium-term notes and
zero coupon subordinated notes convertible at any time into U S WEST common
shares. The zero coupon notes have a yield to maturity of approximately 7.3
percent. The zero coupon notes are recorded at a discounted value of $264 and
$181 at December 31, 1994 and 1993, respectively.
During 1993, U S WEST Communications refinanced debt issues aggregating $2.7
billion in principal amount. Expenses associated with the refinancing resulted
in an extraordinary charge to income of $77, net of a tax benefit of $48. The
refinancing allowed U S WEST Communications to take advantage of favorable
interest rates.
VI-39
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 4: DEBT (CONTINUED)
Interest payments, net of amounts capitalized, were $360, $402 and $418 in
1994, 1993 and 1992, respectively.
NOTE 5: LEASING ARRANGEMENTS
Certain subsidiaries within the Communications Group have entered into
operating leases for office facilities, equipment and real estate. Rent expense
under operating leases was $235, $228 and $222 in 1994, 1993 and 1992,
respectively. Minimum future lease payments as of December 31, 1994, under
non-cancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ------------------------------------------------------------------------------------
<S> <C>
1995................................................................................ $ 116
1996................................................................................ 111
1997................................................................................ 106
1998................................................................................ 106
1999................................................................................ 99
Thereafter.......................................................................... 805
---------
Total............................................................................... $ 1,343
---------
---------
</TABLE>
NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE RISK MANAGEMENT
U S WEST Communications enters into interest rate swap agreements to manage
its market exposure to fluctuations in interest rates. Swap agreements are
primarily used to effectively convert existing commercial paper to fixed-rate
debt. This allows U S WEST Communications to achieve interest savings over
issuing fixed-rate debt directly.
Under an interest rate swap, U S WEST Communications agrees with another
party to exchange interest payments at specified intervals over a defined term.
Interest payments are calculated by reference to the notional amount based on
the fixed- and variable-rate terms of the swap agreements. The net interest
received or paid as part of the interest rate swap is accounted for as an
adjustment to interest expense.
U S WEST Communications also entered into a currency swap to convert Swiss
franc-denominated debt to dollar-denominated debt. This allowed U S WEST
Communications to achieve interest savings over issuing fixed-rate,
dollar-denominated debt. Under the currency swap, U S WEST Communications agreed
with another party to exchange dollars for francs under the terms of the loan
which include periodic interest payments and principal upon origination and
maturity. The currency swap and foreign currency debt are combined and accounted
for as if fixed-rate, dollar-denominated debt were issued directly.
The following table summarizes terms of swaps pertaining to U S WEST
Communications as of December 31, 1994. Variable rates are primarily indexed to
the 30 day commercial paper rate.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Variable to fixed............................................. $ 710 1995-1999 6.14 6.19
Currency...................................................... 71 1999 -- 6.53
</TABLE>
VI-40
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
In 1993, U S WEST Communications executed forward contracts to sell U. S.
Treasuries to reduce debt issuance risks, allowing U S WEST Communications to
lock in the treasury rate component of the future debt issue. At December 31,
1994, deferred credits of $8 and deferred charges of $51 on closed interest rate
forward contracts are included as part of the carrying value of the underlying
debt. The deferred credits and charges are being recognized as a yield
adjustment over the life of the debt, which matures at various dates through
2043. The net deferred charge is directly offset by the lower coupon rate
achieved on the debt issuance. At December 31, 1994, there were no open forward
contracts on interest rates.
The counterparties to these derivative contracts are major financial
institutions. U S WEST Communications is exposed to credit loss in the event of
non-performance by these counterparties. The Company manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations which correspond to the respective credit rating of each
counterparty. U S WEST Communications does not have significant exposure to an
individual counterparty and does not anticipate non-performance by any
counterparty.
NOTE 7: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
The fair values of interest rate swaps are based on estimated amounts U S
WEST Communications would receive or pay to terminate such agreements taking
into account current interest rates and creditworthiness of the counterparties.
The fair value of long-term debt is based on quoted market prices where
available or, if not available, is based on discounting future cash flows using
current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1994 1993
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)...................................... $ 6,124 $ 5,600 $ 5,673 $ 5,801
Interest rate swap agreements -- assets................................. -- (15) -- (1)
----------- --------- ----------- ---------
Debt -- net............................................................. $ 6,124 $ 5,585 $ 5,673 $ 5,800
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
VI-41
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 8: COMMUNICATIONS GROUP EQUITY
COMMUNICATIONS GROUP EQUITY
Following are changes in the Communications Group equity for the periods
presented:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------------
1995 1994 1993 1992
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period...................................... $ 3,179 $ 2,722 $ 6,003 $ 7,530
Net income (loss)................................................... 315 1,150 (2,809) (815)
Dividends........................................................... (251) (980) (905) (876)
Equity issuances.................................................... 20 287 433 164
Equity transfer to Media Group...................................... (69) -- -- --
----------- --------- --------- ---------
Balance at end of period............................................ $ 3,194 $ 3,179 $ 2,722 $ 6,003
----------- --------- --------- ---------
----------- --------- --------- ---------
</TABLE>
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLANS (LESOP)
U S WEST maintains employee savings plans for management and occupational
employees under which the Company matches a certain percentage of eligible
contributions made by the employees with shares of Company stock. The Company
established two LESOPs in 1989 to provide the Company stock used for matching
contributions to the savings plans. The Communications Group made payments
(excluding dividends) of $68, $68 and $67 in 1994, 1993 and 1992, respectively,
to the Media Group to meet trust obligations (of which, $16, $20 and $25,
respectively, has been classified as interest expense). The borrowings
associated with the LESOP are reflected in the Media Group Combined Financial
Statements.
NOTE 9: STOCK INCENTIVE PLANS
Since the Communications Stock was not part of the capital structure of the
Company for the periods presented, there were no stock options outstanding. See
the Consolidated Financial Statements and related notes set forth in Annex V for
information regarding stock incentive plans.
NOTE 10: EMPLOYEE BENEFITS
PENSION PLAN
The Communications Group and the Media Group participate in the defined
benefit pension plan sponsored by U S WEST. Substantially all management and
occupational employees of the Communications Group are covered by this plan.
Since plan assets are not segregated into separate accounts or restricted to
providing benefits to employees of the Communications Group, assets of the plan
may be used to provide benefits to employees of both the Communications Group
and the Media Group. In the event the single employer pension plan sponsored by
U S WEST would be separated into two or more plans, guidelines in the Internal
Revenue Code dictate how assets of the plan must be allocated to the new plans.
U S WEST currently has no intentions to split the plan.
Management benefits are based on a final pay formula while occupational
benefits are based on a flat benefit formula. U S WEST uses the projected unit
credit method for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. The Company's
policy is to fund amounts required under the Employee Retirement Income Security
Act of 1974 ("ERISA") and no funding was required in 1994, 1993 or 1992. Should
funding be required in the future, funding amounts would be allocated to the
Communications Group based upon the ratio of
VI-42
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
service cost of the Communications Group to total service cost of plan
participants. Prior to January 1, 1993, U S WEST maintained separate defined
benefit pension plans for management and occupational employees.
The composition of U S WEST's net pension credit and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Details of pension credit:
Service cost -- benefits earned during the period................................. $ 197 $ 148 $ 141
Interest cost on projected benefit obligation..................................... 561 514 480
Actual return on plan assets...................................................... 188 (1,320) (411)
Net amortization and deferral..................................................... (946) 578 (318)
--------- --------- ---------
Net pension credit.................................................................. $ 0 $ (80) $ (108)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1994, 9.00 percent for 1993 and 9.25 percent
for 1992.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5,044 and $5,286,
respectively................................................................................ $ 5,616 $ 5,860
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds........................................ $ 8,388 $ 8,987
Less: Projected benefit obligation........................................................... 7,149 7,432
--------- ---------
Plan assets in excess of projected benefit obligation........................................ 1,239 1,555
Unrecognized net (gain) loss................................................................. 161 (70)
Prior service cost not yet recognized in net periodic pension cost........................... (67) (72)
Balance of unrecognized net asset at January 1, 1987......................................... (785) (865)
--------- ---------
Prepaid pension asset........................................................................ $ 548 $ 548
--------- ---------
--------- ---------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Discount rate.................................................................................. 8.00% 7.25%
Average rate of increase in future compensation levels......................................... 5.50 5.50
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
ALLOCATION OF PENSION COSTS. Net pension costs (credit) of the plan are
allocated to the Communications Group based upon the ratio of actuarially
determined service cost of participating employees of the Communications Group
to total service cost of plan participants. U S WEST believes that allocating
pension costs based upon service cost is reasonable since service cost is a
primary factor in determining pension costs. The net pension credit allocated to
the Communications Group was $0,
VI-43
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
$(71) and $(104), in 1994, 1993 and 1992, respectively. The portion of the
projected benefit obligation attributable to the Communications Group for
December 31, 1994 and 1993 was 95 percent and 96 percent, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Communications Group and the Media Group participate in plans sponsored
by U S WEST which provide certain health care and life insurance benefits to
retired employees. Effective January 1, 1992, the Communications Group adopted
SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which mandates that employers reflect in their current expenses the
cost of providing retirement medical and life insurance benefits to current and
future retirees. Prior to 1992, the Communications Group recognized these costs
on a cash basis. Adoption of SFAS No. 106 resulted in a one-time, non-cash
charge against the Company's 1992 earnings of $1,741, net of a deferred income
tax benefit of $1,038, ($1,695, net of a deferred income tax benefit of $1,011
for the Communications Group), for the prior service of active and retired
employees. The effect on the Company's 1992 income from continuing operations of
adopting SFAS No. 106 was approximately $47 ($42 for the Communications Group).
In conjunction with the adoption of SFAS No. 106, for financial reporting
purposes, the Company elected to immediately recognize the accumulated
postretirement benefit obligation for current and future retirees, net of the
fair value of plan assets. However, the Federal Communications Commission and
certain state jurisdictions permit amortization of the transition obligation
over the average remaining service period of active employees for regulatory
accounting purposes.
U S WEST uses the projected unit credit method for the determination of
postretirement medical costs for financial reporting purposes. The composition
of net postretirement benefit costs and actuarial assumptions underlying U S
WEST's plans follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1993
--------------------- ---------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
------- ---- ----- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 62 $ 13 $ 75 $ 60 $ 11 $ 71
Interest on accumulated benefit obligation.................. 221 39 260 235 36 271
Actual return on plan
assets..................................................... 3 1 4 (73) (52) (125)
Net amortization and deferral............................... (68) (31) (99) 27 22 49
------- ---- ----- ------- ---- -----
Net postretirement benefit costs............................ $218 $ 22 $ 240 $249 $ 17 $ 266
------- ---- ----- ------- ---- -----
------- ---- ----- ------- ---- -----
<CAPTION>
1992
---------------------
MEDICAL LIFE TOTAL
------- ---- -----
<S> <C> <C> <C>
Service cost -- benefits earned during the period........... $ 57 $ 10 $ 67
Interest on accumulated benefit obligation.................. 223 33 256
Actual return on plan
assets..................................................... (19) (29) (48)
Net amortization and deferral............................... -- -- --
------- ---- -----
Net postretirement benefit costs............................ $261 $ 14 $ 275
------- ---- -----
------- ---- -----
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1994 and 9.00 percent in 1993
and 1992.
VI-44
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the U S WEST plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retirees.......................................... $ 1,733 $ 248 $ 1,981 $ 1,795 $ 311 $ 2,106
Fully eligible plan participants.................. 264 38 302 274 48 322
Other active plan participants.................... 940 135 1,075 983 170 1,153
--------- --------- --------- --------- --------- ---------
Total accumulated postretirement benefit
obligation........................................ 2,937 421 3,358 3,052 529 3,581
Unrecognized net gain (loss)........................ 243 90 333 65 (25) 40
Fair value of plan assets, primarily stocks, bonds
and life insurance (1)............................. (894) (374) (1,268) (613) (388) (1,001)
--------- --------- --------- --------- --------- ---------
Accrued postretirement benefit obligation........... $ 2,286 $ 137 $ 2,423 $ 2,504 $ 116 $ 2,620
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
- ------------------------
(1) Medical plan assets include U S WEST common stock of $164 in 1994.
</TABLE>
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
Discount rate...................................................................... 8.00% 7.25%
Medical trend*..................................................................... 9.70 10.30
<FN>
- ------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 6 percent
in 2006.
</TABLE>
A 1-percent increase in the assumed health care cost trend rates for each
future year would have increased the aggregate of the service and interest cost
components of U S WEST's 1994 net postretirement benefit costs by approximately
$50 and increased the 1994 accumulated postretirement benefit obligation by
approximately $450.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
PLAN ASSETS. Assets of the postretirement medical and life plans may be
used to provide benefits to employees of both the Communications Group and the
Media Group since plan assets are not legally restricted to providing benefits
to either Group. In the event that either plan sponsored by U S WEST would be
separated into two or more plans, there are no guidelines in Internal Revenue
Code for allocating assets of the plan. U S WEST allocates the assets based on
historical contributions for postretirement medical costs, and on the ratio of
salaries for life plan participants. U S WEST currently has no intention to
split the plans.
VI-45
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
POSTRETIREMENT MEDICAL COSTS. The service and interest components of net
postretirement medical benefit costs are calculated for the Communications Group
based upon the population characteristics of the Group. Since funding of
postretirement medical costs is voluntary, return on assets is attributed to the
Communications Group based upon historical funding. For U S WEST Communications,
the annual amount funded will generally follow the amount of expense allowed in
regulatory jurisdictions.
Net postretirement medical benefit costs recognized by the Communications
Group for 1994, 1993 and 1992 was $207, $238 and $251, respectively. The
percentage of medical assets attributed to the Communications Group, based upon
historical voluntary contributions, at December 31, 1994 and 1993 was 95 percent
and 94 percent, respectively. The percentage of the accumulated postretirement
medical benefit obligation attributed to the Communications Group was 97 percent
at December 31, 1994 and 1993.
ALLOCATION OF POSTRETIREMENT LIFE COSTS. Net postretirement life costs, and
funding requirements, if any, are allocated to the Communications Group in the
same manner as pensions. The Company will generally fund the amount allowed for
tax purposes and no funding of postretirement life insurance occurred in 1994,
1993 and 1992. U S WEST believes its method of allocating postretirement life
costs is reasonable.
Net postretirement life benefit costs allocated to the Communications Group
for 1994, 1993 and 1992 was $19, $14 and $12, respectively. The percentage of
the accumulated postretirement life benefit obligation attributed to the
Communications Group was 90 percent at December 31, 1994 and 1993.
OTHER POSTEMPLOYMENT BENEFITS
The Communications Group adopted, effective January 1, 1992, SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires that
employers accrue for the estimated costs of benefits, such as workers'
compensation and disability, provided to former or inactive employees who are
not eligible for retirement. Adoption of SFAS No. 112 resulted in a one-time,
non-cash charge against the Company's 1992 earnings of $53, net of a deferred
income tax benefit of $32 ($50, net of a deferred income tax benefit of $30 for
the Communications Group).
VI-46
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 11: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current............................................................................... $ 368 $ 350 $ 342
Deferred.............................................................................. 233 (115) 48
Investment tax credits -- net......................................................... (47) (56) (63)
--------- --------- ---------
554 179 327
--------- --------- ---------
State and local:
Current............................................................................... 58 48 47
Deferred.............................................................................. 41 (19) 14
--------- --------- ---------
99 29 61
--------- --------- ---------
Provision for income taxes.............................................................. $ 653 $ 208 $ 388
--------- --------- ---------
--------- --------- ---------
</TABLE>
Amounts paid for income taxes were $491, $297 and $414 in 1994, 1993 and
1992, respectively. The Communications Group had taxes payable to U S WEST of
$33 and $98 at December 31, 1994 and 1993, respectively.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate........................................................... 35.0 35.0 34.0
Investment tax credit amortization................................................... (1.7) (3.5) (5.0)
State income taxes -- net of federal effect.......................................... 3.6 3.5 3.0
Rate differential on reversing temporary differences................................. -- (2.6) (3.7)
Depreciation on capitalized overheads -- net......................................... -- 1.6 2.5
Tax law change -- catch-up adjustment................................................ -- 3.7 --
Restructuring charge................................................................. -- (2.4) --
Other................................................................................ (0.7) (0.6) (1.4)
--- --- ---
Effective tax rate................................................................... 36.2 34.7 29.4
--- --- ---
--- --- ---
</TABLE>
VI-47
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 11: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Property, plant and equipment................................................................ $ 1,428 $ 1,299
State deferred taxes -- net of federal effect................................................ 221 181
Other........................................................................................ 77 91
--------- ---------
Deferred tax liabilities..................................................................... 1,726 1,571
--------- ---------
Postemployment benefits, including pension................................................... 689 732
Restructuring and other...................................................................... 287 406
Unamortized investment tax credit............................................................ 79 94
State deferred taxes -- net of federal effect................................................ 194 183
Other........................................................................................ 231 184
--------- ---------
Deferred tax assets.......................................................................... 1,480 1,599
--------- ---------
Net deferred tax liability (asset)........................................................... $ 246 $ (28)
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $300 and $308 at December
31, 1994 and 1993, respectively, resulting primarily from restructuring charges
and compensation-related items.
On August 10, 1993, federal legislation was enacted which increased the
corporate tax rate from 34 percent to 35 percent retroactive to January 1, 1993.
The cumulative effect on deferred taxes of the 1993 increase in income tax rates
was $54.
NOTE 12: RESTRUCTURING CHARGES
The Communications Group's 1993 results reflect a $880 restructuring charge
(pretax) at U S WEST Communications. The restructuring charge includes only the
specific, incremental and direct costs which can be estimated with reasonable
accuracy and are clearly identifiable with the related plan (the "Restructuring
Plan"). The Restructuring Plan is designed to provide faster, more responsive
customer services, while reducing the costs of providing these services. As part
of the Restructuring Plan, U S WEST Communications is developing new systems
that will enable it to monitor networks to reduce the risk of service
interruptions, activate telephone service on demand, provide automated inventory
systems and centralize its service centers so that customers can have their
telecommunications needs resolved with one phone call. U S WEST Communications
is consolidating its 560 customer centers into ten cities and reducing its total
work force by approximately 9,000 employees (including the remaining employee
reductions pursuant to the restructuring plan announced in 1991). The
Restructuring Plan provides for the reduction of 2,450 management and 6,550
occupational employees.
Following is a schedule of the costs included in the 1993 restructuring
charge:
<TABLE>
<S> <C>
Employee separation.................................................. $ 225
Systems development.................................................. 360
Real estate.......................................................... 130
Relocation........................................................... 105
Retraining and other................................................. 60
---------
Total................................................................ $ 880
---------
---------
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Systems development costs include the
replacement of existing, single-
VI-48
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 12: RESTRUCTURING CHARGES (CONTINUED)
purpose systems with new systems designed to provide integrated, end-to-end
customer service. The work-force reductions would not be possible without the
development and installation of the new systems, which will eliminate the
current, labor-intensive interfaces between existing processes. Real estate
costs include preparation costs for the new service centers. The relocation and
retraining costs are related to moving employees to the sites of the new service
centers and retraining employees on the new methods and systems required in the
new, restructured mode of operation.
During 1994, 497 management and 1,683 occupational employees left U S WEST
Communications under the Restructuring Plan. The following table shows amounts
charged to the restructuring reserve:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
Employee separation (1).............................................................. $ 75
Systems development.................................................................. 118
Real estate.......................................................................... 50
Relocation........................................................................... 21
Retraining and other................................................................. 8
-----
1994 restructuring reserve activity.................................................. $ 272
-----
-----
<FN>
- ------------------------
(1) Includes $56 associated with work-force reductions under the 1991
restructuring plan.
</TABLE>
The Communications Group 1991 restructuring plan included a pretax charge of
$277 primarily due to planned work-force reductions. The portion of the 1991
restructuring charge related to work-force reductions at U S WEST Communications
was $240, and covered approximately 6,000 employees. The balance of the unused
reserve associated with work-force reductions at December 31, 1993, was $56. All
expenditures and work-force reductions pursuant to the 1991 plan were completed
by the end of 1994.
NOTE 13: CONTINGENCIES
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for reconsideration, thereby establishing
two exceptions to the rule against retroactive ratemaking: 1) unforeseen and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request from interexchange carriers and other parties related to the Tax Reform
Act of 1986. At the current time, this action is still in the discovery process.
If a formal filing -- made in accordance with the remand from the Supreme Court
- -- alleges that the exceptions apply, the range of possible risk to U S WEST
Communications is $0 to $140.
VI-49
<PAGE>
ANNEX VII
MEDIA GROUP
<TABLE>
<S> <C>
Description of Business............................................................ VII-2
Selected Financial Data............................................................ VII-14
Unaudited Pro Forma Combined Statement of Operations............................... VII-19
Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................ VII-20
Index to Combined Financial Statements............................................. VII-44
</TABLE>
VII-1
<PAGE>
MEDIA GROUP
DESCRIPTION OF BUSINESS
The Media Group is comprised of (i) cable and telecommunications network
businesses outside of the Communications Group Region and internationally, (ii)
domestic and international wireless communications network businesses and (iii)
domestic and international multimedia content and services businesses.
MEDIA GROUP STRATEGY
The Media Group's strategy is to become a leading provider of CEIT services
to business and residential customers over wired broadband and wireless networks
in selected domestic and foreign markets. Implementation of this strategy
focuses on two key components:
- LOCAL NETWORKS. The Media Group plans to provide mass market business and
residential customers with wired and wireless networks that are superior
to those offered by competitors.
- PACKAGING SERVICES. The Media Group plans to create nationally branded
packages of services which enable customers to communicate, collaborate,
access information and entertainment services, and buy and sell goods and
services over networks owned by the Media Group, the Communications Group
and unaffiliated service providers worldwide.
The Media Group's cable and telecommunications, wireless communications and
multimedia content and services businesses support this strategy.
- CABLE AND TELECOMMUNICATIONS. The Media Group is building a domestic
cable and telecommunications business outside of the Communications Group
Region, which will give the Media Group a national footprint in wired
broadband networks in the United States. The Media Group's domestic cable
and telecommunications business includes the Atlanta Systems and the
Company's interest in TWE, the second largest provider of cable television
services in the United States. The Media Group is also establishing wired
broadband network positions internationally, including the Company's
interest in TeleWest, the largest provider of combined cable and
telecommunications services in the United Kingdom. See "-- Cable and
Telecommunications." The Media Group may acquire or make investments in
additional cable systems in the United States or internationally to become
a leading provider of cable television, local telecommunications and
multimedia services over wired broadband networks. See "-- Cable and
Telecommunications."
- WIRELESS COMMUNICATIONS. The Media Group is establishing a national
footprint in wireless networks in the United States that will complement
its domestic wired broadband networks. U S WEST and AirTouch have
announced plans to combine their domestic cellular properties and create
the third largest cellular company in the United States. In addition, U S
WEST and AirTouch, in partnership with Bell Atlantic Corporation ("Bell
Atlantic") and NYNEX Corporation ("NYNEX"), have formed a national
wireless alliance, which successfully bid on 11 PCS licenses in March
1995, and have agreed to coordinate the operations of their PCS and
cellular businesses. These actions will enable the Media Group and its
partners to provide nationally branded wireless services across the United
States. The Media Group also provides wireless communications services
internationally, including through its Mercury One-2-One joint venture,
the world's first PCS service, in the United Kingdom. See "-- Wireless
Communications."
- MULTIMEDIA CONTENT AND SERVICES. The Media Group, through its multimedia
content and services businesses, develops and packages content and
information services, including telephone directories, database marketing,
and interactive services in domestic and international markets. The Media
Group plans to create nationally branded packages of communications,
entertainment, information and transaction services, to be marketed and
distributed through the channels and over the wired and wireless networks
of the Media Group, the Communications Group and unaffiliated service
providers worldwide. The Media Group will acquire these
VII-2
<PAGE>
services through a combination of sourcing and internal development,
utilizing, among other assets, the skills and knowledge developed in the
directory publishing business. See "-- Multimedia Content and Services."
In addition, the Media Group believes there are significant opportunities to
enhance its businesses by taking advantage of the following synergies among its
businesses:
- Transfer of skills and technology between domestic and international
businesses, such as the application of New Vector's domestic wireless
experience in developing Mercury One-2-One and other international
wireless networks, or the application of the Media Group's domestic
directory publishing experience in the United Kingdom, Brazil and Poland;
- Realization of economies of scale (e.g. in programming or equipment
acquisition across networks and geographic areas);
- Use of the Media Group's cable and wireless footprint to provide "critical
mass" for the development and launch of multimedia service packages;
- Application of the database, marketing and buyer-seller expertise of the
directory business to enhance the marketing efforts of the Media Group's
domestic cable business; and
- Application of the Media Group's wireless expertise to develop wireless
service offerings utilizing domestic cable networks, including resale of
wireless services of the Media Group and its partners.
The Media Group also expects to be able to benefit from synergies with the
Communications Group, including achieving economies of scale through joint
purchasing of equipment, programming and services, and drawing upon the
Communications Group's telecommunications expertise.
CABLE AND TELECOMMUNICATIONS
DOMESTIC OPERATIONS
The Media Group's domestic cable and telecommunications operations are
conducted through U S WEST Multimedia Communications, Inc. ("U S WEST
Multimedia") and consist of domestic cable properties and investments outside of
the Communications Group Region, including U S WEST Multimedia's ownership of
the Atlanta Systems and investment in TWE.
ATLANTA SYSTEMS. In December 1994, the Company acquired the Atlanta
Systems, which serve approximately 65 percent of the Atlanta, Georgia
metropolitan area, including the City of Atlanta and most of Clayton, Cobb,
DeKalb, Fulton and Gwinnett counties, for a purchase price of approximately $1.2
billion. The Atlanta metropolitan statistical area ("MSA") is the ninth largest
MSA in the United States, with a population of over 3 million. As of March 31,
1995, the Atlanta Systems served approximately 501,000 subscribers. All of the
Atlanta Systems are substantially built out and fully addressable with at least
54 channel capacity. The Atlanta Systems' subscribers base has been growing at
rates faster than the national average for the past two years.
U S WEST Multimedia has begun upgrading the Atlanta Systems to 750 megahertz
capability, which will provide more reliability, better signal quality and
additional capacity and enable U S WEST Multimedia to provide enhanced cable and
telecommunications services to its customers. This upgrade is expected to be
completed by 1998. In addition, U S WEST Multimedia plans to upgrade the Atlanta
Systems to the "Full Service Network" capability being developed by U S WEST
Multimedia and to provide a full range of interactive CEIT services as soon as
regulatory and market conditions permit. See "-- Time Warner Cable." Because the
Atlanta Systems serve contiguous areas, they are particularly well-suited for
the offering of interactive CEIT services. U S WEST Multimedia also owns Access
Telecommunications Interconnect, Inc. ("ATI"), a CAP in the Atlanta area. ATI
provides
VII-3
<PAGE>
business customers with high capacity network services that connect to
interexchange carrier facilities or other business locations. The Media Group
plans to offer local exchange services to customers over the Atlanta Systems'
network when regulation permits and the necessary upgrades to the network are
completed. In March 1995, the Georgia legislature passed a bill which would
permit U S WEST Multimedia to offer such local exchange services in the Atlanta
area as early as July 1995.
TIME WARNER CABLE. U S WEST Multimedia owns a 25.51 percent pro rata
priority capital and residual equity interest in TWE, which it acquired in
September 1993 for an aggregate purchase price of $2.55 billion. TWE's cable and
telecommunications business, Time Warner Cable, manages cable systems located in
32 states which, as of March 31, 1995, served a total of 7.6 million
subscribers. Time Warner Cable is the second-largest multiple system cable
operator in the United States, owning or operating 22 of the top 100 cable
systems, including Time Warner Cable of New York City, the largest cable system
cluster in the country. TWE is also engaged in the filmed entertainment and
programming businesses. For a description of such businesses, as well as certain
provisions of the TWE partnership agreement, see "-- Time Warner Entertainment
Company, L.P."
TWE has announced plans to build a "Full Service Network" for its cable
systems which, when completed, will utilize fiber optics, digital compression,
digital switching and storage services to provide business and residential
customers with a broad range of CEIT services as soon as regulatory and market
conditions permit, including video-on-demand, interactive games, distance
learning, full motion video, interactive shopping and alternative access and
local telephone services. In December 1994, TWE introduced the Full Service
Network in its suburban Orlando, Florida cable system. TWE expects to connect
4,000 customers to the Full Service Network by the end of 1995. In addition, TWE
is currently upgrading its systems to 750 megahertz capability, which will
provide more reliability, better signal quality and additional capacity and
enable TWE to provide enhanced cable and telephone services to its customers. At
the end of 1994, 15 percent of TWE's systems were upgraded to 750 megahertz
capability. It is expected that 30 percent of TWE's existing systems will be so
upgraded by the end of 1995 and that 85 percent of such systems will be so
upgraded by the end of 1998.
The business and affairs of the Full Service Network, which is comprised of
85 percent of the cable systems of TWE, are governed by a Management Committee
(the "Management Committee"). The Management Committee is comprised of six
voting members, three designated by U S WEST and three designated by Time Warner
Inc. The Management Committee has full discretion and final authority with
respect to the business and affairs of the Full Service Network, including all
decisions with respect to the upgrading of TWE's cable systems to Full Service
Network capability.
