<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1995
REGISTRATION NO. 33-59315
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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. / /
------------------------
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
S-4 ITEM NUMBER AND CAPTION LOCATION IN PROXY STATEMENT AND PROSPECTUS
- ------------------------------------------------------------------------ ---------------------------------------------------
15. Information with Respect to S-3 Companies......... Incorporation of Certain Documents by Reference
<C> <C> <S> <C>
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
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
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 AUGUST 11, 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 10:00 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.
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.
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 company.
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.
<PAGE>
At the Special Meeting, you will also be asked to consider and approve other
related Proposals which would amend the U S WEST 1994 Stock Plan and the U S
WEST 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.
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.
Sincerely,
Richard D. McCormick
CHAIRMAN OF THE BOARD,
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
PRELIMINARY COPY, DATED AUGUST 11, 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 10:00 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 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 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................................... 36
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.............. 39
Certain Management Policies............. 42
Accounting Matters and Policies......... 43
Dividend Policy......................... 45
Description of Communications Stock and
Media Stock............................ 46
Future Inter-Group Interest............. 59
Stock Transfer Agent and Registrar...... 61
Stock Exchange Listings................. 61
Financial Advisors...................... 61
Comparison of Shareholder Rights........ 61
Certain Federal Income Tax
Considerations......................... 68
Restated Rights Agreement............... 72
Convertible Securities.................. 73
Preferred Stock......................... 74
Anti-Takeover Considerations............ 76
Dissenters' Rights...................... 77
Proposal 2 -- Amendment of the U S WEST,
Inc. 1994 Stock Plan..................... 80
Proposal 3 -- Amendment of the U S WEST,
Inc. Deferred Compensation Plan.......... 82
Solicitation Statement.................... 84
<CAPTION>
PAGE
---------
<S> <C>
Shareholder Proposals for 1996 Annual
Meeting.................................. 84
Experts................................... 84
Legal Opinions............................ 85
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-27
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 72
Acquisition Trigger Date 72
Advance/Newhouse VII-5
Advanced Technologies VI-7
Affinity Group VII-5
AirTouch 6
AirTouch -- U S WEST PCS Partnership VII-7
Announcement Date 79
Article 113 77
Articles 3
ATI VII-3
AT&T VI-3
Atlanta Systems 6
Available Dividend Amount 47
Bell Atlantic VII-2
Bellcore VI-7
Board 1
Broadband Applications VI-4
Broadband Network VI-4
CAPs VI-6
CableComms VII-6
CBCA 20
CEIT VI-2
Code 68
Commission 4
Common Stock 1
Communications Group 2
Communications Group Available Dividend
Amount 47
Communications Group Net Earnings (Loss) 47
Communications Group Region 6
Communications Group Subsidiaries 51
Communications Right 72
Communications Stock 1
Company 1
Compensation Plan 82
Composite Tape 29
Convertible Security 74
Cox VII-6
D.C. District Court VI-3
DBS VII-12
DGCL 30
Disposition 48
Dissenter 78
Dissenter's Notice 78
Dissenter's Responsive Notice 79
Distribution Date 72
<CAPTION>
TERM PAGE
- ------------------------------------------- ---------
<S> <C>
EBITDA 23
Effective Time 38
Exchange Act 4
Existing By-Laws 19
Existing Certificates 38
Existing Common Stock 1
Existing Preferred Stock 46
Existing Rights 72
Existing Series A Preferred Stock 46
Existing Series B Preferred Stock 1
Expiration Date 72
Fair Value II-18
FCC 34
Flextech VII-9
FSA 74
GAAP 23
Fund American 14
Foreign Exchanges 3
Full Service Network VII-3
Group 2
Home Box Office VII-10
Human Resources Committee 82
Inter-Group Interest 19
Inter-Group Interest Fraction 59
Junior Stock 75
LATAs V-15
LECs VII-11
Liquidation Unit 2
LYONs 74
LYONs Indenture 74
Mailing Date 38
Management Committee VII-4
Market Capitalization II-18
Market Value II-18
Market Value Ratio of the Communications
Stock to the Media Stock II-19
Market Value Ratio of the Media Stock to
the Communications Stock.................. II-19
Marketing Resources 42
Media Group 2
Media Group Available Dividend Amount 47
Media Group Net Earnings (Loss) 47
Media Group Subsidiaries 51
Media Right 72
Media Stock 1
Mercury One-2-One VII-8
Merger 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ------------------------------------------- ---------
<S> <C>
Merger Agreement 1
MFJ VI-3
MMDS VII-12
MSA VII-3
Mountain Bell VI-3
Net Proceeds 50
New By-Laws 2
NewVector 16
1992 Cable Act VII-11
Non-Competition Restrictions VII-10
Northwestern Bell VI-3
Number of Shares Issuable with Respect to
the Inter-Group Interest 60
Non-Regulated Communication Businesses 44
NYNEX VII-2
NYSE 3
ONA VI-25
Outside Activities Restrictions VII-7
Outstanding Media Fraction 59
Ownership Trigger Date 72
Pacific Northwest Bell VI-3
Parity Stock 75
Payment Demand 78
Payment Demand Date 78
PAYSOP 36
PCS 16
PCS Primeco V-24
POPs 28
Preferred Stock 46
Proxy Statement 1
PSC VI-8
PSE 3
Publicly Traded II-23
PUCs 34
RBOCs VI-7
Recapitalization Proposal 1
Redemption Price 73
Registration Statement 4
Related Business Transaction 50
<CAPTION>
TERM PAGE
- ------------------------------------------- ---------
<S> <C>
Restated Certificate 1
Restated Rights Agreement 72
Restructuring Plan VI-2
Rights 72
Rights Agreement 72
Rights Redemption Date 73
Savings Plan 80
SBC VII-6
Series A Preferred Stock 46
Series B Preferred Stock 46
Series C Preferred Stock 1
Series A Purchase Price 72
Series B Purchase Price 72
Service 20
SFAS 23
Shareholder's Notice of Intent to Dissent 77
Six Flags VII-10
SMATV VII-12
SP/E 36
Special Committee 39
Special Meeting 1
Stock Plan 80
TCI International VII-5
TeleWest 6
Thomson Directories V-7
TITUS VII-6
Trading Day II-23
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-25
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 AUGUST 11, 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 10:00 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 10:00 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
company. 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 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. The Liquidation Units of the
Communications Stock and the Media Stock were determined by the Company and are
based upon, among other factors, each Group's initial level of debt and equity
capitalization, each Group's recent historical performance, the market prices of
shares of comparable companies that are
2
<PAGE>
publicly traded and the current state of the markets for public offerings and
other stock transactions. 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."
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 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 Deferred Compensation Plan to provide for the deferral of compensation by
certain employees in phantom units of Communications Stock, Media Stock or both.
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, which is available for inspection
and copying as set forth above. Statements contained in this Proxy Statement as
to the contents of any contract or other document which is filed as an exhibit
to the Registration Statement are not necessarily complete, and each such
statement is qualified in its entirety by reference to the full text of such
contract or document.
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 Reports
on Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995 and (iii)
Current Reports on Form 8-K dated January 19, 1995, April 10, 1995, April 18,
1995, May 23, 1995 (as amended by Form 8-K/A), June 20, 1995 and July 28, 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 -- CERTAIN MANAGEMENT POLICIES," "-- ACCOUNTING
MATTERS AND POLICIES," "-- 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 Com- The Communications Group is The Media Group is com-
pany comprised of businesses prised of:
which provide regulated - the Company's cable and
communications services to telecommunications busi-
customers in the Company's nesses outside of the
14 state region (the Communications Group
"Communications Group Region, including its
Region"), including local cable systems in the
telephone services, ex- Atlanta, Georgia
change access services and metropolitan area (the
certain long distance ser- "Atlanta Systems") and
vices, as well as various its investments in Time
new services, including Warner Entertainment
Caller ID, voice messaging Company, L.P. ("TWE") and
and high-speed data TeleWest Communications
networking services. plc ("TeleWest");
The Communications Group - the Company's wireless
plans to build an communications business-
interactive broadband es, including its
telecommunications network proposed joint venture
in its region, capable of with AirTouch Communica-
providing a broader range tions, Inc. ("AirTouch")
of products and services to and Mercury One-2-One,
its customers. its personal communica-
tions services joint ven-
ture in the United King-
dom; 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 con- Common Stock will be con-
verted into one share of verted into one share of
Communications Stock and Communications Stock and
one share of Media Stock. one share of Media Stock.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THE RECAPITALIZATION PROPOSAL
EXISTING --------------------------------------------------------
COMMON STOCK COMMUNICATIONS STOCK MEDIA STOCK
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
The Communications Stock is The Media Stock is intend-
intended to reflect sepa- ed to reflect separately
rately the performance of the performance of the
the Communications Group. Media Group.
NUMBER OF SHARES OUTSTAND- 471,329,711 471,329,711 471,329,711
ING (BASED ON NUMBER OF
SHARES OF EXISTING COMMON
STOCK OUTSTANDING AS OF
AUGUST 7, 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 ap-
redesignation of the Ex- proval of the listing of
isting 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, in-
(i) the requirement that, cluding (i) the requirement
subject to certain ex- that, subject to certain
ceptions, all transactions exceptions, all
between the Communications transactions between the
Group and the Media Group Media Group and the
be consistent with Communications Group be
arm's-length terms and (ii) consistent with
the use by the Board of its arm's-length terms and (ii)
good faith business judg- the use by the Board of its
ment to allocate corporate good faith business judg-
opportunities between the ment to allocate corporate
two Groups. opportunities between the
two Groups.
The Company does not in- The Company does not in-
tend to transfer funds be- tend to transfer funds be-
tween the Groups, except tween the Groups, except
for certain short-term for certain short-term
ordinary course advances of ordinary course advances of
funds at market rates asso- funds at market rates asso-
ciated with the Company's ciated with the Company's
centralized cash manage- centralized cash manage-
ment. The Board may, how- ment. The Board may, how-
ever, in its sole ever, 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 in- The Company currently does
dividend rate is presently tends to pay dividends on not intend to pay divi-
$0.535 per share of the Communications Stock dends 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 Communi- Dividends on the Media
Common Stock are limited to cations Stock will be paid Stock will be paid at the
legally available funds at the discretion of the discretion of the Board
under Colorado law and are Board based primarily upon based primarily upon the
payable at the discretion the financial condition, financial condition,
of the Board based results of operations and results of operations and
primarily upon the business requirements of business requirements of
financial condition, the Communications Group the Media Group and the
results of operations and and the Company as a whole. Company as a whole.
business requirements of Dividends will be payable Dividends, if any, will be
the Company. out of the lesser of (i) payable out of the lesser
the funds of the Company of (i) the funds of the
legally available for the Company legally available
payment of dividends and for the payment of divi-
(ii) the Communications dends and (ii) the Media
Group Available Dividend Group Available Dividend
Amount. Amount.
The Communications Group The Media Group Available
Available Dividend Amount Dividend Amount is intend-
is intended to be similar ed to be similar to the
to the amount of assets amount of assets that would
that would be available for be 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, not- or unequal amounts,
withstanding the relative notwithstanding the rela-
amounts of the Communi- tive amounts of the Media
cations Group Available Group Available Dividend
Dividend Amount and the Amount and the Communi-
Media Group Available Div- cations Group Available
idend Amount, the amount of Dividend Amount, the amount
prior dividends declared on of prior dividends declared
each class, the respective on each class, the
voting or liquidation respective voting or
rights of each class or any liquidation rights of each
other factor. class or any 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 de- Except as otherwise de-
scribed herein, the holders scribed herein, the holders
of Communications Stock and of Media Stock and Com-
Media Stock will vote munications Stock will vote
together as a single class. together as a single class.
The Communications Stock Prior to March 1, 1996,
will have one vote per each share of Media Stock
share. will have . of a vote.
Thereafter, each share of
Media Stock will have a
variable number of votes
equal to the ratio of the
time-weighted average Mar-
ket Value of one share of
Media Stock to the time-
weighted average Market
Value of one share of Com-
munications 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 Me- Because each share of Me-
dia Stock will have a dia Stock will have a
variable number of votes variable number of votes,
based upon a ratio of the the relative voting power
time-weighted average per share of Media Stock
Market Value of one share and Communications Stock
of Media Stock to the will fluctuate. Market
time-weighted average Value could be influenced
Market Value of one share by many factors, including
of Communications Stock, the results of operations
the relative voting power of the Company and each of
per share of Communications the Groups, the regulatory
Stock and Media Stock will environment, trading
fluctuate. Market Value volume, share issuances and
could be influenced by many repurchases and general
factors, including the economic and market
results of operations of conditions.
the Company and each of the
Groups, the regulatory
environment, trading
volume, share issuances and
repurchases and general
economic and market
conditions.
PREEMPTIVE RIGHTS: The holders of Existing The holders of Communica- The holders of Media Stock
Common Stock do not have tions Stock will not have will not have any preemp-
any preemptive rights or any preemptive rights or tive rights or any rights
any rights to convert their any rights to convert their to convert their shares
shares into any other secu- shares into any other secu- into any other securities
rities of the Company. rities of the Company. of the 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 110% of the shares of Communications
ratio of the average Market Stock equal to 110% of the
Value of one share of ratio of the average Market
Communications Stock to the Value of one share of Media
average Market Value of one Stock to the average Market
share of Media Stock, Value of one share of
calculated over the ten- Communications Stock,
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 110% of the ratio of the
Stock equal to 110% of the time-weighted average
ratio of the time-weighted Market Value of one share
average Market Value of one of Media Stock to the
share of Communications time-weighted average
Stock to the time-weighted Market Value of one share
average Market Value of one of 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 115% of the
number of shares of Media ratio of the time-weighted
Stock equal to 100% of the average Market Value of one
ratio of the time-weighted share of Media Stock to the
average Market Value of one time-weighted average
share of Communications Market Value of one share
Stock to the time-weighted of Communications Stock,
average Market Value of 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 100% 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
<TABLE>
<S> <C>
DATE, TIME AND PLACE OF MEETING... A Special Meeting of Shareholders of the Company will be
held on , 1995, at 10:00 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 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
Deferred Compensation Plan to provide for the deferral
of compensation by certain employees in phantom units
of Communications Stock, Media Stock or both.
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.
Fund American Enterprises Holdings, Inc. ("Fund
American"), the sole holder of all of the outstanding
shares of Existing Series B Preferred Stock, has agreed
to vote such shares in favor of the Recapitalization
Proposal.
- 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.
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14
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- 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.
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 premise
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
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15
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<S> <C>
telecommunications investments, including the Company's
interest in TeleWest, a leading 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 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
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16
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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.
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
company 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.
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17
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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.
While the Company has not been impeded in operating 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
</TABLE>
18
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<S> <C>
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 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 Commu-
nications 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."
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19
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<S> <C>
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 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."
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20
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<S> <C>
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 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 Deferred
Compensation Plan to provide for the deferral of
compensation by certain employees in phantom units of
Communications Stock, Media Stock or both. If the
Recapitalization Proposal is approved by the
shareholders, 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.
</TABLE>
21
<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 "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 June 30, 1995
and 1994, and for the six months ended June 30, 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>
SIX MONTHS ENDED
JUNE 30, 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............... $ 5,722 $ 5,349 $ 10,953 $ 10,294 $ 9,823 $ 9,528 $ 9,369
Income from continuing operations
(1)................................... 648 699 1,426 476 1,076 840 1,145
Net income (loss) (2).................. 648 699 1,426 (2,806) (614) 553 1,199
Total assets........................... $ 24,193 $ 21,193 $ 23,204 $ 20,680 $ 23,461 $ 23,375 $ 22,160
Total debt (3)......................... 8,990 7,231 7,938 7,199 5,430 5,969 5,147
Shareowners' equity.................... 7,679 6,597 7,382 5,861 8,268 9,587 9,240
Earnings per common share (continuing
operations) (1)....................... 1.37 1.56 3.14 1.13 2.61 2.09 2.97
Earnings (loss) per common share....... 1.37 1.56 3.14 (6.69) (1.49) 1.38 3.11
Dividends per common share............. 1.07 1.07 2.14 2.14 2.12 2.08 2.00
Book value per common share............ 16.31 14.52 15.73 13.29 19.95 23.39 23.48
Return on common shareowners' equity
(4)................................... 17.0% 22.1% 21.6% -- 14.4% 5.7% 13.7%
Percentage of debt to total capital
(3)................................... 53.9% 52.3% 51.8% 55.1% 39.6% 38.4% 35.8%
Capital expenditures (3)............... $ 1,365 $ 1,227 $ 2,820 $ 2,441 $ 2,554 $ 2,425 $ 2,217
OPERATING DATA
EBITDA (5)............................. $ 2,451 $ 2,287 $ 4,559 $ 4,228 $ 3,963 $ 3,920 $ 3,889
Telephone network access lines in
service (thousands)................... 14,518 14,009 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use
(millions)............................ 28,058 25,630 52,275 48,123 44,369 41,701 38,832
Cellular subscribers................... 1,165,000 738,000 968,000 601,000 415,000 300,000 219,000
Cable television basic subscribers
served................................ 509,000 473,000 486,000 -- -- -- --
Employees.............................. 61,448 61,320 61,505 60,778 63,707 65,829 65,469
Number of common shareowners........... 789,009 831,620 816,099 836,328 867,773 899,082 935,530
Weighted average common shares
outstanding (thousands)............... 469,490 449,024 453,316 419,365 412,518 401,332 386,012
PRO FORMA INFORMATION
Earnings per share of Communications
Stock................................. $ 1.29 $ 1.30 $ 2.53
Average shares of Communications Stock
outstanding (thousands)............... 469,490 449,024 453,316
Earnings per share of Media Stock...... $ 0.08 $ 0.26 $ 0.61
Average shares of Media Stock
outstanding (thousands)............... 469,490 449,024 453,316
<FN>
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(1) 1995 first six months income includes gains of $49 ($.10 per share) on the
sales of rural telephone exchanges. 1994 first six months income includes
gains of $31 ($.07 per share) on the sales of rural telephone exchanges and
a gain of $41 ($.09 per share) on the sale of the Company's paging unit.