Time Warner Communications, a division of Time Warner Cable, conducts TWE's
wireline telecommunications operations. Time Warner Communications currently
acts as a CAP in 12 markets and plans to expand into additional markets in the
near future. As a CAP, Time Warner Communications provides business customers
with high capacity network services that connect to interexchange carrier
facilities or other business locations. In addition, Time Warner Communications
plans to offer local exchange services over its networks. Time Warner
Communications began a limited initial trial of local exchange services in
Rochester, New York in December 1994 and expects its local exchange services to
be generally available over its Rochester network in the second half of 1995.
The business and affairs of Time Warner Communications is subject to the full
discretion and final authority of the Management Committee.
Time Warner Telecommunications, a division of Time Warner Cable, plans to
provide cellular service, paging and data services under the Time Warner brand
in various markets by reselling cellular service purchased at wholesale rates
from existing facilities-based cellular carriers and other future wireless
carriers, including PCS carriers. In November 1994, the New York Public Service
Commission approved Time Warner Telecommunications' tariff to provide resold
cellular service in New York State. Following such approval, Time Warner
Telecommunications formally commenced the provision of residential and business
cellular service in Rochester, New York.
VII-4
<PAGE>
In April 1995, TWE formed a cable television partnership (the "TWE --A/N
Partnership") with subsidiaries of Advance Publications, Inc. and Newhouse
Broadcasting Corporation ("Advance/Newhouse") to which Advance/Newhouse and TWE
contributed cable television systems serving approximately 4.5 million
subscribers (or interests therein) and related assets. TWE owns a two-thirds
equity interest in the partnership and is the managing partner. Advance/Newhouse
owns a one-third equity interest in the partnership. The partnership will
enlarge existing cable clusters already owned by TWE and Advance/Newhouse in
North Carolina, Florida and New York.
THE AFFINITY GROUP. The Media Group, through its ownership of and
investments in cable television businesses, is assembling a national footprint
for the distribution of interactive CEIT services. Together with Time Warner
Inc., U S WEST Multimedia has established an affinity group (the "Affinity
Group") consisting of the cable systems owned by U S WEST Multimedia, TWE and
Time Warner Inc. The Affinity Group will create and promote a national syndicate
offering packages of integrated CEIT services under a common market strategy
using a national branding system. The formation of the TWE -- A/N Partnership
and the acquisition by Time Warner Inc. of Summit Communications Group, Inc. has
increased the customer base of the Affinity Group by approximately 1.7 million
subscribers. See "-- Time Warner Cable." In addition, the customer base of the
Affinity Group will soon be expanded by the planned acquisition by Time Warner
Inc. of Cablevision Industries Corporation and KBLCOM Incorporated, which
together include 2.4 million subscribers. Following such acquisitions, the
Affinity Group will serve more than 12 million customers and include the three
top MSAs in the country in terms of degree of clustering -- Atlanta, New York
and Houston. The Communications Group may also participate in the Affinity Group
upon the upgrade of its networks. The following chart sets forth pertinent data
concerning the cable systems of the Affinity Group:
<TABLE>
<CAPTION>
TIME WARNER CABLE/ U S WEST
TIME WARNER INC. (1) MULTIMEDIA TOTAL
--------------------- --------------- ---------
<S> <C> <C> <C>
Homes passed (millions)....................................... 18.1 .8 18.9
Basic subscribers (millions).................................. 11.5 .5 12.0
Number of Top 50 MSAs......................................... 30 1 31
Number of markets serving at least 100,000 households......... 33 1 34
<FN>
- ------------------------
(1) After completion of pending acquisitions
</TABLE>
U S WEST Multimedia, TWE and Time Warner Inc. intend to upgrade their cable
systems to Full Service Network capability to offer integrated packages of CEIT
services to customers as soon as regulatory and market conditions permit. See
"-- Time Warner Cable." The Media Group may enlarge its national footprint by
acquiring or making investments in additional cable systems in the United States
outside of the Communications Group Region.
INTERNATIONAL OPERATIONS
The Media Group's international cable and telecommunications operations are
conducted through U S WEST International Holdings, Inc. ("U S WEST
International") and include investments in cable and telecommunications that
focus on serving mass market business and residential customers in key
geographic markets. To decrease investment risk and gain access to technical
skills and capabilities, U S WEST International's strategy has been to make
these investments with other major cable television companies, including Time
Warner Inc. and Tele-Communications, Inc. In certain circumstances, foreign laws
require the participation of local partners in these ventures.
TELEWEST COMMUNICATIONS PLC. U S WEST International, through subsidiaries,
owns a 37.8 percent interest in TeleWest, a leading provider of cable television
and residential and business telecommunications services in the United Kingdom.
An affiliate of Tele-Communications, Inc. ("TCI International"), through
subsidiaries, also owns a 37.8 percent interest in TeleWest, with the remaining
interests held by the public. TeleWest owns all or part of 23 franchises that
include approximately 3.6 million homes and approximately 235,000 businesses.
TeleWest provides cable television and cable
VII-5
<PAGE>
telecommunications services over a high capacity network which has been designed
to provide a wide range of interactive and integrated CEIT services as they
become available in the future. These services may include video games,
video-on-demand and on-line interactive information services. Construction of
high capacity networks for TeleWest's franchises is expected to be completed by
the end of 2000. Through TeleWest, the Company has gained experience in
packaging video and telephony service that it utilizes in other parts of the
world. Each of U S WEST International and TCI International have two
representatives on TeleWest's board of directors. In addition, an employee of U
S WEST is the Chief Executive Officer of TeleWest and an employee of
Tele-Communications, Inc. is the Chief Operating Officer of TeleWest.
U S WEST International and TCI International have entered into certain
agreements with respect to the voting and disposition of their interests in
TeleWest. Pursuant to such agreements, on any matter requiring a vote of
TeleWest's shareholders, U S WEST International and TCI International will vote
their interests in the same manner. In addition, on any matter requiring a vote
of TeleWest's board of directors, U S WEST International and TCI International
will cause each of their board representatives to vote in the same manner.
In June 1995, TeleWest announced that it had entered into an agreement in
principle to acquire SBC CableComms (UK) ("CableComms"), currently the fifth
largest provider of cable television and residential and business
telecommunications services in the United Kingdom based on the number of homes
in its franchise areas, in exchange for shares of TeleWest. CableComms owns
eight franchises that include approximately 1.3 million homes. CableComms is
owned jointly by subsidiaries of SBC Communications, Inc. ("SBC") and Cox
Communications, Inc. ("Cox"). Following the consummation of the acquisition,
each of U S WEST International and TCI International will indirectly own
approximately 26.7% of the combined company and each of SBC and Cox will
indirectly own approximately 14.65% of the combined company. U S WEST
International's existing arrangements with TCI International with respect to the
voting and disposition of their respective interests in TeleWest will continue
following consummation of the acquisition. It is expected that the acquisition
will be consummated in September 1995, subject to the satisfaction of certain
conditions.
JAPANESE INVESTMENTS. The Media Group holds a 12.75 percent interest in
Time Warner Entertainment Japan Inc. ("TWE Japan"), which U S WEST acquired in
connection with its investment in TWE. TWE Japan conducts TWE's business in
Japan, including home video distribution, theatrical film and television
distribution and merchandising. In early 1995, Time Warner Inc., TWE Japan, U S
WEST, Itochu Corporation and Toshiba Corporation agreed jointly to establish
TITUS Communications Corp. ("TITUS"), a multiple system operator that will start
new cable operations in one or more selected locations throughout Japan, each of
which covers 150,000-200,000 households. The agreement also contemplates that
TITUS eventually will provide telephone services as well as video services in
its operating areas.
OTHER INTERNATIONAL INVESTMENTS. U S WEST International also holds
interests in cable television systems in Norway, Hungary, Sweden and France.
WIRELESS COMMUNICATIONS
DOMESTIC OPERATIONS
The Media Group provides domestic wireless communications products and
services, including cellular and PCS services, to customers over wireless
networks.
CELLULAR. NewVector provides cellular services to customers over wireless
networks in 31 metropolitan service areas and 34 rural service areas located
primarily in the Communications Group Region. NewVector's cellular services
provide customers with high-quality and readily available two-way communications
services that interconnect with local and long distance telephone networks. As
of March 31, 1995, NewVector had approximately 1,048,000 cellular customers, a
58 percent increase from March 31, 1994. In 1994, NewVector introduced several
new products and service enhancements in order to service the changing needs of
its customers. One such service, AccessLine, gives customers
VII-6
<PAGE>
the ability to consolidate their home phone, office phone, cellular, fax and
pager numbers into one personal number that "follows" them wherever they want.
Another service offers customers automatic call delivery in more than 2,200
cities nationwide through NewVector's cellular network and an alliance with
MobiLink.
On July 25, 1994, AirTouch and the Company announced a definitive agreement
to combine their domestic cellular operations. This joint venture will have a
presence in 9 of the top 20 cellular markets in the country and will form the
third largest cellular company in the United States, with more than 54 million
POPs. The transaction is expected to close in the third quarter of 1995 upon
obtaining certain federal and state regulatory approvals. By combining their
domestic cellular operations, NewVector and AirTouch will create opportunities
for new cost efficiencies in equipment purchasing, information systems,
distribution, marketing and advertising.
Upon closing, each company's cellular operations will continue to operate as
separately owned entities, but will report to a wireless management company, WMC
Partners, L.P. ("WMC Partners"), which will oversee both companies' domestic
cellular operations and provide management and support services on a contract
basis. WMC Partners will be managed by a partnership committee comprised of the
president and chief operating officer of AirTouch, three other AirTouch
representatives, three U S WEST representatives and one mutually agreed upon
independent representative. AirTouch's initial equity ownership of WMC Partners
will be approximately 70 percent and the Media Group's will be approximately 30
percent. Each company's domestic cellular operations will be contributed to WMC
Partners upon the earlier of July 25, 1998, the lifting of certain MFJ
restrictions, or at AirTouch's option. The agreement gives the Media Group
strategic flexibility, including the right following such contribution to
exchange its interest in WMC Partners at an appraised private market value for
up to 19.9 percent of AirTouch common stock, with any excess amounts to be
received in the form of AirTouch non-voting preferred stock. AirTouch and U S
WEST also formed a second partnership to bid on PCS licenses (the "AirTouch -- U
S WEST PCS Partnership").
WMC Partners' limited partnership agreement contains certain non-competition
restrictions (the "Outside Activities Restrictions") which prohibit each of the
Company and AirTouch from competing with WMC Partners in the provision of
wireless communications services, subject to certain agreed upon exceptions and
limited passive investments. The Outside Activities Restrictions will not
prohibit the Communications Group from bidding on 10 megahertz PCS licenses in
the Communications Group Region being auctioned by the FCC or from building a
wireless network in the Communications Group Region using such spectra and the
Communications Group's wireline network in order to offer wireless services to
the Communications Group's customers. See "Annex VI -- Communications Group --
Description of Business -- U S WEST Communications -- Development of Wireless
Capability."
PERSONAL COMMUNICATIONS SERVICES. PCS services are anticipated to provide a
wide range of wireless communications services through a network of small,
low-powered transceivers placed throughout a neighborhood, business complex,
community or metropolitan area to provide customers with mobile voice and data
communications. It is anticipated that PCS subscribers will have dedicated
personal telephone numbers and will communicate using digital handsets that can
be carried in a pocket or purse.
In October 1994, AirTouch and U S WEST agreed to form a strategic wireless
alliance with Bell Atlantic and NYNEX. As part of this alliance, the AirTouch-U
S WEST PCS Partnership and a partnership formed between Bell Atlantic and NYNEX
formed PCS PrimeCo, for the purpose of bidding on PCS licenses being auctioned
by the FCC. The objective of PCS PrimeCo is to build and operate PCS networks
where its partners do not operate cellular networks, thus enabling them to
establish a national wireless alliance. In the FCC auction, which concluded in
March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets covering 57
million POPs, including licenses in
VII-7
<PAGE>
Chicago, Dallas, Tampa, Houston, Miami and New Orleans. PCS PrimeCo will be
governed by an executive committee made up of three Bell Atlantic-NYNEX
representatives and three AirTouch-U S WEST representatives.
In October 1994, in connection with the formation of PCS PrimeCo, WMC
Partners and a joint venture formed between Bell Atlantic and NYNEX formed
TOMCOM, a partnership that will coordinate the operation of each partner's
wireless operations. Such coordination will minimize costs and maximize
efficiencies through national branding and retail distribution, the coordination
of technical standards, including product features and systems interoperability,
and the linking of business operations, including network and information
systems and transaction processing. Together, the partners of TOMCOM own
cellular licenses in 15 of the top 20 MSAs in the United States, serve more than
five million cellular customers and reach more than 100 million POPs. The
cellular properties of Bell Atlantic and NYNEX will not be merged with those of
AirTouch and NewVector. TOMCOM will be governed by a board made up of three Bell
Atlantic-NYNEX representatives, three AirTouch-U S WEST representatives and one
independent member.
The following map illustrates the geographic scope of the strategic wireless
alliance of U S WEST, AirTouch, Bell Atlantic and NYNEX.
[MAP]
Map of the United States, depicting the states in which AirTouch, U S WEST, Bell
Atlantic and NYNEX hold cellular licenses and the metropolitan trading areas in
which PCS Primeco holds PCS licenses.
INTERNATIONAL OPERATIONS
U S WEST International owns wireless communications systems or investments
in eight countries, including the United Kingdom, Malaysia, Russia, Hungary, the
Czech Republic, Slovakia, Japan and Bulgaria.
MERCURY ONE-2-ONE. U S WEST International, through subsidiaries, owns 50
percent of Mercury One-2-One, a 50-50 joint venture between subsidiaries of U S
WEST International and Cable & Wireless plc. Mercury One-2-One operates a PCS
system in the United Kingdom. Mercury One-2-One's PCS is a digital cellular
communications service designed to offer consumers higher quality service,
increased privacy and more features at lower prices than existing cellular
communications systems. To meet growing customer demand, Mercury One-2-One has
expanded its coverage to reach 30 percent of the United Kingdom's population.
OTHER INTERNATIONAL INVESTMENTS. U S WEST International's wireless
investments also include 20 percent of a partnership in Malaysia formed to
provide a range of wired, wireless and satellite communications and
entertainment services. The partnership holds four licenses that will enable it
to become a fully integrated "second-network" operator in Malaysia. U S WEST
International owns
VII-8
<PAGE>
49 percent of Westel, a cellular operator in Hungary. U S WEST International
also holds a 24.5 percent interest in Eurotel, a cellular operator in the Czech
Republic and Slovakia. In addition, U S WEST International holds a 71 percent
interest in the Russian Telecommunications Development Corp., a corporation
formed in 1993 to manage, develop and fund telecommunications projects in
Russia.
MULTIMEDIA CONTENT AND SERVICES
DOMESTIC OPERATIONS
The Media Group, through Marketing Resources, provides directory publishing
as well as database marketing and interactive services. Marketing Resources
publishes, prints and sells advertising in approximately 300 White and Yellow
Pages directories in the Communications Group Region. Marketing Resources'
growth strategy is to increase its advertiser base through expanded marketing
efforts, the expansion of core products, such as new targeted directories for
specific neighborhoods or industries and new directory features, and the
development and packaging of new information products, such as local audiotext
services. Marketing Resources' directory publishing business had revenue growth
of approximately 6.5 percent in 1994.
Marketing Resources also provides database marketing services that enable
businesses to segment and target customers and is developing the capability to
provide one-to-one marketing over interactive networks. In the future, Marketing
Resources plans to develop, package, market and distribute integrated,
interactive CEIT services over networks operated by the Media Group and others,
including the networks of the Communications Group in the Communications Group
Region.
INTERNATIONAL OPERATIONS
U S WEST International owns 100 percent of Thomson Directories, which it
acquired in 1994. Thomson Directories annually publishes 155 directories in the
United Kingdom, reaching 46 million people, or 80 percent of all households, in
the United Kingdom. U S WEST International owns a 50 percent interest in Listel,
Brazil's largest telephone directory publisher, which it acquired in 1994 from
the Abril Group. U S WEST International also owns 100 percent of Polska, which
publishes 17 directories in Poland with a combined circulation of approximately
1.7 million.
In June 1995, a subsidiary of U S WEST International purchased a 9.01%
interest in Flextech plc ("Flextech"), one of the United Kingdom's largest
providers of cable and satellite programming, in exchange for redeemable
preference shares in Thomson Directories. U S WEST International has the right
to appoint one representative to Flextech's board of directors.
TIME WARNER ENTERTAINMENT COMPANY, L.P.
U S WEST Multimedia owns a 25.51 percent pro rata priority capital and
residual equity interest in TWE, while affiliates of Time Warner Inc. (the "TWE
General Partners") own a 63.27 percent pro rata priority capital and residual
equity interest in TWE and affiliates of Itochu Corporation and Toshiba
Corporation each own a 5.61 percent pro rata priority capital and residual
equity interest in TWE. The TWE General Partners also own priority capital
interests senior and junior to the pro rata priority capital interests. For a
further discussion of the capital structure of TWE, see "Media Group -- Notes to
Combined Financial Statements -- Note 5: Investment in Time Warner
Entertainment."
TWE's businesses consist of substantially all of the cable, filmed
entertainment and programming operations previously owned and operated by Time
Warner Inc. Subject to the powers of the Management Committee with respect to
TWE's cable business, and except for approvals required for certain significant
actions, the business and affairs of TWE are controlled by the TWE General
Partners. For a description of the cable operations of TWE, see "-- Cable and
Telecommunications -- Domestic Operations -- Time Warner Cable."
TWE's filmed entertainment business consists of the production, financing
and distribution of feature motion pictures (including through Warner Bros.),
television series, made-for-television movies, miniseries for television,
first-run syndication programming and animated programming for theatrical and
television exhibition, and the distribution of prerecorded videocassettes and
videodiscs.
VII-9
<PAGE>
The filmed entertainment business is also engaged in product licensing and the
ownership and operation of retail stores, movie theaters and theme parks,
including Warner Bros. Studio Stores and Six Flags theme parks ("Six Flags"). In
June 1995, TWE sold 51 percent of Six Flags. In addition, the filmed
entertainment business owns and operates The WB, a national broadcast television
network which it launched in January 1995.
TWE's programming business is principally conducted by TWE's Home Box Office
division ("Home Box Office"). The principal businesses of Home Box Office are
the programming and marketing of two pay television programming services, HBO
and Cinemax. HBO's programming includes commercial-free, uncut feature motion
pictures, sporting events, special entertainment events (such as concerts,
comedy shows and documentaries) and motion pictures produced by or for HBO.
Cinemax offers a broad range of motion pictures, including classic, family,
action-adventure, foreign and recently released films. At December 31, 1994, HBO
had approximately 19.2 million subscribers and Cinemax had approximately 7.8
million subscribers.
U S WEST Multimedia has an option to increase its equity interests in TWE
from 25.51 percent to 31.84 percent. The option is exercisable, in whole or in
part, between January 1, 1999 and May 31, 2005 upon the attainment of certain
earnings thresholds for an aggregate cash exercise price of $1.25 billion to
$1.8 billion, depending on the year of exercise. Either U S WEST or TWE may
elect that the exercise price for the option be paid with partnership interests
rather than cash.
TWE's limited partnership agreement contains certain non-competition
restrictions (the "Non-Competition Restrictions"), which prohibit each of the
TWE partners, including the Company, from competing with TWE in the three
principal lines of business of TWE -- cable, filmed entertainment and
programming -- as such businesses may evolve, subject to certain agreed upon
exceptions and limited passive investments. The Non-Competition Restrictions
will not prohibit (i) the Company from conducting cable and certain related
regional programming businesses in the Communications Group Region, (ii) the
Company from engaging in the cable business in an area in which TWE is not then
engaging in the cable business, subject to TWE's right of first refusal with
respect to such cable business, or (iii) the Company from engaging in the
telephone or information services businesses (other than programming). The
ability of the Media Group to acquire additional cable systems may be limited by
the Non-Competition Restrictions.
In early 1995, Time Warner Inc. announced its intention to restructure TWE
and establish a separate, self-financing enterprise to hold TWE's cable and
telecommunications properties, as well as portions of the assets of Cablevision
Industries Corporation, KBLCOM Incorporated and Summit Communications Group,
Inc. Any change in the structure of TWE would require the approval of U S WEST
Multimedia and the other TWE partners, as well as the approval of certain
creditors and regulatory authorities.
CAPITAL ASSETS SEGMENT
In June 1993, in connection with its decision to concentrate its resources
and efforts on developing its telecommunications and multimedia businesses, the
Company determined to dispose of the businesses comprising its capital assets
segment. In 1993 and 1994, the Company made significant progress in disposing of
these businesses. See "-- Media Group -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Disposition of the Capital
Assets Segment."
The remaining assets of the capital assets segment, which will be attributed
to the Media Group, include a 60.9 percent total interest, and 49.8 percent
voting interest, in FSA, which provides financial guarantee insurance policies
for corporate and municipal clients, U S WEST Real Estate, Inc., which holds a
portfolio of real estate assets, valued at approximately $596 million, net of
reserves, at March 31, 1995, and U S WEST Financial Services, Inc., which holds
investments in long-term leases related primarily to aircraft and power plants,
which the Company intends to allow to expire at the end of their terms.
VII-10
<PAGE>
REGULATION
The businesses of the Media Group are subject to varying degrees of
regulation by federal, state and local governmental authorities. In addition,
the Media Group, as an affiliate of U S WEST Communications, is subject to the
restrictions of the MFJ. See "Annex VI -- Communications Group -- Description of
Business -- Regulation -- The MFJ Restrictions."
DOMESTIC CABLE. The Cable television industry is regulated by the federal
government, some state governments and most local governments. The following
discussion summarizes certain federal, state and local laws and regulations
affecting cable television.
Under the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), the FCC has implemented regulations covering, among
other things, cable rates, composition of certain service offerings, consumer
protection and customer service standards, leased access, and public,
educational and governmental channels, programmer access to cable systems,
programming agreements, technical standards, consumer electronics equipment
compatibility, ownership of home wiring, program exclusivity, and various
aspects of direct broadcast satellite system ownership and operation. The
implementation of the 1992 Cable Act continues to create uncertainty in the
cable television industry as the FCC issues additional orders impacting
operations and cash flow.
Several cable operators and programmers have filed federal lawsuits seeking
to overturn certain major provisions of the 1992 Cable Act and the FCC's rules
thereunder. The primary grounds for the actions have been that such provisions
violate the First Amendment. The FCC rate regulations, in particular, have been
challenged as contrary to the Act itself, arbitrary and capricious, and
unconstitutional. The lawsuits are in various stages of the legal process.
Legislation that would make significant changes to current federal cable
regulation is being considered in Congress during 1995. Among the proposed
revisions currently contained in draft House legislation and in the bill
recently passed by the Senate are provisions that would reduce rate regulation
of cable programming services. While such a provision would have a favorable
impact on cable industry revenue, the Media Group cannot predict whether any
such provision will be enacted into law.
Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services, franchise renewal and imposition of franchise fees.
The foregoing does not purport to describe 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 television industry can be predicted at this
time.
DOMESTIC TELECOMMUNICATIONS. The ability of U S WEST Multimedia to offer
local exchange services requires the removal of state and local barriers which
prevent cable operators and others from providing local exchange service in
competition with local exchange carriers ("LECs"). Some states permit
competition with the LECs in the offering of local exchange services. For
example, Time Warner Communications has been certified to provide local exchange
services throughout New York State and the Georgia legislature has passed
legislation permitting U S WEST Multimedia to offer local exchange service in
the Atlanta area. Any provision of interstate access services by U S WEST
Multimedia outside of the Communications Group Region, whether as a CAP or a
local exchange carrier, requires the filing of interstate access tariffs with
the FCC. Legislation is pending in Congress which would open local exchange
service to competition and preempt states from imposing barriers which prevent
such competition. There is, however, uncertainty as to the outcome of such
legislation.
DOMESTIC WIRELESS COMMUNICATIONS. The Media Group's wireless operations,
including its cellular and PCS businesses, are subject to regulation by federal
and some state and local authorities. The construction and transfer of cellular
systems in the United States are regulated by the FCC pursuant
VII-11
<PAGE>
to the Communications Act of 1934. The FCC has promulgated guidelines for
construction and operation of cellular systems and licensing and technical
standards for the provision of cellular telephone service. Pursuant to Congress'
1993 Omnibus Budget Reconciliation Act, the FCC adopted rules preempting state
and local governments from regulating wireless entry and most rates. State and
local governments are, however, still permitted to regulate other terms and
conditions of wireless services. For example, the siting and construction of
cellular transmitter towers, antennas and equipment shelters are still subject
to state or local zoning, land use and other local regulation, which may include
zoning and building permit approvals or other state or local certification.
INTERNATIONAL. The Media Group is subject to various regulations in the
foreign countries in which it has operations. In the United Kingdom, the
licensing, construction, operation, sale and acquisition of cable and wireline
and wireless communications systems are regulated by various governmental
entities, including the Department of Trade and Industry and the Department of
National Heritage.
COMPETITION
CABLE. U S WEST Multimedia's cable television systems generally compete for
viewer attention with programming from a variety of sources, including the
direct reception of broadcast television signals by the viewer's own antenna,
subscription and low power television stations, multichannel multipoint
distribution systems ("MMDS" or "wireless cable"), satellite master antenna
("SMATV") service, direct broadcast satellite ("DBS") services, telephone
companies, including other RBOCs, and other cable companies within an operating
area. The extent of such competition in any franchise area is dependent, in
part, upon the quality, variety and price of the programming provided by these
technologies. Many of these competitive technologies are generally not subject
to the same local government regulation that affects cable television. Cable
television systems are also in competition for both viewers and advertising in
varying degrees with other communications and entertainment media, and such
competition may increase with the development and growth of new technologies.
TeleWest's cable television services compete with broadcast television stations,
DBS services, SMATV systems and certain narrowband operators in the United
Kingdom.
TELECOMMUNICATIONS. U S WEST Multimedia will be offering telecommunications
services in competition with the dominant LECs, CAPs and other potential
providers of telephone services in local domestic markets, including
interexchange carriers such as AT&T, MCI Communications and Sprint Corp. The
degree of competition will be dependent upon state and federal regulations
concerning entry, interconnection requirements, and the degree of unbundling of
the LECs' networks. Competition will be based upon price, service quality and
breadth of services offered. TeleWest's telecommunications services compete with
domestic telephone companies in the United Kingdom, such as British
Telecommunications plc.
WIRELESS COMMUNICATIONS. As discussed above under "-- Regulation,"
NewVector's wireless business is subject to FCC regulation and licensing
requirements. To assure competition, the FCC has awarded two competitive
cellular licenses in each market. Many competing cellular providers are
substantial businesses with experience in broadcasting, telecommunications,
cable television and radio common carrier services. In many markets, competing
cellular service is provided by businesses owned or controlled by an LEC, AT&T
or other major telephone companies. Competition is based upon the price of
cellular service, the quality of the service and the size of the geographic area
served. The development of PCS services will create multiple new competitors for
NewVector's wireless businesses. Competition for the provision of wireless
services is also provided by providers of enhanced specialized mobile radio
services. In the United Kingdom, Mercury One-2-One's operations compete with two
established cellular providers and one PCS provider. In addition, Mercury
One-2-One competes in the consumer market with telephone companies such as
British Telecommunications plc.
MULTIMEDIA CONTENT AND SERVICES. Marketing Resources's directory publishing
businesses continue to face significant competition from local and national
publishers of directories, as well as other advertising media such as
newspapers, magazines, broadcast media, direct mail and operator assisted
services. Directory listings are now offered in electronic data bases through
telephone company and third party networks. As such offerings expand and are
enhanced through interactivity and other
VII-12
<PAGE>
features, the Company will experience heightened competition in its directory
publishing businesses. Marketing Resources will continue to expand its core
products and develop and package new information products to meet its customers'
needs. Marketing Resources' database marketing services also continue to face
competition from direct mail list providers, co-op direct mail programs and
coupon programs. Marketing Resources will also face emerging competition in the
provision of interactive services from cable and entertainment companies,
on-line services, advertising agencies specializing in interactive advertising
and many small companies who are information providers. Many of these potential
competitors may also be joint venture partners, suppliers or distributors.
The actions of public policy makers play an important role in determining
how increased competition affects the Media Group. The Media Group is working
with regulators and legislators to help ensure that public policies are fair and
in the best interests of customers.
RESEARCH AND DEVELOPMENT
Advanced Technologies, a business of the Communications Group, will provide
certain research and development services to the Media Group on a
fee-for-service, arm's-length basis. See "Annex VI -- Communications Group --
Description of Business -- Research and Development." In addition, unaffiliated
third parties will provide research and development services to the Media Group.
MANAGEMENT
The following executives of the Company will have primary operating
responsibility for the Media Group:
CHARLES M. LILLIS, Executive Vice President of U S WEST and President and
Chief Executive Officer of U S WEST Diversified Group. Upon implementation of
the Recapitalization Proposal, Mr. Lillis will become President and Chief
Executive Officer of the Media Group. Mr. Lillis joined the Company in 1985 as
Vice President of Strategic Marketing and was named Executive Vice President and
chief planning officer in 1987.
A. GARY AMES, President and Chief Executive Officer of U S WEST
International Business Development Group. Based in London, Mr. Ames is
responsible for the Media Group's international operations. Mr. Ames previously
served as President and Chief Executive Officer of U S WEST Communications. Mr.
Ames has been affiliated with U S WEST and its predecessor companies for 28
years, serving in various operational and management positions.
THOMAS E. PARDUN, President and Chief Executive Officer of U S WEST
Multimedia. Mr. Pardun is responsible for the Media Group's domestic cable and
telephone operations, including the Atlanta Systems and the Company's investment
in TWE. Prior to assuming his present position, Mr. Pardun served in other
positions at the Company, including as Vice President and General Manager of
Business and Government Services for U S WEST.
EMPLOYEES
At March 31, 1995, the businesses of the Media Group had 10,219 employees,
of which 22 percent were represented by unions. The Media Group believes that
its relations with the unions in which its employees are members are good. An
existing contract with the Communications Workers of America representing
approximately 1,700 employees will expire on October 14, 1995. Negotiations for
the renewal of such contracts are expected to begin shortly.
LITIGATION
The Media Group is currently subject to claims and proceedings that have
arisen in the ordinary course of business. While complete assurance cannot be
given as to the outcome of any contingent liabilities, in the opinion of the
Media Group, any financial impact to which the Media Group is subject is not
expected to be material in amount to its financial position or results of
operations. In addition, the businesses in which the Media Group holds an
investment, including TWE, are also subject to claims and proceedings which may
be material to such businesses.
VII-13
<PAGE>
MEDIA GROUP
SELECTED FINANCIAL DATA
COMBINED AND PROPORTIONATE FINANCIAL RESULTS
The Media Group uses consolidation and proportionate principles of
accounting to present certain financial information. Consolidation accounting
principles are used to prepare the Combined Financial Statements. See Note 1 to
the Media Group Combined Financial Statements for a complete description of the
accounting principles used to prepare the Combined Financial Statements.
Proportionate financial information is not required by GAAP or intended to
replace the Combined Financial Statements 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 when 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.
Because significant assets of the Media Group are not consolidated, and
because of the substantial effect of certain joint ventures on the year-to-year
comparability of the Media Group's combined financial results, the Media Group
believes that proportionate financial and operating data facilitate the
understanding and assessment of its Combined Financial Statements. For example,
international cable and telecommunications proportionate results present the
Media Group's percentage ownership of all the Media Group's international cable
and telecommunications operations, including the Media Group's investment in
TeleWest Communications. In addition, the Media Group's share of all its
significant worldwide operations are included in the proportionate financial
information that follows. Excluded are certain international and domestic
investments for which the Media Group does not receive timely detailed financial
statements and which are, collectively, not material.
VII-14
<PAGE>
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. See "-- Media Group -- Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "-- Combined
Financial Statements." The selected combined Financial Data at December 31, 1994
and 1993, and for each of the three years in the period ended December 31, 1994,
have been derived from the Media Group Combined Financial Statements, which have
been audited by Coopers & Lybrand L.L.P., independent certified public
accountants. See "Experts." At December 31, 1992, 1991 and 1990 and March 31,
1995 and 1994 and for the years ended December 31, 1991 and 1990 and for the
three months ended March 31, 1995 and 1994, the Selected Combined Financial Data
has been derived from unaudited Media Group Combined Financial Statements. The
unaudited Combined Financial Statements have been prepared on the same basis as
the 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>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
----------- --------- ----------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
Sales and other revenues...................... $ 536 $ 418 $ 1,908 $ 1,549 $ 1,384 $ 1,261 $ 1,210
Income from continuing operations (1)......... 15 29 276 85 146 69 210
Net income (loss)............................. 15 29 276 3 201 (218) 264
Total assets.................................. 7,908 5,690 7,394 5,446 3,130 3,235 2,555
Total debt (2)................................ 2,298 1,559 1,814 1,526 249 682 118
Media Group equity............................ 4,338 3,428 4,203 3,139 2,265 2,057 1,961
Percentage of debt to total capital (2)....... 34.6% 31.3% 30.1% 32.7% 9.9% 24.9% 5.7%
Capital expenditures (2)...................... $ 76 $ 46 $ 343 $ 215 $ 169 $ 231 $ 195
OPERATING DATA
EBITDA (3).................................... $ 176 $ 132 $ 533 $ 485 $ 410 $ 373 $ 388
Employees..................................... 10,219 8,292 10,103 8,180 8,355 8,104 8,059
PRO FORMA INFORMATION
Earnings per share............................ $ 0.03 $ 0.61
Average shares outstanding.................... 468,557 453,316
----------- -----------
<FN>
(1) 1994 income from continuing operations includes a gain of $105 on the sale
of 24.4 percent of the Company's joint venture interest in TeleWest, and a
gain of $41 from the sale of the Company's paging operations. 1993 income
from continuing operations was reduced by restructuring charges of $76.
1991 income from continuing operations was reduced by restructuring charges
of $57.
(2) Debt, the percentage of debt to total capital ratio and capital
expenditures exclude discontinued operations. Including discontinued
operations the percentage of debt to total capital was 43.4% at March 31,
1995 and 42.4%, 49.1%, 61.9%, 67.2%, and 66.9% for each of the five years
ended in 1994.
(3) The Media Group considers EBITDA an important indicator of the operational
strength and performance of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of
the performance of the Media Group's businesses or as an alternative to
cash flows from operating activities as a measure of liquidity, in each
case determined in accordance with GAAP.
</TABLE>
VII-15
<PAGE>
SELECTED PROPORTIONATE FINANCIAL DATA
The following table shows the entities included in the Media Group Combined
Financial Statements and the percent ownership by industry segment. The
proportionate financial and operating data for these entities are summarized in
the proportionate data table below.
<TABLE>
<CAPTION>
MULTIMEDIA CONTENT AND
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS SERVICES
------------------------------ ------------------------------ ------------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
C
O
N
S Thomson
O Directories
L Atlanta NewVector Marketing 100%
I Systems 84% (1) Resources U S WEST
D 100% 100% Polska
A 100%
T
E
D
Mercury One-
2-One
50%
E TeleWest Westel
Q 37.8% Radiotelefon
U TWE TeleWest 49%
I 25.51% Europe Westel 900
T 50% 44%
Y EuroTel Czech
& Slovak
24.5%
<FN>
- ------------------------------
The above table and the selected proportionate financial data that follows
exclude certain international and domestic investments (collectively not
material) for which the Media Group does not receive timely detailed financial
statements.
(1) Proportionate information reflects an approximate 16 percent minority
interest in NewVector's underlying operations.
</TABLE>
VII-16
<PAGE>
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
The following table is not required by GAAP or intended to replace the
Combined Financial Statements prepared in accordance with GAAP. It is presented
supplementally because the Company believes that proportionate financial and
operating data facilitate the understanding and assessment of its Combined
Financial Statements. The following table includes allocations of Media Group
corporate activity. The table does not reflect financial data of the capital
assets segment, which had net assets of $414 at March 31, 1995 and $302 at
December 31, 1994. THE FINANCIAL INFORMATION INCLUDED BELOW DEPARTS MATERIALLY
FROM GAAP BECAUSE IT AGGREGATES THE REVENUES AND OPERATING INCOME OF ENTITIES
NOT CONTROLLED BY THE MEDIA GROUP WITH THOSE OF THE CONSOLIDATED OPERATIONS OF
THE MEDIA GROUP.
<TABLE>
<CAPTION>
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS MULTIMEDIA CONTENT AND TOTAL
SERVICES --------
THREE MONTHS ENDED ---------------------------- ------------------------ ------------------------
MARCH 31, 1995 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $ 581 $ 24 $168 $ 60 $260 $ 14 $ 1,107
Operating expenses............... 453 35 116 72 150 18 844
Depreciation and amortization.... 95 10 24 9 7 3 148
Operating income................. 33 (21) 28 (21) 103 (7) 115
Income from continuing
operations...................... (16) (11) 12 (28) 62 (4) 15
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 128 $(11) $ 52 $ (12) $110 $ (4) $ 263
Subscribers/Customers............ 2,422 231 885 205 -- -- 3,743
Advertisers...................... -- -- -- -- 470 150 620
Homes passed..................... 3,960 605 -- -- -- -- 4,565
POPs (4)......................... -- -- 19,100 38,300 -- -- 57,400
Telephone lines.................. -- 81 -- -- -- -- 81
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1994
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $ 495 $ 18 $132 $ 30 $244 -$- $ 919
Operating expenses............... 389 28 105 36 139 1 698
Depreciation and amortization.... 72 7 18 8 6 -- 111
Operating income................. 34 (17) 9 (14) 99 (1) 110
Income from continuing
operations...................... (5) (8) 2 (21) 62 (1) 29
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 106 $(10) $ 27 $ (6) $105 $ (1) $ 221
Subscribers/Customers............ 1,851 218 563 52 -- -- 2,684
Advertisers...................... -- -- -- -- 462 25 487
Homes passed..................... 3,078 551 -- -- -- -- 3,629
POPs (4)......................... -- -- 18,500 38,300 -- -- 56,800
Telephone lines.................. -- 49 -- -- -- -- 49
</TABLE>
(See footnotes on next page)
VII-17
<PAGE>
<TABLE>
<CAPTION>
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS MULTIMEDIA CONTENT AND
SERVICES TOTAL
---------------------------- ------------------------ ------------------------ --------
YEAR ENDED 1994 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
FINANCIAL DATA (MILLIONS):
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $2,386 $ 85 $634 $ 186 1$,005 $ 79 $ 4,375
Operating expenses............... 1,854 127 485 254 592 77 3,389
Depreciation and amortization.... 383 31 80 35 24 10 563
Operating income................. 149 (73) 69 (103) 389 (8) 423
Income from continuing operations
(5)............................. (53) (40) 30 (68) 251 (4) 116
Debt (6)......................... -- -- -- -- -- -- 3,865
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 532 $(42) $149 $ (68) $413 $ 2 $ 986
Subscribers/Customers............ 2,407 226 817 169 -- -- 3,619
Advertisers...................... -- -- -- -- 468 147 615
Homes passed..................... 3,952 576 -- -- -- -- 4,528
POPs (4)......................... -- -- 18,900 38,300 -- -- 57,200
Telephone lines.................. -- 69 -- -- -- -- 69
<CAPTION>
YEAR ENDED 1993
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $2,048 $ 59 $432 $ 78 $958 $ 7 $ 3,582
Operating expenses............... 1,611 101 331 126 540 10 2,719
Depreciation and amortization.... 301 22 76 5 21 -- 425
Operating income................. 136 (64) 25 (53) 397 (3) 438
Income from continuing operations
(5)............................. (6) (49) (2) (22) 252 (3) 170
Debt (6)......................... -- -- -- -- -- -- 3,492
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 437 $(42) $101 $ (48) $418 $ (3) $ 863
Subscribers/Customers............ 1,837 215 509 41 -- -- 2,602
Advertisers...................... -- -- -- -- 459 25 484
Homes passed..................... 3,061 524 -- -- -- -- 3,585
POPs (4)......................... -- -- 18,200 38,300 -- -- 56,500
Telephone lines.................. -- 44 -- -- -- -- 44
<FN>
- ------------------------------
(1) The proportionate results are based on the Media Group's 25.51 percent pro
rata priority and residual equity interests in reported TWE results. The
reported TWE results are prepared in accordance with GAAP and have not been
adjusted to report TWE investments accounted for under the equity method on
a proportionate basis. The Media Group's share of TWE results on a
proportionate basis do not necessarily reflect the Media Group's recorded
share of income due to special allocations of income stipulated by the TWE
Partnership Agreement and the amortization of the excess of fair market
value over the book value of the partnership net assets. As a result of
this special income allocation and amortization, the Media Group's recorded
pretax share of TWE operating results was ($13) and ($12) for the three
months ended March 31, 1995 and 1994, respectively and ($18) and ($20) for
1994 and 1993, respectively.
(2) Although the TWE and Atlanta Systems acquisitions occurred within 1993 and
1994, for comparability in reporting, 1993 proportionate results include 12
months of TWE activity and 1994 proportionate results include 12 months of
activity for the Atlanta Systems. First quarter 1994 results include three
months of activity for the Atlanta Systems.
(3) Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entities' EBITDA. As such, proportionate EBITDA
does not represent cash available to the Media Group. The Media Group
considers EBITDA an important indicator of the operational strength and
performance of its businesses. EBITDA, however, should not be considered as
an alternative to operating or net income as an indicator of the
performance of the Media Group's businesses or as an alternative to cash
flows from operating activities as a measure of liquidity, in each case
determined in accordance with GAAP.
(4) Wireless Communications -- International includes 29,000 POP's representing
the total POP's to be achieved upon completion of the build-out of Mercury
One-2-One's PCS network. As of March 31, 1995, the system reached 30% of
the population.
(5) See the Supplementary Selected Proportionate Financial Data schedule to the
Media Group Combined Financial Statements for a reconcilation of the
proportionate amount of income from continuing operations to the amount
reported on a GAAP basis.
(6) See Note 5 to the Media Group Combined Financial Statements for additional
information regarding the obligations inherent in the capital structure of
the TWE partnership. Included in debt is the Company's proportionate share
of TWE external debt of $1,835 and $1,824 in 1994 and 1993, respectively.
</TABLE>
VII-18
<PAGE>
MEDIA GROUP
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma data gives effect to the December 6, 1994
acquisition of the Atlanta Systems for cash of $745 and 12,779,206 shares of
Existing Common Stock valued at $459, for a total purchase price of
approximately $1.2 billion, assuming the acquisition had occurred as of January
1, 1994. The Atlanta Systems were previously operated by Wometco Cable Corp. and
subsidiaries and Georgia Cable Holdings Limited Partnership ("Georgia Cable
Holdings") and subsidiary partnerships.
The unaudited pro forma Combined Statement of Operations is provided for
informational purposes only and does not represent what the actual results of
operations of the Media Group would have been had the Atlanta Systems been
acquired as of January 1, 1994, nor are they necessarily indicative of the
results of operations which may be achieved in the future. The unaudited pro
forma Combined Statement of Operations should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Media Group Combined Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------------------------------------------
MEDIA GROUP WOMETCO CABLE GEORGIA CABLE
COMBINED CORP. HOLDINGS PRO FORMA PRO FORMA
HISTORICAL (1) HISTORICAL (2) HISTORICAL (2) ADJUSTMENTS COMBINED
-------------- -------------- -------------- ----------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales and other revenues..................... $1,908 $101 $89 $-- $ 2,098
Cost of sales and other revenues............. 612 38 31 -- 681
Selling, general and administrative
expenses.................................... 747 14 11 -- 772
Depreciation and amortization................ 144 18 28 21(3) 211
Interest expense............................. 82 10 18 14(3) 124
Equity losses in unconsolidated ventures..... 121 -- -- -- 121
Gains on sales of assets:
Partial sale of joint venture interest..... 164 -- -- -- 164
Paging assets.............................. 68 -- -- -- 68
Other income -- net.......................... 46 -- -- -- 46
------- ----- --- ----------- ---------
Income (loss) from continuing operations
before income taxes......................... 480 21 1 (35) 467
Provision for income taxes................... 204 9 -- (11)(3) 202
------- ----- --- ----------- ---------
Net income (loss)............................ $ 276 $ 12 $ 1 $ (24) $ 265
------- ----- --- ----------- ---------
------- ----- --- ----------- ---------
Pro forma earnings per share of Media Stock
(4)......................................... $ 0.61 $ 0.57
------- ---------
------- ---------
Pro forma average shares of Media Stock
outstanding (thousands) (4)................. 453,316 12,779(4) 466,095
<FN>
- ------------------------
(1) Includes the Atlanta Systems' results of operations from the date of
acquisition.
(2) Reflects the historical results of operations of the Atlanta Systems from
January 1, 1994 through the date of acquisition.
(3) Pro forma adjustments include: a) additional interest expense associated
with debt (at an average rate of 6.14%) incurred to finance the
acquisitions, b) additional amortization expense as a result of the excess
of the purchase price over the fair value of assets acquired amortized over
25 years and adjusted depreciation expense based on the fair value of the
assets acquired, and c) adjustment for the tax impact of the acquisitions.
Pro forma net income will fluctuate $.6 for each 1/8% change in the
interest rate on the debt used to finance the acquisition.
(4) Pro forma average common shares outstanding reflect the pro forma Media
Group shares after giving effect to the Recapitalization Proposal and
include the pro forma effect of issuing additional shares of Media Stock as
of January 1, 1994 to acquire the Atlanta Systems.
</TABLE>
VII-19
<PAGE>
MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
The Media Group is comprised of: (i) cable and telecommunications network
businesses outside of the Communications Group Region and internationally, (ii)
domestic and international wireless communications network businesses and (iii)
domestic and international multimedia content and services businesses. The Media
Group's cable and telecommunications businesses include the interests in TWE,
the second largest provider of cable television services in the United States,
and the Atlanta Systems, and international cable and telecommunications
investments, including TeleWest, the largest provider of combined cable and
telecommunications services in the United Kingdom. The Media Group, through
NewVector, provides domestic wireless communications services, including
cellular services, to a rapidly growing customer base. The Media Group also
provides wireless communications services internationally through its joint
venture in Mercury One-2-One, the world's first PCS service. The Media Group's
multimedia content and services business develops and packages content and
information services, including telephone directories, database marketing and
other interactive services in domestic and international markets. The Media
Group's strategy is to become a leading provider of CEIT services to business
and residential customers over wired broadband and wireless networks in selected
domestic and international markets. For a detailed discussion of the Media
Group's strategy, see "-- Media Group -- Description of Business -- Media Group
Strategy."
The Board of Directors of the Company has adopted a proposal that would
change the state of incorporation of the Company from Colorado to Delaware and
create two classes of common stock, the Media Stock and the Communications
Stock, intended to reflect separately the performance of the Media Group and the
Communications Group.
The Combined Financial Statements of the Media Group include the (i)
combined historical balance sheets, results of operations and cash flows of the
businesses that comprise the Media Group; and (ii) corporate assets and
liabilities of the Company and related transactions not identified with the
Communications Group; and (iii) an allocated portion of the corporate expense of
the Company. All significant intra-Group financial transactions have been
eliminated; however, transactions between the Media Group and the Communications
Group have not been eliminated. For a more complete discussion of the Company's
corporate allocation policies, see "-- Media Group -- Combined Financial
Statements -- Note 1: Summary of Significant Accounting Policies."
The following discussion of the Media Group's results of operations,
liquidity and capital resources should be read in conjunction with the Company's
Consolidated Financial Statements. See "Annex V -- U S WEST, Inc. --
Consolidated Financial Statements."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1994
NET INCOME
Net income of the Media Group declined by $14 in the first quarter of 1995
as compared to the first quarter of 1994 due primarily to higher equity losses
related to international growth initiatives partially offset by improvement in
the wireless communications business. A significant increase in the effective
tax rate related to the amortization of intangible assets and goodwill
associated with the Atlanta Systems acquisition also contributed to the decrease
in earnings. EBITDA increased by approximately 33 percent, to $176, due
primarily to the acquisition of the Atlanta Systems. Excluding the effects of
the acquisition, EBITDA increased by approximately 15 percent.
The Media Group considers EBITDA an important indicator of the operational
strength and performance of its businesses. EBITDA, however, should not be
considered as an alternative to
VII-20
<PAGE>
operating or net income as an indicator of the performance of the Media Group's
businesses or as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with GAAP.
Following is a summary of net income by industry segment and for significant
unconsolidated, equity investments:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
PERCENT ------------------------ INCREASE
OWNERSHIP 1995 1994 (DECREASE)
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Consolidated:
Multimedia content and services................................. 100 $ 59 $ 60 $ (1)
Wireless communications......................................... 100 15 -- 15
Cable and telecommunications.................................... 100 (3) -- (3)
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P. (1)..................... 25.5 (13) (12) (1)
TeleWest Communications plc..................................... 37.8 (8) (7) (1)
Mercury One-2-One............................................... 50.0 (19) (10) (9)
Other (2)......................................................... (16) (2) (14)
--- --- ---
Net Income........................................................ $ 15 $ 29 $ (14)
--- --- ---
--- --- ---
<FN>
- ------------------------
(1) Percent ownership represents pro rata priority capital and residual equity
interests.
(2) Includes other unconsolidated equity investments and divisional expenses.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. Income related to Yellow Pages directory
advertising increased by approximately 9 percent in the first quarter of 1995
compared to the first quarter of 1994, to $74, due to pricing, product
enhancements and the effect of improved marketing programs on business volume.
However, Yellow Pages income growth was largely offset by the effects of
increased expenditures related to new products and other growth initiatives,
including development of interactive services. The Media Group anticipates that
accelerated investments in new products and services in 1995 will more than
offset expected income growth related to the Yellow Pages business.
Income related to multimedia content and services in the first quarter of
1995 includes $4 in losses related to international directory publishing
operations. The international publishing operations were not significant to the
first quarter of 1994 results of operations.
WIRELESS COMMUNICATIONS. The increase in wireless communications income is
attributable to continued strong growth in cellular subscribers. The cellular
subscriber base reached 1,048,000 at March 31, 1995, a 58 percent increase as
compared with March 31, 1994. Cellular service EBITDA approximated $62 during
the first quarter of 1995, an increase of $28, or 82 percent, as compared to the
first quarter of 1994. Cellular service revenue growth in addition to expense
controls resulted in a first quarter of 1995 cellular service EBITDA margin of
33.6 percent compared to 25.9 percent in the first quarter of 1994.
CABLE AND TELECOMMUNICATIONS. The first quarter of 1995 loss in cable and
telecommunications operations is the result of amortization of intangible assets
related to the December 1994 acquisition of the Atlanta Systems. The Atlanta
Systems contributed EBITDA of approximately $24 in the first quarter 1995. The
subscriber base of the Atlanta Systems increased 7.5 percent during the last
twelve months, to 501,000 at March 31, 1995.
OPERATING RESULTS OF UNCONSOLIDATED EQUITY INVESTMENTS. The net loss
related to the Media Group's interests in TWE increased in the first quarter of
1995 as compared to the first quarter of 1994 as a result of a decrease in TWE
net income due primarily to higher TWE financing costs and
VII-21
<PAGE>
depreciation charges, partially offset by increased income related to cable and
programming operations. Subscribers served by TWE increased by 5 percent in the
first quarter of 1995 as compared to the first quarter of 1994.
International businesses are experiencing rapid growth, and will continue to
incur near term start-up losses.
Cable television subscribers of TeleWest and its affiliates, based on
TeleWest's proportionate interest in affiliated operations, increased to 239,000
at March 31, 1995, an increase of 51 percent as compared to March 31, 1994, and
telephone access lines increased 123 percent during the last twelve months, to
214,000 at March 31, 1995. On a total venture basis, cable television
subscribers and telephone access lines totaled 338,000 and 312,000,
respectively, at March 31, 1995.
Subscribers to U S WEST's international wireless joint venture operations in
the United Kingdom, Hungary, the Czech Republic, Slovakia and Russia grew to
444,000 at March 31, 1995, which number is more than three times the customer
base at March 31, 1994. Mercury One-2-One added 55,000 customers during first
quarter 1995, a 26.8 percent increase since December 31, 1994. Mercury One-2-One
served 260,000 customers at March 31, 1995, compared with 51,000 customers at
March 31, 1994.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH INCREASE (DECREASE)
31,
------------------------ --------------------
1995 1994 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic............................................................... $ 258 $ 242 $ 16 6.6
International.......................................................... 14 -- 14 --
----- ----- --------- ---------
272 242 30 12.4
----- ----- --------- ---------
Wireless communications:
Cellular service....................................................... 185 132 53 40.2
Cellular equipment..................................................... 17 22 (5) (22.7)
Paging sales and service (1)........................................... -- 14 (14) --
----- ----- --------- ---------
202 168 34 20.2
----- ----- --------- ---------
Cable and telecommunications............................................. 54 -- 54 --
Other.................................................................... 8 8 --
----- ----- --------- ---------
Sales and other revenues................................................. $ 536 $ 418 $ 118 28.2
----- ----- --------- ---------
----- ----- --------- ---------
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the three months ending March 31, 1994.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. Revenues related to Yellow Pages directory
advertising increased approximately $17, or 7 percent, in the first quarter of
1995 as compared to the first quarter of 1994, due to pricing and an increase in
Yellow Pages advertising volume. Product enhancements and the effect of improved
marketing programs on business volume also contributed to the increase in
revenues. Non-Yellow Pages revenues increased by $4 in the first quarter of 1995
as compared to the first quarter of 1994. Partially offsetting this increase was
the effect of the sale of certain software development and marketing operations,
which had contributed approximately $5 to revenues in the first quarter of 1994.
International directory publishing revenue increased by $14 in the first
quarter of 1995 as compared to the first quarter of 1994 due to the Company's
May 1994 purchase of Thomson Directories.
WIRELESS COMMUNICATIONS.__Cellular service revenues increased by $53, or
40.2 percent, in the first quarter of 1995 as compared to the first quarter of
1994 due to a 58 percent increase in
VII-22
<PAGE>
subscribers during the last twelve months, partially offset by an 11 percent
drop in average revenue per subscriber to $62 per month at March 31, 1995. The
increase in subscribers relates to lower costs for cellular phone equipment and
enhanced service offerings, which has resulted in a shift in the wireless
customer base from businesses to consumers. The decrease in average revenue per
subscriber is due to the continuing effects of non-business user market
penetration.
Cellular equipment revenues decreased by $5, or 22.7 percent, in the first
quarter of 1995 as compared to the first quarter of 1994 primarily due to a 20
percent decrease in unit sales. Equipment sales in the first quarter 1994 were
unusually strong due to a shortage of available inventory in December 1993.
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $14 in the first quarter of 1994.
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues reflect the December 1994 acquisition of the Atlanta Systems.
COSTS OF SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH INCREASE (DECREASE)
31,
------------------------ --------------------
1995 1994 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic................................................................. $ 91 $ 84 $ 7 8.3
International............................................................ 10 -- 10 --
----- ----- --- ---------
101 84 17 20.2
----- ----- --- ---------
Wireless communications:
Cost of cellular service................................................. 31 17 14 82.4
Cost of cellular equipment............................................... 18 22 (4) (18.2)
Cost of paging sales & service (1)....................................... -- 3 (3) --
----- ----- --- ---------
49 42 7 16.7
----- ----- --- ---------
Cable and telecommunications............................................... 13 -- 13 --
----- ----- --- ---------
Costs of sales and other revenues.......................................... $ 163 $ 126 $ 37 29.4
----- ----- --- ---------
----- ----- --- ---------
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the three months ending March 31, 1994.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. Costs of sales related to domestic
publishing operations increased primarily due to growth in the Yellow Pages
directory business. The increase in cost of sales for international directory
publishing operations was primarily due to the May 1994 acquisition of Thomson
Directories.
WIRELESS COMMUNICATIONS. Land-line telecommunications charges increased by
$4 and network maintenance expenses increased by $3 in the first quarter of 1995
as compared to the first quarter of 1994 due primarily to additional network
usage and expansion of the wireless network. Billing expenses increased by $3,
due primarily to a larger average customer base. Costs associated with
fraudulent activity increased by $4.
Cost of cellular equipment sold decreased in proportion to equipment
revenues.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications costs reflect
the December 1994 acquisition of the Atlanta Systems.
VII-23
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, INCREASE
------------------------ --------------------
1995 1994 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic.................................................................. $ 58 $ 53 $ 5 9.4
International............................................................. 6 1 5 --
----- ----- --- ---------
64 54 10 18.5
----- ----- --- ---------
Wireless communications (1)................................................. 92 87 5 5.7
Cable and telecommunications................................................ 17 -- 17 --
Other....................................................................... 24 19 5 26.3
----- ----- --- ---------
$ 197 $ 160 $ 37 23.1
----- ----- --- ---------
----- ----- --- ---------
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the three months ending March 31, 1994.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. In domestic operations, costs related to
the development of new database marketing and interactive services increased by
$8 in the first quarter of 1995 as compared to the first quarter of 1994.
Partially offsetting these cost increases was the effect of the sale of certain
publishing and software development and marketing operations, which decreased
selling, general and administrative expenses by $3.
The increase in selling, general and administrative expenses related to
international directory publishing operations relates primarily to the May 1994
acquisition of Thomson Directories.
WIRELESS COMMUNICATIONS. Excluding the effects of the sale of the paging
business in 1994, selling, general and administrative expenses increased by $11,
or 13.6 percent, in the first quarter of 1995 as compared to the first quarter
of 1994. Commissions paid to retailers increased by $9 as a result of a 42
percent increase in gross customer additions. Other selling, general and
administrative expenses increased by $2, primarily related to increased
advertising expenditures.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications costs reflect
the December 1994 acquisition of the Atlanta Systems.
OTHER. The increase in these other selling, general and administrative
expenses is primarily attributable to additional resources being allocated to
accommodate growth in international operations.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED INCREASE (DECREASE)
MARCH 31,
-------------------- --------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services.......................................... $8 $5 $ 3 60.0
Wireless communications (1).............................................. 28 23 5 21.7
Cable and telecommunications............................................. 21 -- 21 --
Other.................................................................... 4 5 (1) (20.0)
--------- --------- --- ---------
Total.................................................................. $61 $33 $ 28 84.8
--------- --------- --- ---------
--------- --------- --- ---------
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the three months ending March 31, 1994.
</TABLE>
Depreciation and amortization related to wireless operations increased by $7
in the first quarter of 1995 as compared to the first quarter of 1994, excluding
the effects of the sale of the paging business
VII-24
<PAGE>
in 1994. Multimedia content and services depreciation and amortization increased
principally due to the effects of the May 1994 acquisition of Thomson
Directories. Cable and telecommunications depreciation and amortization reflect
the December 1994 acquisition of the Atlanta Systems.