1994 income from continuing operations includes a gain of $105 ($.23 per
share) on the sales 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 June 30, 1995 and 1994, and for the years
ended December 31, 1991 and 1990, and for the six months ended June 30, 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>
SIX MONTHS ENDED
JUNE 30, 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................................. $ 4,656 $ 4,534 $ 9,176 $ 8,870 $ 8,530 $ 8,345 $ 8,235
Net income (loss) (1).............................. 608 584 1,150 (2,809) (815) 771 935
Total assets....................................... 16,078 15,655 15,944 15,423 20,655 20,244 19,756
Total debt......................................... 6,657 5,940 6,124 5,673 5,181 5,287 5,029
Communications Group equity........................ 3,191 3,044 3,179 2,722 6,003 7,530 7,279
Return on Communications Group equity (2, 3)....... 38.2% 40.6% 39.0% 22.5% 13.7% 12.8% 12.8%
Percentage of debt to total capital (3)............ 67.6% 66.1% 65.8% 67.6% 46.3% 41.3% 40.9%
Capital expenditures............................... $ 1,193 $ 1,118 $ 2,477 $ 2,226 $ 2,385 $ 2,194 $ 2,022
OPERATING DATA
EBITDA (4)......................................... $ 2,106 $ 2,018 $ 4,026 $ 3,743 $ 3,553 $ 3,547 $ 3,500
Telephone network access lines in service
(thousands)....................................... 14,518 14,009 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use (millions)............ 28,058 25,630 52,275 48,123 44,369 41,701 38,832
Employees.......................................... 51,169 52,937 51,402 52,598 55,352 57,725 57,410
PRO FORMA INFORMATION
Earnings per share................................. $ 1.29 $ 1.30 $ 2.53
Dividends per share................................ 1.07 1.07 2.14
Average shares outstanding (thousands)............. 469,490 449,024 453,316
<FN>
- ------------------------------
(1) Net income for the first six months of 1995 and 1994 includes gains of $49
and $31, 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 June 30, 1995 and 1994, and for the years ended
December 31, 1991 and 1990, and for the six months ended June 30, 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>
SIX MONTHS ENDED
JUNE 30, 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.............................................. $ 1,121 $ 877 $ 1,908 $1,549 $1,384 $1,261 $1,210
Income from continuing operations (1)................................. 40 115 276 85 146 69 210
Net income (loss)..................................................... 40 115 276 3 201 (218) 264
Total assets.......................................................... 8,220 5,646 7,394 5,446 3,130 3,235 2,555
Total debt (2)........................................................ 2,333 1,291 1,814 1,526 249 682 118
Media Group equity.................................................... 4,488 3,553 4,203 3,139 2,265 2,057 1,961
Percentage of debt to total capital (2)............................... 34.2% 26.7% 30.1% 32.7% 9.9% 24.9% 5.7%
Capital expenditures (2).............................................. $ 172 $ 109 $ 343 $ 215 $ 169 $ 231 $ 195
OPERATING DATA
EBITDA (3)............................................................ $ 345 $ 269 $ 533 $ 485 $ 410 $ 373 $ 388
Employees............................................................. 10,279 8,383 10,103 8,180 8,355 8,104 8,059
PRO FORMA INFORMATION
Earnings per share.................................................... $ 0.08 $ 0.26 $ 0.61
Average shares outstanding (thousands)................................ 469,490 449,024 453,316
<FN>
- ------------------------------
(1) Income from continuing operations for the first half of 1994 includes a
gain of $41 from the sale of the Company's paging operations. 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 and capital expenditures
exclude discontinued operations. Including discontinued operations the
percentage of debt to total capital was 42.4% at June 30, 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 $422 at June 30, 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 WIRELESS MULTIMEDIA CONTENT TOTAL
TELECOMMUNICATIONS COMMUNICATIONS AND SERVICES --------
SIX MONTHS ENDED ---------------------------- ------------------------ ------------------------
JUNE 30, 1995 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $1,251 $ 56 $361 $ 134 $524 $ 44 $ 2,370
Operating expenses............... 973 79 249 159 313 48 1,821
Depreciation and amortization.... 201 19 50 22 13 5 310
Operating income (loss).......... 77 (42) 62 (47) 198 (9) 239
Net income (loss)................ (32) (13) 31 (60) 119 (5) 40
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 278 $(23) $112 $ (25) $211 $ (4) $ 549
Subscribers/Customers............ 2,887 237 988 241 -- -- 4,353
Advertisers...................... -- -- -- -- 472 161 633
Homes passed..................... 4,550 646 -- -- -- -- 5,196
POPs (4)......................... -- -- 33,200 38,300 -- -- 71,500
Telephone lines.................. -- 93 -- -- -- -- 93
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1994
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $1,023 $ 43 $313 $ 69 $490 $ 11 $ 1,949
Operating expenses............... 803 63 236 92 280 13 1,487
Depreciation and amortization.... 151 15 41 17 12 1 237
Operating income (loss).......... 69 (35) 36 (40) 198 (3) 225
Income (loss) from continuing
operations...................... (14) (18) 54 (35) 130 (2) 115
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 220 $(20) $ 77 $ (23) $210 $ (2) $ 462
Subscribers/Customers............ 1,853 225 624 90 -- -- 2,792
Advertisers...................... -- -- -- -- 464 120 584
Homes passed..................... 3,092 588 -- -- -- -- 3,680
POPs-Cellular (4)................ -- -- 18,500 38,300 -- -- 56,800
Telephone lines.................. -- 58 -- -- -- -- 58
(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 (loss).......... 149 (73) 69 (103) 389 (8) 423
Income (loss) 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 (loss).......... 136 (64) 25 (53) 397 (3) 438
Income (loss) 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 ($11) and ($6) for the six months
ended June 30, 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. June 30, 1994 results do not include
activity for the Atlanta Systems.
(3) Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entity's 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 June
30, 1995, Mercury One-2-One's network reached 30% of the population. June
30, 1995 data also includes 14,300 POPs related to the March 1995
acquisition of domestic PCS licenses.
(5) See the Supplementary Selected Proportionate Financial Data schedule to the
Media Group Combined Financial Statements for a reconciliation 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........................................... 42.875 39.375 0.535
Third Quarter (through August 10, 1995).................. 45.00 40.875 0.535
</TABLE>
On April 7, 1995, the trading day prior to the Company's announcement of the
Recapitalization Proposal, and on August 10, 1995, the closing sales price of
the Existing Common Stock, as reported on the Composite Tape, was $41.875 and
$42.875, respectively. As of August 7, 1995, there were 471,329,711 shares of
Existing Common Stock outstanding and 795,741 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.
29
<PAGE>
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, 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 ratio, over a specified period, of the time-weighted average
Market Value of one share of Media Stock to the time-weighted average Market
Value of one share of Communications Stock. This formula is intended to equate
the proportionate voting rights of each class of 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
30
<PAGE>
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 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. See "-- Fiduciary Duties of
the Board" below. 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
31
<PAGE>
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 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 115% for the first five
years and thereafter declining annually to 100% 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 110% premium following any dividend or partial
redemption undertaken in connection with a disposition of all or
substantially all of the properties or assets attributed to the Group whose
stock is being converted. Any such determination could be made at a time
when either or both of the Communications Stock and the Media Stock may be
considered to be overvalued or undervalued. In addition, any such conversion
at any premium would dilute the interests in 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. In determining whether to convert one class of Common Stock
into the other class of Common Stock, the Board would act in accordance with
its good faith business judgment that any such conversion is in the best
interests of the Company and all of its stockholders, including both the
holders of the class of Common Stock being converted and the holders of the
class of Common Stock into which it is to be converted. 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 110% of the ratio,
calculated over a period of time, of the average Market Value of one share
of the Common Stock relating to the Group subject to such Disposition to the
average 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."
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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 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. The Board will ensure that
management implements procedures to resolve any such conflict in the best
interests of the Company and all of its stockholders. In the event any such
conflict cannot be resolved or otherwise requires resolution by the Board,
the Board would resolve such conflict 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, in 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.
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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 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.
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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."
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
Dividend, 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
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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 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.
For participants in the U S WEST Shareowner Investment Plan, the proxy card
will cover the number of full shares in the plan account, as well as shares
registered in the participant's name. For participants in the U S WEST Payroll
Stock Ownership Plan ("PAYSOP") or the U S WEST Savings Plan/ESOP ("SP/E"), the
proxy card will also serve as a voting instruction card for the trustees of
those plans with respect to the shares held in the participants' accounts.
Shares held in the SP/E for which proxy cards are not returned (as well as
shares held in the suspense account under the plan) will be voted by the trustee
of the SP/E in accordance with its own proxy voting guidelines. Shares held in
the PAYSOP cannot be voted unless a proxy card covering those shares is signed
and returned.
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
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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.
Fund American, the sole holder of all of the outstanding shares of Existing
Series B Preferred Stock, has agreed to vote such shares in favor of the
Recapitalization Proposal. 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).
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 following the filing of a
certificate of merger with the Secretary of State of Delaware and articles of
merger with the Secretary of State of Colorado. The time of such effectiveness
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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.
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. As soon as practicable following the Effective Time, holders of Existing
Common Stock of record as of the Effective Time will be mailed certificates
representing shares of Media Stock, and information pursuant to which each
holder may, at its option, forward its Existing Certificates to State Street
Bank and Trust Company, as exchange agent, for surrender and exchange for
certificates representing shares of Communications Stock. In lieu of
certificates, enrollees in the U S WEST Shareowner Investment Plan will receive
a statement setting forth their holdings of Communications Stock and Media
Stock.
On a date as soon as practicable following the mailing to stockholders of
certificates representing shares of Media Stock (the "Mailing Date"), the
Company will mail to each stockholder who receives fewer than 100 shares of
Communications Stock and Media Stock information with respect to, and a form for
use in connection with, the Odd-Lot Program. 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
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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. 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.
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.
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- 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.
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 company. 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
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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.
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 possible inability or increased difficulty of
receiving a ruling from the Service 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
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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 described
below and subject to the interests of the Company as a whole, all
transactions between the Communications Group and the Media Group are
intended, to the extent practicable, to be on terms consistent with those
that would be applicable to arm's-length dealings, taking into account a
number of factors, including quality, availability and pricing.
Notwithstanding the policy that all transactions between the
Communications Group and the Media Group be consistent with arm's-length
terms, transactions between U S WEST Communications and the Media Group are
subject to certain FCC affiliate transaction accounting rules. Pursuant to
such rules, transactions involving the provision of goods and services
between the Media Group and U S WEST Communications must be recorded on U S
WEST Communications' regulated books, which are used by the PUCs to
determine rates, at tariffed rates, prevailing company price or fully
distributed cost. In addition, such rules require that assets transferred
must be recorded at either net book value or fair market value.
U S WEST Communications 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
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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 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, the Media Group's 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 the
Communications Group.
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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 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
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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 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
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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."
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.
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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.
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.
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 attributed to the Communications Group (provided that preferred
stock shall not be treated as a liability), in each case as of such date and
determined on a basis consistent with that applied in determining the
Communications Group Net Earnings (Loss) over (ii) the aggregate par value of,
or any greater amount determined to be capital in respect of, all outstanding
shares of Communications Stock and each class or series of Preferred Stock
attributed to the Communications Group.
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 multiplied by (y) an amount equal to the fair market value of the
total assets attributed to the Media Group less the total amount of the
liabilities attributed to the Media Group (provided that preferred stock shall
not be treated as a liability), in each case as of such date and determined on a
basis consistent with that applied in determining the Media Group Net Earnings
(Loss) over (ii) the aggregate par value of, or any greater amount determined to
be capital in respect of, all outstanding shares of Media Stock and each class
or series of Preferred Stock attributed to the Media Group. As used herein,
"Available Dividend Amount" refers to the Communications Group Available
Dividend Amount and/or the Media Group Available Dividend Amount, as the context
requires.
"Communications Group Net Earnings (Loss)," for any period through any date,
shall mean the net income or loss of the Communications Group for such period
(or in respect of fiscal periods of the Company commencing prior to the
Effective Time, the pro forma net income or loss of the Communications Group for
such period as if the Effective Time had been the first day of such period)
determined in accordance with generally accepted accounting principles in effect
at such time, reflecting income and expense of the Company attributed to the
Communications Group on a basis substantially consistent with attributions of
income and expense made in the calculation of Media Group Net Earnings (Loss),
including, without limitation, corporate administrative costs, net interest and
other financial costs and income taxes.
"Media Group Net Earnings (Loss)," for any period through any date, shall
mean the net income or loss of the Media Group for such period (or in respect of
the fiscal periods of the Company commencing prior to the Effective Time, the
pro forma net income or loss of the Media Group for such period as if the
Effective Time had been the first day of such period) determined in accordance
with
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generally accepted accounting principles in effect at such time, reflecting
income and expense of the Company attributed to the Media Group on a basis
substantially consistent with attributions of income and expense made in the
calculation of the Communications Group Net Earnings (Loss), including, without
limitation, corporate administrative costs, net interest and other financial
costs and income taxes.
At June 30, 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 $7.669 billion, the Communications Group Available
Dividend Amount would have been at least $3.186 billion and the Media Group
Available Dividend Amount would have been at least $4.483 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 Fair Value of such dividend or distribution paid
or distributed in respect of the outstanding shares of Media Stock multiplied by
(ii) a fraction, the numerator of which is the Inter-Group Interest Fraction on
the record date for such dividend or distribution and the denominator of which
is the Outstanding Media Fraction on the record date for such dividend or
distribution.
For the definition of "Fair Value," see Glossary of Defined Terms. 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.
For the definitions of "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 and the distribution of assets to
stockholders,
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(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) to 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) subject to the limitations described above in the second paragraph under
"-- Dividends," 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 a
Fair Value as of the date of such consummation equal in the aggregate to (A) in
the case of a Disposition of the properties and assets attributed to the
Communications Group, the Fair Value of the Net Proceeds of such Disposition and
(B) in the case of a Disposition of the properties and assets attributed to the
Media Group, the product of the Outstanding Media Fraction as of the record date
for determining holders entitled to receive such dividend multiplied by the Fair
Value of the Net Proceeds of such Disposition; or
(ii) (A) if such Disposition involves all (not merely substantially all) of
the properties and assets attributed to such Group, redeem all
outstanding shares of Common Stock relating to the Group subject to such
Disposition in exchange for cash and/or securities (other than Common
Stock) or other property having a Fair Value as of the date of such
consummation in the aggregate equal to (I) in the case of a Disposition
of the properties and assets attributed to the Communications Group, the
Fair Value of the Net Proceeds of such Disposition and (II) in the case
of a Disposition of the properties and assets attributed to the Media
Group, the product of the Outstanding Media Fraction as of such
redemption date multiplied by the Fair Value of the Net Proceeds of such
Disposition; or
(B) if such Disposition involves substantially all (but not all) of
the properties and assets attributed to such Group, redeem such number of
whole shares of the class of 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 for cash and/or securities (other than Common Stock) or
other property having a Fair Value in the aggregate equal to such Fair
Value of the Net Proceeds or such product, as applicable;
provided, however, that the Company may only redeem shares of a class of
Common Stock pursuant to this paragraph (ii) if the amount to be paid in
redemption of such shares is less than or equal to the sum of, as of the
redemption date, (a) the Available Dividend Amount with respect to such
class of Common Stock and (b) the amount determined to be capital in respect
of such shares in accordance with applicable corporation law; or
(2) convert each outstanding share of the class of 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 has the largest
49
<PAGE>
Market Capitalization as of the close of business on the Trading Day
immediately preceding the date of the notice of such conversion mailed to
holders), equal to 110% of the ratio (calculated to the nearest five decimal
places) of the average Market Value of one share of Common Stock relating to
the Group subject to such Disposition to the average 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, of such other class or series of
common stock as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of such
conversion mailed to holders) equal to 110% of the Market Value Ratio of the
Communications Stock to the Media Stock or the Market Value Ratio of the Media
Stock to the Communications Stock, as the case may be, as of the fifth Trading
Day prior to the date notice of such conversion is mailed to such holders. Any
such exchange would dilute the interest in 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"
attributed to any Group means a portion of such properties and assets that
represents at least 80% of the then Fair Value of the properties and assets
attributed to such Group.
A "Related Business Transaction" means any disposition of all or
substantially all of the properties and assets attributed to any Group in a
transaction or series of related transactions that result in 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
primarily engaged or proposes to engage primarily in one or more businesses
similar or complementary to the businesses conducted by such Group prior to such
Disposition, as determined by the Board. The purpose of the Related Business
Transaction exception is to enable the Company to technically "dispose" of
properties or assets of a Group to other entities engaged or proposing to engage
in businesses similar or complementary to those of such Group without resulting
in a dividend on, or a conversion or redemption of, the class of Common Stock of
such Group.
The "Net Proceeds" of a Disposition of any of the properties and assets
attributed to any Group means, as of any date, an amount, if any, equal to what
remains of the gross proceeds of such Disposition after any payment of, or
reasonable provision for, (a) any taxes payable by 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
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<PAGE>
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 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 Fair
Value of such dividend multiplied by (ii) a fraction, the numerator of which is
the Inter-Group Interest Fraction on the record date for such dividend and the
denominator of which is the Outstanding Media Fraction on the record date for
such dividend.
CONVERSION AT OPTION OF THE COMPANY. At any time following the ninth
anniversary of the Effective Time, the Board may convert each outstanding share
of Communications Stock into a number of fully paid and nonassessable shares of
Media Stock (or, if Media Stock is not Publicly Traded at such time and shares
of another class or series of common stock of the Company (other than
Communications Stock) are then Publicly Traded, of such other class or series of
common stock as has the largest Market Capitalization as of the close of
business on the Trading Day immediately preceding the date of the notice of such
conversion mailed to holders), equal to 100% of the Market Value Ratio of the
Communications Stock to the Media Stock as of the fifth Trading Day prior to the
date notice of such conversion is mailed to such holders.
The Board may at any time convert each outstanding share of Media Stock into
a number of fully paid and nonassessable shares of Communications Stock (or, if
Communications Stock is not Publicly Traded at such time and shares of another
class or series of common stock of the Company (other than Media Stock) are then
Publicly Traded, of such other class or series of common stock as has the
largest Market Capitalization as of the close of business on the Trading Day
immediately preceding the date of the notice of such conversion mailed to
holders), equal to the applicable percentage set forth below, on the conversion
date, of the Market Value Ratio of the Media Stock to the Communications Stock
as of the fifth Trading Day prior to the date of notice of such conversion:
<TABLE>
<CAPTION>
12 MONTH PERIOD PRIOR TO PERCENTAGE OF
ANNIVERSARY OF EFFECTIVE TIME MARKET VALUE RATIO
- ------------------------------------------------------------------------------------ -------------------
<S> <C>
First through Fifth................................................................. 115%
Sixth............................................................................... 112%
Seventh............................................................................. 109%
Eighth.............................................................................. 106%
Ninth............................................................................... 103%
thereafter.......................................................................... 100%
</TABLE>
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY. At any time at which all of
the assets and liabilities attributed to the Communications Group (and no other
assets or liabilities of 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, 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.
At any time at 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,
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<PAGE>
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 the 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 amount of cash and/or the number of shares of
the kind of capital stock and/or other securities or property 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 received had such shares
been outstanding on such conversion date; or
(ii) in the event the shares of such class of Common Stock outstanding on
such redemption date 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 shares outstanding 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,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof and (iv) in the case of a Disposition of the properties and assets
attributed to the Media Group, the Outstanding Media Fraction on the date of
such notice. Not earlier than the 26th Trading Day and not later than the 30th
Trading Day following the consummation of such Disposition, 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 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 shares of 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
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<PAGE>
dividend (which will not be more than 85 Trading Days following the consummation
of such Disposition), (iii) type of property to be paid as such dividend in
respect of outstanding shares of such 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 properly converts, exchanges or exercises them on or prior to the
record date referred to in clause (i) of this sentence. Such notice will be sent
by first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of 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 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 will not be more than 85 Trading Days following the consummation of such
Disposition), (3) the type of property in which the redemption price for the
shares to be redeemed is to be paid, (4) the Net Proceeds of such Disposition,
(5) in the case of a Disposition of the properties and assets attributed to the
Media Group, the Outstanding Media Fraction on the date of such notice, (6) the
place or places where certificates for shares of such 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 properly converts, exchanges or exercises such
Convertible Securities on or prior to the redemption date referred to in clause
(2) of this sentence and a statement as to what, if anything, such holder will
be entitled to receive pursuant to the terms of such Convertible Securities or,
if applicable, the provisions described under " -- Effects on Convertible
Securities" if such holder thereafter converts, exchanges or exercises such
Convertible Securities and (9) a statement to the effect that, except as
otherwise provided below, dividends on such shares of such Common Stock shall
cease to be paid as of such redemption date. Such notice will be sent by
first-class mail, postage prepaid to each such holder at such holder's address
as the same appears on the transfer books of 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 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 will not be more than 85
Trading Days following the consummation of such Disposition), (iii) the type of
property in which the
53
<PAGE>
redemption price for the shares to be redeemed is to be paid, (iv) the Net
Proceeds of such Disposition, (v) in the case of a Disposition of properties and
assets attributed to the Media Group, the Outstanding Media Fraction, (vi) the
number of outstanding shares of such 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, (vii) in the case of notice to be given to holders of
Convertible Securities, a statement to the effect that a holder of such
Convertible Securities will be entitled to participate in such selection for
redemption only if such holder properly converts, exchanges or exercises them on
or prior to the date referred to in clause (i) of this sentence and a statement
as to what, if anything, such holder will be entitled to receive pursuant to the
terms of such Convertible Securities or, if applicable, the provisions described
under " -- Effects on Convertible Securities" if such holder thereafter
converts, exchanges or exercises such Convertible Securities and (viii) a
statement that the Company will not be required to register a transfer of any
shares of such class of Common Stock for a period of 15 Trading Days next
preceding the date referred to in clause (i) of this sentence. Promptly, but not
earlier than 40 Trading Days nor 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 will be
redeemed, (3) the redemption date, (4) the kind and per share amount of cash
and/or securities or other property to be received by such holder with respect
to each share of such 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 waives such requirement) are to be surrendered for delivery of such cash
and/or securities or other property, (6) if applicable, a statement to the
effect that the shares being redeemed may no longer be transferred on the
transfer books of 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 will cease to be paid as of such redemption date. Such notices
will be sent by first-class mail, postage prepaid to each such holder, at such
holder's address as the same appears on the transfer books of 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 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 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, will not be more than 85 Trading Days
following the consummation of such Disposition), (iii) the per share number of
shares of Communications Stock or Media Stock or another class or series of
common stock of 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 will cease to be paid as of such conversion date and (vii) in the
case of notice to be given to holders of Convertible Securities, a statement to
the effect that a holder of such Convertible Securities will be entitled to
receive shares of
54
<PAGE>
such Common Stock upon such conversion only if such holder properly converts,
exchanges or exercises such Convertible Securities on or prior to the conversion
date referred to in clause (ii) of this sentence and a statement as to what, if
anything, such holder will be entitled to receive pursuant to the terms of such
Convertible Securities or, if applicable, the provision described under "--
Effects on Convertible Securities" if such holder thereafter converts, exchanges
or exercises such Convertible Securities. Such notice will be sent by
first-class mail, postage prepaid, to such holder at such holder's address as
the same appears on the transfer books of 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 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 will 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 properly converts, exchanges or exercises such
Convertible Securities on or prior to the date referred to in clause (ii) of
this sentence and a statement as to what, if anything, such holder will be
entitled to receive pursuant to the terms of such Convertible Securities or, if
applicable, the provision described under "-- Effects on Convertible Securities"
if such holder thereafter converts, exchanges or exercises such Convertible
Securities. Such notice will be sent by first-class mail, postage prepaid, not
less than 30 Trading Days nor more than 45 Trading Days prior to the redemption
date, to each such holder at such holder's address as the same appears on the
transfer books of the Company.
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 distributable to such holder upon any such conversion,
redemption, dividend or other distribution (including any fractions of shares or
securities). If the number of shares of any class of capital stock or the amount
of securities remaining to be issued or distributed to any holder of such Common
Stock is a fraction, the Company will, if such fraction is not issued or
distributed to such holder, pay a cash adjustment in respect of such fraction in
an amount equal to the Fair Value of such fraction on the fifth Trading Day
prior to the date such payment is to be made (without interest).
No adjustments in respect of dividends will be made upon the conversion or
redemption of any shares of such Common Stock; provided, however, that if such
shares are converted or redeemed by
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<PAGE>
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 waives 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
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 or 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
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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 Market Value of the Media Stock over the
five-Trading Day period ending on such tenth Trading Day, (2) three times the
average Market Value of the Media Stock over the next preceding five-Trading Day
period, (3) two times the average Market Value of the Media Stock over the next
preceding five-Trading Day period and (4) the average Market Value of the Media
Stock over the next preceding five-Trading Day period, divided by (B) the sum of
(1) four times the average Market Value of the Communications Stock over the
five-Trading Day period ending on such tenth Trading Day, (2) three times the
average Market Value of the Communications Stock over the next preceding
five-Trading Day period, (3) two times the average Market Value of the
Communications Stock over the next preceding five-Trading Day period and (4) the
average Market Value of the Communications Stock over the next preceding
five-Trading Day period. If shares of only one class of 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 Market Value of the Media Stock
for the periods specified in Clause (A) above were $20, $24, $22 and $18,
respectively, and the average Market
Value of the Communications Stock for the periods specified in Clause (B) above
were $30,
$28, $32, and $35, respectively, each share of Communications Stock would have
one vote and
each share of Media Stock would have 0.706 votes based on the following
calculation:
{[(4X$20)+(3X$24)+(2X$22)+(1X$18)]/[(4X$30)+(3X$28)+(2X$32)+(1X$35)]}. 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 500 million shares of Communications Stock and
500 million shares of Media Stock, the shares of Communications Stock and Media
Stock would represent 58.62% and 41.38%, 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 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
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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 or dissolution and 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 or liquidation and
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 full
preferential amounts (including any accumulated and unpaid dividends) to which
holders of Preferred Stock are entitled (regardless of the Group to which such
shares of Preferred Stock were attributed), the holders of Communications Stock
and Media Stock will be entitled to receive the net assets, if any, of the
Company remaining for distribution to holders of Common Stock on a per share
basis in proportion to the Liquidation Units per share of each class. Each share
of Communications Stock will have one Liquidation Unit and each share of Media
Stock will have . 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 Liquidation Units of the Communications Stock and the Media Stock were
determined by the Company in consultation with its financial advisors and are
based upon, among other factors, each Group's initial level of debt and equity
capitalization, each Group's recent historical financial performance, the market
prices of shares of comparable companies that are publicly traded and the
current state of the markets for public offerings and other stock transactions.
See "Risk Factors -- No Assurance as to Market Price." 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. No holder of Communications
Stock will have any special right to receive specific assets attributable to the
Communications Group and no holder of Media Stock will have any special right to
receive specific assets attributable to the Media Group in the case of a
dissolution or liquidation and winding-up of the Company.
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If the Company subdivides (by stock split or otherwise) or combines (by
reverse stock split or otherwise) the outstanding shares of either
Communications Stock or Media Stock or declares a dividend or other distribution
of shares of Communications Stock or Media Stock to holders of such class of
Common Stock, the number of Liquidation Units of the Communications Stock or the
number of Liquidation Units of the Media Stock, as applicable, will be
appropriately adjusted as determined by the Board 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 Media 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.
PREEMPTIVE 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
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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.
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 Fair Value of any dividend or other distribution
paid or distributed in respect of the outstanding shares of Media Stock
(including any dividend of Net Proceeds from a Disposition), times (ii) a
fraction, the numerator of which is the Inter-Group Interest Fraction on the
record date for such dividend or distribution and the denominator of which is
the the Outstanding Media Fraction on the record date for such dividend or
distribution.
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.
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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.
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
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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."
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 relating to certain business combinations, amendments to
By-Laws, the composition of the Board 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 relating to
certain business combinations, amendments to By-Laws, the composition of the
Board, the removal of directors and stockholder actions and meetings 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.
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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.
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
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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 Restated Certificate and 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 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,
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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 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 Restated Certificate and 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 who
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are unaffiliated with the related person and who were directors prior to the
time such owner became a related person or (ii) the shareholders receive a "fair
price" (as defined therein) for their holdings and other procedural requirements
are met.
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 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.
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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 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
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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.
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
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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 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.
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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.
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 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.
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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, 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.
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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 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 Communications Stock Preferred
Stock Purchase Right (a "Communications Right"), and one share of Media Stock,
together with a Media Stock Preferred Stock Purchase Right (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
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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 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 B-1 the Form of Rights Certificate for Communications Rights and as
Exhibit B-2 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
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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 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 the date of this Proxy Statement, 50,000 shares of Existing Series B
Preferred Stock were issued and outstanding, all of which were issued to 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
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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 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."
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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."
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
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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.
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) Except as provided in (c), 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.
(c) The exercise of dissenters' rights with respect to Existing Common
Stock held in the SP/E and in the PAYSOP will be at the discretion of the
record shareholder (Bankers Trust Company, as Trustee and fiduciary).
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
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"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 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
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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.
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
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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 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.
PROPOSAL 2 -- AMENDMENT OF THE U S WEST 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 1994 Stock Plan (the "Stock Plan") to
provide for the granting of stock awards in either Communications Stock or Media
Stock, or both.
It is proposed that the Stock Plan be amended to (i) clarify that grants of
stock options and other stock awards made after the Merger may be made with
respect to either Communications Stock or Media Stock, or both, in the same
manner as currently permitted with respect to Existing Common Stock, (ii) set
the number of shares of Communications Stock and Media Stock available for
issuance under the Stock Plan, and (iii) set the number of shares of Common
Stock with respect to which stock options and other stock awards may be granted
to any individual in any calendar year. For the text of the Stock Plan as
proposed to be amended, see Annex IX hereto.
GRANTS OF AWARDS. Under the amended Stock Plan, grants of stock options and
other stock awards made after the Merger may be made with respect to either
Communications Stock or Media Stock, or both, in the same manner as currently
permitted with respect to Existing Common Stock.
LIMITATION ON SHARES OF COMMON STOCK AVAILABLE UNDER STOCK PLAN. Under the
amended Stock Plan, up to ______ shares of Communications Stock and up to ______
shares of Media Stock may be granted in calendar year 1995 and the maximum
number of shares of Communications Stock and Media Stock that may be granted in
any other calendar year for all purposes under the Stock Plan shall be
nine-tenths of one percent (0.90%) and three-quarters of one percent (0.75%),
respectively, of the shares of such class outstanding (excluding shares held in
the Company's treasury) on the first day of such calendar year, provided,
however, that in the event that fewer than the full number of shares of either
class available for issuance in any calendar year is issued in such year, the
shares not issued shall be added to the shares of such class available for
issuance in any subsequent year or years. If, for any
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reason, any shares of Common Stock as to which stock options or other stock
awards have been granted cease to be subject to exercise or purchase under the
Stock Plan (other than the exercise of Stock Appreciation Rights (as defined in
the Stock Plan) for cash), such underlying shares of Common Stock shall
thereafter be available for grants under the Stock Plan during any calendar
year.
LIMITATION ON AWARDS TO ANY INDIVIDUAL. Under the amended Stock Plan, the
maximum number of shares of Common Stock with respect to which stock options or
other stock awards may be granted to any individual in any calendar year may not
exceed five hundred thousand (500,000).
FEDERAL INCOME TAX CONSEQUENCES. An optionee will not realize taxable
income upon the granting of a stock option pursuant to the Stock Plan, nor would
the Company be entitled to a deduction at that time. There will be no
realization of taxable income by an optionee upon the exercise of an incentive
stock option (if exercised no later than three months after termination of
employment in the case of retirement, and one year in the case of disability,
and to the extent that the aggregate fair market value of Common Stock with
respect to such incentive stock options, when first exercised, does not exceed
$100,000 during any calendar year) and the optionee's basis in the Common Stock
will be the strike price under the option. If an employee exercises a stock
option after these requisite periods, the stock option will be treated as a
nonqualified stock option plan with the consequences described below in this
paragraph. If an optionee sells or otherwise disposes of Common Stock received
upon exercise of an incentive stock option after one year from the exercise date
and two years from the date of grant of the incentive stock option (the
"applicable holding period"), any gain or loss on the sale will be treated as
long-term, and the Company will not be entitled to any deduction on account of
the issuance of Common Stock or the grant of the incentive stock option. If,
however, an employee does not hold the shares so acquired for the applicable
holding period the employee would recognize ordinary income equal to the excess
of the fair market value of the Common Stock at the time of exercise over the
exercise price and the balance, if any, of the employee's amount recognized on
the disposition would likely be long-term capital gain (provided the Common
Stock was held for more than one year). The Company would be entitled to a
deduction in an amount equal to the ordinary income included by the employee.
Upon exercise of a nonqualified stock option, an optionee will realize
compensation income in the amount of the excess of the fair market value of the
Common Stock on the day of exercise over the stock option exercise price, and
the Company will receive a corresponding deduction. The tax basis of any shares
of Common Stock received upon exercise of a nonqualified stock option will be
the fair market value of such shares on the date the stock option is exercised.
ADJUSTMENTS OF EXISTING AWARDS. If the Recapitalization Proposal is
approved and implemented, outstanding awards previously granted under the Stock
Plan based upon shares of Existing Common Stock will be adjusted so that each
holder of an outstanding award will receive a corresponding award based upon
shares of Media Stock, with such outstanding award to continue in effect as an
award based upon shares of Communications Stock in lieu of Existing Common
Stock. The aggregate pre-adjustment strike price of existing options or stock
appreciation rights will be allocated between the existing options or stock
appreciation rights (which will cover Communications Stock) and the newly issued
options or stock appreciation rights (which will cover Media Stock) in a ratio
to be determined by the Board's Human Resources Committee (the "Human Resources
Committee").
FUTURE ISSUANCES PURSUANT TO STOCK PLAN. Following implementation of the
Recapitalization Proposal, the Human Resources Committee may, in its discretion,
grant awards with respect to Communications Stock, Media Stock, or both, in such
amounts and types as it determines in accordance with the terms of the Stock
Plan, as amended.
In determining whether awards in respect of Communications Stock, Media
Stock, or both, are to be made to specific employees, it is anticipated that the
Human Resources Committee will consider, among other things, the identity of the
Group to which the employee in question provides services. It is also
anticipated, however, that the Human Resources Committee will consider that
employees should be granted awards based upon the success of the Company as a
whole and that a policy of granting awards solely in respect of the class of
Common Stock relating to the Group for which the employee provides
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services may be counterproductive to the overall success of the Company. In
addition, because of the complementary nature of the businesses of the
Communications Group and the Media Group, it is anticipated that services
performed in respect of one Group would have at least an indirect effect upon
the business of the other Group. Accordingly, it is anticipated that the Human
Resources Committee could decide that in order to provide the maximum incentive
to employees regarding the overall success of the Company, it may be appropriate
to grant awards consisting of shares of both classes of Common Stock to
employees performing services for one Group. If the Human Resources Committee
elects to grant awards to individual employees with respect to both
Communications Stock and Media Stock, the allocation of such awards between the
two classes of Common Stock will be at the Human Resources Committee's
discretion. To the extent awards based upon one class of Common Stock are
granted to employees of the Group relating to the other class of Common Stock,
the issuance of shares of such class of Common Stock upon exercise of such
awards will not be treated as an Inter-Group Interest and will dilute the
holders of the other class of Common Stock.
In connection with the allocation of expenses related to and proceeds
received upon the exercise of options awarded under the Stock Plan, such
expenses and proceeds will be attributed to the Communications Group, in the
case of options to purchase Communications Stock, and to the Media Group, in the
case of options to purchase Media Stock.
The foregoing summary of the amendment to the Stock Plan is qualified in its
entirety by reference to the full proposed text of the Stock Plan as set forth
in Annex IX hereto. Proposal 2 is conditioned upon approval by shareholders of
the Recapitalization Proposal. If the Recapitalization Proposal is not approved
by shareholders and implemented by the Board, Proposal 2 will not be
implemented. The Merger Agreement provides that U S WEST Delaware will succeed
to all of the stock option and other benefit plans of U S WEST. The approval of
the Recapitalization Proposal (which constitutes approval of the Merger
Agreement) and Proposal 2 by shareholders of U S WEST at the Special Meeting
will constitute approval of the Stock Plan by the stockholders of U S WEST
Delaware.
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 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 Deferred Compensation Plan (the
"Compensation Plan"), as set forth in Annex X hereto.
If the Recapitalization Proposal is approved, it is proposed that the
Compensation Plan be amended and restated to permit highly compensated employees
designated by the Human Resources Committee of the Board of Directors to (i)
defer salary and amounts paid under short-term incentive plans in phantom units
of Communications Stock or Media Stock, or both, as well as in an
interest-bearing cash account, and (ii) make transfers of deferred amounts among
such accounts. Approximately 175 individuals are expected to be eligible for
participation in the Compensation Plan. As amended, the Compensation Plan would
also permit the Company to make matching contributions of amounts deferred by
Compensation Plan participants pursuant to the same matching formula percentage
that is available to a Compensation Plan participant under the SP/E (up to
83 1/3% of deferred amounts may be matched by the Company under the SP/E). Up to
75% of salary and up to 100% of any short-term incentive plan payment would be
eligible for deferral under the Compensation Plan.
DEFERRAL ELECTIONS. Compensation Plan participants will have an opportunity
to make annual, irrevocable deferral elections respecting salary and short-term
incentive amounts to be paid in any calendar year. Up to 50% of amounts deferred
may be allocated to a cash account, which will accrue interest at a rate of 1%
over the prevailing rate of ten-year U.S. Treasury Notes (or 2% over such rate
in the case of pre-1991 cash deferrals). Other amounts deferred may be allocated
to a Communications Stock account and/or a Media Stock account, and shall be
credited as phantom units of stock based on
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the closing price of the applicable stock on the New York Stock Exchange on the
first to occur, on or following the payment date of the amount to be deferred,
of the 15th or last day of the month or, if no trading occurs on such dates, the
trading day immediately preceding such dates.
COMPANY MATCH. Compensation Plan participants will receive matching
contributions on deferred salary provided that the participant has contributed
to the SP/E the maximum before-tax amount permitted under Section 402(g) of the
Code less the amount, if any, by which contributions are reduced,
recharacterized or refunded so that the SP/E may satisfy the average deferral
percentage test of Section 401(k) of the Internal Revenue Code. Deferred
short-term incentive plan payments will be eligible for a Company matching
contribution without regard to whether such maximum before-tax amount has been
met in the SP/E and without regard to whether the participant's salary has
exceeded the dollar limit in effect during a calendar year under Section
401(a)(17) of the Code. Matching contributions will be credited to a Company
match account as phantom shares of Communications Stock or Media Stock, as
elected by the participant in connection with the annual deferral election
described above. Company matching contributions will be credited to a
participant's Company match account at the same time that salary deferrals or
short-term incentive plan deferrals are credited to separate phantom stock
accounts. If a participant's employment with the Company terminates before the
completion of three years of service beginning with the participant's employment
commencement date for any reason other than retirement, death or disability, the
participant shall forfeit all matching contributions and earnings thereon under
the Compensation Plan.
PHANTOM DIVIDENDS. Phantom dividends, calculated by multiplying the number
of phantom shares in an account by any declared dividend payable per share with
respect to the class of stock represented by such phantom shares, shall be
credited to accounts as additional phantom shares.
TRANSFERS AMONG ACCOUNTS. At such time as the Recapitalization Proposal is
implemented, each phantom share of common stock theretofore credited to a
participant's account shall be redesignated as one phantom share of
Communications Stock and one phantom share of Media Stock. Twice each calendar
year a participant may make an election to exchange any number of phantom shares
of one class of Common Stock for phantom shares of the other class of Common
Stock. A participant may at any time elect to exchange all or any portion of a
deferred cash account for phantom shares of Communications Stock and/or Media
Stock. A participant may not exchange any phantom shares for interests in a
deferred cash account unless the participant is receiving a service pension
under the U S WEST Pension Plan.