INTEREST EXPENSE AND OTHER
Interest expense increased by $8, or 42 percent, in the first quarter of
1995 as compared to the first quarter of 1994, primarily as a result of
incremental financing costs associated with the December 1994 acquisition of the
Atlanta Systems.
Equity losses increased by $22, or 63 percent, in the first quarter of 1995
as compared to the first quarter of 1994, primarily due to costs related to the
expansion of the customer base at Mercury One-2-One, network expansion at
TeleWest and the impact of new investments.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECREASE
-------------------- --------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes................................................ $ 23 $ 26 $ (3) (11.5)
Effective tax rate........................................................ 60.5% 47.3% -- --
</TABLE>
The increase in the effective tax rate primarily reflects the impact of
lower pretax income, the effects of goodwill amortization related to the
acquisition of the Atlanta Systems, a benefit recorded in 1994 related to the
sale of the paging assets and higher state income taxes.
1994 COMPARED WITH 1993
NET INCOME
<TABLE>
<CAPTION>
1994 (1) 1993 (2) INCREASE
----------- ----------- -----------
<S> <C> <C> <C>
Income from continuing operations................................................... $ 276 $ 85 $ 191
Loss from discontinued operations................................................... -- (82) 82
----- --- -----
Net income.......................................................................... $ 276 $ 3 $ 273
----- --- -----
----- --- -----
<FN>
- ------------------------
(1) 1994 income from continuing operations includes a gain of $105 from the
sale of 24.4 percent of the Company's joint venture interest in TeleWest,
and a gain of $41 from the sale of the Company's paging operations.
(2) 1993 income from continuing operations was reduced by $76 for restructuring
charges.
</TABLE>
Income from continuing operations in 1994 included one-time, after-tax gains
described in note (1) to the table above. Excluding these gains, income from
continuing operations was $130. In 1993, income from continuing operations,
excluding the effects of restructuring charges, was $161. Without the effects of
such gains and charges, 1994 income from continuing operations decreased by $31,
or 19.3 percent. This is primarily a result of increased start-up losses
associated with international businesses, partially offset by income growth in
domestic wireless operations attributable to rapid growth in customer demand.
Costs related to the development and launching of new products in multimedia
content and services offset income growth from Yellow Pages publishing
operations.
Revenue growth, partially offset by higher operating expenses, provided an
8.7 percent increase in the Media Group's 1994 EBITDA, compared to an increase
of 16.1 percent in 1993. EBITDA also excludes equity losses in unconsolidated
ventures, gains on sales of assets, restructuring charges and other income. The
Media Group considers EBITDA an important indicator of the operational strength
and performance of its businesses. For information regarding proportionate
EBITDA related to the Media Group's equity investments, see "-- Media Group --
Selected Combined Financial Data -- Selected Proportionate Financial Data." The
reduction in the EBITDA growth rate in 1994 as compared to 1993 was primarily
the result of a significant increase in expenses related to funding new products
and other growth initiatives in the multimedia content and services business.
VII-25
<PAGE>
In 1993, U S WEST discontinued the operations of its capital assets segment.
See "-- Disposition of the Capital Assets Segment."
INCOME FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
PERCENT INCREASE
OWNERSHIP 1994 1993 (DECREASE)
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Consolidated:
Multimedia content and services (1).................................... 100 $ 247 $ 220 $ 27
Wireless communications (2)............................................ 100 67 (43) 110
Cable and telecommunications........................................... 100 (2) -- (2)
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P................................. 25.5(3) (30) (19) (11)
TeleWest Communications plc (4)........................................ 37.8 76 (21) 97
Mercury One-2-One...................................................... 50.0 (58) (22) (36)
Other (5)................................................................ (24) (30) 6
--------- --------- -----
Income from continuing operations........................................ $ 276 $ 85 $ 191
--------- --------- -----
--------- --------- -----
<FN>
- ------------------------
(1) Includes a 1993 restructuring charge of $31.
(2) Includes a 1994 gain of $41 from the sale of the Company's paging
operations and a 1993 restructuring charge of $45.
(3) Percent ownership represents pro rata priority capital and residual equity
interests.
(4) Includes a 1994 gain of $105 from the sale of 24.4 percent of the Company's
joint venture interest in TeleWest.
(5) Includes other unconsolidated equity investments and divisional expenses.
</TABLE>
The Media Group operations include both domestic and international wholly
owned subsidiaries and equity investments. Under generally accepted accounting
principles, only the revenues and operating costs of majority-owned businesses
are included within the Combined Statements of Operations. The less than
majority-owned businesses are not consolidated and the operating effects of
those businesses are aggregated and reported within the line item "equity losses
in unconsolidated ventures."
The Media Group has four industry segments: multimedia content and services,
wireless communications, cable and telecommunications and capital assets. The
capital assets segment was discontinued in 1993. Domestic equity investments
include a 25.51 percent pro rata priority capital and residual equity interest
in TWE. International equity investments include investments in cable and
telecommunications, wireless communications (including personal communications
services) and directory publishing. While the Central European wireless ventures
generate positive net income and cash flow, most of the Media Group's
international equity investments are in start-up phases and will not show
positive net income or cash flow until they mature.
MULTIMEDIA CONTENT AND SERVICES. The Media Group's multimedia content and
services operations consist of the publishing of approximately 300 White and
Yellow Pages telephone directories in the Communications Group Region, database
marketing and other interactive services in domestic and international markets.
Income related to multimedia content and services operations include the effects
of a $6 gain on the 1994 sale of software development and marketing operations,
partially offset by the effects of adopting a new accounting standard related to
advertising costs which reduced 1994 income by $4. A restructuring charge
reduced 1993 income by $31. As normalized, income from multimedia content and
services operations decreased by $6, or 2.4 percent, compared to 1993.
Income related to Yellow Pages directory advertising, excluding the effects
of the 1993 restructuring charge, grew by approximately 4 percent in 1994, to
$279, due to pricing, product enhancements and the effect of improved marketing
programs on business volume. However, Yellow Pages income growth was more than
offset by the effects of increased expenditures related to new products and
VII-26
<PAGE>
other growth initiatives, including development of interactive services. The
Media Group anticipates that accelerated investments in new products and
services in 1995 will more than offset expected income growth related to the
Yellow Pages business.
International publishing subsidiaries include Thomson Directories in the
United Kingdom, with 155 directories and a combined circulation of 18.6 million,
and U S WEST Polska, with 17 directories having a combined circulation of almost
1.7 million in Poland. The operating results of the international publishing
operations were not significant to 1994 results of operations.
WIRELESS COMMUNICATIONS. Domestic cellular operations are conducted in 31
metropolitan and 34 rural statistical areas in 13 western and midwestern states.
Cellular income increased by $24 over 1993, excluding the effects of the $41
gain on the sale of paging operations in 1994 and a $45 restructuring charge in
1993. The increase is due to the addition of 367,000 subscribers in 1994, a 61
percent increase as compared to 1993. Additionally, cellular service EBITDA
increased by $57, or 46 percent, as compared to 1993. Cellular service EBITDA
margin was 28.8 percent, essentially unchanged as compared to 1993. U S WEST
anticipates continued growth in income and EBITDA from domestic wireless
operations as the customer base expands.
On July 25, 1994, AirTouch and U S WEST announced a definitive agreement to
combine their domestic wireless operations. The initial equity ownership of the
wireless joint venture will be approximately 70 percent by AirTouch and
approximately 30 percent by the Media Group. The transaction is expected to
close in the third quarter of 1995 upon obtaining federal and state regulatory
approvals. After closing, the earnings of the Media Group will reflect its 30
percent interest in the joint venture. The wireless operations of both parties
will initially continue operating as separate entities owned by the individual
partners, but will receive support services on a contract basis from a joint
wireless management company. Following the combination of the wireless
operations of the two companies, the assets, liabilities and operations of the
domestic wireless operations of the Media Group will no longer be consolidated,
but will be reported based on the equity method of accounting for less than
majority-owned entities. For a detailed discussion of the planned merger, see
"-- Media Group -- Description of Business -- Wireless Operations -- Cellular."
Had the Media Group recognized 30 percent of the combined earnings of the
joint venture beginning January 1, 1994, Media Group net income for the year
ended December 31, 1994, would have increased by approximately $30.
CABLE AND TELECOMMUNICATIONS. On December 6, 1994, the Media Group
purchased the Atlanta Systems for $1.2 billion. The results of operations of the
Atlanta Systems have been included in the Media Group's results of operations
since the date of acquisition and did not have a material impact on 1994 net
income. If the acquisition had taken place at the beginning of 1994, net income
of the Media Group would have been reduced by an additional $11. See "-- Media
Group -- Unaudited Pro Forma Combined Statement of Operations."
OPERATING RESULTS OF UNCONSOLIDATED EQUITY INVESTMENTS. TWE partnership
losses increased in 1994 primarily due to the full year impact (including
financing costs) of the TWE investment as compared to three months in 1993. The
effects of lower prices for cable services also contributed to the higher loss
in 1994. In early 1995, Time Warner Inc. announced its intention to simplify its
corporate structure by establishing a separate, self-financing enterprise to
house TWE's cable and telecommunications properties. Any change in the structure
of TWE would require the approval of the Company and its TWE partners in
addition to certain creditor and regulatory approvals.
The majority of U S WEST's international equity investments relates to
ventures in the United Kingdom. These include TeleWest, the largest provider of
cable and telecommunications services in the United Kingdom, and Mercury
One-2-One, the world's first PCS service. These businesses are experiencing
rapid growth, and will continue to incur near term start-up losses related to
expansion of the customer base at Mercury One-2-One and build out of the network
at TeleWest.
VII-27
<PAGE>
Cable television subscribers of TeleWest and its affiliates increased 42
percent to 320,000 at year-end 1994, compared to 226,000 the prior year, and
telephone access lines increased 94 percent to 271,000. Subscribers to U S
WEST's international wireless joint venture operations in the United Kingdom,
Hungary, the Czech Republic, Slovakia and Russia grew to 367,000 in 1994, nearly
three times the customer base of the prior year. Subscribers to European cable
ventures totaled 586,000 at December 31, 1994.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic.................................................................. $ 997 $ 949 $ 48 5.1
International............................................................. 78 7 71 --
--------- --------- --------- ---------
1,075 956 119 12.4
--------- --------- --------- ---------
Wireless communications:
Cellular service.......................................................... 633 443 190 42.9
Cellular equipment........................................................ 120 63 57 90.5
Paging sales and service (1).............................................. 28 55 (27) (49.1)
--------- --------- --------- ---------
781 561 220 39.2
--------- --------- --------- ---------
Cable and telecommunications................................................ 18 -- 18 --
Other....................................................................... 34 32 2 6.2
--------- --------- --------- ---------
Sales and other revenues.................................................... $ 1,908 $ 1,549 $ 359 23.2
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the six months ending June 30, 1994
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. The Yellow Pages directory advertising
business accounted for approximately 97 percent of the revenues of the domestic
multimedia content and services business in 1994. Revenues related to Yellow
Pages directory advertising increased approximately $59, or 6.5 percent in 1994,
due primarily to pricing. Product enhancements and the effect of improved
marketing programs on business volume also contributed to the increase in
revenues. Non-Yellow Pages revenues increased by $11, including $7 related to
new products. Partially offsetting these increases was the absence of revenues
related to certain publishing, software development and marketing operations
that were sold, which reduced revenues by $22.
The increase in international directory publishing revenue is attributable
to the Company's May 1994 purchase of Thomson Directories. Thomson Directories
revenues are expected to approximate $100 in 1995.
WIRELESS COMMUNICATIONS. Cellular service revenues increased during 1994
due to a 61 percent increase in subscribers as compared to 1993 (with 24 percent
of the additions occurring in December), partially offset by an 8 percent drop
in average revenue per subscriber to $70 per subscriber, per month. The increase
in subscribers has resulted from lower costs for cellular phone equipment and
enhanced service offerings, which has resulted in a shift in the wireless
customer base from business to consumers. A shift in distribution strategy in
late 1992 from a direct sales focus to the predominate use of local and national
retailers also stimulated subscriber growth by improving product visibility and
simplifying the activation process for customers. Continued rapid growth in the
wireless subscriber base is expected, though growth rates will be affected by
consumer demand, market positioning and increased competition in coming years.
VII-28
<PAGE>
The decrease in average revenue per subscriber is due to an increase in the
proportion of non-business users. Consumer users tend to obtain service
primarily for convenience and safety, and select price plans with fewer included
minutes and features. Reductions in average revenue per subscriber are expected
to continue as a result of continued market penetration and increased
competition.
Cellular equipment revenues increased primarily due to an 83 percent
increase in gross customer additions, with a higher percentage of those
customers purchasing equipment than in 1993. This increase was partially offset
by a 13 percent decline in the average selling price of wireless phones,
primarily the result of lower unit costs from manufacturers being passed on to
consumers. The equipment business is employed as a means to grow the customer
base. Consequently, equipment gross margins have been managed at or near break
even, and equipment sales have not significantly impacted net income.
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues reflect the December 1994 acquisition of the Atlanta Systems. These
revenues are expected to exceed $200 in 1995.
COSTS OF SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic...................................................................... $ 342 $ 317 $ 25 7.9
International................................................................. 53 6 47 --
--------- --------- --------- ---------
395 323 72 22.3
--------- --------- --------- ---------
Wireless communications:
Cost of cellular service...................................................... 89 58 31 53.4
Cost of cellular equipment.................................................... 122 64 58 90.6
Cost of paging sales & service (1)............................................ 6 12 (6) (50.0)
--------- --------- --------- ---------
217 134 83 61.9
--------- --------- --------- ---------
Costs of sales and other revenues............................................... $ 612 $ 457 $ 155 33.9
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the six months ending June 30, 1994.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. Costs of multimedia content and services
operations primarily include all directory and other production and distribution
costs, direct selling costs and costs related to the launching of new products.
Costs of sales related to domestic publishing operations increased primarily
because of the introduction of new products and services, including interactive
services.
The $47 increase in cost of sales related to international directory
publishing operations was primarily due to the May 1994 acquisition of Thomson
Directories.
WIRELESS COMMUNICATIONS. Cost of cellular service consists primarily of
charges for access and usage of land-line telecommunications networks, expenses
associated with maintaining and monitoring the wireless network, customer
billing expenses and fraud costs. Costs related to network access and usage
purchased from the Communications Group were $30 in 1994 and $24 in 1993.
Land-line telecommunication charges increased by $7 and network maintenance
expenses increased by $5 in 1994 due primarily to additional network usage and
expansion of the wireless network. Billing expenses increased by approximately
$8, due primarily to a larger average customer base. Costs associated with
fraudulent activity increased by $5 in 1994. Management has negotiated contracts
with other carriers to settle charges for fraudulent usage at a rate that
approximates the serving carriers' costs, in addition to providing better
monitoring of network activity to limit exposure to fraud losses. The cost of
cellular service will continue to increase with a growing subscriber base
VII-29
<PAGE>
and expanding network. While most elements of cost of cellular service vary
directly in relation to revenue growth, greater scale and enhanced employee
productivity may result in future cost efficiencies.
Cost of cellular equipment sold increased in proportion to equipment
revenues in 1994. Higher equipment sales were primarily due to the 83 percent
increase in gross customer additions, with a higher percentage of those
customers purchasing equipment than in 1993, partially offset by an 8 percent
decline in the average unit cost of equipment from the manufacturer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
INCREASE
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic....................................................................... $ 237 $ 207 $ 30 14.5
International.................................................................. 17 4 13 --
--------- --------- --------- ---
254 211 43 20.4
--------- --------- --------- ---
Wireless communications (1)...................................................... 374 283 91 32.2
Other............................................................................ 135 113 22 19.5
--------- --------- --------- ---
Total............................................................................ $ 763 $ 607 $ 156 25.7
--------- --------- --------- ---
--------- --------- --------- ---
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the six months ending June 30, 1994.
</TABLE>
Selling, general and administrative expenses include certain costs relating
to the Company's general and administrative services (including certain
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy services) that 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. The Company charges each Group for such services at fully distributed
cost. These direct and indirect allocations were $35 and $43 for 1994 and 1993,
respectively. The direct allocations comprise approximately 60 percent of the
total shared corporate services allocated to the Media Group. It is not
practicable to provide a detailed estimate of the expenses which would be
recognized if the Media Group were a separate legal entity. However, the Company
believes that under the Recapitalization Proposal each Group would benefit from
synergies with the other, including having lower operating expenses than might
be incurred than if each Group was a separate legal entity.
MULTIMEDIA CONTENT AND SERVICES. General and administrative expenses for
multimedia content and services operations primarily include costs related to
administration, marketing and advertising, customer listings, billing and
collection services, rents, new product development and Company allocations.
Selling costs related to the multimedia content and services operations are
included in costs of services and products.
Customer lists, billing and collection and other services are purchased from
the Communications Group in connection with the publication of the Yellow Pages.
The services are purchased at the higher of fully distributed cost or at a
market price from the Communications Group, in accordance with regulatory
requirements. The charges for these services were $27 and $26 in 1994 and 1993,
respectively. In domestic operations, costs related to development of new
database marketing and interactive services increased by approximately $34 in
1994. Additionally, the 1994 adoption of a new accounting standard related to
advertising costs resulted in a one-time charge of approximately $7. As a result
of the new standard, advertising expenses are now recorded in the period
incurred rather than being deferred. Partially offsetting these cost increases
was the effect of the sale of certain publishing, software development and
marketing operations which decreased selling, general and administrative
expenses by $11.
VII-30
<PAGE>
The international increase of $13 relates primarily to the May 1994
acquisition of Thomson Directories in the United Kingdom.
WIRELESS COMMUNICATIONS. Selling, general and administrative expenses
related to the cellular services and equipment business primarily include
distribution costs, promotions, bad debts and administration.
Commissions paid to retailers increased by $50 in 1994. The increase was
driven by the 83 percent increase in gross customer additions, partially offset
by a slightly lower average commission than in 1993. Commission expense will
continue to increase as gross customer additions increase. The average
commission may increase as competition for distribution outlets increases.
Advertising and promotion costs increased by $21 in 1994, primarily as a
result of aggressive marketing programs designed to obtain new subscribers and
to increase market share. Tactical advertising programs such as local market and
retailer-specific promotions will increase in the future.
Other general and administrative costs increased in 1994 by $20.
Contributing to the increase was a $7 increase in bad debt expense resulting
from the increase in the customer base and the shift to proportionately more
consumer users. Consumer users tend to be a higher credit risk than business
users. This shift in the customer base is expected to continue as cellular
market penetration increases. Employee-related costs increased approximately $8,
primarily attributable to adding customer service employees to improve response
time and customer satisfaction, sales employees to support an aggressive
marketing strategy and operations employees to support the growing wireless
network. Growth in employees will continue as the customer base expands, though
economies of scale may be realized. Data processing costs increased $5 due
primarily to the development of new business systems.
OTHER. Other selling, general and administrative expenses consist primarily
of administration costs related to equity investments in international ventures
and the domestic cable operations and investments. The increase in these costs
is primarily attributable to growth in these operations, the inclusion of
administrative costs related to the TWE investment for the full year in 1994, as
compared to three months in 1993, and the December 1994 acquisition of the
Atlanta Systems.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Wireless communications (1)........................................................ $ 102 $ 104 $ (2) (1.9)
Multimedia content and services.................................................... 30 16 14 87.5
Other.............................................................................. 12 7 5 71.4
--------- --------- --- ---
Total.............................................................................. $ 144 $ 127 $ 17 13.4
--------- --------- --- ---
--------- --------- --- ---
<FN>
- ------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the six months ending June 30, 1994.
</TABLE>
Depreciation and amortization related to wireless operations increased by
$4, excluding the effects of the sale of the paging business in 1994. The effect
on depreciation of the increasing asset base was largely offset by a network
asset write-off done in 1993. See "-- 1993 Compared with 1992 -- Restructuring
Charges." Excluding the effect of the write-off, wireless operations
depreciation increased by 18.9 percent.
Multimedia content and services depreciation and amortization increased
principally due to the effects of the May 1994 acquisition of Thomson
Directories.
Other depreciation and amortization increased principally because of the
effects of amortization of intangible assets of the Atlanta Systems, acquired in
December 1994.
VII-31
<PAGE>
INTEREST EXPENSE AND OTHER
Interest expense increased by $39, primarily as a result of incremental
financing costs associated with the September 1993 TWE investment. U S WEST's
average borrowing cost decreased to 6.6 percent, from 6.7 percent in 1993.
Equity losses related to developing businesses increased by $47, primarily
due to start-up costs related to the build out of TeleWest's network and costs
related to the expansion of the customer base at Mercury One-2-One.
Other income increased by $37, primarily due to an $18 increase in the
management fee associated with the TWE investment and a $10 gain on the sale of
certain software development and marketing operations.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes..................................................... $ 204 $ 61 $ 143 --
Effective tax rate............................................................. 42.5% 41.8% -- --
</TABLE>
The effective tax rate is significantly impacted by state and foreign taxes
on the Media Group Combined Financial Statements. See "-- Media Group --
Combined Financial Statements -- Note 18: Income Taxes."
1993 COMPARED WITH 1992
NET INCOME
<TABLE>
<CAPTION>
INCREASE
1993 (1) 1992 (DECREASE)
----------- --------- -----------
<S> <C> <C> <C>
Income from continuing operations.................................................. $ 85 $ 146 $ (61)
Income (loss) from discontinued operations......................................... (82) 103 (185)
Cumulative effect of change in accounting principles............................... -- (48) 48
--- --------- -----------
Net income......................................................................... $ 3 $ 201 $ (198)
--- --------- -----------
--- --------- -----------
<FN>
- ------------------------
(1) 1993 income from continuing operations was reduced by $76 for restructuring
charges.
</TABLE>
In 1993, Media Group income from continuing operations was $161, excluding
the effects of restructuring charges of $76, an increase of $15, or 10.3
percent, as compared to 1992. Higher income from multimedia content and
services, and improvement in wireless communications, attributable to rapid
growth in customer demand, was partially offset by increased start-up losses
associated with international businesses and the acquisition of the partnership
interest in TWE.
Revenue growth in 1993, primarily in wireless operations, partially offset
by higher operating expenses, provided a 16.1 percent increase in EBITDA,
excluding the effects of the 1993 restructuring charges.
During 1993, the Board approved a plan to dispose of the capital assets
segment, which includes activities related to financial services, financial
guarantee insurance operations and real estate. Until January 1, 1995, the
capital assets segment was accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30, which provides for
the reporting of the operating results of discontinued operations separately
from continuing operations. The Media Group recorded a provision of $100 (after
tax) for the estimated loss on disposal of the discontinued operations and an
additional provision of $20 to reflect the cumulative effect on deferred taxes
of the 1993 federally mandated increase in income tax rates. Income from
discontinued operations to June 1, 1993, was $38, net of $15 in income taxes.
Income from discontinued operations subsequent to June 1, 1993, is being
deferred and was included within the provision for loss on disposal of the
capital assets segment.
Effective January 1, 1995, the capital assets segment will be accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Commission,
which requires discontinued operations
VII-32
<PAGE>
not disposed of within one year of the measurement date to be accounted for
prospectively in continuing operations as a net investment in assets held for
sale. The net realizable value of the assets will be reevaluated on an ongoing
basis with adjustments to the existing reserve, if any, being charged to
continuing operations.
The accounting change in 1992 relates to two accounting standards issued by
the Financial Accounting Standards Board. The first is SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," which mandates that
employers reflect in their current expenses an accrual for the cost of providing
retirement medical and life insurance benefits to current and future retirees.
Prior to 1992, the Media Group, like most businesses, recognized these costs as
they were paid. The Media Group also adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires that employers
accrue for the estimated costs of benefits, such as workers' compensation and
disability, provided to former or inactive employees who are not eligible for
retirement. Adoption of SFAS Nos. 106 and 112 resulted in a one-time, non-cash
charge against 1992 earnings of $48, net of tax, including $3 related to SFAS
No. 112.
INCOME FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
PERCENT INCREASE
OWNERSHIP 1993 1992 (DECREASE)
------------- --------- --------- -------------
<S> <C> <C> <C> <C>
Consolidated:
Multimedia content and services (1).................................... 100 $ 220 $ 225 $ (5)
Wireless communications (2)............................................ 100 (43) (17) (26)
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P................................. 25.5(3) (19) -- (19)
TeleWest Communications plc............................................ 50.0 (21) (13) (8)
Mercury One-2-One...................................................... 50.0 (22) (9) (13)
Other (4)................................................................ (30) (40) 10
--------- --------- ---
Income from continuing operations........................................ $ 85 $ 146 $ (61)
--------- --------- ---
--------- --------- ---
<FN>
- ------------------------
(1) Includes a 1993 restructuring charge of $31.
(2) Includes a 1993 restructuring charge of $45.
(3) Percent ownership represents pro rata priority capital and residual equity
interests.
(4) Includes other unconsolidated equity investments and divisional expenses.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. In 1993, multimedia content and services
income increased $26, or 11.6 percent, excluding the effects of the 1993
restructuring charge of $31. The increase in income was primarily due to the
effects of pricing, product enhancements and the effect of improved marketing
programs on Yellow Pages business volume, partially offset by higher operating
costs, including costs related to new product development. The divestiture of
nonstrategic lines of business also contributed to improvement in income.
WIRELESS COMMUNICATIONS. Cellular losses decreased by $19 in 1993,
excluding the $45 restructuring charge. The improvement in cellular operations
is due to the continued expansion of the customer base, to 601,000 subscribers
in 1993, a 45 percent increase over 1992. Cellular service EBITDA increased by
$45, or 55 percent, over 1992.
OPERATING RESULTS OF UNCONSOLIDATED EQUITY INVESTMENTS. In 1993, losses
related to equity investments increased as a result of the 1993 TWE investment,
expansion of the customer base at Mercury One-2-One and build out of the network
at TeleWest.
VII-33
<PAGE>
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic................................................................... $ 949 $ 949 $ -- --
International.............................................................. 7 -- 7 --
--------- --------- --------- ---
956 949 7 0.7
--------- --------- --------- ---
Wireless communications:
Cellular service (1)....................................................... 443 350 93 26.6
Cellular equipment (1)..................................................... 63 45 18 40.0
Paging sales and services.................................................. 55 47 8 17.0
Adjustment (1)............................................................. -- (35) 35 --
--------- --------- --------- ---
561 407 154 37.8
--------- --------- --------- ---
Other........................................................................ 32 28 4 14.3
--------- --------- --------- ---
Sales and other revenues..................................................... $ 1,549 $ 1,384 $ 165 11.9
--------- --------- --------- ---
--------- --------- --------- ---
<FN>
- ------------------------
(1) Prior to 1993, managed rural markets were accounted for under the equity
method. Beginning in 1993, these interests were consolidated. 1992 sales
and other revenues for cellular service and equipment are reflected on a
comparable basis with 1993.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. Domestic revenues were unchanged over
1992. Yellow Pages revenues increased approximately $42, or 4.8 percent in 1993,
primarily as a result of price increases. Volume of Yellow Pages directory
advertising was essentially flat in 1993. The effect of the divestiture of
nonstrategic businesses offset growth in Yellow Pages revenue.
International publishing revenue is attributable to the start of U S WEST
Polska operations in 1993.
WIRELESS COMMUNICATIONS. The increase in cellular service revenues in 1993
resulted from the 45 percent increase in subscribers as compared to 1992. This
growth reflects increased penetration and a migration to the retail distribution
channel. Average cellular revenue declined 5.6 percent to approximately $76 per
subscriber, per month.
Cellular equipment revenues increased primarily due to a 50 percent increase
in gross customer additions, with a higher percentage of those customers
purchasing equipment than in 1993. This increase was partially offset by a 25
percent decline in the average selling price of wireless phones, primarily the
result of lower unit costs from manufacturers being passed on to consumers.
VII-34
<PAGE>
COSTS OF SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic...................................................................... $ 317 $ 333 $ (16) (4.8)
International................................................................. 6 -- 6 --
--------- --------- --- ---------
323 333 (10) (3.0)
--------- --------- --- ---------
Wireless communications:
Cost of cellular service (1).................................................. 58 49 9 18.4
Cost of cellular equipment (1)................................................ 64 43 21 48.8
Cost of paging sales & service................................................ 12 10 2 20.0
Adjustment (1)................................................................ -- (10) 10 --
--------- --------- --- ---------
134 92 42 45.7
--------- --------- --- ---------
Costs of sales and other revenues............................................... $ 457 $ 425 $ 32 7.5
--------- --------- --- ---------
--------- --------- --- ---------
<FN>
- ------------------------
(1) Prior to 1993, managed rural markets were accounted for under the equity
method. Beginning in 1993, these interests were consolidated. 1992 costs of
sales for cellular service and equipment are reflected on a comparable
basis with 1993.
</TABLE>
MULTIMEDIA CONTENT AND SERVICES. Cost of domestic publishing operations
decreased $26 as a result of the sale of certain publishing operations in 1993,
which more than offset increased directory production costs resulting from
general inflationary effects.
International publishing costs reflect the start of U S WEST Polska
operations in 1993.
WIRELESS COMMUNICATIONS. Land-line telecommunication charges increased by
$3 and network maintenance expenses increased by $4 in 1993 due primarily to
additional network usage and expansion of the wireless network. Billing expenses
increased by approximately $2, due primarily to the increased customer base.