DISTRIBUTION. Deferred amounts shall be paid, or begin to be paid, to a
participant in March of the year following the first to occur of (i) termination
of employment, (ii) commencement of a service pension or disability pension
under the U S WEST Pension Plan, or (iii) death. Amounts held in a deferred cash
account shall be distributed in cash and amounts held as phantom shares of
Communications Stock or Media Stock shall be distributed as shares of
Communications Stock or Media Stock, as the case may be. A participant may elect
to receive all deferred amounts as a lump sum or in any number of annual
installments not exceeding ten. In the event of a "Change of Control," as that
term is defined in the Compensation Plan, the Compensation Plan shall
immediately terminate and the present value of the benefits under the
Compensation Plan, together with an additional payment, to the extent necessary,
to provide each participant with the same benefits that would have been received
had there been no Change of Control, shall be distributed to participants as
soon as practicable.
The foregoing summary of the proposed amendments to the Compensation Plan is
qualified in its entirety by reference to the full proposed text of the
Compensation Plan, as amended, as set forth in Annex X hereto. Proposal 3 is
conditioned upon approval by shareholders of the Recapitalization Proposal. If
the Recapitalization Proposal is not approved by shareholders and implemented by
the Board, Proposal 3 will not be implemented. The Merger Agreement provides
that U S WEST Delaware will succeed to all of the stock option and other benefit
plans of U S WEST. The approval of the
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Recapitalization Proposal (which constitutes approval of the Merger Agreement)
and Proposal 3 by shareholders of U S WEST at the Special Meeting will
constitute approval of the Compensation Plan by the stockholders of U S WEST
Delaware.
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, as amended by
Form 8-K/A, are incorporated herein by reference in reliance on the report of
Ernst & Young LLP, independent auditors, given upon the authority of that firm
as experts in accounting and auditing.
The financial statements of Mercury Personal Communications (trading as
Mercury One-2-One) as of March 31, 1995, 1994 and 1993 and for each of the three
years in the period ended March 31, 1994, which appear in the Current Report on
Form 8-K of U S WEST, dated May 23, 1995, as amended by
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Form 8-K/A, are incorporated herein by reference in reliance on the report of
Arthur Andersen, independent chartered 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, as amended by
Form 8-K/A, 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 in the Current Report on
Form 8-K of U S WEST, dated May 23, 1995, as amended by Form 8-K/A, 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 the matters
set forth under "Proposal 1 -- The Recapitalization Proposal -- Certain Federal
Income Tax Considerations" 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.
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 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.
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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.
(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
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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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<PAGE>
ANNEX II
RESTATED CERTIFICATE OF INCORPORATION
OF
U S WEST, INC.
(ORIGINALLY INCORPORATED MAY 12, 1995 UNDER THE SAME NAME)
ARTICLE I
NAME
The name of the corporation is U S WEST, Inc. (the "Corporation").
ARTICLE II
ADDRESS OF REGISTERED OFFICE;
NAME OF REGISTERED AGENT
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of its registered agent at
that address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law (the "Corporation Law").
ARTICLE IV
POWERS
The Corporation shall have all powers that may now or hereafter be lawful
for a corporation to exercise under the Corporation law.
ARTICLE V
CAPITAL STOCK
SECTION 1. AUTHORIZATION.__The aggregate number of shares of stock which
the Corporation shall have authority to issue is four billion two hundred
million (4,200,000,000) shares, of which two billion (2,000,000,000) shares
shall be shares of a class of common stock designated as "U S WEST
Communications Group Common Stock," having a par value of $0.01 per share (the
"Communications Stock"), two billion (2,000,000,000) shares shall be shares of a
class of common stock designated as "U S WEST Media Group Common Stock," having
a par value of $0.01 per share (the "Media Stock"), and two hundred million
(200,000,000) shares shall be shares of a class of preferred stock having a par
value of $1.00 per share (the "Preferred Stock") and issuable in one or more
series as hereinafter provided. The Communications Stock and the Media Stock
shall hereinafter collectively be called "Common Stock" and either shall
sometimes be called a class of Common Stock. For purposes of this Article V,
references to the "Board of Directors" shall refer to the Board of Directors of
the Corporation, as established in accordance with Article VI of the certificate
of incorporation of the Corporation and references to "the Certificate of
Incorporation" of the Corporation" shall refer to this Restated Certificate of
Incorporation as the same may be amended from time to time. Certain capitalized
terms used in this Article V shall have the meanings set forth in subsection 2.6
of this Article. For purposes of this Article V, the Media Stock, when issued,
shall be considered issued in
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respect of the Media Group and the Communications Stock, when issued, shall be
considered issued in respect of the Communications Group. The number of
authorized shares of any class or classes of capital stock of the Corporation
may be increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the voting
power of the stock of the Corporation entitled to vote generally in the election
of directors.
SECTION 2. COMMON STOCK.__The voting powers, preferences and relative,
participating, optional or other special rights of the Common Stock, and the
qualifications and restrictions thereon, shall be as follows in this Section 2.
2.1. DIVIDENDS.__Subject to any preferences and relative, participating,
optional or special rights of any outstanding series of Preferred Stock and any
qualifications or restrictions on the Common Stock or any class thereof created
thereby, dividends may be declared and paid upon each class of Common Stock,
upon the terms with respect to each such class, and subject to the limitations
provided for below in this subsection 2.1, as the Board of Directors may
determine.
2.1.1. LIMITATION ON DIVIDENDS ON COMMUNICATIONS STOCK.__Dividends on
Communications Stock may be declared and paid only out of the lesser of (i) the
funds of the Corporation legally available therefor and (ii) the Communications
Group Available Dividend Amount.
2.1.2. LIMITATION ON DIVIDENDS ON MEDIA STOCK.__Dividends on Media Stock
may be declared and paid only out of the lesser of (i) the funds of the
Corporation legally available therefor and (ii) the Media Group Available
Dividend Amount.
2.1.3. DISCRIMINATION IN DIVIDENDS BETWEEN CLASSES OF COMMON STOCK.__The
Board of Directors, subject to the provisions of subsections 2.1.1 and 2.1.2,
may at any time 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
dividends previously declared on each class of Common Stock, the respective
voting or liquidation rights of each class of Common Stock or any other factor.
2.1.4. SHARE DISTRIBUTIONS.__Subject to subsections 2.1.1 and 2.1.2, as the
case may be, and except as permitted by subsections 2.4.1 and 2.4.2 the Board of
Directors may declare and pay dividends or distributions of shares of Common
Stock (or Convertible Securities convertible into or exchangeable or exercisable
for shares of Common Stock) on shares of Common Stock or shares of Preferred
Stock only as follows:
(A)_dividends or distributions of shares of Communications Stock (or
Convertible Securities convertible into or exchangeable or exercisable for
shares of Communications Stock) on shares of Communications Stock or shares
of Preferred Stock attributed as provided by subsection 3.4 to the
Communications Group;
(B)_dividends or distributions of shares of Media Stock (or Convertible
Securities convertible into or exchangeable or exercisable for shares of
Media Stock) on shares of Media Stock or shares of Preferred Stock
attributed as provided by subsection 3.4 to the Media Group; and
(C)_dividends or distributions of shares of Media Stock (or Convertible
Securities convertible into or exchangeable or exercisable for shares of
Media Stock) on shares of Communications Stock or shares of Preferred Stock
attributed as provided by subsection 3.4 to the Communications Group, but
only if the sum of (1) the number of shares of Media Stock to be so issued
(or the number of such shares which would be issuable upon conversion,
exchange or exercise of any Convertible Securities to be so issued) and (2)
the number of shares of Media Stock which are issuable upon conversion,
exchange or exercise of any Convertible Securities then outstanding that are
attributed in accordance with this Article V to the Communications Group is
less than or equal to the Number of Shares Issuable with Respect to the
Intergroup Interest.
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<PAGE>
For purposes of this subsection 2.1.4, any outstanding Convertible Securities
that are convertible into or exchangeable or exercisable for any other
Convertible Securities which are themselves convertible into or exchangeable
or exercisable for Communications Stock or Media Stock (or other Convertible
Securities that are so convertible, exchangeable or exercisable) shall be
deemed to have been converted, exchanged or exercised in full for such
Convertible Securities.
2.2.__VOTING POWERS.__Except as otherwise provided by law or by the terms of
any outstanding series of Preferred Stock or any provision of the certificate of
incorporation of the Corporation restricting the power to vote on a specified
matter to other stockholders, the entire voting power of the stockholders of the
Corporation shall be vested in the holders of Common Stock of the Corporation,
who shall be entitled to vote on any matter on which the holders of stock of the
Corporation shall, by law or by the provisions of this Restated Certificate of
Incorporation or by-laws of the Corporation, be entitled to vote, and each class
of Common Stock shall vote thereon together as though one class. On each matter
to be voted on by the holders of all classes of Common Stock voting together as
one 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
(including a fraction of one vote) equal to, if the record date for determining
the stockholders entitled to vote is before March 1, 1996, ______(__/__) of one
vote and, if the record date for determining the stockholders entitled to vote
is on or after March 1, 1996, the number of votes determined by the ratio of the
forward weighted average during the twenty Trading Days next preceding the tenth
Trading Day prior to the record date for determining the stockholders entitled
to vote of the Market Value of the Media Stock to the forward weighted average
over the same twenty Trading Days of the Market Value of the Communications
Stock, expressed as a decimal fraction rounded to the nearest three decimal
places, determined as follows: (A) the numerator of such fraction shall be the
sum of (1) four times the average Market Value of the Media Stock over the
period of five Trading Days ending on such tenth Trading Day prior to such
record date, (2) three times the average Market Value of the Media Stock over
the period of five Trading Days ending on the fifteenth Trading Day prior to
such record date, (3) two times the average Market Value of the Media Stock over
the period of five Trading Days ending on the twentieth Trading Day prior to
such record date and (4) the average Market Value of the Media Stock over the
period of five Trading Days ending on the twenty-fifth Trading Day prior to such
record date and (B) the denominator of such fraction shall be the sum of (1)
four times the average Market Value of the Communications Stock over the period
of five Trading Days ending on such tenth Trading Day prior to such record date,
(2) three times the average Market Value of the Communications Stock over the
period of five Trading Days ending on the fifteenth Trading Day prior to such
record date, (3) two times the average Market Value of the Communications Stock
over the period of five Trading Days ending on the twentieth Trading Day prior
to such record date and (4) the average Market Value of the Communications Stock
over the period of five Trading Days ending on the twenty-fifth Trading Day
prior to such record date.
Notwithstanding the foregoing provisions of this subsection 2.2, if shares
of only one class of Common Stock are outstanding on the record date for
determining the Common Stockholders entitled to vote on any matter, then each
share of that class shall be entitled to one vote and, if any class of Common
Stock is entitled by law to vote as a separate class with respect to any matter,
each share of that class shall, for purpose of such class vote, be entitled to
one vote on such matter.
2.3. LIQUIDATION RIGHTS. In the event of the voluntary or involuntary
dissolution of the Corporation or the liquidation and winding up of the
Corporation, after payment or provision for payment of the debts and other
liabilities of the Corporation and the full preferential amounts (including any
accumulated and unpaid dividends) to which the holders of Preferred Stock are
entitled (regardless of the Group to which such shares of Preferred Stock were
attributed in accordance with this Article V), unless otherwise provided in
respect of a series of preferred stock by the resolution of the Board of
Directors fixing the liquidation rights and preferences of such series of
preferred stock, the holders of the outstanding shares of Common Stock shall be
entitled to receive the remaining assets of the Corporation, regardless of the
Group to which such assets are attributed in accordance with this Article V,
divided among the holders of Common Stock in accordance with the per share
"Liquidation
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<PAGE>
Units" attributable to each class of Common Stock. Each share of Communications
Stock is hereby attributed one "Liquidation Unit" and each share of Media Stock
is hereby attributed ____ (__/__) of a "Liquidation Unit," in the case of each
such class of Common Stock subject to adjustment as determined by the Board of
Directors to be appropriate to reflect equitably any subdivision (by stock split
or otherwise) or combination (by reverse stock split or otherwise) of such class
of Common Stock or any dividend or other distribution of shares of such class of
Common Stock to holders of shares of such class of Common Stock. Neither the
merger nor consolidation of the Corporation into or with any other company, nor
the merger or consolidation of any other company into or with the Corporation,
nor a sale, transfer or lease of all or any part of the assets of the
Corporation, shall, alone, be deemed a liquidation or winding up of the
Corporation, or cause the dissolution of the Corporation, for purposes of this
subsection 2.3.
2.4. CONVERSION OR REDEMPTION OF COMMON STOCK. Shares of Common Stock are
subject to conversion or redemption, as the case may be, upon the terms provided
below in this subsection 2.4 with respect to each class; provided, however, that
neither class of Common Stock may be converted or redeemed if the other class
has been converted or redeemed in its entirety or notice thereof shall have been
given as required by this subsection 2.4.
2.4.1. CONVERSION OR REDEMPTION OF MEDIA STOCK.
(A) In the event of the Disposition, in one transaction or a series of
related transactions, by the Corporation and/or its subsidiaries of all or
substantially all of the properties and assets attributed to the Media Group to
one or more persons or entities (other than (1) the Disposition by the
Corporation of its properties and assets in one transaction or a series of
related transactions in connection with the dissolution or the liquidation and
winding up of the Corporation and the distribution of assets to stockholders as
referred to in subsection 2.3, (2) the Disposition of the properties and assets
of the Media Group as contemplated by subsection 2.4.3 or otherwise to all
holders of shares of Media Stock and to the Corporation or subsidiaries thereof,
divided among such holders and the Corporation or subsidiaries thereof on a pro
rata basis in accordance with the number of shares of Media Stock outstanding
and the Number of Shares Issuable with Respect to the Intergroup Interest, (3)
to any person or entity controlled (as determined by the Board of Directors) by
the Corporation or (4) pursuant to a Related Business Transaction), the
Corporation shall, on or prior to the 85th Trading Day after the date of
consummation of such Disposition (the "Media Group Disposition Date"), pay a
dividend on the Media Stock or redeem some or all of the Media Stock or convert
Media Stock into Communications Stock (or another class or series of common
stock of the Corporation), all as provided by the following subparagraphs (1)
and (2) of this paragraph (A) and, to the extent applicable, by subsection
2.4.5, as the Board of Directors shall have selected among such alternatives:
(1) provided that there are funds of the Corporation legally available
therefor:
(a) pay to the holders of the shares of Media Stock a dividend, as
the Board of Directors shall have declared subject to compliance with
subsection 2.1.2, in cash and/or in securities (other than a dividend of
Common Stock) or other property having a Fair Value as of the Media Group
Disposition Date in the aggregate equal to 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
(b) (i) subject to the last sentence of this paragraph (A), if such
Disposition involves all (not merely substantially all) of the properties
and assets attributed to the Media Group, redeem as of the Redemption
Date provided by paragraph (C) of subsection 2.4.5 all outstanding shares
of Media Stock in exchange for cash and/or for securities (other than
Common Stock) or other property having a Fair Value as of the Media Group
Disposition Date in the aggregate equal to 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
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(ii) subject to the last sentence of this paragraph (A), if such
Disposition involves substantially all (but not all) of the properties
and assets attributed to the Media Group, redeem as of the Redemption
Date provided by paragraph (D) of subsection 2.4.5 such number of whole
shares of Media Stock (which may be all of such shares outstanding) as
have in the aggregate an average Market Value during the period of ten
consecutive Trading Days beginning on the sixteenth Trading Day
immediately succeeding the Media Group Disposition Date closest to the
product of the Outstanding Media Fraction as of the date such shares are
selected for redemption multiplied by the Fair Value as of the Media
Group Disposition Date of the Net Proceeds of such Disposition (but in no
event more than all the shares of Media Stock then outstanding), in
consideration for cash and/or securities (other than Common Stock) or
other property having a Fair Value in the aggregate equal to such
product; or
(2) declare that each outstanding share of Media Stock shall be
converted as of the Conversion Date provided by paragraph (E) of subsection
2.4.5 into a number of fully paid and nonassessable shares of Communications
Stock (or, if the Communications Stock is not Publicly Traded at such time
and shares of another class or series of common stock of the Corporation
(other than Media Stock) are then Publicly Traded, of such other class or
series of common stock as has the largest Market Capitalization as of the
close of business on the Trading Day immediately preceding the date of the
notice of such conversion required by paragraph (E) of subsection 2.4.5)
equal to 110% of the ratio, expressed as a decimal fraction rounded to the
nearest five decimal places, of the average Market Value of one share of
Media Stock over the period of ten consecutive Trading Days beginning on the
sixteenth Trading Day following the Media Group Disposition Date to the
average Market Value of one share of Communications Stock (or such other
class or series of common stock) over the same ten Trading Day period.
Notwithstanding the foregoing provisions of this paragraph (A), the
Corporation shall redeem Media Stock as provided by subparagraph (1)(b)(i) or
(1)(b)(ii) of this paragraph (A) only if the amount to be paid in redemption of
such stock is less than or equal to the sum of (i) the Media Group Available
Dividend Amount as of the Redemption Date and (ii) the amount determined to be
capital in respect of the shares to be redeemed in accordance with applicable
corporation law as of the Redemption Date.
(B) For purposes of this subsection 2.4.1:
(1) as of any date, "substantially all of the properties and assets"
attributed to the Media Group shall mean a portion of such properties and
assets that represents at least 80% of the Fair Value of the properties and
assets attributed to the Media Group as of such date;
(2) in the case of a Disposition of the properties and assets attributed
to the Media Group in a series of related transactions, such Disposition
shall not be deemed to have been consummated until the consummation of the
last of such transactions; and
(3) the Board of Directors may pay any dividend or redemption price
referred to in paragraph (A) of this subsection 2.4.1 in cash, securities
(other than Common Stock) or other property, regardless of the form or
nature of the proceeds of the Disposition.
(C) After the payment of the dividend or the redemption price with respect
to the Media Stock provided for by subparagraph (1) of paragraph (A) of this
subsection 2.4.1, the Board of Directors may declare that each share of Media
Stock remaining outstanding shall be converted, but only as of a Conversion Date
(determined as provided by paragraph (E) of subsection 2.4.5) prior to the first
anniversary of the payment of such dividend or redemption price, into a number
of fully paid and nonassessable shares of Communications Stock (or, if the
Communications Stock is not Publicly Traded at such time and shares of any other
class or series of common stock of the Corporation (other than Media Stock) are
then Publicly Traded, of such other class or series of common stock as has the
largest Market Capitalization as of the close of business on the Trading Day
immediately preceding
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the date of the notice of such conversion required by paragraph (E) of
subsection 2.4.5) equal to 110% of the Market Value Ratio of the Media Stock to
the Communications Stock as of the fifth Trading Day prior to the date of the
notice of such conversion required by paragraph (E) of subsection 2.4.5.
(D) The Board of Directors may declare that each outstanding share of Media
Stock shall be converted, as of the Conversion Date provided by paragraph (E) of
subsection 2.4.5, into the number of fully paid and nonassessable shares of
Communications Stock (or, if the Communications Stock is not Publicly Traded at
such time and shares of any other class or series of common stock of the
Corporation (other than Media Stock) are then Publicly Traded, of such other
class or series of common stock as has the largest Market Capitalization as of
the close of business on the Trading Day immediately preceding the date of the
notice of conversion required by paragraph (E) of subsection 2.4.5) equal to the
applicable percentage, on the Conversion Date, set forth below of the Market
Value Ratio of the Media Stock to the Communications Stock as of the fifth
Trading Day prior to the date of the notice of such conversion required by
paragraph (E) of subsection 2.4.5:
<TABLE>
<CAPTION>
12 MONTH PERIOD
PRIOR TO PERCENTAGE OF
ANNIVERSARY OF MARKET
EFFECTIVE TIME VALUE RATIO
- ----------------------- -------------------
<S> <C>
First through Fifth 115%
Sixth 112%
Seventh 109%
Eighth 106%
Ninth 103%
thereafter 100%
</TABLE>
2.4.2. REDEMPTION OR CONVERSION OF COMMUNICATIONS STOCK.
(A) In the event of the Disposition, in one transaction or a series of
related transactions, by the Corporation and/or its subsidiaries of all or
substantially all of the properties and assets attributed to the Communications
Group to one or more persons or entities (other than (1) the Disposition by the
Corporation of its properties and assets in one transaction or a series of
related transactions in connection with the dissolution or the liquidation and
winding up of the Corporation and the distribution of assets to stockholders as
referred to in subsection 2.3, (2) the Disposition of the properties and assets
of the Communication Group as contemplated by subsection 2.4.3 or otherwise to
all holders of shares of Communications Stock, divided among such holders on a
pro rata basis in accordance with the number of such shares of Communications
Stock outstanding, (3) to any person or entity controlled (as determined by the
Board of Directors) by the Corporation or (4) pursuant to a Related Business
Transaction), the Corporation shall, on or prior to the 85th Trading Day after
the date of consummation of such Disposition (the "Communications Group
Disposition Date"), pay a dividend on the Communications Stock or redeem some or
all of the Communications Stock or convert Communications Stock into Media Stock
(or another class or series of common stock of the Corporation), all as provided
by the following subparagraphs (1) and (2) of this paragraph (A) and, to the
extent applicable, by subsection 2.4.5, as the Board of Directors shall have
selected among such alternatives:
(1) provided that there are funds of the Corporation legally available
therefor:
(a) pay to the holders of the shares of Communications Stock a
dividend, as the Board of Directors shall have declared subject to
compliance with subsection 2.1.1, in cash and/or in securities (other
than a dividend of Common Stock) or other property having a Fair Value as
of the Communications Group Disposition Date in the aggregate equal to
the Fair Value of the Net Proceeds of such Disposition; or
(b) (i) subject to the last sentence of this paragraph (A), if such
Disposition involves all (not merely substantially all) of the properties
and assets attributed to the Communications Group, redeem as of the
Redemption Date provided by paragraph (C) of subsection 2.4.5, all
outstanding shares of Communications Stock in exchange for cash and/or
for securities
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(other than Common Stock) or other property having a Fair Value as of the
Communications Group Disposition Date in the aggregate equal to the Fair
Value of the Net Proceeds of such Disposition; or
(ii) subject to the last sentence of this paragraph (A), if such
Disposition involves substantially all (but not all) of the properties
and assets attributed to the Communications Group, redeem as of the
Redemption Date provided by paragraph (D) of subsection 2.4.5 such number
of whole shares of Communications Stock (which may be all of such shares
outstanding) as have in the aggregate an average Market Value during the
period of ten consecutive Trading Days beginning on the sixteenth Trading
Day immediately succeeding the Communications Group Disposition Date
closest to the Fair Value as of the Communications Group Disposition Date
of the Net Proceeds of such Disposition (but in no event more than all
the shares of Communications Stock then outstanding), in consideration
for cash and/or securities (other than Common Stock) or other property
having in the aggregate an equivalent Fair Value as of the Communications
Group Disposition Date; or
(2) declare that each outstanding share of Communications Stock shall be
converted as of the Conversion Date provided by paragraph (E) of subsection
2.4.5 into a number of fully paid and nonassessable shares of Media Stock
(or, if the Media Stock is not Publicly Traded at such time and shares of
another class or series of common stock of the Corporation (other than
Communications Stock) are then Publicly Traded, of such other class or
series of common stock as has the largest Market Capitalization as of the
close of business on the Trading Day immediately preceding the date of the
notice of such conversion required by paragraph (E) of subsection 2.4.5)
equal to 110% of the ratio, expressed as a decimal fraction rounded to the
nearest five decimal places, of the average Market Value of one share of
Communications Stock over the period of ten consecutive Trading Days
beginning on the sixteenth Trading Day following the Communications Group
Disposition Date to the average Market Value of one share of Media Stock (or
such other class or series of common stock) over the same ten Trading Day
period.
Notwithstanding the foregoing provisions of this paragraph (A), the
Corporation shall redeem Communications Stock as provided by subparagraph
(1)(b)(i) or (1)(b)(ii) of this paragraph (A) only if the amount to be paid in
redemption of such stock is less than or equal to the sum of (i) the
Communications Group Available Dividend Amount as of the Redemption Date and
(ii) the amount determined to be capital in respect of the shares to be redeemed
in accordance with applicable corporation law as of the Redemption Date.
(B) For purposes of this subsection 2.4.2:
(1) as of any date, "substantially all of the properties and assets"
attributed to the Communications Group shall mean a portion of such
properties and assets that represents at least 80% of the Fair Value of the
properties and assets attributed to the Communications Group as of such
date;
(2) in the case of a Disposition of properties and assets attributed to
the Communications Group in a series of related transactions, such
Disposition shall not be deemed to have been consummated until the
consummation of the last of such transactions; and
(3) the Board of Directors may pay any dividend or redemption price
referred to in paragraph (A) of this subsection 2.4.2 in cash, securities
(other than Common Stock) or other property regardless of the form or nature
of the proceeds of the Disposition.
(C) After the payment of the dividend or the redemption price with respect
to the Communications Stock provided for by subparagraph (1) of paragraph (A) of
this subsection 2.4.2, the Board of Directors may declare that each share of
Communications Stock remaining outstanding shall be converted, but only as of a
Conversion Date (determined as provided by paragraph (E) of subsection 2.4.5)
prior to the first anniversary of the payment of such dividend or redemption
price, into a number of fully paid and non-assessable shares of Media Stock (or,
if the Media Stock is not Publicly
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Traded at such time and shares of any other class or series of common stock of
the Corporation (other than Communications Stock) are then Publicly Traded, of
such other class or series of common stock as has the largest Market
Capitalization as of the close of business on the Trading Day immediately
preceding the date of the notice of such conversion required by paragraph (E) of
subsection 2.4.5), equal to 110% of the Market Value Ratio of the Communications
Stock to the Media Stock as of the fifth Trading Day prior to the date of the
notice of such conversion required by paragraph (E) of subsection 2.4.5.
(D) At any time following the ninth anniversary of the Effective Date, the
Board of Directors of the Corporation may declare that each outstanding share of
Communications Stock shall be converted, as of the Conversion Date provided by
paragraph (E) of subsection 2.4.5, into the number of fully paid and
nonassessable shares of Media Stock (or, if the Media Stock is not Publicly
Traded at such time and shares of any other class or series of common stock of
the Corporation (other than Communications Stock) are then Publicly Traded, of
such other class or series of common stock as has the largest Market
Capitalization as of the close of business on the Trading Day immediately
preceding the date of the notice of conversion required by paragraph (E) of
subsection 2.4.5) equal to 100% of the Market Value Ratio of the Communications
Stock to the Media Stock as of the fifth Trading Day prior to the date of the
notice of such conversion required by paragraph (E) of subsection 2.4.5.
2.4.3. REDEMPTION OF COMMON STOCK FOR SUBSIDIARY STOCK.
(A) At any time at which all of the assets and liabilities attributed to the
Media Group (and no other assets or liabilities of the Corporation or any
subsidiary thereof) are held directly or indirectly by one or more wholly-owned
subsidiaries of the Corporation (each, a "Media Group Subsidiary"), the Board of
Directors may, provided that there are funds of the Corporation legally
available therefor, redeem all of the outstanding shares of Media Stock, on a
Redemption Date of which notice is delivered in accordance with paragraph (F) of
subsection 2.4.5, in exchange for the number of shares of common stock of each
Media Group Subsidiary equal to the product of the Outstanding Media Fraction
multiplied by the number of shares of common stock of such Media Group
Subsidiary to be outstanding immediately following such exchange of shares, such
Media Group Subsidiary shares to be delivered to the holders of shares of Media
Stock on the Redemption Date either directly or indirectly through another Media
Group Subsidiary (as a wholly-owned subsidiary thereof) and to be divided among
the holders of Media Stock pro rata in accordance with the number of shares of
Media Stock held by each on such Redemption Date, each of which shares of common
stock of such Media Group Subsidiary shall be, upon such delivery, fully paid
and nonassessable.
(B) At any time at which all of the assets and liabilities attributed to the
Communications Group (and no other assets or liabilities of the Corporation or
any subsidiary thereof) are held directly or indirectly by one or more
wholly-owned subsidiaries of the Corporation (each, a "Communications Group
Subsidiary"), the Board or Directors may, provided that there are funds of the
Corporation legally available therefor, redeem all of the outstanding shares of
Communications Stock, on a Redemption Date of which notice is delivered in
accordance with paragraph (F) of subsection 2.4.5, in exchange for all of the
shares of common stock of each Communications Group Subsidiary as will be
outstanding immediately following such exchange of shares, such Communications
Group Subsidiary shares to be delivered to the holders of shares of
Communications Stock on the Redemption Date either directly or indirectly
through another Communications Group Subsidiary (as a wholly-owned subsidiary
thereof) and to be divided among the holders of Communications Stock pro rata in
accordance with the number of shares of Communications Stock held by each on
such Redemption Date, each of which shares of common stock of such
Communications Group Subsidiary shall be, upon such delivery, fully paid and
nonassessable.
2.4.4. TREATMENT OF CONVERTIBLE SECURITIES. 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
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Securities shall, immediately upon such conversion, exchange or exercise and
without any notice from or to, or any other action on the part of, the
Corporation or its Board of Directors or the holder of such Convertible
Security:
(A) in the event the shares of such class of Common Stock outstanding on
such Conversion Date were converted into shares of the other class of Common
Stock (or another class or series of common stock of the Corporation) pursuant
to subparagraph (A)(2) or paragraph (C) or (D) of subsection 2.4.1 or
subparagraph (A)(2) or paragraph (C) or (D) of subsection 2.4.2, be converted
into the amount of cash and/or the number of shares of the kind of capital stock
and/or other securities or property of the Corporation that the number of shares
of such class of Common Stock that were to be issued upon such conversion,
exchange or exercise would have received had such shares been outstanding on
such Conversion Date; or
(B) in the event the shares of such class of Common Stock outstanding on
such Redemption Date were redeemed pursuant to subparagraph (A)(1)(b) of
subsection 2.4.1, subparagraph (A)(1)(b) of subsection 2.4.2 or subsection
2.4.3, be redeemed, to the extent of funds of the Corporation 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.
The provisions of the immediately preceding sentence shall not apply to the
extent that other adjustments in respect of such conversion, exchange or
redemption of a class of Common Stock are otherwise made pursuant to the
provisions of such Convertible Securities.
2.4.5. NOTICE AND OTHER PROVISIONS.
(A) Not later than the tenth Trading Day following the consummation of a
Disposition referred to in paragraph (A) of subsection 2.4.1 or paragraph (A) of
subsection 2.4.2, the Corporation shall announce publicly by press release (1)
the Net Proceeds of such Disposition, (2) the number of shares outstanding of
the class of Common Stock relating to the Group subject to such Disposition, (3)
the number of shares of such Common Stock into or for which Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof and (4) in the case of a Disposition of the
properties and assets attributed to the Media Group, the Outstanding Media
Fraction on the date of such notice. Not earlier than the 26th Trading Day and
not later than the 30th Trading Day following the consummation of such
Disposition, the Corporation shall announce publicly by press release which of
the actions specified in paragraph (A) of subsection 2.4.1 or paragraph (A) of
subsection 2.4.2, as the case may be, it has irrevocably determined to take in
respect of such Disposition.
(B) If the Corporation determines to pay a dividend on shares of Media Stock
pursuant to subparagraph (A)(1)(a) of subsection 2.4.1, or if the Corporation
determines to pay a dividend on shares of Communications Stock pursuant to
subparagraph (A)(1)(a) of subsection 2.4.2, as the case may be, the Corporation
shall, not later than the 30th Trading Day following the consummation of the
Disposition referred to in such subparagraph, cause notice to be given to each
holder of shares of such class of Common Stock and to each holder of Convertible
Securities that are 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), setting forth (1) 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, (2) the anticipated payment date of such
dividend (which shall not be more than 85 Trading Days following the
consummation of such Disposition), (3) the type of property to be paid as such
dividend in respect of the outstanding shares of such class of Common Stock, (4)
the Net Proceeds of such Disposition, (5) 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, (6) 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 and
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(7) 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 shall be
entitled to receive such dividend only if such holder properly converts,
exchanges or exercises such Convertible Securities on or prior to the record
date referred to in clause (1) of this sentence. Such notice shall be sent by
first-class mail, postage prepaid, to each such holder at such holder's address
as the same appears on the transfer books of the Corporation.
(C) If the Corporation determines to redeem Media Stock pursuant to
subparagraph (A)(1)(b)(i) of subsection 2.4.1, or if the Corporation determines
to redeem Communications Stock pursuant to subparagraph (A)(1)(b)(i) of
subsection 2.4.2, as the case may be, the Corporation shall, not earlier than
the 35th Trading Day and not later than the 45th Trading Day prior to the
Redemption Date, cause notice to be given to each holder of 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),
setting forth (1) a statement that all shares of such Common Stock outstanding
on the Redemption Date shall 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 in which the redemption price for the
shares to be redeemed is to be paid, (4) the Net Proceeds of such Disposition,
(5) in the case of a Disposition of the properties and assets attributed to the
Media Group, the Outstanding Media Fraction on the date of such notice, (6) the
place or places where certificates for shares of such Common Stock, properly
endorsed or assigned for transfer (unless the Corporation 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
such 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 shall be entitled to
participate in such selection for redemption only if such holder properly
converts, exchanges or exercises such Convertible Securities on or prior to the
Redemption Date referred to in clause (2) of this sentence and a statement as to
what, if anything, such holder will be entitled to receive pursuant to the terms
of such Convertible Securities or, if applicable, this Section 2.4 if such
holder thereafter converts, exchanges or exercises such Convertible Securities
and (9) a statement to the effect that, except as otherwise provided by
paragraph (I) of this subsection 2.4.5, dividends on such shares of such Common
Stock shall cease to be paid as of such Redemption Date. Such notice shall be
sent by first-class mail, postage prepaid, to each such holder at such holder's
address as the same appears on the transfer books of the Corporation.
(D) If the Corporation determines to redeem Media Stock pursuant to
subparagraph (A)(1)(b)(ii) of subsection 2.4.1, or if the Corporation determines
to redeem Communications Stock pursuant to subparagraph (A)(1)(b)(ii) of
subsection 2.4.2, as the case may be, the Corporation shall, not later than the
30th Trading Day following the consummation of the Disposition referred to in
such subparagraph, cause notice to be given to each holder of shares of such
class of Common Stock and to each holder of Convertible Securities that are
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) setting forth (1) a date not earlier than the 40th Trading Day and
not later than the 50th Trading Day following the consummation of the
Disposition in respect of which such redemption is to be made on which shares of
such class of Common Stock shall be selected for redemption, (2) the anticipated
Redemption Date (which shall not be more than 85 Trading Days following the
consummation of such Disposition), (3) the type of property in which the
redemption price for the shares to be redeemed is to be paid, (4) the Net
Proceeds of such Disposition, (5) in the case of a Disposition of properties and
assets attributed to the Media Group, the Outstanding Media Fraction, (6) the
number of shares of such class of Common Stock outstanding 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
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conversion, exchange or exercise price thereof, (7) 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 shall be eligible to participate in such
selection for redemption only if such holder properly converts, exchanges or
exercises such Convertible Securities on or prior to the record date referred to
in clause (1) 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, this subsection 2.4 if such holder thereafter
converts, exchanges or exercises such Convertible Securities and (8) a statement
that the Corporation will not be required to register a transfer of any shares
of such class of Common Stock for a period of 15 Trading Days next preceding the
date referred to in clause (1) of this sentence. Promptly following the date
referred to in clause (1) of the preceding sentence, but not earlier than 40
Trading Days nor later than 50 Trading Days following the consummation of such
Disposition, the Corporation shall cause a notice to be given to each holder of
record of shares of such class of Common Stock to be redeemed setting forth (1)
the number of shares of such class of Common Stock held by such holder to be
redeemed, (2) a statement that such shares of 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 class of Common Stock, properly endorsed or assigned for transfer (unless
the Corporation 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 Corporation after the Redemption Date
and (7) a statement to the effect that, subject to paragraph (I) of this
subsection 2.4.5, dividends on such shares of such class of Common Stock shall
cease to be paid as of the Redemption Date. Such notices shall be sent by
first-class mail, postage prepaid, to each such holder at such holder's address
as the same appears on the transfer books of the Corporation.
(E) If the Corporation determines to convert the Media Stock into
Communications Stock (or another class or series of common stock of the
Corporation) pursuant to subparagraph (A)(2) or paragraph (C) or (D) of
subsection 2.4.1, or if the Corporation determines to convert the Communications
Stock into Media Stock (or another class or series of common stock of the
Corporation) pursuant to subparagraph (A)(2) or paragraph (C) or (D) of
subsection 2.4.2, as the case may be, the Corporation shall, not earlier than
the 35th Trading Day and not later than the 45th Trading Day prior to the
Conversion Date, cause notice to be given to each holder of shares of such class
of Common Stock and to each holder of Convertible Securities that are
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) setting forth (1) a statement that all outstanding shares of such
class of Common Stock shall be converted, (2) 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), (3) the per share number of
shares of Communications Stock, Media Stock or another class or series of Common
Stock of the Corporation, as the case may be, to be received with respect to
each share of such class of Common Stock, including details as to the
calculation thereof, (4) the place or places where certificates for shares of
such class of Common Stock, properly endorsed or assigned for transfer (unless
the Corporation shall waive such requirement), are to be surrendered for
delivery of certificates for shares of such Common Stock, (5) 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, (6) a statement to the effect that, subject to
paragraph (I) of this subsection 2.4.5, dividends on such shares of such class
of Common Stock shall cease to be paid as of such Conversion Date and (7) in the
case of notice to holders of such Convertible Securities, a statement to the
effect that a holder of such Convertible Securities shall be entitled to receive
shares of common stock upon such conversion only if such holder properly
converts, exchanges or exercises such Convertible Securities on or prior to such
Conversion Date and a statement as to what, if anything, such holder will be
entitled to receive pursuant to the
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terms of such Convertible Securities or, if applicable, this subsection 2.4 if
such holder thereafter converts, exchanges or exercises such Convertible
Securities. Such notice shall be sent by first-class mail, postage prepaid, to
each such holder at such holder's address as the same appears on the transfer
books of the Corporation.