Cost of wireless equipment increased in proportion to equipment revenues in
1993. Higher equipment sales were primarily due to 50 percent higher gross
customer additions, with a higher percentage of those customers purchasing
equipment than in 1992, offset by a 25 percent decline in the average unit cost
of equipment from the manufacturer.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services
Domestic...................................................................... $ 207 $ 226 $ (19) (8.4)
International................................................................. 4 -- 4 --
--------- --------- --- ---------
211 226 (15) (6.6)
Wireless communications (1)..................................................... 283 242 41 16.9
Adjustment (1)................................................................ -- (21) 21 --
Other........................................................................... 113 102 11 10.8
--------- --------- --- ---------
Total........................................................................... $ 607 $ 549 $ 58 10.6
--------- --------- --- ---------
--------- --------- --- ---------
<FN>
- ------------------------
(1) Prior to 1993, managed rural markets were accounted for under the equity
method. Beginning in 1993, these interests were consolidated. 1992 selling,
general and administrative costs for cellular service and equipment are
reflected on a comparable basis with 1993.
</TABLE>
VII-35
<PAGE>
MULTIMEDIA CONTENT AND SERVICES. General and administrative expenses
related to domestic multimedia content and services operations decreased $19 in
1993, of which $13 related to the disposition of nonstrategic businesses. A
reduction of $9 in bad debt expense, also related to the disposition of
nonstrategic businesses, contributed to the decrease. These expense reductions
were partially offset by a net increase of $3 in other selling, general and
administrative expenses.
WIRELESS COMMUNICATIONS. Commissions paid to retailers increased by $26 in
1993, driven by the increase in gross customer additions. In 1993, the
distribution strategy was shifted to focus on retail channels as opposed to
in-house sales. In-house sales costs increased by approximately $8 in 1993 due
to higher customer adds, partially offset by the shift to retail channels. An
increase in other general and administrative costs of approximately $14,
resulting from the effects of business growth and general inflation, were
partially offset by a $7 reduction in reserves related to bad debts.
OTHER. Other selling, general and administrative expenses increased in 1993
as a result of growth in international operations.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1993 1992 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Wireless Communications.......................................................... $ 104 $ 89 $ 15 16.9
Multimedia content and services.................................................. 16 15 1 6.7
Other............................................................................ 7 18 (11) (61.1)
--------- --------- --- ---------
Total............................................................................ $ 127 $ 122 $ 5 4.1
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>
Depreciation and amortization increased principally due to a higher
depreciable asset base in both wireless and multimedia content and services
operations. Other depreciation and amortization declined primarily as a result
of a change in sharing arrangements with international strategic partners.
RESTRUCTURING CHARGES
The Media Group's 1993 financial results reflect $120 of restructuring
charges (pretax). The charges include only specific, incremental and direct
costs which can be estimated with reasonable accuracy and are clearly
identifiable with the related plan. The related Restructuring Plan is designed
to provide faster, more responsive customer services, while reducing the costs
of providing these services, and to implement new technology to improve cellular
call quality, increase capacity and expand services.
In connection with the wireless business, the Media Group replaced
substantially all of the cellular network equipment, consisting primarily of
cell site electronics and switching equipment in certain of its major market
areas. The Media Group recorded a pretax charge of $65, net of a minority
interest component of $5, to record the displaced equipment at net realizable
value.
In connection with the content and services operations, systems development
costs of $40 (pretax) were recorded to replace existing, single-purpose systems
used in directory publishing with new systems designed to provide integrated,
end-to-end customer service. Other restructuring costs aggregating $15 consist
primarily of employee separation costs including severance payments, health care
coverage and postemployment education benefits and relocation costs. The
restructuring will occur over a 3-year period ending in 1996. The unused portion
of the reserve at December 31, 1994, is $40.
INTEREST EXPENSE AND OTHER
Interest expense increased by $12, primarily as a result of incremental
financing costs associated with the September 1993 TWE investment. U S WEST's
average borrowing cost decreased to 6.7 percent in 1993 from 7.7 percent in
1992.
VII-36
<PAGE>
Equity losses related to developing businesses increased by $31, primarily
due to start-up costs related to the build out of the network at TeleWest and
costs related to the expansion of the customer base at Mercury One-2-One.
Other income decreased by $12, primarily due to other costs related to
international operations.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
------------
1993 1992 $ %
------ ----- ---- ------
<S> <C> <C> <C> <C>
Provision for income taxes........................ $ 61 $105 $(44) (41.9)
Effective tax rate................................ 41.8% 41.8% -- --
</TABLE>
The effective tax rate is significantly impacted by state and foreign taxes
on the Media Group Combined Financial Statements. See " -- Media Group --
Combined Financial Statements -- Note 18: Income Taxes."
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the first quarter of 1995, cash provided by operating activities of
the Media Group decreased by $33 as compared to the first quarter of 1994. Cash
provided by operating activities in the first quarter of 1995 includes an income
tax payment of approximately $60 related to the 1994 sale of the Media Group's
joint venture interest in TeleWest and an additional payment of $14 related to
prior periods. Adjusted for these payments, operating cash flow of the Media
Group increased by $41, or approximately 36 percent. Growth in operating cash
flow from wireless communication services was partially offset by continued
expansion of international operations and growth initiatives within multimedia
content and services.
Cash provided by operating activities of the Media Group increased by $60 in
1994 and $29 in 1993 due to expansion of the wireless communications business.
Cash flow from wireless operations will continue to increase as the customer
base expands. Operating cash flow from multimedia content and services
operations has been impacted by expenditures related to development and
introduction of new products. Growth in operating cash flow from multimedia
content and services operations will be limited as the Media Group continues to
invest in growth initiatives.
The Media Group expects that cash from operations will not be adequate to
fund expected cash requirements in the foreseeable future. Additional financing
will primarily come from a combination of new debt and equity. The Media Group
will also continue to employ strategic alliances in executing its business
strategies.
INVESTING ACTIVITIES
Total capital expenditures of the Media Group were $76 in the first quarter
of 1995 compared to $46 in the first quarter of 1994, the majority of which were
devoted to the enhancement and expansion of the cellular network.
Total capital expenditures of the Media Group were $343 in 1994, $215 in
1993 and $169 in 1992, the majority of which were devoted to the enhancement and
expansion of the cellular network. As the cellular customer base expands,
additional capital expenditures will be required to increase network coverage
and capacity. The implementation of digital technology will also require
additional capital outlays. Cellular operating cash flow will not be sufficient
to cover these future requirements, which will be met through the operating cash
flows of other Media Group businesses or through incremental borrowing. Capital
expenditures in 1995 are expected to approximate $500, of which 65 percent
relates to the cellular business.
Significant investing activities of the Media Group also include
acquisitions and equity investments in international ventures. The cash
investment related to the December 1994 acquisition of the Atlanta Systems was
$745, obtained through short-term borrowing. The Media Group invested
VII-37
<PAGE>
approximately $444 in developing international businesses in 1994, including the
acquisition of Thomson Directories. The Media Group anticipates that investments
in international ventures will approximate $400 in 1995, of which approximately
$182 was invested during the first quarter of 1995 in developing international
businesses, primarily in Malaysia and the Czech Republic.
In March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets. The Media
Group's share of the cost of the licenses was approximately $277, of which $55
was funded through the first quarter of 1995. The remainder of the licensing
costs will be funded through issuance of short-term debt in the third quarter of
1995.
In 1994, the Media Group received cash proceeds of $143 from the sale of its
paging operations. In 1993, cash proceeds of $30 were received from the sale of
certain nonstrategic lines of business. The Media Group did not receive cash
from the partial sale of its joint venture interest in TeleWest. All proceeds
from the sale will be used by TeleWest for general business purposes, including
financing construction and operations costs, and repaying debt.
FINANCING ACTIVITIES
Debt increased by $484 at March 31, 1995, from December 31, 1994, primarily
due to new investments in international ventures and a $254 reclassification of
debt to continuing operations from net investment in assets held for sale.
Excluding debt included in net investment in assets held for sale, the Media
Group's percentage of debt to total capital at March 31, 1995 was 34.6 percent
compared to 30.1 percent at December 31, 1994. Including debt related to net
investment in assets held for sale, the Media Group's percentage of debt to
total capital was 43.4 percent and 42.4 percent at March 31, 1995, and December
31, 1994, respectively.
Debt increased by $288 compared to 1993, primarily due to the acquisition of
the Atlanta Systems, partially offset by reductions in debt related to the
investment in TWE. The Media Group's year-end 1994 percent of debt to total
capital was 30.1 percent compared to 32.7 percent at December 31, 1993.
Including debt related to discontinued operations, the percent of debt to total
capital was 42.4 percent, and 49.1 percent at December 31, 1994 and 1993,
respectively. The decrease in the percent of debt to total capital is primarily
attributable to higher earnings and the issuance of equity, of which $459
related to the acquisition of the Atlanta Systems, which more than offset
additional debt incurred.
U S WEST maintains short-term lines of credit aggregating approximately $1.3
billion, which is available to both the Media Group and the nonregulated
subsidiaries of the Communications Group in accordance with their borrowing
needs. Under registration statements filed with the Commission, as of December
31, 1994, U S WEST is permitted to issue up to approximately $1.5 billion
available to both the Media Group and the non-regulated subsidiaries of the
Communications Group. U S WEST also maintains a commercial paper program to
finance short-term cash flow requirements, as well as to maintain a presence in
the short-term debt market.
Cash to the discontinued capital assets segment of $101 in 1994 primarily
reflects the payment of debt, net of $154 in proceeds from the sale of 8.1
million shares of FSA stock. Debt related to discontinued operations decreased
by $213 in 1994. See " -- Media Group -- Combined Financial Statements -- Note
20: Net Assets of Discontinued Operations." For financial reporting purposes
this debt is netted against the related assets.
The Media Group reinvests earnings, if any, for future growth and does not
expect to pay dividends on the Media Stock in the foreseeable future.
The Media Group from time to time engages in discussions regarding
acquisitions. The Company may fund any such acquisitions, if consummated, with
internally generated funds, debt or equity. The incurrence of indebtedness to
fund such acquisitions and/or the assumption of indebtedness in connection with
such acquisitions could result in a downgrading of the Company's credit rating.
VII-38
<PAGE>
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
securities, will be managed by the Company on a centralized basis.
Notwithstanding such centralized management, financing activities for U S WEST
Communications will be separately identified and accounted for in the Company's
records and U S WEST Communications will continue to conduct its own borrowing
activities. All debt incurred and investments made by the Company and its
subsidiaries would be specifically allocated to and reflected on the financial
statements of the Media Group except that debt incurred and investments made by
the Company and its subsidiaries on behalf of the Non-Regulated Communications
Businesses 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 the Company or a subsidiary on behalf
of a Group would be charged to such Group at the borrowing rate of the Company
or such subsidiary.
During the first quarter of 1995, the Media Group received a $69 transfer of
equity from the Communications Group. Following implementation of the
Recapitalization Proposal, the Company does not intend to transfer funds between
the Groups, except for certain short-term ordinary course advances of funds at
market rates associated with the Company's centralized cash management. Such
short-term transfers of funds will be 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 Board, in
its sole discretion, determines that a transfer of funds between the Groups
should be accounted for as a long-term loan, the 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 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 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 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.
RISK MANAGEMENT
The Media Group is exposed to market risks arising from changes in interest
rates and foreign exchange rates. Derivative financial instruments are used to
manage these risks. The Company does not use derivative financial instruments
for trading purposes.
INTEREST RATE RISK MANAGEMENT The objective of the interest rate risk
management program is to minimize the total cost of debt. To meet this objective
the Company uses risk reducing and risk adjusting strategies. Interest rate
swaps are used to adjust the risks of the debt portfolio on a consolidated basis
by varying the ratio of fixed- to floating-rate debt. The market value of the
debt portfolio and its risk adjusting derivative instruments are monitored and
compared to predetermined benchmarks to evaluate the effectiveness of the risk
management program.
Notional amounts of interest rate swaps outstanding at December 31, 1994,
were $850 with various maturities that extend to 2004. The estimated effect of
the Company's interest rate derivative transactions was to adjust the level of
fixed-rate debt of the Media Group from 68.2 percent to 70.5 percent of the
total debt portfolio (including continuing and discontinued operations).
FOREIGN EXCHANGE RISK MANAGEMENT The Company has entered into forward and
option contracts to manage the market risks associated with fluctuations in
foreign exchange rates after considering offsetting foreign exposures among
international operations. The use of forward and option contracts allows the
Company to fix or cap the cost of firm foreign investment commitments in
VII-39
<PAGE>
countries with freely convertible currencies. The market values of the foreign
exchange positions, including the hedging instruments, are continuously
monitored and compared to predetermined levels of acceptable risk.
Notional amounts of foreign exchange forward and option contracts in British
pounds outstanding at December 31, 1994, were $170, with maturities within one
year. Cumulative deferred credits and charges associated with forward and option
contracts of $7 and $25, respectively, are recorded in Media Group equity.
At December 31, 1994, the Media Group had a British pound-denominated
receivable from a wholly owned United Kingdom subsidiary in the translated
principal amount of $48 that is subject to foreign exchange risk. This position
is hedged in 1995.
DISPOSITION OF THE CAPITAL ASSETS SEGMENT
U S WEST announced a plan of disposition of the capital assets segment in
June 1993. " -- See Media Group -- Combined Financial Statements -- Note 20: Net
Investment in Assets Held for Sale." In December 1993, U S WEST sold $2.0
billion of finance receivables and the business of U S WEST Financial Services,
Inc. to NationsBank Corporation. Proceeds from the sale of $2.1 billion were
used to repay related debt. Additionally, U S WEST Real Estate sold five
properties in 1993 for proceeds of approximately $66.
During 1994, U S WEST reduced its ownership interest in FSA, a member of the
capital assets segment, to 60.9 percent, and its voting interest to 49.8 percent
through a series of transactions. In May and June 1994, U S WEST sold 8.1
million shares of FSA, including 2 million shares sold to Fund American, in an
initial public offering of FSA common stock at $20 per share. U S WEST received
$154 in net proceeds from the offering. On September 2, 1994, U S WEST issued to
Fund American 50,000 shares of cumulative redeemable preferred stock for a total
of $50. Fund American's voting interest in FSA is 21.0 percent, achieved through
a combination of direct share ownership of common and preferred FSA shares and a
voting trust agreement with U S WEST. Fund American has a right of first offer
and a call right to purchase from U S WEST up to 9.0 million shares, or
approximately 57 percent, of outstanding FSA stock held by U S WEST. U S WEST
currently anticipates its ownership will be further reduced by 1996.
During 1994, U S WEST Real Estate, Inc. sold 12 buildings, six parcels of
land and other assets for approximately $327. In the first quarter of 1995, U S
WEST Real Estate, Inc. sold two properties for proceeds of $47. The sales were
in line with Company estimates. U S WEST has completed all construction of
existing buildings in the commercial real estate portfolio and expects to
substantially complete the liquidation of its portfolio by 1998. The remaining
balance of assets subject to sale is approximately $596, net of reserves, at
March 31, 1995. The Company believes its reserves related to discontinued
operations are adequate.
Effective January 1, 1995, the capital assets segment will be accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Commission,
which requires discontinued operations not disposed of within one year of the
measurement date to be accounted for prospectively in continuing operations as a
net investment in assets held for sale. The net realizable value of the assets
will be reevaluated on an ongoing basis with adjustments to the existing
reserve, if any, being charged to continuing operations.
REGULATION
On April 28, 1995, the divestiture Court waived the Court's restriction on
the RBOCs provision of wireless long-distance service. The ruling contained a
number of provisions, including a requirement that local cellular markets be
competitive before long-distance services can be offered. The ruling positions
the Media Group to begin offering long-distance network services through
NewVector.
In September 1994, the DOJ granted U S WEST's request for two MFJ waivers
relating to its TWE investment and the Atlanta Systems. The waivers will allow
the Media Group to provide video
VII-40
<PAGE>
and information services across LATA boundaries in the Atlanta Systems and TWE
service areas. The waivers also will allow the Media Group to participate in
limited manufacturing and the provision of equipment through its partnership in
TWE.
The Media Group's operations are subject to regulation by various local,
state and federal agencies. Additionally, the ability of the Media Group to
offer certain services, including local telephone exchange services, will
require the removal of state and local barriers which prevent cable operators
and others from providing local exchange service in competition with local
exchange carriers. For a detailed discussion of regulatory issues, see " --
Media Group -- Description of Business -- Regulation."
SELECTED PROPORTIONATE FINANCIAL DATA
The following table shows the entities included in the Media Group Combined
Financial Statements and the percent ownership by industry segment. The
proportionate financial and operating data for these entities are summarized in
the proportionate data table that follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS MULTIMEDIA CONTENT AND SERVICES
------------------------------------ ------------------------------------ ------------------------------------
<CAPTION>
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
C
O
N
S
O Thomson
L Atlanta Systems NewVector Marketing Directories
I 100% 84% (1) Resources 100%
D 100% U S WEST Polska
A 100%
T
E
D
Mercury
One-2-One
50%
E Westel
Q TeleWest Radiotelefon
U TWE 37.8% 49%
I 25.51% TeleWest Europe Westel 900
T 50% 44%
Y EuroTel Czech &
Slovak
24.5%
</TABLE>
The above table and the selected proportionate financial data that follows
exclude certain international and domestic investments (collectively not
material) for which the Media Group does not receive timely detailed income
statements.
(1) Proportionate information reflects an approximate 16 percent minority
interest in NewVector's underlying operations.
VII-41
<PAGE>
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
The following table is not required by GAAP or intended to replace the
Combined Financial Statements prepared in accordance with GAAP. It is presented
supplementally because the Company believes that proportionate financial and
operating data facilitate the understanding and assessment of its Combined
Financial Statements. The following table includes allocations of Media Group
corporate activity. The table does not reflect financial data of the capital
assets segment, which had net assets of $414 at March 31, 1995 and $302 at
December 31, 1994. THE FINANCIAL INFORMATION INCLUDED BELOW DEPARTS MATERIALLY
FROM GAAP BECAUSE IT AGGREGATES THE REVENUES AND OPERATING INCOME OF ENTITIES
NOT CONTROLLED BY THE MEDIA GROUP WITH THOSE OF THE CONSOLIDATED OPERATIONS OF
THE MEDIA GROUP.
<TABLE>
<CAPTION>
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS MULTIMEDIA CONTENT AND TOTAL
SERVICES --------
THREE MONTHS ENDED ---------------------------- ------------------------ ------------------------
MARCH 31, 1995 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $ 581 $ 24 $168 $ 60 $260 $ 14 $ 1,107
Operating expenses............... 453 35 116 72 150 18 844
Depreciation and amortization.... 95 10 24 9 7 3 148
Operating income................. 33 (21) 28 (21) 103 (7) 115
Income from continuing
operations...................... (16) (11) 12 (28) 62 (4) 15
OPERATING DATA (THOUSANDS):
EBITDA (millions)(3)............. $ 128 $(11) $ 52 $ (12) $110 $ (4) $ 263
Subscribers/Customers............ 2,422 231 885 205 -- -- 3,743
Advertisers...................... -- -- -- -- 470 150 620
Homes passed..................... 3,960 605 -- -- -- -- 4,565
POPs (4)......................... -- -- 19,100 38,300 -- -- 57,400
Telephone lines.................. -- 81 -- -- -- -- 81
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1994
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $ 495 $ 18 $132 $ 30 $244 -$- $ 919
Operating expenses............... 389 28 105 36 139 1 698
Depreciation and amortization.... 72 7 18 8 6 -- 111
Operating income................. 34 (17) 9 (14) 99 (1) 110
Income from continuing
operations...................... (5) (8) 2 (21) 62 (1) 29
OPERATING DATA (THOUSANDS):
EBITDA (millions)(3)............. $ 106 $(10) $ 27 $ (6) $105 $ (1) $ 221
Subscribers/Customers............ 1,851 218 563 52 -- -- 2,684
Advertisers...................... -- -- -- -- 462 25 487
Homes passed..................... 3,078 551 -- -- -- -- 3,629
POPs (4)......................... -- -- 18,500 38,300 -- -- 56,800
Telephone lines.................. -- 49 -- -- -- -- 49
</TABLE>
(see footnotes on following page)
VII-42
<PAGE>
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS MULTIMEDIA CONTENT AND
SERVICES TOTAL
---------------------------- ------------------------ ------------------------ --------
YEAR ENDED 1994 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $2,386 $ 85 $634 $ 186 1$,005 $ 79 $ 4,375
Operating expenses............... 1,854 127 485 254 592 77 3,389
Depreciation and amortization.... 383 31 80 35 24 10 563
Operating income................. 149 (73) 69 (103) 389 (8) 423
Income from continuing
operations (5).................. (53) (40) 30 (68) 251 (4) 116
Debt (6)......................... -- -- -- -- -- -- 3,865
OPERATING DATA (THOUSANDS):
EBITDA (millions)(3)............. $ 532 $(42) $149 $ (68) $413 $ 2 $ 986
Subscribers/Customers............ 2,407 226 817 169 -- -- 3,619
Advertisers...................... -- -- -- -- 468 147 615
Homes passed..................... 3,952 576 -- -- -- -- 4,528
POPs (4)......................... -- -- 18,900 38,300 -- -- 57,200
Telephone lines.................. -- 69 -- -- -- -- 69
<CAPTION>
YEAR ENDED 1993
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $2,048 $ 59 $432 $ 78 $958 $ 7 $ 3,582
Operating expenses............... 1,611 101 331 126 540 10 2,719
Depreciation and amortization.... 301 22 76 5 21 -- 425
Operating income................. 136 (64) 25 (53) 397 (3) 438
Income from continuing
operations (5).................. (6) (49) (2) (22) 252 (3) 170
Debt (6)......................... -- -- -- -- -- -- 3,492
OPERATING DATA (THOUSANDS):
EBITDA (millions)(3)............. $ 437 $(42) $101 $ (48) $418 (3) $ 863
Subscribers/Customers............ 1,837 215 509 41 -- -- 2,602
Advertisers...................... -- -- -- -- 459 25 484
Homes passed..................... 3,061 524 -- -- -- -- 3,585
POPs (4)......................... -- -- 18,200 38,300 -- -- 56,500
Telephone lines.................. -- 44 -- -- -- -- 44
<FN>
- ------------------------------
(1) The proportionate results are based on the Media Group's 25.51 percent pro
rata priority and residual equity interests in reported TWE results. The
reported TWE results are prepared in accordance with GAAP and have not been
adjusted to report TWE investments accounted for under the equity method on
a proportionate basis. The Media Group's share of TWE results on a
proportionate basis do not necessarily reflect the Media Group's recorded
share of income due to special allocations of income stipulated by the TWE
Partnership Agreement and the amortization of the excess of fair market
value over the book value of the partnership net assets. As a result of
this special income allocation and amortization, the Media Group's recorded
pretax share of TWE operating results was ($13) and ($12) for the three
months ended March 31, 1995 and 1994, and ($18) and ($20) for 1994 and
1993, respectively.
(2) Although the TWE and Atlanta Systems acquisitions occurred within 1993 and
1994, for comparability in reporting 1993 proportionate results include 12
months of TWE activity and 1994 proportionate results include 12 months of
activity for the Atlanta Systems. First quarter 1994 results include three
months of activity for the Atlanta Systems.
(3) Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entities' EBITDA. As such, proportionate EBITDA
does not represent cash available to the Media Group. The Media Group
considers EBITDA an important indicator of the operational strength and
performance of its businesses. EBITDA, however, should not be considered as
an alternative to operating or net income as an indicator of the
performance of the Media Group's businesses or as an alternative to cash
flows from operating activities as a measure of liquidity, in each case
determined in accordance with GAAP.
(4) Wireless Communications -- International includes 29,000 POP's representing
the total POP's to be achieved upon completion of the build-out of Mercury
One-2-One's PCS network. As of March 31, 1995, Mercury One-2-One's network
reached 30% of the population.
(5) See the Supplementary Selected Proportionate Financial Data schedule to the
Media Group Combined Financial Statements for a reconcilation of the
proportionate amount of income from continuing operations to the amount
reported on a GAAP basis.
(6) See Note 5 to the Media Group Combined Financial Statements for additional
information regarding the obligations inherent in the capital structure of
the TWE partnership. Included in debt is the Company's proportionate share
of TWE external debt of $1,835 and $1,824 in 1994 and 1993, respectively.
</TABLE>
VII-43
<PAGE>
MEDIA GROUP
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................. VII-45
Financial Statements for the Three Months Ended March 31, 1995 and 1994 (unaudited)
and for the Years Ended December 31, 1994, 1993 and 1992
Combined Statements of Operations................................................ VII-46
Combined Balance Sheets.......................................................... VII-47
Combined Statements of Cash Flows................................................ VII-48
Notes to Combined Financial Statements........................................... VII-49
</TABLE>
VII-44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of U S WEST, Inc.:
We have audited the Combined Balance Sheets of U S WEST Media Group (as
described in Note 1) as of December 31, 1994 and 1993 and the related Combined
Statements of Operations and Cash Flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of U S WEST, Inc.'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 combined financial position of U S WEST Media
Group as of December 31, 1994 and 1993, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As more fully discussed in Note 1, the Combined Financial Statements of U S
WEST Media Group should be read in connection with the audited Consolidated
Financial Statements of U S WEST, Inc.
As discussed in Note 17 to the Combined Financial Statements, U S WEST Media
Group changed its method of accounting for postretirement benefits other than
pensions and other postemployment benefits in 1992.
We have also audited the Supplementary Selected Historical Proportionate
Results of Operations for the years ended December 31, 1994 and 1993 presented
on Page VII-79. We did not audit the pro forma adjustments or the pro forma
proportionate amounts. As described on Page VII-79, the Supplementary Selected
Historical Proportionate Results of Operations have been prepared by management
to present relevant financial information that is not provided by the
consolidated financial statements and is not intended to be a presentation in
accordance with generally accepted accounting principles.
In our opinion, the Supplementary Selected Historical Proportionate Results
of Operations referred to above presents fairly, in all material respects, the
information set forth therein on the basis of accounting described on Page
VII-79.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
May 12, 1995
VII-45
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------ ---------------------------------
1995 1994 1994 1993 1992
----------- ----------- ----------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales and other revenues............................... $536 $418 $ 1,908 $ 1,549 $ 1,384
Costs of sales and other revenues...................... 163 126 612 457 425
Selling, general and administrative expenses........... 197 160 763 607 549
Depreciation and amortization.......................... 61 33 144 127 122
Restructuring charges.................................. -- -- -- 120 --
Interest expense....................................... 27 19 66 27 15
Equity losses in unconsolidated ventures............... 57 35 121 74 43
Gains on sales of assets:
Partial sale of joint venture interest............... -- -- 164 -- --
Paging assets........................................ -- -- 68 -- --
Other income -- net.................................... 7 10 46 9 21
----------- ----------- ----------- --------- ---------
Income from continuing operations before income
taxes................................................. 38 55 480 146 251
Provision for income taxes............................. 23 26 204 61 105
----------- ----------- ----------- --------- ---------
Income from continuing operations...................... 15 29 276 85 146
Discontinued operations:
Estimated loss from June 1, 1993 through disposal,
net of tax.......................................... -- -- -- (100) --
Income tax rate change............................... -- -- -- (20) --
Income, net of tax (to June 1, 1993)................. -- -- -- 38 103
----------- ----------- ----------- --------- ---------
Income before cumulative effect of change in accounting
principles............................................ 15 29 276 3 249
Cumulative effect of change in accounting principles:
Transition effect of change in accounting for
postretirement benefits other than pensions and
other postemployment benefits, net of tax........... -- -- -- -- (48)
----------- ----------- ----------- --------- ---------
Net income............................................. 15 29 276 3 201
----------- ----------- ----------- --------- ---------
Dividend on preferred stock............................ 1 -- -- -- --
----------- ----------- ----------- --------- ---------
Earnings available after preferred stock dividend...... $14 $29 $276 $3 $201
----------- ----------- ----------- --------- ---------
Pro forma earnings per share of Media Stock
(unaudited)........................................... $0.03 $ 0.61
----------- -----------
----------- -----------
Pro forma average shares of Media Stock outstanding
(thousands) (unaudited)............................... 468,557 453,316
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
VII-46
<PAGE>
U S WEST MEDIA GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
(UNAUDITED) DECEMBER 31,
----------- --------------------
1995 1994 1993
----------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 111 $ 93 $ 72
Accounts and notes receivable, less allowance for credit losses of $37, $33
and $26, respectively........................................................ 209 212 153
Deferred directory costs...................................................... 239 234 199
Receivable from Communications Group.......................................... 134 109 98
Deferred tax asset............................................................ 46 52 28
Prepaid and other............................................................. 46 56 30
----------- --------- ---------
Total current assets............................................................ 785 756 580
----------- --------- ---------
Property, plant and equipment -- net............................................ 973 956 601
Investment in Time Warner Entertainment......................................... 2,509 2,522 2,552
Intangible assets -- net........................................................ 1,887 1,858 514
Investment in international ventures............................................ 994 881 477
Net investment in assets held for sale.......................................... 414 302 554
Other assets.................................................................... 346 119 168
----------- --------- ---------
Total assets.................................................................... $ 7,908 $ 7,394 $ 5,446
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt............................................................... $ 1,718 $ 1,229 $ 394
Accounts payable.............................................................. 151 170 151
Income taxes payable.......................................................... 64 86 --
Deferred revenue and customer deposits........................................ 86 76 51
Employee compensation......................................................... 35 54 58
Other......................................................................... 266 318 266
----------- --------- ---------
Total current liabilities....................................................... 2,320 1,933 920
----------- --------- ---------
Long-term debt.................................................................. 580 585 1,132
Deferred income taxes........................................................... 340 344 --
Postretirement and postemployment benefit obligations........................... 78 75 71
Deferred credits and other...................................................... 111 119 121
Minority interests.............................................................. 90 84 63
Preferred stock subject to mandatory redemption................................. 51 51 --
Media Group equity.............................................................. 4,525 4,390 3,382
Company LESOP guarantee......................................................... (187) (187) (243)
----------- --------- ---------
Total equity.................................................................... 4,338 4,203 3,139
----------- --------- ---------
Total liabilities and equity.................................................... $ 7,908 $ 7,394 $ 5,446
----------- --------- ---------
----------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
VII-47
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 15 $ 29 $ 276 $ 3 $ 201
Adjustments to net income:
Cumulative effect of change in accounting principles.......... -- -- -- -- 48
Restructuring charges......................................... -- -- -- 120 --
Depreciation and amortization................................. 61 33 144 127 122
Gains on sales of assets:
Partial sale of joint venture interest...................... -- -- (164) -- --
Paging assets............................................... -- -- (68) -- --
Equity losses in unconsolidated ventures...................... 57 35 121 74 43
Postretirement medical and life costs, net of cash fundings... 3 3 5 13 (8)
Discontinued operations....................................... -- -- -- 82 (103)
Deferred income taxes......................................... (27) 49 147 (34) 5
Changes in operating assets and liabilities:
Restructuring payments........................................ (3) -- (10) -- (6)
Accounts and notes receivable................................. 4 (11) (40) (12) 18
Deferred directory costs, prepaid and other................... (9) (3) (52) (33) (1)
Accounts payable and accrued liabilities...................... (99) (48) 137 85 30
Other -- net.................................................... 78 26 49 120 88
--------- --------- --------- --------- ---------
Cash provided by operating activities........................... 80 113 545 545 437
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................. (76) (46) (343) (215) (169)
Investment in Time Warner Entertainment......................... -- -- -- (1,557) --
Investment in Atlanta Systems................................... -- -- (745) -- --
Investment in international ventures............................ (182) (70) (350) (230) (173)
Proceeds from sale of paging assets............................. -- -- 143 -- --
Cash (to) from investment in assets held for sale............... (60) -- -- -- --
Proceeds from disposal of property, plant and equipment......... -- -- -- 3 23
Other -- net.................................................... (63) (6) (121) (10) 91
--------- --------- --------- --------- ---------
Cash (used for) investing activities............................ (381) (122) (1,416) (2,009) (228)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from short-term debt............................... 435 248 936 -- 4
Repayments of long-term debt.................................... (150) (31) (316) (143) (147)
Proceeds from issuance of preferred stock....................... -- -- 50 -- --
Proceeds from issuance of equity................................ 11 290 323 794 --
Equity transfer from Communications Group....................... 69 -- -- -- --
(Advance)/repayment to/from Communications Group................ (46) -- -- 153 (153)
--------- --------- --------- --------- ---------
Cash provided by (used for) financing activities................ 319 507 993 804 (296)
--------- --------- --------- --------- ---------
Cash provided by (used for) continuing operations............... 18 498 122 (660) (87)
--------- --------- --------- --------- ---------
Cash (to) from discontinued operations.......................... -- (161) (101) 610 (237)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................. 18 337 21 (50) (324)
Beginning balance............................................... 93 72 72 122 446
--------- --------- --------- --------- ---------
Ending balance.................................................. $ 111 $ 409 $ 93 $ 72 $ 122
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
VII-48
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Board of Directors of U S WEST, Inc., a Colorado corporation ("U S WEST"
or "Company") has adopted a proposal (the "Recapitalization Proposal") that
would change the state of incorporation of the Company from Colorado to Delaware
and create two classes of common stock that are intended to reflect separately
the performance of the Company's telecommunications and multimedia businesses.
Under the Recapitalization Proposal, shareholders of the Company will be asked
to approve an Agreement and Plan of Merger between the Company and U S WEST,
Inc., a Delaware corporation and wholly owned subsidiary of the Company ("U S
WEST Delaware"), pursuant to which the Company would be merged (the "Merger")
with and into U S WEST Delaware with U S WEST Delaware continuing as the
surviving corporation. In connection with the Merger, the Certificate of
Incorporation of U S WEST Delaware would be amended and restated (as so amended
and restated, the "Restated Certificate") to, among other things, authorize two
classes of common stock of U S WEST Delaware, one class of which would be
designated as U S WEST Communications Group Common Stock ("Communications
Stock"), and the other class of which would be designated as U S WEST Media
Group Common Stock ("Media Stock"). Upon consummation of the Merger, each share
of existing Common Stock of the Company would be automatically converted into
one share of Communications Stock and one share of Media Stock.
The Communications Stock and Media Stock are designed to provide
shareholders with separate securities reflecting the telecommunications business
of U S WEST Communications, Inc. ("U S WEST Communications") and certain other
subsidiaries of the Company (the "Communications Group") and the Company's
multimedia businesses (the "Media Group" and, together with the Communications
Group, the "Groups").
The Communications Group is comprised of U S WEST Communications, Inc., U S
WEST Communications Services, Inc., U S WEST Federal Services, Inc., U S WEST
Advanced Technologies, Inc. and U S WEST Business Resources, Inc.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc., a
publisher of White and Yellow Pages telephone directories, and provider of
multimedia content and services, U S WEST NewVector Group, Inc., which provides
communications and information products and services over wireless networks, U S
WEST Multimedia Communications, Inc., which owns domestic cable television
operations and investments and U S WEST International Holdings, Inc., which
primarily owns investments in international cable and telecommunications,
wireless communications and directory publishing operations.
BASIS OF PRESENTATION
The Combined Financial Statements of the Groups comprise all of the accounts
included in the corresponding Consolidated Financial Statements of the Company.
Investments in less than majority-owned ventures are generally accounted for
using the equity method. The separate Group financial statements give effect to
the accounting policies that will be applicable upon implementation of the
Recapitalization Proposal. The separate Group Combined Financial Statements have
been prepared on a basis that management believes to be reasonable and
appropriate and include (i) the combined historical balance sheets, results of
operations and cash flows of businesses that comprise each of the Groups, with
all significant intragroup amounts and transactions eliminated; (ii) in the case
of the Communications Group Combined Financial Statements, corporate assets and
liabilities of U S WEST, Inc. and related transactions identified with the
Communications Group, (iii) in the case of the
VII-49
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Media Group Combined Financial Statements, all other corporate assets and
liabilities and related transactions of U S WEST, Inc. and (iv) an allocated
portion of corporate expense of U S WEST, Inc. Transactions between the
Communications Group and the Media Group have not been eliminated.
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 will
continue to be subject to risks associated with an investment in a single
company and all of the Company's businesses, assets and liabilities. Such
allocation of assets and liabilities and change in the equity structure of the
Company will not result in a distribution or spin-off to shareholders of any
assets or liabilities of the Company or any of its subsidiaries or otherwise
affect responsibility for the liabilities of the Company or such subsidiaries.
As a result, the rights of holders of the Company's or any of its subsidiaries'
debt will not be affected thereby. Financial effects arising from each Group
that affect the Company's results of operations or financial condition could, if
significant, affect the results of operations or financial position of the other
Group or the market price of the class of Common Stock relating to the other
Group. Any net losses of the Communications Group or the Media Group, and
dividends or distributions on, or repurchases of, Communications Stock, Media
Stock or Preferred Stock, will reduce the funds of the Company legally available
for payment of dividends on both the Communications Stock and the Media Stock.
Accordingly, the Company's Consolidated Financial Statements should be read in
conjunction with the Communications Group's and the Media Group's Combined
Financial Statements.
The accounting policies described herein applicable to the preparation of
the financial statements of the Media Group may be modified or rescinded in the
sole discretion of the board of directors of the Company ("the Board") without
approval of the shareholders, although there is no present intention to do so.
The Board may also adopt additional policies depending upon the circumstances.
Any determination of the 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 in good faith and in the honest belief that such decision is in the
best interests of all the Company's stockholders, including the holders of
Communications Stock and the holders of Media Stock. In making such
determination, the Board may also consider regulatory requirements imposed on U
S WEST Communications by the public utility commissions of various states and
the Federal Communications Commission. 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.
ALLOCATION OF SHARED SERVICES. Certain costs relating to the Company's
general and administrative services (including certain executive management,
legal, accounting and auditing, tax, treasury, strategic planning and public
policy services) are directly assigned to each Group based on actual utilization
or are allocated based on each Group's operating expenses, number of employees,
external revenues, average capital and/or average equity. The Company charges
each Group for such services at fully distributed cost. These direct and
indirect allocations were $35, $43 and $41 for the three years ended December
31, 1994, 1993 and 1992, respectively. In 1994, the direct allocations comprised
approximately 60 percent of the total shared corporate services allocated to the
Media Group. It is not practicable to provide a detailed estimate of the
expenses which would be recognized if the Media
VII-50
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Group were a separate legal entity. However, the Company believes that under the
Recapitalization Proposal each Group would benefit from synergies with the
other, including lower operating costs than might be incurred if each Group was
a separate legal entity.
ALLOCATION OF EMPLOYEE BENEFITS. A portion of U S WEST's employee benefit
costs, including pension and postretirement medical and life, are allocated to
the Media Group. (See Note 17 to the Combined Financial Statements.)
ALLOCATION OF INCOME 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 the Company 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
the Company 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 members which operate in states where the Company
does not file consolidated or combined state income tax returns. Separate state
income tax returns are filed by these members in accordance with the respective
states' laws and regulations. The members record a tax provision on a separate
company basis in accordance with the requirements of SFAS 109.
GROUP FINANCING. Financing activities for the Media Group and the
Communications 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 securities, are managed by the Company on a centralized
basis. Notwithstanding such centralized management, financing activities for U S
WEST Communications are separately identified and accounted for in the Company's
records and U S WEST Communications conducts its own borrowing activities. All
debt incurred and investments made by the Company and its subsidiaries are
specifically allocated to and reflected on the financial statements of the Media
Group except that debt incurred and investments made by the Company and its
subsidiaries on behalf of the non-regulated businesses of the Communications
Group and all debt incurred and investments made by U S WEST Communications are
specifically allocated to and reflected on the financial statements of the
Communications Group. Debt incurred by the Company or a subsidiary on behalf of
a Group is charged to such Group at the borrowing rate of the Company or such
subsidiary.
Following implementation of the Recapitalization Proposal, the Company does
not intend to transfer funds between the Groups, except for certain short-term
ordinary course advances of funds at market rates associated with the Company's
centralized cash management. Such short-term transfers of funds will be
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 Board, in its sole discretion, determines
that a transfer of funds between the Groups should be accounted for as a
long-term loan, the Board would establish the terms on which such loan would be
VII-51
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
interest (an "Inter-Group Interest"), determined by the 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
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.
DIVIDENDS. Under the Recapitalization Proposal, the Company intends to
retain future earnings of the Media Group, if any, for the development of the
Media Group's businesses and does not anticipate paying dividends to the Media
Group shareholders in the foreseeable future.
INDUSTRY SEGMENTS. The accompanying Combined Financial Statements reflect
the combined accounts of the businesses comprising the Media Group and their
majority-owned subsidiaries, except for the discontinued capital assets segment.
Prior to January 1, 1995, the capital assets segment was accounted for as
discontinued operations. Effective January 1, 1995, the capital assets segment
has been accounted for as a net investment in assets held for sale, as discussed
in Note 20 to the Media Group Combined Financial Statements.
The businesses comprising the Media Group operate in four industry segments,
as defined in SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", consisting of multimedia content and services, wireless
communications, cable and telecommunications and the discontinued capital assets
segment.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less that are readily convertible into cash and
are not subject to significant risk from fluctuations in interest rates.
PROPERTY, PLANT AND EQUIPMENT
The investment in property, plant and equipment is carried at cost, less
accumulated depreciation. Additions, replacements and substantial betterments
are capitalized. All other repairs and maintenance are expensed when incurred.
Interest related to qualifying construction projects is capitalized and is
reflected as a reduction of interest expense. Amounts capitalized by the Media
Group were $8, $5 and $6 in 1994, 1993, and 1992, respectively.
VII-52
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation is calculated using the straight-line method. When such
depreciable property, plant and equipment is retired or sold, the resulting gain
or loss is recognized currently as an element of other income. Depreciable lives
follow:
<TABLE>
<S> <C>
Buildings................................................... 15 to 25 years
Cellular systems............................................ 3 to 20 years
Cable distribution systems.................................. 5 to 15 years
General purpose computer and other.......................... 3 to 20 years
</TABLE>
Depreciation expense was $121, $113 and $98 in 1994, 1993 and 1992,
respectively.
INTANGIBLE ASSETS
The costs of identified intangible assets and goodwill are amortized by the
straight-line method over periods ranging from five to forty years. These assets
are evaluated, with other related assets, for impairment using a discounted cash
flow methodology. Amortization expense was $23, $14 and $24 in 1994, 1993 and
1992, respectively.
FOREIGN CURRENCY TRANSLATION
For international investments, assets and liabilities are translated at year
end exchange rates, and income statement items are translated at average
exchange rates for the year. Resulting translation adjustments are recorded as a
separate component of Media Group equity.
REVENUE RECOGNITION
Cellular access and cable television revenues are generally billed monthly,
in advance, and revenues are recognized the following month when services are
provided. Revenues derived from wireless airtime usage are billed and recorded
monthly as services are provided. Directory advertising revenues and related
directory costs are generally deferred and recognized over the period during
which directories are used, normally 12 months.
FINANCIAL INSTRUMENTS
Net interest income or expense on interest rate swaps is recognized over the
life of the swaps as an adjustment to interest expense. Gains and losses on
foreign exchange forward, option and combination option contracts, designated as
hedges, are included in Media Group equity and recognized in income on sale of
the investment.
INCOME TAXES
The provision for income taxes consists of an amount for taxes currently
payable and an amount for tax consequences deferred to future periods in
accordance with SFAS No. 109. The Company implemented SFAS No. 109, "Accounting
for Income Taxes," in 1993. Adoption of the new standard did not have a material
effect on the financial position or results of operations, primarily because of
the Company's earlier adoption of SFAS No. 96.
EARNINGS PER COMMON SHARE
Historical earnings per share is omitted from the statements of operations
because the Media Stock was not part of the capital structure of the Company for
the periods presented. Pro forma
VII-53
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
earnings per share, reflecting the Media Stock issued under the Recapitalization
Proposal, is presented in the Media Group Combined Statements of Operations for
the first quarter of 1995 and for 1994.
INTERIM FINANCIAL STATEMENTS
The interim financial statements have been prepared in accordance with GAAP
and in accordance with SEC rules and regulations for interim reporting. In the
opinion of the Company's management, the interim financial statements include
all adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the interim financial information set forth therein.
NOTE 2: RELATED PARTY TRANSACTIONS
Related party transactions for the Media Group follow.
CUSTOMER LISTS, BILLING AND COLLECTION, AND OTHER SERVICES
The domestic publishing operations purchase customer lists, billing and
collection and other services from the Communications Group. The data and
services are purchased at fully distributed cost or at a market price in
accordance with regulatory requirements. The charges for these services were
$27, $26 and $25 for December 31, 1994, 1993 and 1992, respectively.
TELECOMMUNICATIONS SERVICES
The domestic wireless operations purchase telecommunications network access
and usage from the Communications Group. The charges for these services were
$30, $24, and $22 in 1994, 1993 and 1992, respectively.
TIME WARNER ENTERTAINMENT
Notes payable to TWE are $771 and $1,005 at December 31, 1994 and 1993,
respectively.
NOTE 3: ACQUISITION OF ATLANTA SYSTEMS
On December 6, 1994, the Company acquired the stock of Wometco Cable Corp.
and subsidiaries, and the assets of Georgia Cable Partners and Atlanta Cable
Partners L.P. (the "Atlanta Systems"), for cash of $745 and 12,779,206 U S WEST
common shares valued at $459, for a total purchase price of approximately $1.2
billion. The Atlanta Systems' results of operations have been included in the
combined results of operations of the Media Group since the date of acquisition.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated to assets acquired (primarily identified
intangibles) based on their estimated fair values. The identified intangibles
and goodwill are being amortized on a straight-line basis over 25 years.
VII-54
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 3 ACQUISITION OF ATLANTA SYSTEMS (CONTINUED)
Following are summarized, combined, unaudited pro forma results of
operations for the Media Group for the years ended December 31, 1994 and 1993,
assuming the acquisition occurred as of the beginning of the respective periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Revenue................................................................ $ 2,098 $ 1,749
Net income (loss)...................................................... 265 (8)
Pro forma earnings per average common share (1)........................ 0.57 --
<FN>
- ------------------------
(1) Reflects the pro forma Media Group shares after giving effect to the
Recapitalization Proposal and includes the pro forma effect of issuing
additional shares as of January 1, 1994 to acquire the Atlanta Systems.
</TABLE>
NOTE 4: INDUSTRY SEGMENTS
In accordance with generally accepted accounting principles, industry
segment data is presented for the combined operations of the Media Group. The
Company's equity method investments and discontinued operations are excluded
from segment data and are included in "Corporate and other".
The multimedia content and services segment consists of the publishing of
White and Yellow Pages telephone directories, database marketing services and
interactive services in domestic and international markets. The wireless
communications segment provides information products and
VII-55
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
services over wireless networks in 13 western and midwestern states. The cable
and telecommunications segment was created with the acquisition of the Atlanta
Systems on December 6, 1994 (see Note 3 to the Combined Financial Statements)
and provides cable television services to the metropolitan Atlanta area.
Industry segment financial information follows:
<TABLE>
<CAPTION>
MULTIMEDIA CORPORATE
CONTENT AND WIRELESS CABLE AND AND OTHER
1994 SERVICES (1) COMMUNICATIONS TELECOMMUNICATIONS (2) (5) COMBINED
- ---------------------------------------- ------------ -------------- ---------------------- --------- --------
<S> <C> <C> <C> <C> <C>
Sales and other revenues................ $1,075 $ 781 $ 18 $ 34 $1,908
Operating income (loss) from continuing
operations............................. 396 88 -- (95) 389
Identifiable assets..................... 613 1,286 1,459 4,036 7,394
Depreciation and amortization........... 30 102 6 6 144
Capital expenditures.................... 42 274 2 25 343
1993
- ----------------------------------------
Sales and other revenues (3)............ 956 561 -- 32 1,549
Operating income (loss) from continuing
operations (4)......................... 356 (29) -- (89) 238
Identifiable assets..................... 450 1,175 -- 3,821 5,446
Depreciation and amortization........... 16 104 -- 7 127
Capital expenditures.................... 32 175 -- 8 215
1992
- ----------------------------------------
Sales and other revenues (3)............ 949 407 -- 28 1,384
Operating income (loss) from continuing
operations............................. 375 5 -- (92) 288
Identifiable assets..................... 444 1,110 -- 1,576 3,130
Depreciation and amortization........... 15 89 -- 18 122
Capital expenditures.................... 38 124 -- 7 169
<FN>
- ------------------------------
(1) Includes revenue from directory publishing activities in Europe of $78 and
$7 and identifiable assets of $124 and $4 for 1994 and 1993, respectively.
(2) Results of operations have been included since date of acquisition,
December 6, 1994.
(3) In 1992, certain rural markets in the wireless communications segment were
accounted for under the equity method. Beginning in 1993, these markets
were consolidated. Wireless sales and other revenues would increase $35 if
these rural markets were consolidated in 1992.
(4) Includes pretax restructuring charges of $50 and $70 for the multimedia
content and services and wireless communications segments, respectively.
(5) The Company's equity method investments and discontinued operations are
included in "Corporate and other."
</TABLE>
Intrasegment sales are not material. Operating income represents sales and
other revenues less operating expenses, and excludes interest expense, equity
losses in unconsolidated ventures, other income (expense) and income taxes.
Identifiable assets are those assets used in each segment's operations.
Corporate and other assets consist primarily of cash, marketable securities,
investments in international ventures, investment in Time Warner Entertainment,
net assets of discontinued operations and assets not directly employed in
revenue generation. Corporate and other operating losses includes general
corporate expenses and administrative costs primarily associated with the Media
Group investments.
VII-56
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment Company, L.P. ("TWE") for an aggregate purchase price of $2.553
billion, consisting of $1.532 billion in cash and $1.021 billion in the form of
a four-year promissory note bearing interest at a rate of 4.391 percent per
annum. TWE owns and operates substantially all of the entertainment assets
previously owned by Time Warner Inc., consisting primarily of its filmed
entertainment, programming-HBO and cable businesses. As a result of U S WEST's
admission to the partnership, certain wholly owned subsidiaries of Time Warner
Inc. ("General Partners") and subsidiaries of Toshiba Corporation and ITOCHU
Corporation hold equity interests of 63.27, 5.61 and 5.61 percent, respectively.
In connection with the TWE investment, U S WEST acquired 12.75 percent of the
common stock of Time Warner Entertainment Japan Inc., a joint venture
established to expand and develop the market for entertainment services in
Japan.
U S WEST has an option to increase its equity interests in TWE from 25.51 up
to 31.84 percent depending upon cable operating performance, as defined in the
TWE Partnership Agreement. The option is exercisable, in whole or part, between
January 1, 1999, and May 31, 2005, for an aggregate cash exercise price of $1.25
billion to $1.8 billion, depending upon the year of exercise. Either TWE or U S
WEST may elect that the exercise price for the option be paid with partnership
interests rather than cash.
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the General Partners); pro rata priority capital (A preferred -- held pro
rata by all partners); junior priority capital (B preferred -- all held by the
General Partners); and common (residual equity interests held pro rata by all
partners). Of the $2.553 billion contributed by U S WEST, $1.658 billion
represents A preferred capital and $895 represents common capital. The TWE
Partnership Agreement provides for special allocations of income and
distributions of partnership capital, which are based on the fair value of
assets contributed to the partnership. Partnership income, to the extent earned,
is allocated as follows: (1) to the partners so that the economic burden of the
income tax consequences of partnership operations is borne as though the
partnership was taxed as a corporation ("special tax income"); (2) to the
partners' preferred capital accounts in order of priority shown above, at
various rates of return ranging from 8 percent to 13.25 percent; and (3) to the
partners' common capital according to their residual partnership interests. To
the extent partnership income is insufficient to satisfy all special allocations
in a particular accounting period, the unearned portion is carried over until
satisfied out of future partnership income. Partnership losses generally will be
allocated in reverse order, first to eliminate prior allocations of partnership
income, except senior preferred and special tax income, next to reduce initial
capital amounts, other than senior preferred, then to reduce the senior
preferred account and finally, to eliminate special tax income. Also, the senior
preferred is scheduled to be distributed in three annual installments beginning
July 1, 1997.
VII-57
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and limitations on the allocation of
partnership income follows:
<TABLE>
<CAPTION>
TIME
INITIAL INCOME WARNER
CAPITAL ALLOCATIONS GENERAL U S
PRIORITY OF CONTRIBUTED CAPITAL AMOUNTS (A) LIMITED TO PARTNERS WEST ITOCHU TOSHIBA
- --------------------------------------------- ----------- ------------ -------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
(% PER ANNUM
COMPOUNDED
QUARTERLY)
(OWNERSHIP %)
Special tax allocations...................... $ 0 No limit * * * *
Senior Preferred............................. 1,400 8.00% 100.00% -- -- --
Pro rata priority capital.................... 5,600 13.00%(b) 63.27% 25.51% 5.61% 5.61%
Junior priority capital (d).................. 2,600 13.25%(c) 100.00% -- -- --
Residual equity interests.................... 3,300 No limit 63.27% 25.51% 5.61% 5.61%
<FN>
- ------------------------------
* as necessary
(a) Excludes partnership income or loss (to the extent earned) allocated
thereto.
(b) 11.0% to the extent concurrently distributed.
(c) 11.25% to the extent concurrently distributed.
(d) Junior priority capital is subject to retroactive adjustment based on TWE's
operating performance over five and ten year periods.
</TABLE>
Beginning July 1, 1994, the TWE Partnership Agreement generally permits cash
distributions to the partners to pay applicable taxes on their allocable taxable
income from TWE. In addition, beginning July 1, 1995, and subject to restricted
payment limitations and availability under the applicable financial ratios
contained in the TWE Credit Agreement, distributions other than tax-related
distributions are also permitted. For distributions other than those related to
taxes or the senior preferred, the TWE Partnership Agreement requires certain
cash distribution thresholds be met to the limited partners before the General
Partners receive their full share of distributions. No cash distributions were
made to U S WEST in 1994.
The Media Group accounts for its investment in TWE under the equity method
of accounting. The excess of fair market value over the book value of total
partnership net assets implied by the Company's investment is $5.7 billion. This
excess is being amortized on a straight-line basis over 25 years. The Media
Group's recorded share of TWE operating results represents allocated TWE net
income or loss adjusted for the amortization of the excess of fair market value
over the book value of the partnership net assets. As a result of this
amortization and the special income allocations described above, the Media
Group's recorded pretax share of TWE operating results was ($13) and ($12) for
the three months ended March 31, 1995 and 1994, respectively, and ($18) and
($20) for 1994 and 1993, respectively.
As consideration for its expertise and participation in the cable operations
of TWE, the Media Group earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 and $8
were recorded to other income in 1994 and 1993, respectively.
VII-58
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(Dollars in millions)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER
MARCH 31, 31,
-------------------- --------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993
- -------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue....................................................... $ 2,046 $ 1,919 $ 8,460 $ 7,946
Operating expenses (1)........................................ 1,855 1,716 7,612 7,063
Interest and other expense, net (2)........................... 176 151 647 611
--------- --------- --------- ---------
Income before income taxes and extraordinary items............ 15 52 201 272
Income before extraordinary item.............................. 4 48 161 208
--------- --------- --------- ---------
Net income.................................................... $ 4 $ 48 $ 161 $ 198
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) Includes depreciation and amortization of $226 and $213 for the three
months ended March 31, 1995 and 1994, respectively, and $943 and $902, in
1994 and 1993, respectively.
(2) Includes corporate services of $15 for the three months ended March 31,
1995 and 1994 and $60 in 1994 and 1993.
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- ----------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- -------------------------------------------------- ----------- ------- -------
<S> <C> <C> <C>
Current assets (3)................................ $ 3,708 $ 3,573 $ 3,745
Non-current assets (4)............................ 15,050 15,089 14,218
Current liabilities............................... 2,820 2,857 2,265
Non-current liabilities........................... 7,963 7,909 8,162
Senior preferred capital.......................... 1,696 1,663 1,536
Partners' capital (5)............................. 6,279 6,233 6,000
<FN>
- ------------------------
(3) Includes cash of $1,267 at March 31, 1995, $1,071 and $1,338 at December
31, 1994 and 1993, respectively.
(4) Includes loan receivable from Time Warner of $400 in 1995 and 1994.
(5) Net of a note receivable from U S WEST of $621 at March 31, 1995 and $771
and $1,005 at December 31, 1994 and 1993, respectively.
</TABLE>
In early 1995, Time Warner Inc. announced its intention to simplify its
corporate structure by establishing a separate, self-financing enterprise to
house its cable and telecommunications properties. Any change in the structure
of TWE would require the Company's approval in addition to certain creditors and
regulatory approvals.
NOTE 6: INVESTMENTS IN INTERNATIONAL VENTURES
The majority of the Company's investments in international ventures consist
of wireless communications, and combined cable television and telecommunications
networks. The investments are located primarily in the United Kingdom and other
parts of Europe. The most significant of these investments are TeleWest
Communications plc ("TeleWest"), a combined cable television and
telecommunications network, and Mercury One-2-One, a 50-50 joint venture between
the U S WEST and Cable & Wireless plc offering personal communications services.
TeleWest and Mercury One-2-One are located in the United Kingdom.
VII-59
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 6: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
TeleWest made an initial public offering of its ordinary shares in November
1994. Following the offering, in which the Company sold 24.4 percent of its
joint venture interest, the Company owns approximately 37.8 percent of TeleWest.
Net proceeds of approximately $650 are being used by TeleWest to finance
construction and operations costs, invest in affiliated companies and repay
debt. It is the Company's policy to recognize as income any gains or losses
related to the sale of stock to the public. The Media Group recognized a gain of
$105 in 1994, net of $59 in deferred taxes, for the partial sale of its joint
venture interest in TeleWest.
The following table shows summarized combined financial information for the
Media Group's significant equity method international ventures.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
COMBINED OPERATIONS 1994 1993 1992
- ----------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue...................................................................... $ 580 $ 296 $ 156
Operating expenses........................................................... 684 354 159
Depreciation and amortization................................................ 140 60 37
--------- --------- ---------
Operating loss............................................................. (244) (118) (40)
Interest and other, net...................................................... (75) (40) (53)
--------- --------- ---------
Net loss before extraordinary item......................................... (319) (158) (93)
Extraordinary item........................................................... 11 -- --
--------- --------- ---------
Net loss................................................................... $ (308) $ (158) $ (93)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1994 1993
- ----------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets..................................................................... $ 714 $ 258
Property, plant and equipment -- net............................................... 1,462 812
Other assets....................................................................... 343 341
--------- ---------
Total assets..................................................................... $ 2,519 $ 1,411
--------- ---------
--------- ---------
Current liabilities................................................................ $ 344 $ 207
Long-term debt..................................................................... 463 296
Other liabilities.................................................................. 71 38
Owners' equity..................................................................... 1,641 870
--------- ---------
Total liabilities and equity..................................................... $ 2,519 $ 1,411
--------- ---------
--------- ---------
</TABLE>
NOTE 7: RESTRUCTURING CHARGES
The Media Group's 1993 results reflect $120 of restructuring charges
(pretax). The restructuring charges include only specific, incremental and
direct costs which can be estimated with reasonable accuracy and are clearly
identifiable with the resturcturing plan. The related restructuring plan is
designed to provide faster, more responsive customer services, while reducing
the costs of providing these services and to implement new technology to improve
wireless call quality, increase capacity and expand services.