(F) If the Corporation determines to redeem shares of any class of Common
Stock pursuant to subsection 2.4.3, the Corporation shall cause notice to be
given to each holder of shares of such class of Common Stock to be redeemed, and
to each holder of Convertible Securities that are 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),
setting forth (1) a statement that all shares of such class of Common Stock
outstanding on the Conversion Date shall be redeemed in exchange for shares of
common stock of the Communications Group Subsidiary or the Media Group
Subsidiary, as the case may be, (2) the Redemption Date, (3) in the case of a
redemption of the Media Stock, the Outstanding Media Fraction on the date of
such notice, (4) the place or places where certificates for shares of the class
of Common Stock to be redeemed, properly endorsed or assigned for transfer
(unless the Corporation shall waive such requirement), are to be surrendered for
delivery of certificates for shares of the Media Group Subsidiaries or the
Communications Group Subsidiaries, as the case may be, (5) a statement to the
effect that, subject to paragraph (I) of this subsection 2.4.5, dividends on
such shares of Common Stock shall cease to be paid as of such Redemption Date,
(6) the number of shares of such class of Common Stock outstanding 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 (7) in the case of notice to holders of
Convertible Securities, a statement to the effect that a holder of Convertible
Securities shall be entitled to receive shares of common stock of the Media
Group Subsidiaries or the Communications Group Subsidiaries, as the case may be,
upon redemption only if such holder properly converts, exchanges or exercises
such Convertible Securities on or prior to the Redemption Date 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, this subsection 2.4 if
such holder thereafter converts, exchanges or exercises such Convertible
Securities. Such notice shall be sent by first-class mail, postage prepaid, not
less than 30 Trading Days nor more than 45 Trading Days prior to the Redemption
Date to each such holder at such holder's address as the same appears on the
transfer books of the Corporation.
(G) If less than all of the outstanding shares of a class of Common Stock
are to be redeemed pursuant to subparagraph (A)(1) of subsection 2.4.1 or
subparagraph (A)(1) of subsection 2.4.2, as the case may be, the shares to be
redeemed by the Corporation shall be selected from among the holders of shares
of such class of Common Stock outstanding at the close of business on the record
date for such redemption on a pro rata basis among all such holders or by lot or
by such other method as may be determined by the Board of Directors of the
Corporation to be equitable.
(H) The Corporation shall not be required to issue or deliver fractional
shares of any capital stock or of any other securities to any holder of any
class of Common Stock upon any conversion, redemption, dividend or other
distribution pursuant to this subsection 2.4. If more than one share of any
class of Common Stock shall be held at the same time by the same holder, the
Corporation may aggregate the number of shares of any capital stock that shall
be issuable or any other securities or property that shall be distributable to
such holder upon any conversion, redemption, dividend or other distribution
(including any fractional shares). If there are fractional shares of any capital
stock or of any other securities remaining to be issued or distributed to the
holders of any class of Common Stock, the Corporation shall, if such fractional
shares are not issued or distributed to the holder, pay cash in respect of such
fractional shares in an amount equal to the Fair Value thereof on the fifth
Trading Day prior to the date such payment is to be made (without interest).
(I) No adjustments in respect of dividends shall be made upon the conversion
or redemption of any shares of any class of Common Stock; provided, however,
that if the Conversion Date or Redemption Date, as the case may be, with respect
to any shares of any class of Common Stock shall be
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subsequent to the record date for the payment of a dividend or other
distribution thereon or with respect thereto, the holders of such shares of such
class of Common Stock at the close of business on such record date shall be
entitled to receive the dividend or other distribution payable on or with
respect to such shares on the date set for payment of such dividend or other
distribution, in each case without interest, notwithstanding the subsequent
conversion or redemption of such shares.
(J) Before any holder of any class of Common Stock shall be entitled to
receive any cash payment and/or certificates or instruments representing shares
of any capital stock and/or other securities or property to be distributed to
such holder with respect to such shares of such class of Common Stock pursuant
to this subsection 2.4, such holder shall surrender at such place as the
Corporation shall specify certificates for such shares of such class of Common
Stock, properly endorsed or assigned for transfer (unless the Corporation shall
waive such requirement). The Corporation shall as soon as practicable after
receipt of certificates representing such shares of such class of Common Stock
deliver to the person for whose account such shares of such class of Common
Stock were so surrendered, or to such person's nominee or nominees, the cash
and/or the certificates or instruments representing the number of whole shares
of the kind of capital stock and/or other securities or property to which such
person shall be entitled as aforesaid, together with any payment in respect of
fractional shares contemplated by paragraph (H) of this subsection 2.4.5, in
each case without interest. If less than all of the shares of any class of
Common Stock represented by any one certificate are to be redeemed or converted,
the Corporation shall issue and deliver a new certificate for the shares of such
class of Common Stock not redeemed.
(K) From and after any applicable Conversion Date or Redemption Date, as the
case may be, all rights of a holder of shares of any class of Common Stock that
were converted or redeemed shall cease except for the right, upon surrender of
the certificates representing such shares of such class of Common Stock as
required by paragraph (J) of this subsection 2.4.5, to receive the cash and/or
the certificates or instruments representing shares of the kind of capital stock
and/or other securities or property for which such shares were converted or
redeemed, together with any payment in respect of fractional shares contemplated
by paragraph (H) of this subsection 2.4.5 and rights to dividends as provided in
paragraph (I) of this subsection 2.4.5, in each case without interest. No holder
of a certificate that immediately prior to the applicable Conversion Date
represented shares of a class of Common Stock shall be entitled to receive any
dividend or other distribution or interest payment with respect to shares of any
kind of capital stock or other security or instrument for which such class of
Common Stock was converted until the surrender as required by this subsection
2.4 of such certificate in exchange for a certificate or certificates or
instrument or instruments representing such capital stock or other security.
Upon such surrender, there shall be paid to the holder the amount of any
dividends or other distributions (without interest) which theretofore became
payable on any class of capital stock of the Corporation as of a record date
after the Conversion Date, but that were not paid by reason of the foregoing,
with respect to the number of whole shares of the kind of capital stock
represented by the certificate or certificates issued upon such surrender. From
and after a Conversion Date, the Corporation shall, however, be entitled to
treat the certificates for a class of Common Stock that have not yet been
surrendered for conversion as evidencing the ownership of the number of whole
shares of the kind or kinds of capital stock of the Corporation for which the
shares of such class of Common Stock represented by such certificates shall have
been converted, notwithstanding the failure to surrender such certificates.
(L) The Corporation shall pay any and all documentary, stamp or similar
issue or transfer taxes that may be payable in respect of the issuance or
delivery of any shares of capital stock and/or other securities upon conversion
or redemption of shares of any class of Common Stock pursuant to this subsection
2.4. The Corporation shall not, however, be required to pay any tax that may be
payable in respect of any transfer involved in the issuance or delivery of any
shares of capital stock and/or other securities in a name other than that in
which the shares of such class of Common Stock so converted or
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redeemed were registered, and no such issuance or delivery shall be made unless
and until the person requesting such issuance or delivery has paid to the
Corporation the amount of any such tax or has established to the satisfaction of
the Corporation that such tax has been paid.
(M) Neither the failure to mail any notice required by this subsection 2.4.5
to any particular holder of Common Stock or of Convertible Securities nor any
defect therein shall affect the sufficiency thereof with respect to any other
holder of outstanding shares of Common Stock or of Convertible Securities or the
validity of any such conversion or redemption.
(N) The Board of Directors may establish such rules and requirements to
facilitate the effectuation of the transactions contemplated by this subsection
2.4 as the Board of Directors shall determine to be appropriate.
2.5. APPLICATION OF THE PROVISIONS OF ARTICLE V.
2.5.1. CERTAIN DETERMINATIONS BY THE BOARD OF DIRECTORS. In addition to
the determinations regarding Preferred Stock to be made by the Board of
Directors as provided by subsection 3.4, the Board of Directors shall make such
determinations with respect to the assets and liabilities to be attributed to
the Groups, the items of income and expenses attributed to the Groups for
purposes of determining the Communications Group Net Earnings (Loss) and the
Media Group Net Earnings (Loss), the application of the provisions of this
Section 2 to transactions to be engaged in by the Corporation and the powers,
preferences and relative, participating, optional and other special rights of
the holders of the classes of Common Stock, and the qualifications and
restrictions thereon, provided by this Restated Certificate of Incorporation as
may be or become necessary or appropriate to the exercise of such powers,
preferences and relative, participating, optional and other special rights,
including, without limiting the foregoing, the determinations referred to in the
following paragraphs (A), (B), (C) and (D) of this subsection 2.5.1. A record of
any such determination shall be filed with the records of the actions of the
Board of Directors.
(A) Upon any acquisition by the Corporation or its subsidiaries of any
assets or business, or any assumption of liabilities, outside of the ordinary
course of business of the Communications Group or the Media Group, as the case
may be, the Board of Directors shall determine whether such assets, business and
liabilities (or an interest therein) shall be for the benefit of the
Communications Group or the Media Group or that an interest therein shall be
partly for the benefit of the Communications Group and partly for the benefit of
the Media Group and, accordingly, shall be attributed to the Communications
Group or the Media Group, or partly to each, in accordance with subsection 2.6.1
or 2.6.15, as the case may be.
(B) Upon any issuance of any shares of Media Stock at a time when the Number
of Shares Issuable with Respect to the Intergroup Interest is more than zero,
the Board of Directors shall determine, based on the use of the proceeds of such
issuance and any other relevant factors, whether all or any part of the shares
of Media Stock so issued should reduce the Number of Shares Issuable with
Respect to the Intergroup Interest and the Number of Shares Issuable with
Respect to the Intergroup Interest shall be adjusted accordingly.
(C) Upon any issuance by the Corporation or any subsidiary thereof of any
Convertible Securities that are convertible into or exchangeable or exercisable
for shares of Media Stock, if at the time such Convertible Securities are issued
the Number of Shares Issuable with Respect to the Intergroup Interest is greater
than zero, the Board of Directors shall determine whether, upon conversion,
exchange or exercise thereof, the issuance of shares of Media Stock pursuant
thereto shall, in whole or in part, reduce the Number of Shares Issuable with
Respect to the Intergroup Interest, taking into consideration the use of the
proceeds of such issuance of Convertible Securities in the business of the
Communications Group or the Media Group and any other relevant factors.
(D) Upon any redemption or repurchase by the Corporation or any subsidiary
thereof of shares of any Preferred Stock of any class or series or of other
securities or debt obligations of the Corporation, if some of such shares, other
securities or debt obligations were attributed to the Communications
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Group and some of such shares, other securities or debt obligations were
attributed to the Media Group, the Board of Directors shall determine which, if
any, of such shares, other securities or debt obligations redeemed or
repurchased shall be attributed to the Communications Group and which, if any,
of such shares, other securities or debt obligations shall be attributed to the
Media Group and, accordingly, how many of the shares of such series of Preferred
Stock or of such other securities, or how much of such debt obligations, that
remain outstanding, if any, continue to be attributed to the Communications
Group or to the Media Group.
2.5.2. SOURCES OF DIVIDENDS AND DISTRIBUTIONS; USES OF PROCEEDS OF SHARE
ISSUANCES. Notwithstanding the attribution of properties or assets of the
Corporation to the Communications Group or the Media Group as provided by
subsection 2.6.1 or 2.6.15, but subject to the limitations of subsections 2.1.1,
2.1.2 and 2.1.4, the Board of Directors (i) may cause dividends or distributions
or other payments to the holders of any class of Common Stock or any class or
series of Preferred Stock to be made out of the properties or assets attributed
to any Group, subject, however, to any contrary term of any series of Preferred
Stock fixed in accordance with Section 3 of this Article V, and (ii) may cause
the proceeds of issuance of any shares of Communications Stock or Media Stock or
any class or series of Preferred Stock, to whichever Group attributed in
accordance with subsection 3.4, to be used in the business of, and to be
attributed either to the Communications Group in accordance with subsection
2.6.1 or to the Media Group in accordance with subsection 2.6.15.
2.5.3. CERTAIN DETERMINATIONS NOT REQUIRED. Notwithstanding the foregoing
provisions of this subsection 2.5, the provisions of subsection 2.6.1, 2.6.3,
2.6.15 or 2.6.16 or any other provision of this Article V, at any time when
there are not outstanding both (i) one or more shares of Communications Stock or
Convertible Securities convertible into or exchangeable or exercisable for
Communications Stock and (ii) one or more shares of Media Stock or Convertible
Securities convertible into or exchangeable or exercisable for Media Stock, the
Corporation (A) need not attribute any of the assets or liabilities of the
Corporation or any of its subsidiaries to the Communications Group or the Media
Group or any of the earnings (or any loss) of the Corporation or any of its
subsidiaries to the Communications Group Net Earnings (Loss) or the Media Group
Net Earnings (Loss) or (B) make any determination required in connection
therewith, nor shall the Board of Directors be required (C) to make any of the
determinations otherwise required by this Article V, and in such circumstances
the holders of the shares of Communications Stock or Media Stock outstanding, as
the case may be, shall (unless otherwise specifically provided by this Restated
Certificate) be entitled to all the voting powers, preferences, optional or
other special rights of both classes of the Common Stock without differentiation
between the Communications Stock and the Media Stock and any provision of this
Article V to the contrary shall no longer be in effect or operative and the
Board of Directors may cause the Corporation's certificate of incorporation to
be amended as permitted by law to delete such provisions as are no longer
operative or of further effect.
2.5.4. BOARD DETERMINATIONS BINDING. Subject to applicable law, any
determinations made in good faith by the Board of Directors of the Corporation
under any provision of this subsection 2.5 or otherwise in furtherance of the
application of this Section 2 shall be final and binding on all shareholders.
2.6. CERTAIN DEFINITIONS. As used in this Section 2 of this Article V, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meaning when used in the plural and vice versa),
unless the context otherwise requires. As used in this subsection 2.6, a
"contribution" or "transfer" of assets or properties from one Group to another
shall refer to the reattribution of such assets or properties from the
contributing or transferring Group to the other Group and correlative phrases
shall have correlative meanings.
2.6.1. COMMUNICATIONS GROUP SHALL MEAN, as of any date from and as of the
Effective Date:
(A) the interest of the Corporation on such date in each of U S WEST
Communications Group, Inc., a Colorado corporation, U S WEST Advanced
Technologies, Inc., a Colorado corporation,
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and U S WEST Business Resources, Inc., a Colorado corporation (the
"Communications Group Companies"), and any successor companies, and all of the
businesses, assets and liabilities of the Communications Group Companies and the
subsidiaries thereof;
(B) all assets and liabilities of the Corporation (other than capital stock
of a subsidiary) on such date attributed by the Board of Directors to any of the
Communications Group Companies or the businesses thereof, whether or not such
assets or liabilities are or were also assets and liabilities of any of the
Communications Group Companies, including, without limitation, the assets and
liabilities as of the Effective Date specified in the schedules filed with the
records of the actions of the Board of Directors (a copy of which shall be made
available to any stockholder of the Corporation upon written request therefor);
(C) a proportionate undivided interest in each and every business, asset and
liability attributed to the Media Group equal to the Intergroup Interest
Fraction as of such date;
(D) all properties and assets transferred to the Communications Group from
the Media Group (other than pursuant to paragraph (E) of this section 2.6.1)
after the Effective Date pursuant to transactions in the ordinary course of
business of both the Communications Group and the Media Group or otherwise as
the Board of Directors may have directed as permitted by this Article V;
(E) all properties and assets transferred to the Communications Group from
the Media Group in connection with a reduction of the Number of Shares Issuable
with Respect to the Intergroup Interest;
(F) the interest of the Corporation or any of its subsidiaries in any
business or asset acquired and any liabilities assumed by the Corporation or any
of its subsidiaries outside the ordinary course of business and attributed to
the Communications Group, as determined by the Board of Directors as
contemplated by paragraph (A) of subsection 2.5.1; and
(G) from and after the payment date of any dividend or other distribution
with respect to shares of Media Stock (other than a dividend or other
distribution payable in shares of Media Stock, with respect to which adjustment
shall be made as provided in paragraph (A) of subsection 2.6.19, or in
securities of the Corporation attributed to the Media Group, for which provision
shall be made as set forth in the third to last sentence of this definition), an
amount of assets or properties previously attributed to the Media Group of the
same kind as were paid in such dividend or other distribution with respect to
shares of Media Stock as have a Fair Value on the record date for such dividend
or distribution equal to the product of (1) the Fair Value on such record date
of the aggregate of such dividend or distribution to holders of shares of Media
Stock declared multiplied by (2) a fraction the numerator of which is equal to
the Intergroup Interest Fraction in effect on the record date for such dividend
or distribution and the denominator of which is equal to the Outstanding Media
Fraction in effect on the record date for such dividend or distribution;
provided that from and after any transfer of any assets or properties from the
Communications Group to the Media Group, the Communications Group shall no
longer include such assets or properties so transferred (other than as reflected
in respect of such a transfer by the Intergroup Interest Fraction, as provided
by paragraph (C) of this subsection 2.6.1).
If the Corporation shall pay a dividend or make some other distribution with
respect to shares of Media Stock payable in securities of the Corporation that
are attributed to the Media Group for purposes of this Article V (other than
Media Stock), the Communications Group shall be deemed to hold an interest in
the Media Group equivalent to the number or amount of such securities that is
equal to the product of the number or amount of securities so distributed to
holders of Media Stock multiplied by the fraction specified in clause (2) of
paragraph (G) of this subsection 2.6.1. (determined as of the record date for
such distribution) and, to the extent interest is or dividends are paid on the
securities so distributed, the Communications Group shall include, and there
shall be transferred thereto out of the Media Group, a corresponding ratable
amount of the kind of assets paid as such
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interest or dividends as would have been paid in respect of such securities so
deemed to be held by the Communications Group if such securities were
outstanding. The Corporation may also, to the extent the securities so paid as a
dividend or other distribution to the holders of Media Stock are Convertible
Securities and at the time are convertible into or exchangeable or exercisable
for shares of Media Stock, treat such Convertible Securities as are so deemed to
be held by the Communications Group to be deemed to be converted, exchanged or
exercised, and shall do so to the extent such Convertible Securities are
mandatorily converted, exchanged or exercised (and to the extent the terms of
such Convertible Securities require payment of consideration for such
conversion, exchange or exercise, the Communications Group shall then no longer
include an amount of the kind of properties or assets required to be paid as
such consideration for the amount of Convertible Securities deemed converted,
exchanged or exercised (and the Media Group shall be attributed such properties
or assets)), in which case, from and after such time, the securities into or for
which such Convertible Securities so deemed to be held by the Communications
Group were so considered converted, exchanged or exercised shall be deemed held
by the Communications Group (as provided in clause (3) of paragraph (C) of
subsection 2.6.19) and such Convertible Securities shall no longer be deemed to
be held by the Communications Group. A statement setting forth the election to
effectuate any such deemed conversion, exchange or exercise of Convertible
Securities so deemed to be held by the Communication Group and the properties or
assets, if any, to be attributed to the Media Group in consideration of such
conversion, exchange or exercise (if any) shall be filed in the records of the
actions of the Board of Directors and, upon such filing, such deemed conversion,
exchange or exercise shall be effectuated.