VII-60
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 7: RESTRUCTURING CHARGES (CONTINUED)
Following is a schedule of the costs included in the 1993 restructuring
charges and amounts remaining at December 31, 1994:
<TABLE>
<CAPTION>
RESTRUCTURING BALANCE AT DECEMBER
CHARGES 31, 1994
--------------- -------------------
<S> <C> <C>
Asset write-down...................................................... $ 65 $ --
Systems development................................................... 40 30
Employee separation costs and other................................... 15 10
----- -----
Total................................................................. $ 120 $ 40
----- -----
----- -----
</TABLE>
During 1993, the Media Group's wireless subsidiary replaced substantially
all of its cellular network equipment, consisting primarily of cell site
electronics and switching equipment, in certain of its major market areas. The
Media Group recorded a pretax charge of $65 in connection with this transaction,
net of a minority interest component of $5, to record the displaced equipment at
net realizable value. Systems development costs include the replacement of
existing, single-purpose systems used in the publishing businesses with new
systems designed to provide integrated, end-to-end customer service. Other costs
consist primarily of employee separation costs including severance payments,
health care coverage and postemployment education benefits and relocation costs.
The restructuring will occur over a three year period ending in 1996.
The Media Group's 1991 restructuring plan included a pretax charge of $87
due to the write-off of certain intangible and other assets. The balance of the
unused reserve at December 31, 1993, was $30. All expenditures pursuant to the
1991 plan were completed by the end of 1994.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Land and buildings.................................................................... $ 151 $ 114
Cellular systems...................................................................... 585 481
Cable distribution systems............................................................ 148 --
General purpose computer and other.................................................... 412 325
Construction in progress.............................................................. 140 68
--------- ---------
1,436 988
Less accumulated depreciation......................................................... 480 387
--------- ---------
Property, plant and equipment -- net.................................................. $ 956 $ 601
--------- ---------
--------- ---------
</TABLE>
VII-61
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 9: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1993
------ ----
<S> <C> <C>
Identified intangibles, primarily franchise
value............................................ $1,166 $187
Goodwill.......................................... 762 399
------ ----
1,928 586
Less accumulated amortization................... 70 72
------ ----
Total intangible assets........................... $1,858 $514
------ ----
------ ----
</TABLE>
NOTE 10: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Commercial paper..................................................................... $ 868 $ --
Current portion of long-term debt.................................................... 561 442
Allocated to discontinued operations -- net.......................................... (200) (48)
--------- ---------
Total................................................................................ $ 1,229 $ 394
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 6.04 percent at
December 31, 1994.
U S WEST maintains short-term lines of credit aggregating approximately $1.3
billion which is available to the Media Group as well as the unregulated
subsidiaries of the Communications Group in accordance with their borrowing
needs.
VII-62
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 10: DEBT (CONTINUED)
LONG-TERM DEBT
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1996 1997 1998 1999 THEREAFTER 1994 1993
- ------------------------------------------------ --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................ $ 271 $ -- $ -- $ -- $ -- $ 271 $ 568
Above 5% to 6%.................................. 13 -- -- -- -- 13 --
Above 6% to 7%.................................. -- -- -- -- -- -- --
Above 7% to 8%.................................. 300 -- -- -- 757 1,057 1,338
Above 8% to 9%.................................. 28 -- -- 126 40 194 254
Above 9% to 10%................................. -- 29 -- 15 35 79 79
--------- --------- --------- --------- ----- --------- ---------
$ 612 $ 29 $ -- $ 141 $ 832 $ 1,614 $ 2,239
--------- --------- --------- --------- -----
--------- --------- --------- --------- -----
Capital lease obligations and other............. 5 --
Unamortized discount -- net..................... (524) (740)
Allocated to discontinued operations -- net..... (510) (367)
--------- ---------
Total........................................... $ 585 $ 1,132
--------- ---------
--------- ---------
</TABLE>
Long-term debt consists principally of debentures and medium-term notes,
debt associated with the Company's Leveraged Employee Stock Ownership Plans
(LESOP), and zero coupon, subordinated notes convertible at any time into U S
WEST common shares. The zero coupon notes have a yield to maturity of
approximately 7.3 percent and are recorded at a discounted value of $234 in 1994
and $299 in 1993.
Interest payments, net of amounts capitalized, were $174, $277 and $286 for
1994, 1993 and 1992, respectively, of which $103, $212 and $220 relate to
discontinued operations, respectively.
VII-63
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 11: LEASING ARRANGEMENTS
The Company has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $63, $57 and
$60 in 1994, 1993 and 1992, respectively. Minimum future lease payments as of
December 31, 1994, under non-cancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- --------------------------------------------------------------------------------------
<S> <C>
1995.................................................................................. $ 50
1996.................................................................................. 42
1997.................................................................................. 34
1998.................................................................................. 27
1999.................................................................................. 22
Thereafter............................................................................ 115
---------
Total................................................................................. $ 290
---------
---------
</TABLE>
NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS
The Media Group is exposed to market risks arising from changes in interest
rates and foreign exchange rates. Derivative financial instruments are used by
the Company to manage these risks.
INTEREST RATE RISK MANAGEMENT
Interest rate swap agreements are used to manage the Media Group's market
exposure to fluctuations in interest rates. Swap agreements are primarily used
to effectively convert existing commercial paper to fixed-rate debt. This allows
the Company to achieve interest savings over issuing fixed-rate debt directly.
Additionally, the Company has entered into interest rate swaps to effectively
terminate existing swaps.
Under an interest rate swap, the Company agrees with another party to
exchange interest payments at specified intervals over a defined term. Interest
payments are calculated by reference to the notional amount based on the fixed-
and variable-rate terms of the swap agreements. The net interest received or
paid as part of the interest rate swap is accounted for as an adjustment to
interest expense. Gains or losses on swaps entered into to terminate existing
swaps are deferred and amortized over the remaining life of the swaps.
The following table summarizes terms of swaps pertaining to the Media
Group's continuing operations as of December 31, 1994. Variable rates are
indexed to the 30 day commercial paper rate.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
----------------------
CONTINUING OPERATIONS NOTIONAL AMOUNT MATURITIES RECEIVE PAY
- ---------------------------------------------------------------- ------------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Variable to fixed............................................... $ 75 1995-2004 6.06 9.17
Fixed to variable............................................... 5 1995 6.61 5.87
</TABLE>
VII-64
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The following table summarizes terms of swaps pertaining to discontinued
operations as of December 31, 1994. Variable rates are indexed to three- and
six-month LIBOR.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
----------------------
DISCONTINUED OPERATIONS NOTIONAL AMOUNT MATURITIES RECEIVE PAY
- ---------------------------------------------------------------- ----------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
Variable to fixed (1)........................................... $ 380 1996-1997 5.69 9.03
Fixed to variable (1)........................................... 380 1996-1997 7.29 5.80
Variable rate basis adjustment (2).............................. 10 1997 5.89 7.04
<FN>
- ------------------------
(1) The fixed to variable swap has the same terms as the variable to fixed swap
and was entered into to terminate the variable to fixed swap. The net loss
on the swaps is deferred and amortized over the remaining life of the swaps
and is included in the discontinued operations loss provision.
(2) Variable rate debt based on treasuries is swapped to a LIBOR-based interest
rate.
</TABLE>
The counterparties to these derivative contracts are major financial
institutions. The Media Group is exposed to credit loss in the event of
non-performance by these counterparties. The Company manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations which correspond to the respective credit rating of each
counterparty. The Company does not have significant exposure to an individual
counterparty and does not anticipate non-performance by any counterparty.
FOREIGN EXCHANGE RISK MANAGEMENT
The Company enters into forward and option contracts to manage the market
risks associated with fluctuations in foreign exchange rates after considering
offsetting foreign exposures among international operations.
The Company enters into forward contracts to exchange currencies at agreed
rates on specified future dates. This allows the Media Group to fix the cost of
firm foreign commitments. The commitments and the forward contracts are for
periods up to one year. The gain or loss on forward contracts designated as
hedges of firm foreign investment commitments are included in Media Group equity
and are recognized in income on sale of the investment. The gain or loss on the
forward contract designated as a hedge of foreign denominated loans made to
wholly owned subsidiaries are recorded at market value with the gain or loss
recorded in income. The gain or loss on the portion of the forward contract
designated to offset the translation of investee net income is recorded at
market value with the gain or loss recorded in income.
The Company also enters into foreign exchange combination option contracts
to protect against adverse changes in foreign exchange rates. These option
contracts combine purchased options to cap the foreign exchange rate and written
options to finance the premium of the purchased options. The commitments and
combination option contracts are for periods up to one year. Gains or losses on
the contracts, designated as hedges of firm investment commitments, are included
in Media Group equity and are recognized in income upon sale of the investment.
The counterparties to these contracts are major financial institutions. The
Company is exposed to credit loss in the event of non-performance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate non-performance by any counterparty.
VII-65
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 12: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
At December 31, 1994, the Media Group had outstanding forward and
combination option contracts to purchase British pounds in the notional amounts
of $135 and $35, respectively. All contracts mature within one year.
Cumulative deferred credits on foreign exchange contracts of $7 and deferred
charges of $25, including deferred taxes (benefits) of $3 and ($10),
respectively, are included in Media Group equity at December 31, 1994.
NOTE 13: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
The fair values of mandatorily redeemable preferred stock, foreign exchange
forward and combination option contracts and long-term receivables approximate
the carrying values.
The fair values of interest rate swaps are based on estimated amounts the
Company would receive or pay to terminate such agreements taking into account
current interest rates and creditworthiness of the counterparties.
The fair value of long-term debt, including discontinued operations, is
based on quoted market prices where available or, if not available, is based on
discounting future cash flows using current interest rates.
<TABLE>
<CAPTION>
1994 1993
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
CONTINUING AND DISCONTINUED OPERATIONS VALUE VALUE VALUE VALUE
- ------------------------------------------------------------------------ ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)...................................... $ 3,097 $ 3,100 $ 3,022 $ 3,139
Interest rate swap agreements -- assets................................. -- -- -- (28)
Interest rate swap agreements -- liabilities............................ -- 20 -- 89
----------- --------- ----------- ---------
Debt -- net............................................................. $ 3,097 $ 3,120 $ 3,022 $ 3,200
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
U S WEST has 50,000,000 authorized shares of preferred stock. On September
2, 1994, U S WEST issued to Fund American Enterprises Holdings Inc. ("FFC")
50,000 shares of a class of newly created 7 percent Series B Cumulative
Redeemable Preferred Stock for a total of $50. (See Note 20 to the Combined
Financial Statements.) The preferred stock was attributed to the Media Group and
recorded at fair market value of $51. U S WEST has the right, commencing five
years from September 2, 1994, to redeem the shares for one thousand dollars per
share plus unpaid dividends and a redemption premium. The shares are mandatorily
redeemable in year ten at face value plus unpaid dividends. At the option of
FFC, the preferred stock also can be redeemed for common shares of Financial
Security Assurance, a member of the capital assets segment.
VII-66
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 15: MEDIA GROUP EQUITY
MEDIA GROUP EQUITY
The following analyzes the Media Group equity for the periods presented:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- -------------------------------
1995 1994 1993 1992
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period............................... $ 4,203 $ 3,139 $ 2,265 $ 2,057
Net income................................................... 15 276 3 201
Equity issuances (1)......................................... 84 790 786 --
Market value adjustment for securities....................... 20 (64) 35 --
Foreign currency translation adjustment...................... 16 6 (1) (41)
Company LESOP guarantee...................................... -- 56 51 48
----------- --------- --------- ---------
Balance at end of period..................................... $ 4,338 $ 4,203 $ 3,139 $ 2,265
----------- --------- --------- ---------
----------- --------- --------- ---------
<FN>
- ------------------------
(1) Includes an equity transfer of $69 from the Communications Group at March
31, 1995.
</TABLE>
Included in Media Group equity is the cumulative foreign currency
translation adjustment of $(13) at March 31, 1995 and $(29) and $(35) at
December 31, 1994 and 1993, respectively.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLANS (LESOP)
U S WEST maintains employee savings plans for management and occupational
employees under which the Company matches a certain percentage of eligible
contributions made by the employees with shares of Company stock. The Company
established two LESOPs in 1989 to provide the Company stock used for matching
contributions to the savings plans.
The long-term debt of the LESOP trusts, which is unconditionally guaranteed
by the Company, is included in the accompanying combined balance sheets and
corresponding amounts have been recorded as reductions to Media Group equity.
The trusts will repay the debt with contributions from the Communications Group
and the Media Group, and certain dividends received on shares held by the LESOP.
Contributions to the trusts related to the Media Group were $12, $7 and $11 in
1994, 1993 and 1992, respectively, of which $3, $4 and $3, respectively, have
been classified as interest expense. The Company recognizes expense based on the
cash payments method. Dividends on unallocated shares held by the LESOP were
$11, $14 and $17 in 1994, 1993 and 1992, respectively. Tax benefits related to
dividend payments on LESOP shares have been allocated to the Communications
Group.
NOTE 16: STOCK INCENTIVE PLANS
Since the Media Stock was not part of the capital structure of the Company
for the periods presented, there were no stock options outstanding. See the
Company's Consolidated Financial Statements and related notes set forth in Annex
V for information regarding stock incentive plans.
NOTE 17: EMPLOYEE BENEFITS
PENSION PLAN
The Media Group and the Communications Group participate in the defined
benefit pension plan sponsored by U S WEST. The employees of the Media Group are
covered by the plan except for employees of Southern Multimedia Communications,
which owns the Atlanta Systems, and most foreign national employees. Since plan
assets are not segregated into separate accounts or restricted
VII-67
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
to providing benefits to employees of the Media Group, assets of the plan may be
used to provide benefits to employees of both the Media Group and the
Communications Group. In the event the single employer pension plan sponsored by
U S WEST would be separated into two or more plans, guidelines in the Internal
Revenue Code dictate how assets of the plan must be allocated to the new plans.
U S WEST currently has no intention to split the plan.
Management benefits are based on a final pay formula while occupational
benefits are based on a flat benefit formula. U S WEST uses the projected unit
credit method for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. The Company's
policy is to fund amounts required under the Employee Retirement Income Security
Act of 1974 ("ERISA") and no funding was required in 1994, 1993 or 1992. Should
funding be required in the future, funding amounts would be allocated to the
Media Group based upon the ratio of service cost of the Media Group to total
service cost of plan participants. Prior to January 1, 1993, U S WEST maintained
separate defined benefit pension plans for management and occupational
employees.
The composition of U S WEST's net pension credit and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension credit:
Service cost -- benefits earned during the period....................... $ 197 $ 148 $ 141
Interest cost on projected benefit obligation........................... 561 514 480
Actual return on plan assets............................................ 188 (1,320) (411)
Net amortization and deferral........................................... (946) 578 (318)
--------- --------- ---------
Net pension credit........................................................ $ 0 $ (80) $ (108)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1994, 9.00 percent for 1993 and 9.25 percent
for 1992.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5,044 and $5,286,
respectively...................................................................... $ 5,616 $ 5,860
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds.............................. $ 8,388 $ 8,987
Less: Projected benefit obligation................................................. 7,149 7,432
--------- ---------
Plan assets in excess of projected benefit obligation.............................. 1,239 1,555
Unrecognized net (gain) loss....................................................... 161 (70)
Prior service cost not yet recognized in net periodic pension cost................. (67) (72)
Balance of unrecognized net asset at January 1, 1987............................... (785) (865)
--------- ---------
Prepaid pension asset.............................................................. $ 548 $ 548
--------- ---------
--------- ---------
</TABLE>
VII-68
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Discount rate............................................................................ 8.00 7.25
Average rate of increase in future compensation levels................................... 5.50 5.50
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
ALLOCATION OF PENSION COSTS. Net pension costs (credit) of the plan are
allocated to the Media Group based upon the ratio of actuarially determined
service cost of participating employees of the Media Group to total service cost
of plan participants. U S WEST believes that allocating pension costs based upon
service cost is reasonable since service cost is a primary factor in determining
pension costs. The net pension cost allocated to the Media Group was $0, $(9)
and $(4) in 1994, 1993 and 1992, respectively. The portion of the projected
benefit obligation attributable to the Media Group for December 31, 1994 and
1993 was 5 percent and 4 percent, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Media Group and the Communications Group participate in plans sponsored
by U S WEST which provide certain health care and life insurance benefits to
retired employees. Effective January 1, 1992, the Media Group adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which mandates that employers reflect in their current expenses the cost of
providing retirement medical and life insurance benefits to current and future
retirees. Prior to 1992, the Media Group recognized these costs on a cash basis.
Adoption of SFAS No. 106 resulted in a one-time, non-cash charge against the
Company's 1992 earnings of $1,741, net of a deferred tax benefit of $1,038,
($45, net of a deferred income tax benefit of $28 for the Media Group), for the
prior service of active and retired employees. The effect on the Company's 1992
income from continuing operations of adopting SFAS No. 106 was approximately $47
($5 for the Media Group).
U S WEST uses the projected unit credit method for the determination of
postretirement medical costs for financial reporting purposes. The composition
of net postretirement benefit costs and actuarial assumptions underlying the U S
WEST plans follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1994 1993
--------------------------------- ---------------------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the
period........................................... $ 62 $ 13 $ 75 $ 60 $ 11 $ 71
Interest on accumulated benefit
obligation....................................... 221 39 260 235 36 271
Actual return on plan assets...................... 3 1 4 (73) (52) (125)
Net amortization and deferral..................... (68) (31) (99) 27 22 49
----- --- --------- ----------- --- ---------
Net postretirement benefit costs.................. $ 218 $ 22 $ 240 $ 249 $ 17 $ 266
----- --- --------- ----------- --- ---------
----- --- --------- ----------- --- ---------
<CAPTION>
1992
---------------------------------
MEDICAL LIFE TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the
period........................................... $ 57 $ 10 $ 67
Interest on accumulated benefit
obligation....................................... 223 33 256
Actual return on plan assets...................... (19) (29) (48)
Net amortization and deferral..................... -- -- --
----- --- ---------
Net postretirement benefit costs.................. $ 261 $ 14 $ 275
----- --- ---------
----- --- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1994 and 9.00 percent in 1993
and 1992.
VII-69
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the U S WEST plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1994 1993
------------------------------- -------------------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retirees.......................................... $ 1,733 $ 248 $ 1,981 $ 1,795 $ 311 $ 2,106
Fully eligible plan participants.................. 264 38 302 274 48 322
Other active plan participants.................... 940 135 1,075 983 170 1,153
--------- --------- --------- --------- --------- ---------
Total accumulated postretirement benefit
obligation......................................... 2,937 421 3,358 3,052 529 3,581
Unrecognized net gain (loss)........................ 243 90 333 65 (25) 40
Fair value of plan assets, primarily stocks, bonds
and life insurance (1)............................. (894) (374) (1,268) (613) (388) (1,001)
--------- --------- --------- --------- --------- ---------
Accrued postretirement benefit obligation........... $ 2,286 $ 137 $ 2,423 $ 2,504 $ 116 $ 2,620
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
- ------------------------
(1) Medical plan assets include U S WEST common stock of $164 in 1994.
</TABLE>
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Discount rate........................................................................... 8.00 7.25
Medical trend*.......................................................................... 9.70 10.30
<FN>
- ------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 6 percent
in 2006.
</TABLE>
A 1-percent increase in the assumed health care cost trend rates for each
future year would have increased the aggregate of the service and interest cost
components of the U S WEST 1994 net postretirement benefit costs by
approximately $50 and increased the 1994 accumulated postretirement benefit
obligation by approximately $450.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
PLAN ASSETS. Assets of the postretirement medical and life plans may be
used to provide benefits to employees of both the Media Group and Communications
Group since plan assets are not legally restricted to providing benefits to
employees of either Group. In the event that either plan sponsored by U S WEST
would be separated into two or more plans, there are no guidelines in the
Internal Revenue Code for allocating the assets to the new plans. U S WEST
allocates the assets based on historical contributions for postretirement
medical costs and the ratio of salaries for life plan participants. U S WEST
currently has no intention to split the plans.
POSTRETIREMENT MEDICAL COSTS. The service and interest components of net
postretirement medical benefit costs are calculated for the Media Group based
upon the population characteristics of the
VII-70
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
group. Since funding of postretirement medical costs is voluntary, return on
assets is attributed to the Media Group based upon historical funding. The Media
Group has historically funded the maximum annual tax deductible contribution for
management employees and the amount of annual expense for occupational
employees. The Media Group periodically reviews its funding strategy and future
funding amounts, if any, will be based upon the cash requirements of the Group.
Net postretirement medical benefit costs recognized by the Media Group for
1994, 1993 and 1992 was $11, $11 and $10, respectively. The percentage of
medical assets attributed to the Media Group, based upon historical voluntary
contributions, at December 31, 1994 and 1993 was 5 percent and 6 percent,
respectively. The percentage of the accumulated postretirement medical benefit
obligation attributed to the Media Group was 3 percent at December 31, 1994 and
1993.
ALLOCATION OF POSTRETIREMENT LIFE COSTS. Net postretirement life costs, and
funding requirements, if any, are allocated to the Media Group in the same
manner as pensions. The Company will generally fund the amount allowed for tax
purposes and no funding of postretirement life insurance occurred in 1994, 1993
and 1992. U S WEST believes its method of allocating postretirement life costs
is reasonable.
Net postretirement life benefit costs allocated to the Media Group for 1994,
1993 and 1992 was $3, $3 and $2, respectively. The percentage of the accumulated
postretirement life benefit obligation attributed to the Media Group was 10
percent at December 31, 1994 and 1993.
OTHER POSTRETIREMENT BENEFITS
The Media Group adopted, effective January 1, 1992, SFAS No. 112,
"Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires that
employers accrue for the estimated costs of benefits, such as workers'
compensation and disability, provided to former or inactive employees who are
not eligible for retirement. Adoption of SFAS No. 112 resulted in a one-time,
non-cash charge against the Company's 1992 earnings of $53, net of a deferred
income tax benefit of $32 ($3, net of a deferred income tax benefit of $2 for
the Media Group).
NOTE 18: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current....................................................................... $ 50 $ 72 $ 85
Deferred...................................................................... 118 (30) (2)
--------- --- ---------
168 42 83
--------- --- ---------
State and local:
Current....................................................................... (6) 23 15
Deferred...................................................................... 42 (4) 7
--------- --- ---------
36 19 22
--------- --- ---------
Provision for income taxes...................................................... $ 204 $ 61 $ 105
--------- --- ---------
--------- --- ---------
</TABLE>
VII-71
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 18: INCOME TAXES (CONTINUED)
The Company paid income taxes of $313, $391 and $459 in 1994, 1993 and 1992,
respectively, of which $(178), $94 and $45 related to the Media Group, including
discontinued operations. The Media Group had taxes payable of $88 and $11 to the
Company, including discontinued operations, as of December 31, 1994 and 1993,
respectively.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate....................................................... 35.0 35.0 34.0
State income taxes -- net of federal effect...................................... 4.9 6.6 5.8
Foreign tax -- net of federal effect............................................. 1.9 .6 --
Restructuring charge............................................................. -- 1.1 --
Other............................................................................ .7 (1.5) 2.0
--- --- ---
Effective tax rate............................................................... 42.5 41.8 41.8
--- --- ---
--- --- ---
</TABLE>
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Property, plant and equipment......................................................... $ 76 $ 41
Leases................................................................................ 684 657
State deferred taxes -- net of federal effect......................................... 174 96
Intangible assets..................................................................... 164 --
Investment in partnerships............................................................ 142 46
Other................................................................................. 13 9
--------- ---------
Deferred tax liabilities.............................................................. 1,253 849
--------- ---------
Postemployment benefits, including pension............................................ 29 4
Restructuring, discontinued operations and other...................................... 130 214
State deferred taxes -- net of federal effect......................................... 38 37
Other................................................................................. 86 76
--------- ---------
Deferred tax assets................................................................... 283 331
--------- ---------
Net deferred tax liability............................................................ $ 970 $ 518
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $52 and $28 at December
31, 1994 and 1993, respectively, resulting primarily from restructuring charges
and compensation-related items.
On August 10, 1993, federal legislation was enacted which increased the
corporate tax rate from 34 percent to 35 percent retroactive to January 1, 1993.
The cumulative effect on deferred taxes of the 1993 increase in income tax rates
was $20 related to discontinued operations.
The net deferred tax liability includes $678 in 1994 and $607 in 1993
related to discontinued operations.
VII-72
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 19: AIRTOUCH JOINT VENTURE
During 1994, the Company signed a definitive agreement with AirTouch
Communications to combine their domestic cellular assets. The initial equity
ownership of this cellular joint venture will be approximately 70 percent
AirTouch and approximately 30 percent Media Group. The combination will take
place in two phases. Upon receiving regulatory approval, anticipated during the
third quarter of 1995, Phase I of the joint venture will begin. The two
companies will operate their cellular properties separately during this phase. A
Wireless Management Company will be formed in Phase I to provide centralized
services to both companies on a contract basis. In Phase II, AirTouch and the
Company will contribute their domestic cellular assets to the newly formed
venture. This phase will occur within four years, upon obtaining interim relief,
or earlier, at AirTouch's option.
Had the Media Group recognized 30 percent of the combined earnings of the
joint venture beginning January 1, 1994, Media Group net income for the year
ended December 31, 1994 would have increased by approximately $30.
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE
The Combined Financial Statements of the Media Group include the
discontinued operations of the capital assets segment. During the second quarter
of 1993, the U S WEST Board of Directors approved a plan to dispose of the
capital assets segment through the sale of segment assets and businesses.
Accordingly, the Media Group recorded an after-tax charge of $100 for the
estimated loss on disposition. An additional provision of $20 is related to the
effect of the 1993 increase in federal income tax rates. The capital assets
segment includes activities related to financial services and financial
guarantee insurance operations. Also included in the segment is U S WEST Real
Estate, Inc., for which disposition was announced in 1991 and a $500 valuation
allowance was established to cover both carrying costs and losses on disposal of
related properties.
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a net investment in assets held for sale. The net
realizable value of the assets will be reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, being charged to continuing
operations. Prior to January 1, 1995, the entire capital assets segment was
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
During 1994, U S WEST reduced its ownership interest in Financial Security
Assurance Holdings, Ltd. ("FSA"), a member of the capital assets segment, to
60.9 percent, and its voting interest to 49.8 percent through a series of
transactions. In May and June 1994, U S WEST sold 8.1 million shares of FSA,
including 2 million shares sold to Fund American Enterprises Holdings Inc.
("FFC"), in an initial public offering of FSA common stock at $20 per share. The
Company received $154 in net proceeds from the offering. On September 2, 1994, U
S WEST issued to FFC 50,000 shares of cumulative redeemable preferred stock for
a total of $50. (See Note 14 to the Combined Financial Statements.) FFC's voting
interest in FSA is 21 percent, achieved through a combination of direct share
ownership of common and preferred FSA shares, and a voting trust agreement with
U S WEST. The Media Group retained certain risks in asset-backed obligations
related to the commercial real estate portfolio.
VII-73
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FFC has a right of first offer and a call right to purchase from U S WEST up
to 9.0 million shares, or approximately 57 percent, of outstanding FSA stock
held by U S WEST. U S WEST anticipates its ownership will be further reduced by
1996. The fair value of the call right was $22 (based on the Black-Scholes
model) at December 31, 1994, with no carrying value.
During 1994, U S WEST Real Estate, Inc. sold twelve buildings, six parcels
of land and other assets for approximately $327. Two additional properties were
sold in 1995 for approximately $47. During 1993, five properties were sold for
approximately $66. The sales were in line with Company estimates. Proceeds from
building sales were primarily used to repay related debt. The Company has
completed all construction of existing buildings in the commercial real estate
portfolio and expects to substantially complete the liquidation of this
portfolio by 1998. The remaining balance of assets subject to sale is
approximately $596, net of reserves, as of March 31, 1995.
In December 1993, the Company sold $2.0 billion of finance receivables and
the business of U S WEST Financial Services, Inc. to NationsBank Corporation.
Sales proceeds of $2.1 billion were used primarily to repay related debt. The
pretax gain on the sale of approximately $100, net of selling expenses, was in
line with management's estimate and was included in the Media Group's estimate
of provision for loss on disposal. The management team that previously operated
the entire capital assets segment transferred to NationsBank.
Building sales and operating revenues of the discontinued capital assets
segment were $75 and $305 for the three months ended March 31, 1995 and 1994,
respectively and $553 in 1994, $710 in 1993 and $672 in 1992. Income from
discontinued operations for 1993 (to June 1) and 1992 totaled $38 and $103,
respectively. Income (loss) from discontinued operations subsequent to June 1,
1993 through December 31, 1994 was deferred and is included within the provision
for loss on disposal.