2.6.2. COMMUNICATIONS GROUP AVAILABLE DIVIDEND AMOUNT, on any date, shall
mean the excess, if any, of (1) the amount equal to the fair market value of the
total assets attributed to the Communications Group less the total amount of the
liabilities attributed to the Communications Group (provided that preferred
stock shall not be treated as a liability), in each case as of such date and
determined on a basis consistent with the determination of the Net Earnings
(Loss) of the Communications Group, over (2) the aggregate par value of, or any
greater amount determined in accordance with applicable corporation law to be
capital in respect of, all outstanding shares of Communications Stock and each
class or series of Preferred Stock attributed in accordance with subsection 3.4
to the Communications Group. Notwithstanding the foregoing provisions of this
subsection 2.6.2, and consistent with subsection 2.5.3, at any time when there
are not outstanding both (i) one or more shares of Communications Stock or
Convertible Securities convertible into or exchangeable or exercisable for
Communications Stock and (ii) one or more shares of Media Stock or Convertible
Securities convertible into or exchangeable or exercisable for Media Stock, the
"Available Dividend Amount," on any calculation date during such time period,
with respect to the Communications Stock or the Media Stock, as the case may be
(depending on which of such classes of Common Stock or Convertible Securities
convertible into or exchangeable or exercisable for such class of Common Stock
is outstanding), shall mean the amount available for the payment of dividends on
such Common Stock in accordance with law.
2.6.3. COMMUNICATIONS GROUP NET EARNINGS (LOSS), for any period through
any date, shall mean the net income or loss of the Communications Group for such
period (or in respect of fiscal periods of the Corporation commencing prior to
the Effective Date, the pro forma net income or loss of the Communications Group
for such period as if the Effective Date had been the first day of such period)
determined in accordance with generally accepted accounting principles in effect
at such time, reflecting income and expense of the Corporation attributed to the
Communications Group on a basis substantially consistent with attributions of
income and expense made in the calculation of Media Group Net Earnings (Loss),
including, without limitation, corporate administrative costs, net interest and
other financial costs and income taxes.
2.6.4. CONVERSION DATE shall mean the date fixed by the Board of Directors
as the effective date for the conversion of shares of Media Stock into shares of
Communications Stock (or another class or series of common stock of the
Corporation) or of shares of Communications Stock into shares of Media Stock (or
another class or series of common stock of the Corporation), as the case may be,
as shall be
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set forth in the notice to holders of shares of such class of Common Stock and
to holders of any Convertible Securities that are convertible into or
exchangeable or exercisable for shares of such class of Common Stock required
pursuant to paragraph (E) of subsection 2.4.5.
2.6.5. CONVERTIBLE SECURITIES at any time shall mean any securities of the
Corporation or of any subsidiary thereof (other than shares of Common Stock),
including warrants and options, outstanding at such time that by their terms are
convertible into or exchangeable or exercisable for or evidence the right to
acquire any shares of any class of Common Stock, whether convertible,
exchangeable or exercisable at such time or a later time or only upon the
occurrence of certain events, but in respect of antidilution provisions of such
securities only upon the effectiveness thereof.
2.6.6. DISPOSITION shall mean a sale, transfer, assignment or other
disposition (whether by merger, consolidation, sale or contribution of assets or
stock or otherwise) of properties or assets (including stock, other securities
and goodwill).
2.6.7. EFFECTIVE DATE shall mean the date on which this Restated
Certificate of Incorporation shall become effective.
2.6.8. FAIR VALUE shall mean, in the case of equity securities or debt
securities of a class that has previously been Publicly Traded for a period of
at least 15 months, the Market Value thereof (if such value, as so defined, can
be determined) or, in the case of an equity security or debt security that has
not been Publicly Traded for at least such period, shall mean the fair value per
share of stock or per other unit of such other security, on a fully distributed
basis, as determined by an independent investment banking firm experienced in
the valuation of securities selected in good faith by the Board of Directors,
or, if no such investment banking firm is, as determined in the good faith
judgment of the Board of Directors, available to make such determination, in
good faith by the Board of Directors; provided, however, that in the case of
property other than securities, the "Fair Value" thereof shall be determined in
good faith by the Board of Directors based upon such appraisals or valuation
reports of such independent experts as the Board of Directors shall in good
faith determine to be appropriate in accordance with good business practice. Any
such determination of Fair Value shall be described in a statement filed with
the records of the actions of the Board of Directors.
2.6.9. GROUP shall mean, as of any date, the Communications Group or the
Media Group, as the case may be.
2.6.10. INTERGROUP INTEREST FRACTION as of any date shall mean a fraction
the numerator of which shall be the Number of Shares Issuable with Respect to
the Intergroup Interest on such date and the denominator of which shall be the
sum of (A) such Number of Shares Issuable with Respect to the Intergroup
Interest and (B) the aggregate number of shares of Media Stock outstanding on
such date. A statement setting forth the Intergroup Interest Fraction as of the
record date for any dividend or distribution on any class of Common Stock, as of
the effective date of any conversion, exchange or exercise of Convertible
Securities into or for shares of Media Stock and as of the end of each fiscal
quarter of the Corporation shall be filed by the Secretary of the Corporation in
the records of the Board of Directors of the Corporation not later than ten days
after such date.
2.6.11. MARKET CAPITALIZATION of any class or series of common stock on
any date shall mean the product of (i) the Market Value of one share of such
class of common stock on such date and (ii) the number of shares of such class
of common stock outstanding on such date.
2.6.12. MARKET VALUE of a share of any class or series of capital stock of
the Corporation on any day shall mean the average of the high and low reported
sales prices regular way of a share of such class or series on such Trading Day
or, in case no such reported sale takes place on such Trading Day, the average
of the reported closing bid and asked prices regular way of a share of such
class or series on such Trading Day, in either case as reported on the New York
Stock Exchange Composite Tape or, if the shares of such class or series are not
listed or admitted to trading on such Exchange on such Trading Day, on the
principal national securities exchange in the United States on which the shares
of such class or series are listed or admitted to trading or, if not listed or
admitted to trading on any
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national securities exchange on such Trading Day, on the NASDAQ National Market
or, if the shares of such class or series are not listed or admitted to trading
on any national securities exchange or quoted on such National Market System on
such Trading Day, the average of the closing bid and asked prices of a share of
such class or series in the over-the-counter market on such Trading Day as
furnished by any New York Stock Exchange member firm selected from time to time
by the Corporation or, if such closing bid and asked prices are not made
available by any such New York Stock Exchange member firm on such Trading Day,
the Fair Value of a share of such class or series; provided that, for purposes
of determining the market value of a share of any class of series of capital
stock for any period, (i) the "Market Value" of a share of capital stock on any
day prior to any "ex-dividend" date or any similar date occurring during such
period for any dividend or distribution (other than any dividend or distribution
contemplated by clause (ii)(B) of this sentence) paid or to be paid with respect
to such capital stock shall be reduced by the Fair Value of the per share amount
of such dividend or distribution and (ii) the "Market Value" of any share of
capital stock on any day prior to (A) the effective date of any subdivision (by
stock split or otherwise) or combination (by reverse stock split or otherwise)
of outstanding shares of such class of capital stock occurring during such
period or (B) any "ex-dividend" date or any similar date occurring during such
period for any dividend or distribution with respect to such capital stock to be
made in shares of such class or series of capital stock or Convertible
Securities that are convertible, exchangeable or exercisable for such class or
series of capital stock shall be appropriately adjusted, as determined by the
Board of Directors, to reflect such subdivision, combination, dividend or
distribution.
2.6.13. MARKET VALUE RATIO OF THE COMMUNICATIONS STOCK TO THE MEDIA STOCK
as of any date shall mean the fraction (which may be greater than 1/1),
expressed as a decimal (rounded to the nearest five decimal places), of a share
of Media Stock (or another class or series of common stock of the Corporation,
if so provided by subsection 2.4.2 because Media Stock is not then Publicly
Traded) to be issued in respect of a share of Communications Stock upon a
conversion of Communications Stock into Media Stock (or another class or series
of common stock of the Corporation) in accordance with subsection 2.4.2, based
on the ratio of the market value of a share of Communications Stock to the
market value of a share of Media Stock (or such other common stock) as of such
date, determined by the fraction the numerator of which shall be the sum of (A)
four times the average Market Value of one share of Communications Stock over
the period of five consecutive Trading Days ending on such date, (B) three times
the average Market Value of one share of Communications Stock over the period of
five consecutive Trading Days ending on the fifth Trading Day prior to such
date, (C) two times the average Market Value of one share of Communications
Stock over the period of five consecutive Trading Days ending on the tenth
Trading Day prior to such date and (D) the average Market Value of one share of
Communications Stock over the period of five consecutive Trading Days ending on
the fifteenth Trading Day prior to such date, and the denominator of which shall
be the sum of (A) four times the average Market Value of one share of Media
Stock (or such other common stock) over the period of five consecutive Trading
Days ending on such date, (B) three times the average Market Value of one share
of Media Stock (or such other common stock) over the period of five consecutive
Trading Days ending on the fifth Trading Day prior to such date, (C) two times
the average Market Value of one share of Media Stock (or such other common
stock) over the period of five consecutive Trading Days ending on the tenth
Trading Day prior to such date and (D) the average Market Value of one share of
Media Stock (or such other common stock) over the period of five consecutive
Trading Days ending on the fifteenth Trading Day prior to such date.
2.6.14. MARKET VALUE RATIO OF THE MEDIA STOCK TO THE COMMUNICATIONS STOCK
as of any date shall mean the fraction (which may be greater than 1/1),
expressed as a decimal (rounded to the nearest five decimal places), of a share
of Communications Stock (or another class or series of common stock of the
Corporation, if so provided by subsection 2.4.1 because Communications Stock is
not then Publicly Traded) to be issued in respect of a share of Media Stock upon
a conversion of Media Stock into Communications Stock (or another class or
series of common stock of the Corporation) in accordance with subsection 2.4.1,
based on the ratio of the market value of a share of Media Stock to the market
value of a share of Communications Stock (or such other common stock) as of such
date,
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determined by the fraction the numerator of which shall be the sum of (A) four
times the average Market Value of one share of Media Stock over the period of
five consecutive Trading Days ending on such date, (B) three times the average
Market Value of one share of Media Stock over the period of five consecutive
Trading Days ending on the fifth Trading Day prior to such date, (C) two times
the average Market Value of one share of Media Stock over the period of five
consecutive Trading Days ending on the tenth Trading Day prior to such date and
(D) the average Market Value of one share of Media Stock (or such other common
stock) over the period of five consecutive Trading Days ending on the fifteenth
Trading Day prior to such date and the denominator of which shall be the sum of
(A) four times the average Market Value of one share of Communications Stock (or
such other common stock) over the period of five consecutive Trading Days ending
on such date, (B) three times the average Market Value of one share of
Communications Stock (or such other common stock) over the period of five
consecutive Trading Days ending on the fifth Trading Day prior to such date, (C)
two times the average Market Value of one share of Communications Stock (or such
other common stock) over the period of five consecutive Trading Days ending on
the tenth Trading Day prior to such date and (D) the average Market Value of one
share of Communications Stock (or such other common stock) over the period of
five consecutive Trading Days ending on the fifteenth Trading Day prior to such
date.
2.6.15. MEDIA GROUP shall mean, as of any date from and after the
Effective Date:
(A) the interest of the Corporation or any of its subsidiaries on such date
in all of the assets, liabilities and businesses of the Corporation or any of
its subsidiaries (and any successor companies), other than any assets,
liabilities and businesses attributed in accordance with this Article V to the
Communications Group;
(B) all properties and assets transferred to the Media Group from the
Communications Group (other than a transaction pursuant to paragraph (C) of this
subsection 2.6.15) after the Effective Date pursuant to transactions in the
ordinary course of business of both the Communications Group and the Media Group
or otherwise as the Board of Directors may have directed as permitted by this
Article V;
(C) all properties and assets transferred to the Media Group from the
Communications Group in connection with an increase in the Number of Shares
Issuable with Respect to the Intergroup Interest; and
(D) the interest of the Corporation or any of its subsidiaries in any
business or asset acquired and any liabilities assumed by the Corporation or any
of its subsidiaries outside of the ordinary course of business and attributed to
the Media Group, as determined by the Board of Directors as contemplated by
paragraph (A) of subsection 2.5.1;
provided that (1) from and after the payment date of any dividend or other
distribution with respect to shares of Media Stock (other than a dividend or
other distribution payable in shares of Media Stock, with respect to which
adjustment shall be made as provided in paragraph (A) of subsection 2.6.19, or
in securities of the Corporation attributed to the Media Group, for which
provision shall be made as set forth in clause (2) of this proviso), the Media
Group shall no longer include an amount of assets or properties previously
attributed to the Media Group of the same kind as so paid in such dividend or
other distribution with respect of shares of Media Stock as have a Fair Value on
the record date for such dividend or distribution equal to the product of (a)
the Fair Value on such record date of the aggregate of such dividend or
distribution to holders of shares of Media Stock declared multiplied by (b) a
fraction the numerator of which is equal to the Intergroup Interest Fraction in
effect on the record date for such dividend or distribution and the denominator
of which is equal to the Outstanding Media Fraction in effect on the record date
for such dividend or distribution, (2) if the Corporation shall pay a dividend
or make some other distribution with respect to shares of Media Stock payable in
securities of the Corporation that are attributed to the Media Group for
purposes of this Article V (other than Media Stock), there shall be excluded
from the Media Group an interest in the Media Group equivalent to the number or
amount of such securities that is equal to the product of the
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number or amount of securities so distributed to holders of Media Stock
multiplied by the fraction specified in clause 1(b) of this proviso (determined
as of the record date for such distribution) (and such interest in the Media
Group shall be attributed to the Communications Group) and, to the extent
interest is or dividends are paid on the securities so distributed, the Media
Group shall no longer include a corresponding ratable amount of the kind of
assets paid as such interest or dividends as would have been paid in respect of
the securities equivalent to such interest in the Media Group deemed held by the
Communications Group if the securities equivalent to such interest were
outstanding (and in such eventuality such assets as are no longer included in
the Media Group shall be attributed to the Communications Group) and (3) from
and after any transfer of any assets or properties from the Media Group to the
Communications Group, the Media Group shall no longer include such assets or
properties so contributed or transferred. The Corporation may also, to the
extent a dividend or distribution on the Media Stock has been paid in
Convertible Securities that are convertible into or exchangeable or exercisable
for Media Stock, cause such Convertible Securities as are deemed to be held by
the Communications Group in accordance with the third to last sentence of
subsection 2.6.1 and clause (2) of the proviso to the immediately preceding
sentence to be deemed to be converted, exchanged or exercised as provided in the
penultimate sentence of subsection 2.6.1, in which case such Convertible
Securities shall no longer be deemed to be held by the Communications Group.
2.6.16. MEDIA GROUP AVAILABLE DIVIDEND AMOUNT, on any date, shall mean the
excess, if any, of (1) the product of (a) the Outstanding Media Fraction as of
such date multiplied by (b) an amount equal to the fair market value of the
total assets attributed to the Media Group less the total amount of the
liabilities attributed to the Media Group (provided that preferred stock shall
not be treated as a liability), in each case as of such date and determined on a
basis consistent with the determination of the Net Earnings (Loss) of the Media
Group, over (2) the aggregate par value of, or any greater amount determined in
accordance with applicable corporation law to be capital in respect of, all
outstanding shares of Media Stock and each class or series of Preferred Stock
attributed in accordance with subsection 3.4 to the Media Group. Notwithstanding
the foregoing provisions of this subsection 2.6.16, and consistent with
subsection 2.5.3, at any time when there are not outstanding both (i) one or
more shares of Communications Stock or Convertible Securities convertible into
or exchangeable or exercisable for Communications Stock and (ii) one or more
shares of Media Stock or Convertible Securities convertible into or exchangeable
or exercisable for Media Stock, the "Available Dividend Amount," on any
calculation date during such time period, with respect to the Communications
Stock or the Media Stock, as the case may be (depending on which of such classes
of Common Stock or Convertible Securities convertible into or exchangeable or
exercisable for such class of Common Stock is outstanding), shall mean the
amount available for the payment of dividends on such Common Stock in accordance
with law.
2.6.17. MEDIA GROUP NET EARNINGS (LOSS), for any period through any date,
shall mean the net income or loss of the Media Group for such period (or in
respect of the fiscal periods of the Corporation commencing prior to the
Effective Date, the pro forma net income or loss of the Media Group for such
period as if the Effective Date had been the first day of such period)
determined in accordance with generally accepted accounting principles in effect
at such time, reflecting income and expense of the Corporation attributed to the
Media Group on a basis substantially consistent with attributions of income and
expense made in the calculation of the Communications Group Net Earnings (Loss),
including, without limitation, corporate administrative costs, net interest and
other financial costs and income taxes.
2.6.18. NET PROCEEDS shall mean, as of any date with respect to any
Disposition of any of the properties and assets attributed to the Media Group or
the Communications Group, as the case may be, an amount, if any, equal to what
remains of the gross proceeds of such Disposition after payment of, or
reasonable provision is made as determined by the Board of Directors for, (A)
any taxes payable by the Corporation (or which would have been payable but for
the utilization of tax benefits attributable to the other Group) in respect of
such Disposition or in respect of any resulting dividend or
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redemption pursuant to subparagraph (A)(1)(a) or (b) of subsection 2.4.1 or
subparagraph (A)(1)(a) or (b) of subsection 2.4.2, as the case may be, (B) any
transaction costs, including, without limitation, any legal, investment banking
and accounting fees and expenses and (C) any liabilities (contingent or
otherwise) of or attributed to the Media Group if properties or assets
attributed to the Media Group were disposed of or the Communications Group, if
properties or assets attributed to the Communications Group were disposed of,
including, without limitation, any liabilities for deferred taxes or any
indemnity or guarantee obligations of the Corporation 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 Preferred Stock attributed to such Group. For purposes
of this definition, any properties and assets attributed to such Group remaining
after such Disposition shall constitute "reasonable provision" for such amount
of taxes, costs and liabilities (contingent or otherwise) as the Board of
Directors determines can be expected to be supported by such properties and
assets.
2.6.19. NUMBER OF SHARES ISSUABLE WITH RESPECT TO THE INTERGROUP
INTEREST shall as of the Effective Date be zero; provided, however, that such
number shall from time to time thereafter be:
(A) adjusted, if before such adjustment greater than zero, as determined by
the Board of Directors to be appropriate to reflect equitably any subdivision
(by stock split or otherwise) or combination (by reverse stock split or
otherwise) of the Media Stock or any dividend or other distribution of shares of
Media Stock to holders of shares of Media Stock or any reclassification of Media
Stock;
(B) decreased (but to not less than zero), if before such adjustment greater
than zero, by action of the Board of Directors by (1) the number of shares of
Media Stock issued or sold by the Corporation that, immediately prior to such
issuance or sale, were included (as determined by the Board of Directors
pursuant to paragraph (C) of this subsection 2.6.19) in the Number of Shares
Issuable with Respect to the Intergroup Interest, (2) the number of shares of
Media Stock issued upon conversion, exchange or exercise of Convertible
Securities that, immediately prior to the issuance or sale of such Convertible
Securities, were included in the Number of Shares Issuable with Respect to the
Intergroup Interest, (3) the number of shares of Media Stock issued by the
Corporation as a dividend or other distribution (including in connection with
any reclassification or exchange of shares) to holders of Communications Stock,
(4) the number of shares of Media Stock issued upon the conversion, exchange or
exercise of any Convertible Securities issued by the Corporation as a dividend
or other distribution (including in connection with any reclassification or
exchange of shares) to holders of Communications Stock, or (5) the number
(rounded, if necessary, to the nearest whole number) equal to the quotient of
(a) the aggregate Fair Value as of the date of contribution of properties or
assets (including cash) transferred from the Media Group to the Communications
Group in consideration for a reduction in the Number of Shares Issuable with
Respect to the Intergroup Interest divided by (b) the Market Value of one share
of Media Stock as of the date of such transfer; and
(C) increased by (1) the number of outstanding shares of Media Stock
repurchased by the Corporation for consideration that is attributed as provided
by subsection 2.6.1 to the Communications Group and (2) the number (rounded, if
necessary, to the nearest whole number) equal to the quotient of (a) the Fair
Value of properties or assets (including cash) theretofore attributed as
provided by subsection 2.6.1 to the Communications Group that are contributed to
the Media Group in consideration of an increase in the Number of Shares Issuable
with Respect to the Intergroup Interest, divided by (b) the Market Value of one
share of Media Stock as of the date of such contribution and (3) the number of
shares of Media Stock into or for which Convertible Securities are deemed
converted, exchanged or exercised pursuant to the penultimate sentence of the
definition of "Communications Group" in subsection 2.6.1.