VII-74
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The assets and liabilities of the capital assets segment have been
separately classified on the Combined Balance Sheets as net investment in assets
held for sale.
The components of net investment in assets held for sale follow:
NET INVESTMENT IN ASSETS HELD FOR SALE
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- --------------------
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................................... $ 47 $ 7 $ 24
Finance receivables -- net.............................................. 1,070 1,073 1,131
Investment in real estate -- net of valuation allowance................. 421 465 711
Bonds at market value................................................... 138 155 895
Investment in FSA....................................................... 349 329 --
Other assets............................................................ 264 362 600
----------- --------- ---------
Total assets............................................................ $ 2,289 $ 2,391 $ 3,361
----------- --------- ---------
----------- --------- ---------
LIABILITIES
Debt.................................................................... $ 1,032 $ 1,283 $ 1,496
Deferred income taxes................................................... 713 693 681
Accounts payable, accrued liabilities and other......................... 120 103 244
Unearned premiums....................................................... -- -- 346
Minority interests...................................................... 10 10 40
----------- --------- ---------
Total liabilities....................................................... 1,875 2,089 2,807
----------- --------- ---------
Net investment in assets held for sale.................................. $ 414 $ 302 $ 554
----------- --------- ---------
----------- --------- ---------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases which the Company intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
non-recourse debt which is netted against the related lease receivable.
The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Receivables........................................................................ $ 1,095 $ 1,208
Unguaranteed estimated residual values............................................. 467 477
--------- ---------
1,562 1,685
Less: Unearned income.............................................................. 459 490
Credit loss and other allowances.............................................. 30 64
--------- ---------
Finance receivables -- net......................................................... $ 1,073 $ 1,131
--------- ---------
--------- ---------
</TABLE>
Investments in securities that are designated as available for sale are
carried at market value. Any resulting unrealized gains or losses, net of
applicable deferred income taxes, are reflected as a
VII-75
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
component of Media Group equity. The 1994 net unrealized losses of $64 (net of a
deferred tax benefit of $34) and the 1993 net unrealized gain of $35 (net of
deferred taxes of $19), are included in Media Group equity.
The amortized cost and estimated market value of investments in securities
follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------------- ------------------------------------------
GROSS GROSS GROSS GROSS
MARKETABLE DEBT CARRYING UNREALIZED UNREALIZED FAIR CARRYING UNREALIZED UNREALIZED FAIR
SECURITIES AMOUNT GAINS LOSSES(1) VALUE AMOUNT GAINS LOSSES VALUE
- ------------------------- -------- ----------- ---------- ----- -------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal................ $113 -- $13 $100 $742 $51 $1 $792
Other.................... 65 -- 10 55 99 4 -- 103
-- --
-------- --- ----- -------- --- -----
Total.................... $178 -- $23 $155 $841 $55 $1 $895
-- --
-- --
-------- --- ----- -------- --- -----
-------- --- ----- -------- --- -----
<FN>
- ------------------------------
(1) The Media Group equity at December 31, 1994, includes a net unrealized loss
on marketable debt securities of $49 (net of a deferred tax benefit of $26)
associated with the Media Group's equity investment in FSA.
</TABLE>
DEBT
Interest rates and maturities of debt associated with the discontinued
capital assets segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------ TOTAL TOTAL
INTEREST RATES 1995 1996 1997 1998 1999 THEREAFTER 1994 1993
- ------------------------------ ---- ---- ---- ---- ---- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Up to 5%...................... $ 50 $-- $-- $-- $-- $5 $ 55 $ 496
Above 5% to 6%................ 5 -- 10 -- -- -- 15 5
Above 6% to 7%................ 100 -- 54 -- -- -- 154 54
Above 7% to 8%................ 7 5 5 -- -- -- 17 26
Above 8% to 9%................ -- 35 -- -- 150 4 189 264
Above 9% to 10%............... 61 -- 48 5 -- -- 114 177
Above 10%..................... -- -- -- 29 -- -- 29 29
Commercial paper rates........ -- -- -- -- -- -- -- 30
--
---- ---- ---- ---- ---- ------ ------
$223 $40 $117 $34 $150 $9 573 1,081
--
--
---- ---- ---- ---- ----
---- ---- ---- ---- ----
Allocated from continuing
operations -- net............ 710 415
------ ------
Total......................... $1,283 $1,496
------ ------
------ ------
</TABLE>
Debt of $119 and $124 at December 31, 1994 and 1993, respectively, was
collateralized by first deeds of trust on associated real estate, assignment of
rents from leases, and operating and management agreements.
VII-76
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK -- FINANCIAL GUARANTEES
The Media Group retained certain risks in asset-backed obligations related
to the commercial real estate portfolio. The principal amounts insured on the
asset-backed and municipal obligations follow. The 1994 amounts do not include
the financial guarantees of FSA which is now accounted for under the equity
method.
<TABLE>
<CAPTION>
ASSET-BACKED (1) MUNICIPAL (2)
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
TERM TO MATURITY 1994 1993 1994 1993
- ---------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
0 to 5 Years.......................................................... $ 540 $ 5,955 $ -- $ 1,888
5 to 10 Years......................................................... 537 2,050 -- 2,771
10 to 15 Years........................................................ 391 1,286 -- 2,176
15 to 20 Years........................................................ -- 593 -- 2,346
20 and Above.......................................................... -- 2,501 -- 4,606
--------- --------- --------- ---------
Total................................................................. $ 1,468 $ 12,385 $ -- $ 13,787
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) Excludes amounts ceded to other insurers of $6,210 in 1993 and includes $25
of assumed obligations in 1993.
(2) Excludes amounts ceded to other insurers of $5,576 in 1993 and includes
$1,218 of assumed obligations in 1993.
</TABLE>
The principal amount of insured obligations in the municipal portfolio, net
of amounts ceded, include the following types of issues:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF ISSUE 1994 1993
- ------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
General obligation......................................................................... $ -- $ 3,487
Tax-backed revenue......................................................................... -- 2,919
Housing revenue............................................................................ -- 1,879
Municipal utility revenue.................................................................. -- 1,783
Health care revenue........................................................................ -- 1,399
Transportation revenue..................................................................... -- 710
Other...................................................................................... -- 1,610
--------- ---------
Total...................................................................................... $ -- $ 13,787
--------- ---------
--------- ---------
</TABLE>
VII-77
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
Concentrations of collateral associated with insured asset-backed
obligations, net of amounts ceded, follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1994 1993
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Residential mortgages....................................................................... $ -- $ 3,874
Consumer receivable......................................................................... -- 1,443
Securities:
Government debt........................................................................... -- 2,039
Non-government securities................................................................. -- 1,709
Commercial mortgages:
Commercial real estate.................................................................... 530 809
Corporate secured......................................................................... 888 1,018
Investor-owned utility first mortgage bonds................................................. -- 772
Other asset-backed.......................................................................... 50 721
--------- ---------
Total....................................................................................... $ 1,468 $ 12,385
--------- ---------
--------- ---------
</TABLE>
ADDITIONAL FINANCIAL INFORMATION
Information for U S WEST Financial Services, Inc., a member of the capital
assets segment, follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31,
MARCH 31,
-------------------- -------------------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993 1992
- ---------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.............................................................. $ 10 $ 17 $ 54 $ 410 $ 302
Income before parent support and income taxes......................... -- -- -- -- 83
Income before parent support.......................................... -- -- -- -- 55
Net income............................................................ -- -- -- -- 55
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- --------------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- ---------------------------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
Net finance receivables........................................................... $ 976 $ 981 $ 1,020
Total assets...................................................................... 1,293 1,331 1,797
Total debt........................................................................ 486 533 957
Total liabilities................................................................. 1,223 1,282 1,748
Shareowner's equity............................................................... 70 49 49
</TABLE>
VII-78
<PAGE>
U S WEST MEDIA GROUP
SUPPLEMENTARY SELECTED PROPORTIONATE FINANCIAL DATA
SELECTED PROPORTIONATE RESULTS OF OPERATIONS
The following table is not required by generally accepted accounting
principles ("GAAP") or intended to replace the Combined Financial Statements
prepared in accordance with GAAP. It is presented to provide supplemental data.
However, because significant assets of the Media Group are not consolidated, and
because of the substantial effect of the formation of certain joint ventures on
the year-to-year comparability of the Media Group's combined financial results,
the Media Group believes that proportionate financial data facilitates the
understanding and assessment of its Combined Financial Statements. The following
proportionate accounting table reflects the relative weight of the Media Group's
ownership interest in its domestic and international investments in cable and
telecommunications, wireless and multimedia content and services operations.
Excluded are certain international and domestic investments for which the Media
Group does not receive timely detailed financial statements and which are,
collectively, not material. THE FINANCIAL INFORMATION INCLUDED BELOW DEPARTS
MATERIALLY FROM GAAP BECAUSE IT AGGREGATES THE REVENUES AND OPERATING INCOME OF
ENTITIES NOT CONTROLLED BY THE MEDIA GROUP WITH THOSE OF THE CONSOLIDATED
OPERATIONS OF THE MEDIA GROUP.
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
PROPORTIONATE (UNAUDITED) PROPORTIONATE
(1) (2) (UNAUDITED)
------------- ----------- -------------
<S> <C> <C> <C>
1994
Sales and other revenues.............................................. $ 4,208 $ 167 $ 4,375
Operating expenses.................................................... 3,306 83 3,389
Depreciation and amortization......................................... 498 65 563
Gains on sale of assets:
Partial sale of joint venture interest.............................. 164 (164) --
Paging assets....................................................... 68 (68) --
Other (expense) -- net................................................ (126) (38) (164)
------------- ----------- -------------
Income from continuing operations before income taxes................. 510 (251) 259
Provision (benefit) for income taxes.................................. 234 (91) 143
------------- ----------- -------------
Income from continuing operations..................................... $ 276 $ (160) $ 116
------------- ----------- -------------
------------- ----------- -------------
1993
Sales and other revenues.............................................. $ 2,157 $ 1,425 $ 3,582
Operating expenses.................................................... 1,630 1,089 2,719
Depreciation and amortization......................................... 223 202 425
Restructuring charges................................................. 109 (109) --
Other (expense) -- net................................................ (40) (125) (165)
------------- ----------- -------------
Income from continuing operations before income taxes................. 155 118 273
Provision for income taxes............................................ 70 33 103
------------- ----------- -------------
Income from continuing operations..................................... $ 85 $ 85 $ 170
------------- ----------- -------------
------------- ----------- -------------
<FN>
- ------------------------
(1) Historical proportionate results reflect the Media Group Combined
Statements of Operations for 1994 and 1993 on a proportionate basis.
(2) Pro forma adjustments normalize the historical proportionate results for
acquisitions and dispositions and remove one-time items. The net income
impact of the 1994 pro forma adjustments are $(105) to remove the gain on
sale of TeleWest, $(44) to remove the gain on sale of the paging assets and
related operations and $(11) to reflect the December 1994 acquisition of
the Atlanta systems as if it had occurred as of January 1, 1994. The net
income impact of the 1993 pro forma adjustments are $70 to remove
restructuring charges, $23 to reflect the September 1993 investment in TWE
as if it had occurred as of January 1, 1993 and $(8) to remove paging
operations.
</TABLE>
VII-79
<PAGE>
ANNEX VIII
ILLUSTRATIONS OF INTER-GROUP INTEREST
The following illustrations demonstrate the calculations of the creation and
changes in the Communications Group's Inter-Group Interest in the Media Group
based on the assumptions set forth herein. In the illustrations below, (i) 2
billion shares of Media Stock are assumed to be authorized for issuance, of
which 500 million shares have been deemed to represent 100% of the common
stockholders' equity of the Company attributable to the Media Group, (ii) 500
million shares of Communications Stock are assumed to be issued and outstanding
and (iii) no shares, therefore, are assumed to be initially issuable with
respect to the Communications Group's Inter-Group Interest in the Media Group
(the "Number of Shares Issuable with Respect to the Inter-Group Interest").
Unless otherwise specified, each illustration below should be read independently
as if none of the other transactions referred to below had occurred. Actual
calculations may be slightly different due to rounding.
At any given time, the fractional interest in the equity value of the
Company attributable to the Media Group ("Equity Value") that is intended to be
represented by the outstanding shares of Media Stock (the "Outstanding Media
Fraction") would be equal to:
Outstanding Shares of
Media Stock
----------------------------------------------------
Outstanding Shares of Media Stock + Number of Shares
Issuable with respect to the Inter-Group Interest
The balance of the Equity Value of the Media Group is intended to be
represented by the Communications Group's Inter-Group Interest and, at any given
time, the fractional interest in the Equity Value of the Communications Group
that is intended to be represented by the Inter-Group Interest (the "Inter-Group
Interest Fraction") would be equal to:
Number of Shares Issuable with
Respect to the Inter-Group Interest
----------------------------------------------------
Outstanding Shares of Media Stock + Number of Shares
Issuable with Respect to the Inter-Group Interest
The sum of the Outstanding Media Fraction and the Inter-Group Interest Fraction
would always equal 100%.
PUBLIC OFFERING OF MEDIA STOCK
The following illustrations reflect an assumed sale by the Company of 10
million shares of Media Stock in a public offering of Media Stock.
Assume all of such shares are identified as sold for the account of the
Media Group as an increase in its equity, with the net proceeds reflected
entirely in the financial statements of the Media Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding....................... 500 million
Newly issued shares for account of Media Group................. 10 million
-----------
Total issued and outstanding after initial public offering... 510 million
-----------
-----------
</TABLE>
- The Number of Shares Issuable with Respect to the Inter-Group Interest (0)
would remain unchanged.
VIII-1
<PAGE>
- As a result, the issued and outstanding shares (510 million) would
represent an Outstanding Media Fraction of 100%, calculated as follows:
510 million
---------------
510 million
The Inter-Group Interest Fraction would accordingly be zero.
- The Company would have 1,490 million authorized and unissued shares of
Media Stock remaining (2 billion minus 510 million issued and
outstanding).
REPURCHASE OF MEDIA STOCK
The following illustrations reflect an assumed repurchase by the Company of
50 million shares of Media Stock for the account of the Communications Group.
Assume all such shares are identified as repurchased for the account of the
Communications Group as a creation of an Inter-Group Interest in the Media
Group, with the financial statements of the Communications Group being charged
entirely with the consideration paid for such shares.
<TABLE>
<S> <C>
Shares previously issued and outstanding....................... 500 million
Shares repurchased for the account of Communications Group..... 50 million
-----------
Total issued and outstanding after repurchase................ 450 million
-----------
-----------
</TABLE>
- The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased by the number of any shares of Media Stock repurchased
for the account of the Communications Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group
Interest prior to repurchase................................... 0
Number of shares repurchased for the account of Communications
Group.......................................................... 50 million
----------
Number of Shares Issuable with Respect to the Inter-Group
Interest after repurchase...................................... 50 million
----------
----------
</TABLE>
- As a result, the total issued and outstanding shares (450 million) would
in the aggregate represent an Outstanding Media Fraction of 90%,
calculated as follows:
450 million
---------------------------
450 million + 50 million
The Inter-Group Interest Fraction would accordingly be increased to 10%.
- In this case, in the event of any dividend or other distribution paid on
the outstanding shares of Media Stock (other than a dividend or other
distribution payable in shares of Media Stock), the financial statements
of the Communications Group would be credited, and the financial
statements of the Media Group would be charged, with an amount equal to
11% (representing the ratio of the Number of Shares Issuable with Respect
to the Inter-Group Interest (50 million) to the total number of shares of
Media Stock issued and outstanding following the repurchase (450 million))
of the aggregate amount of such dividend or distribution.
- The Company would have 1,550 million authorized and unissued shares of
such Media Stock
(2 billion minus 450 million issued and outstanding).
MEDIA STOCK DIVIDENDS
The following illustrations reflect assumed dividends of Media Stock on
outstanding shares of Media Stock and outstanding shares of Communications
Stock, respectively, after the assumed repurchase of 50 million shares of Media
Stock for the account of the Communications Group.
VIII-2
<PAGE>
MEDIA STOCK DIVIDEND ON MEDIA STOCK
Assume the Company declares a dividend of 1/10 of a share of Media Stock on
each outstanding share of Media Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding....................... 450 million
Newly issued shares for account of Media Group................. 45 million
-----------
Total issued and outstanding after dividend.................. 495 million
-----------
-----------
</TABLE>
- The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased proportionately to reflect the stock dividend payable
in shares of Media Stock to holders of shares of Media Stock. That is, the
Number of Shares Issuable with Respect to the Inter-Group Interest would
be increased by a number equal to 11% (representing the ratio of the
Number of Shares Issuable with Respect to the Inter-Group Interest (50
million) to the number of shares of Media Stock issued and outstanding
(450 million), in each case immediately prior to such dividend) of the
aggregate number of shares issued in connection with such dividend or
outstanding shares of Media Stock (45 million), or 5 million.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group
Interest prior to dividend..................................... 50 million
Proportionate increase to reflect dividend of shares on
outstanding shares of Media Stock.............................. 5 million
----------
Number of Shares Issuable with Respect to the Inter-Group
Interest after dividend........................................ 55 million
----------
----------
</TABLE>
- As a result, the total issued and outstanding shares (495 million) would
in the aggregate continue to represent an Outstanding Media Fraction of
90%, calculated as follows:
495 million
---------------------------
495 million + 55 million
The Inter-Group Interest Fraction would accordingly continue to be 10%.
- The Company would have 1,505 million authorized and unissued shares of
Media Stock
(2 billion minus 495 million issued and outstanding).
MEDIA STOCK DIVIDEND ON COMMUNICATIONS STOCK
Assume the Company declares a dividend of 1/20 of a share of Media Stock on
each outstanding share of Communications Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding....................... 450 million
Newly issued shares for account of Communications Group........ 25 million
-----------
Total issued and outstanding after dividend.................. 475 million
-----------
-----------
</TABLE>
- Any dividend of shares of Media Stock to the holders of shares of
Communications Stock would be treated as a dividend of shares issuable
with respect to the Communications Group's Inter-
VIII-3
<PAGE>
Group Interest. 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.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group
Interest prior to dividend..................................... 50 million
Number of shares dividend on outstanding shares of
Communications Stock........................................... 25 million
----------
Number of Shares Issuable with Respect to the Inter-Group
Interest after dividend........................................ 25 million
----------
----------
</TABLE>
- As a result, the total issued and outstanding shares (475 million) would
in the aggregate represent an Outstanding Media Fraction of 95%,
calculated as follows:
475 million
---------------------------
475 million + 25 million
The Inter-Group Interest Fraction would accordingly be reduced to 5%.
Note, however, that after the dividend, the holders of Communications
Stock would also hold 25 million shares of Media Stock, which would be
intended to represent a 5% interest in the Equity Value attributable to
the Media Group (together with the 5% Inter-Group Interest of the
Communications Group).
- The Company would have 1,525 million authorized and unissued shares of
such Media Stock
(2 billion minus 475 million issued and outstanding).
TRANSFER OF ASSETS BETWEEN COMMUNICATIONS GROUP AND MEDIA GROUP
CONTRIBUTION OF ASSETS FROM COMMUNICATIONS GROUP TO MEDIA GROUP
The following illustration reflects the assumed contribution by the
Communications Group to the Media Group, after the assumed repurchase of 50
million shares of Media Stock for the account of the Communications Group, of
$100 million of assets allocated to the Communications Group on a date on which
the Market Value of the Media Stock is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding....................... 450 million
Newly issued shares............................................ 0
-----------
Total issued and outstanding after contribution.............. 450 million
-----------
-----------
</TABLE>
- The Number of Shares Issuable with Respect to the Inter-Group Interest
would be increased to reflect the contribution to the Media Group of
assets theretofore allocated to the Communications Group by the number
equal to the value of the assets contributed ($100 million) divided by the
Market Value of the Media Stock at that time ($20), or 5 million shares.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group
Interest prior to contribution................................. 50 million
Increase to reflect contribution to Media Group of assets
allocated to the Communications Group.......................... 5 million
----------
Number of Shares Issuable with Respect to the Inter-Group
Interest after contribution.................................... 55 million
----------
----------
</TABLE>
- As a result, the total issued and outstanding shares (450 million) would
in the aggregate represent an Outstanding Media Fraction of 89%,
calculated as follows:
450 million
---------------------------
450 million + 55 million
VIII-4
<PAGE>
The Inter-Group Interest Fraction would accordingly be increased to 11%.
- The Company would have 1,550 million authorized and unissued shares of
Media Stock
(2 billion minus 450 million issued and outstanding).
TRANSFER OF ASSETS FROM MEDIA GROUP TO COMMUNICATIONS GROUP
The following illustration reflects the assumed transfer by the Media Group
to the Communications Group after the assumed repurchase of 50 million shares of
Media Stock for the account of the Communications Group, of $100 million of
assets allocated to the Media Group on a date on which the Market Value of Media
Stock is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding....................... 450 million
Newly issued shares............................................ 0
-----------
Total issued and outstanding after transfer.................. 450 million
-----------
-----------
</TABLE>
- The Number of Shares Issuable with Respect to the Inter-Group Interest
would be decreased to reflect the transfer to the Communications Group of
assets theretofore allocated to the Media Group.
<TABLE>
<S> <C>
Number of Shares Issuable with Respect to the Inter-Group
Interest prior to transfer.................................... 50 million
Decrease to reflect transfer to Communications Group of assets
allocated to Media Group...................................... 5 million
-----------
Number of Shares Issuable with Respect to the Inter-Group
Interest after transfer....................................... 45 million
-----------
-----------
</TABLE>
- As a result, the total issued and outstanding shares (450 million) would
in the aggregate represent an Outstanding Media Fraction of 91%,
calculated as follows:
450 million
---------------------------
450 million + 45 million
The Inter-Group Interest Fraction would accordingly be decreased to 9%.
- The Company would have 1,550 million authorized and unissued shares of
Media Stock
(2 billion minus 450 million issued and outstanding).
VIII-5
<PAGE>
ANNEX IX
PROPOSED AMENDMENTS TO THE
U S WEST, INC. 1994 STOCK PLAN
IX-1
<PAGE>
ANNEX X
PROPOSED AMENDMENTS TO THE
U S WEST, INC. DEFERRED COMPENSATION PLAN
X-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits the
Registrant's board of directors to indemnify any person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding in which such person is made a
party by reason of his being or having been a director, officer, employee or
agent of the Registrant, in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The statute provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors, or otherwise.
The Registrant's Restated Certificate of Incorporation and By-laws provide
for indemnification of its directors and officers to the fullest extent
permitted by law.
As permitted by sections 102 and 145 of the DGCL, the Registrant's Restated
Certificate of Incorporation eliminates a director's personal liability for
monetary damages to the Registrant and its stockholders arising from a breach or
alleged breach of a director's fiduciary duty except for liability under section
174 of the DGCL, for liability for any breach of the director's duty of loyalty
to the Registrant or its stockholders, for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law or for any
transaction which the director derived an improper personal benefit.
The directors and officers of the Registrant are covered by insurance
policies indemnifying against certain liabilities, including certain liabilities
arising under the Securities Act which might be incurred by them in such
capacities and against which they cannot be indemnified by the Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C> <C>
2 -- Agreement and Plan of Merger, dated as of , 1995, between U S WEST,
Inc., a Colorado corporation, and U S WEST, Inc., a Delaware corporation,
(Annex I to the Proxy Statement and Prospectus included in this Registration
Statement).
**3-A -- Restated Certificate of Incorporation of U S WEST, Inc., a Delaware corporation
(Annex II to the Proxy Statement and Prospectus included in this Registration
Statement).
3-B -- Bylaws of U S WEST, Inc., a Delaware corporation (Annex III to the Proxy
Statement and Prospectus included in this Registration Statement).
**4-A -- Amended and Restated Rights Agreement, dated as of , 1995, between U S
WEST, Inc. and State Street Bank and Trust Company, as Rights Agent
**5 -- Opinion of Weil, Gotshal & Manges regarding the legality of the securities
being registered.
**8 -- Opinion of Weil, Gotshal & Manges regarding certain federal income tax
consequences.
23-A -- Consents of Coopers & Lybrand L.L.P.
23-B -- Consent of Ernst & Young LLP
23-C -- Consent of KPMG Peat Marwick LLP
**23-D -- Consents of Weil, Gotshal & Manges are contained in the opinions of counsel
filed as Exhibits 5 and 8.
*24 -- Powers of Attorney.
<FN>
- ------------------------
*Previously filed.
**To be filed by amendment.
</TABLE>
II-1
<PAGE>
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's Annual Report pursuant to Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (and where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act), that is
incorporated by reference in the Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 15 (other than the
insurance policies referred to therein), or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, U S WEST, Inc.
certifies that it has reasonable grounds to believe that it meets all the
requirements for filing on Form S-4 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Denver, State of Colorado, on the 30th
day of June, 1995.
U S WEST, Inc.
By ________/s/_STEPHEN E. BRILZ_______
Stephen E. Brilz
ASSISTANT SECRETARY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<C> <S> <C>
PRINCIPAL EXECUTIVE OFFICER:
RICHARD D. MCCORMICK* Chairman of the Board,
President and Chief Executive
Officer
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
JAMES M. OSTERHOFF* Executive Vice President and
Chief Financial Officer
DIRECTORS:
RICHARD B. CHENEY*
REMEDIOS DIAZ-OLIVER*
GRANT A. DOVE*
ALLAN D. GILMOUR*
PIERSON M. GRIEVE*
ALLEN F. JACOBSON*
RICHARD D. MCCORMICK*
JERRY O. WILLIAMS*
MARILYN CARLSON NELSON*
FRANK POPOFF*
SHIRLEY M. HUFSTEDLER*
*By /s/Stephen E. Brilz
Stephen E. Brilz
ATTORNEY-IN-FACT
</TABLE>
Dated: June 30, 1995
II-3
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in the Registration Statement of U S WEST, Inc.
on Form S-4 (File No. 33-59315) of our report, which includes an explanatory
paragraph regarding the discontinuance of accounting for the operations of U S
WEST Communications, Inc. in accordance with Statement of Financial Accounting
Standard No. 71, "Accounting for the Effects of Certain Types of Regulation," in
1993, and a change in the method of accounting for postretirement benefits other
than pensions and other postemployment benefits in 1992, dated January 18, 1995,
on our audits of the consolidated financial statements of U S WEST, Inc., as of
December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993 and
1992.
We consent to the inclusion in the Registration Statement of U S WEST, Inc.
on Form S-4 (File No. 33-59315) of our report, which includes an explanatory
paragraph regarding the discontinuance for accounting of the operations of U S
WEST, Communications, Inc. in accordance with Statement of Financial Accounting
Standard No. 71, "Accounting for the Effects of Certain Types of Regulation," in
1993, and a change in the method of accounting for postretirement benefits other
than pensions and other postemployment benefits in 1992, dated May 12, 1995, on
our audits of the combined financial statements of U S WEST, Communications
Group, as of December 31, 1994 and 1993, and for the years ended December 31,
1994, 1993 and 1992.
We consent to the inclusion in the Registration Statement of U S WEST, Inc.
on Form S-4 (File No. 33-59315) of our report, which includes an explanatory
paragraph regarding a change in the method of accounting for postretirement
benefits other than pensions and other postemployment benefits in 1992, dated
May 12, 1995, on our audits of the combined financial statements of U S WEST
Media Group, as of December 31, 1994 and 1993, and for the years ended December
31, 1994, 1993 and 1992.
We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Denver, Colorado
June 30, 1995
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of U S WEST, Inc. on Form S-4 (File No. 33-59315) of our reports, which are
included in U S WEST, Inc.'s Annual Report on Form 10-K and which include an
explanatory paragraph regarding the discontinuance of accounting for the
operations of U S WEST Communications, Inc. in accordance with Statement of
Financial Accounting Standard No. 71, "Accounting for the Effects of Certain
Types of Regulation," in 1993, and a change in the method of accounting for
postretirement benefits other than pensions and other postemployment benefits in
1992, dated January 18, 1995, on our audits of the consolidated financial
statements and the consolidated financial statement schedule of U S WEST, Inc.,
as of December 31, 1994 and 1993, and for the years ended December 31, 1994,
1993 and 1992.
We also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Denver, Colorado
June 30, 1995
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No 1. to Registration Statement No. 33-59315 on Form S-4 and
related Prospectus of U S West, Inc. and to the incorporation by reference
therein of our report dated February 7, 1995, with respect to the
consolidated financial statements of Time Warner Entertainment Company, L.P.
included in the Current Report on Form 8-K of U S West, Inc. dated May 23,
1995, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
New York, New York
June 28, 1995
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the use of our report dated February 25, 1994, on the combined
financial statements of Georgia Cable Holdings Limited Partnership and
Subsidiary Partnerships, incorporated herein by reference and to the
reference to our firm under the heading "Experts" in Amendment No. 1 to
Registration Statement No. 33-59315 on Form S-4 and related prospectus of US
West, Inc.
/s/ KPMG Peat Marwick LLP
Miami, Florida
June 30, 1995
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the use of our report dated March 25, 1994, on the consolidated
financial statements of Wometco Cable Corp. and subsidiaries, incorporated
herein by reference and to the reference to our firm under the heading
"Experts" in Amendment No. 1 to Registration Statement No. 33-59315 on
Form S-4 and related prospectus of US West, Inc.
/s/ KPMG Peat Marwick LLP
Miami, Florida
June 30, 1995