2.6.20. OUTSTANDING MEDIA FRACTION, as of any date, means the fraction
(which may simplify to 1/1) the numerator of which shall be the number of shares
of Media Stock outstanding on such date and the denominator of which shall be
the sum of the number of shares of Media Stock outstanding on such date and the
Number of Shares Issuable with Respect to the Intergroup Interest on such date.
A
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statement setting forth the Outstanding Media Fraction as of the record date for
the payment of any dividend or distribution on any class of Common Stock and as
of the end of each fiscal quarter of the Corporation shall be filed by the
Secretary of the Corporation in the records of the actions of the Board of
Directors not later than ten days after such date.
2.6.21. PUBLICLY TRADED with respect to any security shall mean (i)
registered under Section 12 of the Securities Exchange Act of 1934, as amended
(or any successor provision of law), and (ii) listed for trading on the New York
Stock Exchange or the American Stock Exchange (or any national securities
exchange registered under Section 7 of the Securities Exchange Act of 1934, as
amended (or any successor provision of law), that is the successor to either
such exchange) or quoted in the National Association of Securities Dealers
Automation Quotation System (or any successor system).
2.6.22. REDEMPTION DATE shall mean the date fixed by the Board of
Directors as the effective date for a redemption of shares of any class of
Common Stock, as set forth in a notice to holders thereof required pursuant to
paragraph (C), (D) or (F) of subsection 2.4.5.
2.6.23. RELATED BUSINESS TRANSACTION means any Disposition of all or
substantially all the properties and assets attributed to a Group in a
transaction or series of related transactions that result in the Corporation
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
(1) any entity which (i) acquires such properties or assets or succeeds (by
merger, formation of a joint venture or otherwise) to the business conducted
with such properties or assets or controls such acquiror or successor and (ii)
is primarily engaged or proposes to engage primarily in one or more businesses
similar or complementary to the businesses conducted by such Group prior to such
Disposition, as determined by the Board of Directors.
2.6.24. TRADING DAY shall mean each weekday other than any day on which
the relevant class of common stock of the Corporation is not traded on any
national securities exchange or quoted in the National Association of Securities
Dealers Automated Quotations National Market System or in the over-the-counter
market.
SECTION 3. PREFERRED STOCK. The Preferred Stock may be issued from time to
time in one or more series. Except as provided by subsection 3.1 with respect to
the Series A Preferred Stock (as hereinafter defined), by subsection 3.2 with
respect to the Series B Preferred Stock (as hereinafter defined) and by
subsection 3.3 with respect to the Series C Preferred Stock (as hereinafter
defined), the Board of Directors is authorized, by resolution adopted and filed
in accordance with law, to fix the number of shares in each series, the
designation thereof, the voting powers, preferences and relative, participating,
optional or other special rights thereof, and the qualifications or restrictions
thereon, of each series and the variations in such voting powers and preferences
and rights as between series. Any shares of any class or series of Preferred
Stock purchased, exchanged, converted or otherwise acquired by the Corporation
in any manner whatsoever shall be retired and cancelled promptly after the
acquisition thereof. All such shares shall upon their cancellation become
authorized but unissued shares of Preferred Stock, without designation as to
series, and may be reissued as part of any series of Preferred Stock created by
resolution or resolutions of the Board of Directors, subject to the conditions
and restrictions on issuance set forth in this certificate of incorporation or
in such resolution or resolutions.
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3.1. SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK. There is
hereby created a series of Preferred Stock, designated Series A Junior
Participating Cumulative Preferred Stock, par value $1.00 per share (the "Series
A Preferred Stock"), of 10,000,000 shares having the following voting powers,
preferences and rights, and qualifications and restrictions thereon:
3.1.1. DIVIDENDS AND DISTRIBUTIONS.
(A) The holders of shares of Series A Preferred Stock, in preference to the
holders of shares of Communications Stock and Media Stock and of any other
junior stock of the Corporation that may be outstanding, shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for the purpose, quarterly dividends payable in cash on the tenth day
of January, April, July and October in each year (each such date being referred
to herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (i) $25 per share ($100 per annum), or
(ii) subject to the provision for adjustment hereinafter set forth, the product
of the Communications Number times the aggregate per share amount of all cash
dividends, plus the product of the Communications Number (as hereinafter
defined) times the aggregate per share amount (payable in kind) of all non-cash
dividends or other distributions, other than a dividend payable in shares of
Communications Stock, or a subdivision of the outstanding shares of
Communications Stock (by reclassification or otherwise), declared on the
Communications Stock since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock.
As used in this certificate of incorporation, the Communications Number shall
initially be ______. In the event that the Corporation shall at any time declare
or pay any dividend on Communications Stock payable in shares of Communications
Stock or effect a subdivision or combination or consolidation of the outstanding
shares of Communications Stock (by reclassification or otherwise) into a greater
or lesser number of shares of Communications Stock, then, and in each such
event, the Communications Number shall be adjusted by multiplying such number by
a fraction, the numerator of which is the number of shares of Communications
Stock outstanding immediately after such event, and the denominator of which is
the number of shares of Communications Stock that were outstanding immediately
prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series A
Preferred Stock as provided in paragraph (A) of this subsection 3.1.1.
immediately after it declares a dividend or distribution on the Communications
Stock (other than a dividend payable in shares of Communications Stock);
PROVIDED, HOWEVER, that in the event no dividend or distribution shall have been
declared on the Communications Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a
dividend of $25 per share ($100 per annum) on the Series A Preferred Stock shall
nevertheless be payable on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
(i) the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or (ii) the date of issue
of such shares is after the record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive a quarterly dividend and
on or prior to the next succeeding Quarterly Dividend Payment Date, in which
case such dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall cumulate but shall not
bear interest. Dividends paid on the shares of Series A Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all
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such shares at the time outstanding. The Board of Directors may fix a record
date for the determination of holders of shares of Series A Preferred Stock
entitled to receive payment of a dividend or distribution declared thereon,
which record date shall be not more than 60 days prior to the date fixed for the
payment thereof.
3.1.2. VOTING RIGHTS. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Each holder of Series A Preferred Stock shall be entitled to a number of
votes equal to the product of (i) the Communications Number then in effect for
each share of Series A Preferred Stock held of record on each matter on which
holders of Communications Stock are entitled to vote times (ii) the maximum
number of votes which the holders of Communications Stock then have with respect
to such matter.
(B) Except as otherwise provided in this certificate of incorporation or
herein or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Communications Stock and Media Stock shall vote together as
one class on all matters submitted to a vote of stockholders of the Corporation.
(C) In addition, the holders of shares of Series A Preferred Stock shall
have the following special voting rights: In the event that at any time
dividends on Series A Preferred Stock, whenever accrued and whether or not
consecutive, shall not have been paid or declared and a sum sufficient for the
payment thereof set aside, in an amount equivalent to six quarterly dividends on
all shares of Series A Preferred Stock at the time outstanding, then, and in
each such event, the holders of shares of Series A Preferred Stock and each
other class or series of preferred stock now or hereafter issued that shall be
accorded such class voting right by the Board of Directors (each such other
class or series being hereinafter called "Other Series of Preferred Stock"),
voting together as a separate class, shall be entitled to elect three directors
at the next annual meeting of stockholders of the Corporation, in addition to
the directors to be elected by the holders of all shares of the Corporation
entitled to vote for the election of directors, and the holders of all shares
(including the Series A Preferred Stock) otherwise entitled to vote for
directors, voting separately as a class, shall be entitled to elect the
remaining members of the Board of Directors, provided that the Series A
Preferred Stock, voting as a class together with each Other Series of Preferred
Stock, shall not have the right to elect more than three directors. Such special
voting right of the holders of shares of Series A Preferred Stock may be
exercised until all dividends in default on the Series A Preferred Stock shall
have been paid in full, or declared and funds sufficient therefor set aside,
and, when so paid or provided for, such special voting right of the holders of
shares of Series A Preferred Stock shall cease, but subject always to the same
provisions for the vesting of such special voting rights in the event of any
future dividend default or defaults giving rise to such special voting rights.
At any time after such special voting rights shall have so vested in the holders
of shares of Series A Preferred Stock, the Secretary of the Corporation may, and
upon the written request of the holders of record of 10% or more in number of
the shares of Series A Preferred Stock and each Other Series of Preferred Stock
then outstanding addressed to the Secretary at the principal executive office of
the Corporation shall, call a special meeting of the holders of shares of
Preferred Stock so entitled to vote, for the election of the directors to be
elected by them as herein provided, to be held within 60 days after such call
and at the place and upon the notice provided by law and in the By-laws for the
holding of meetings of stockholders; PROVIDED, HOWEVER, that the Secretary shall
not be required to call such special meeting in the case of any such request
received less than 90 days before the date fixed for any annual meeting of
stockholders, and if in such case such special meeting is not called or held,
the holders of shares of Preferred Stock so entitled to vote shall be entitled
to exercise the special voting rights provided in this paragraph at such annual
meeting. If any such special meeting required to be called as above provided
shall not be called by the Secretary within 30 days after receipt of any such
request, then the holders of record of 10% or more in number of the shares of
Series A Preferred Stock and each Other Series of Preferred Stock then
outstanding may designate in writing one of their number to call such meeting,
and the person so designated may, at the expense of the Corporation, call such
meeting to be held at the place and upon the notice given by such
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person, and for that purpose shall have access to the stock books of the
Corporation. No such special meeting and no adjournment thereof shall be held on
a date later than 60 days before the annual meeting of stockholders. If, at any
meeting so called or at any annual meeting held while the holders of shares of
Series A Preferred Stock have the special voting rights provided for in this
paragraph, the holders of not less than 40% of the shares of Series A Preferred
Stock and each Other Series of Preferred Stock then outstanding are present in
person or by proxy, which percentage shall be sufficient to constitute a quorum
for the section of additional directors as herein provided, the then authorized
number of directors of the Corporation shall be increased by three, as of the
time of such special meeting or the time of the first such annual meeting held
while such holders have special voting rights and such quorum is present, and
the holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock, voting as a class, shall be entitled to elect the additional
directors so provided for. If the directors of the Corporation are then divided
into classes under provisions of this Restated Certificate of Incorporation or
the By-Laws of the Corporation, the three additional directors shall be members
of those respective classes of directors in which a vacancy is created as a
result of such increase in the authorized number of directors. If the foregoing
expansion of the size of the Board of Directors shall not be valid under
applicable law, then the holders of shares of Series A Preferred Stock and of
each Other Series of Preferred Stock, voting as a class, shall be entitled, at
the meeting of stockholders at which they would otherwise have voted, to elect
directors to fill any then existing vacancies on the Board of Directors, and
shall additionally be entitled, at such meeting and each subsequent meeting of
stockholders at which directors are elected, to elect all of the directors then
being elected until by such class vote three members of the Board of Directors
have been so elected. Upon the election at such meeting by the holders of shares
of Series A Preferred Stock and each Other Series of Preferred Stock, voting as
a class, of the directors they are entitled so to elect, the persons so elected,
together with such persons as may be directors or as may have been elected as
directors by the holders of all shares (including Series A Preferred Stock)
otherwise entitled to vote for directors, shall constitute the duly elected
directors of the Corporation. The additional directors so elected by holders of
shares of Series A Preferred Stock and each Other Series of Preferred Stock,
voting as a class, shall serve until the next annual meeting or until their
respective successors shall be elected and qualified, or if any such director is
a member of a class of directors under provisions dividing the directors into
classes, each such director shall serve until the annual meeting at which the
term of office of such director's class shall expire or until such director's
successor shall be elected and shall qualify, and at each subsequent meeting of
stockholders at which the directorship of any director elected by the vote of
holders of shares of Series A Preferred Stock and each Other Series of Preferred
Stock under the special voting rights set forth in this paragraph is up for
election, said special class voting rights shall apply in the reelection of such
director or in the election of such director's successor; PROVIDED, HOWEVER,
that whenever the holders of shares of Series A Preferred Stock and each Other
Series of Preferred Stock shall be divested of the special rights to elect three
directors as above provided, the terms of office of all persons elected as
directors by the holders of shares of Series A Preferred Stock and each Other
Series of Preferred Stock, voting as a class, or elected to fill any vacancies
resulting from the death, resignation, or removal of directors so elected by the
holders of shares of Series A Preferred Stock and each Other Series of Preferred
Stock shall forthwith terminate (and, if applicable, the number of directors
shall be reduced accordingly). If, at any time after a special meeting of
stockholders or an annual meeting of stockholders at which the holders of shares
of Series A Preferred Stock and each Other Series of Preferred Stock, voting as
a class, have elected directors as provided above, and while the holders of
shares of Series A Preferred Stock and each Other Series of Preferred Stock
shall be entitled so to elect three directors, the number of directors who have
been elected by the holders of shares of Series A Preferred Stock and each Other
Series of Preferred Stock (or who by reason of one or more resignations, deaths
or removals have succeeded any directors so elected) shall by reason of
resignation, death or removal be less than three but at least one, the vacancy
in the directors so elected by the holders of shares of the Series A Preferred
Stock and each Other Series of Preferred Stock may be filled by the remaining
director elected by such holders, and in the event that such election shall not
occur within 30 days after such vacancy arises, or in the event that there shall
not be incumbent at least one director so elected by such holders, the Secretary
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of the Corporation may, and upon the written request of the holders of record of
10% or more in number of the shares of Series A Preferred Stock and each Other
Series of Preferred Stock then outstanding addressed to the Secretary at the
principal office of the Corporation shall, call a special meeting of the holders
of shares of Series A Preferred Stock and each Other Series of Preferred Stock
so entitled to vote, for an election to fill such vacancy or vacancies, to be
held within 60 days after such call and at the place and upon the notice
provided by law and in the By-laws for the holding of meetings of stockholders;
PROVIDED, HOWEVER, that the Secretary shall not be required to call such special
meeting in the case of any such request received less than 90 days before the
date fixed for any annual meeting of stockholders, and if in such case such
special meeting is not called, the holders of shares of Preferred Stock so
entitled to vote shall be entitled to fill such vacancy or vacancies at such
annual meeting. If any such special meeting required to be called as above
provided shall not be called by the Secretary within 30 days after receipt of
any such request, then the holders of record of 10% or more in number of the
shares of Series A Preferred Stock and each Other Series of Preferred Stock then
outstanding may designate in writing one of their number to call such meeting,
and the person so designated may, at the expense of the Corporation, call such
meeting to be held at the place and upon the notice above provided, and for that
purpose shall have access to the stock books of the Corporation; no such special
meeting and no adjournment thereof shall be held on a date later than 60 days
before the annual meeting of stockholders.
(D) Nothing herein shall prevent the directors or stockholders from taking
any action to increase the number of authorized shares of Series A Preferred
Stock, or increasing the number of authorized shares of Preferred Stock of the
same class as the Series A Preferred Stock or the number of authorized shares of
Communications Stock or Media Stock, or changing the par value of the
Communications Stock, Media Stock or Preferred Stock, or issuing options,
warrants or rights to any class of stock of the Corporation as authorized by
this Restated Certificate of Incorporation, as it may hereafter be amended.
(E) Except as set forth herein, holders of shares of Series A Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote as set forth in this
Restated Certificate of Incorporation or herein or by law) for taking any
corporate action.
3.1.3. CERTAIN RESTRICTIONS.
(A) Whenever any dividends or other distributions payable on the Series A
Preferred Stock as provided in subsection 3.1.1 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not and shall cause its subsidiaries
not to, directly or indirectly:
(1) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding-up) to the Series A Preferred
Stock;
(2) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding-up) with the Series A Preferred
Stock, except dividends paid ratably on shares of the Series A Preferred
Stock and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such shares
are then entitled;
(3) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock, provided that
the Corporation may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding-up) to the Series A Preferred Stock; or
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(4) purchase or otherwise acquire for consideration any shares of Series
A Preferred Stock, or any shares of stock ranking on a parity with the
Series A Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall determine
in good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this subsection
3.1.3 purchase or otherwise acquire such shares at such time and in such manner.
3.1.4. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of preferred
stock, without designation as to series, and may be reissued as part of any
series of preferred stock created by resolution or resolutions of the Board of
Directors (including Series A Preferred Stock), subject to the conditions and
restrictions on issuance set forth herein.
3.1.5. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding-up of the Corporation, no distribution shall be made to:
(A) the holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding-up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A Preferred Stock shall
have received the greater of (i) $100 per share ($1.00 per one-hundredth of a
share), plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, or (ii) an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to the product of (i) the Communications Number then in effect
times (ii) the aggregate amount to be distributed per share to holders of shares
of Communications Stock; or
(B) the holders of shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding-up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding-up.
3.1.6. CONSOLIDATION, MERGER, ETC. In the event that the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Communications Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, or otherwise changed, then and in
each such event, the shares of Series A Preferred Stock shall at the same time
be similarly exchanged or changed in an amount per share (subject to the
provision for adjustment hereinafter set forth) equal to the product of (i) the
Communications Number then in effect times (ii) the aggregate amount of stock,
securities, cash or any other property (payable in kind), as the case may be,
into which or for which each share of Communications Stock is changed or
exchanged.
3.1.7. NO REDEMPTION. The shares of Series A Preferred Stock shall not be
redeemable. Notwithstanding the foregoing, the Corporation may acquire shares of
Series A Preferred Stock in any other manner permitted by law or this Restated
Certificate of Incorporation.
3.1.8. RANK. Unless otherwise provided in this Restated Certificate of
Incorporation or a Certificate of Designations relating to a subsequent series
of preferred stock of the Corporation, the Series A Preferred Stock shall rank,
as to the payment of dividends and the distribution of assets on liquidation,
dissolution or winding-up of the Corporation, pari passu to the Series B Junior
Participating Cumulative Preferred Stock, par value $1.00 per share (the "Series
B Preferred Stock"), and the
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Series C Cumulative Redeemable Preferred Stock, par value $1.00 per share (the
"Series C Preferred Stock"), of the Corporation, junior to all other series of
the Corporation's Preferred Stock and senior to the Communications Stock and
Media Stock.
3.1.9. AMENDMENT. This Restated Certificate of Incorporation shall not be
amended in any manner that would materially and adversely alter or change the
powers, preferences or special rights of the Series A Preferred Stock without
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of Series A Preferred Stock, voting together as a single series.
3.1.10. FRACTIONAL SHARES. Series A Preferred Stock may be issued in
fractions of a share (in one one-hundredths (1/100) of a share and integral
multiples thereof) that shall entitle the holder thereof, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of shares of Series A Preferred Stock.
3.2. SERIES B JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK. There is
hereby created a series of Preferred Stock, par value $1.00 per share designated
Series B Junior Participating Cumulative Preferred Stock, par value $1.00 per
share (the "Series B Preferred Stock"), of 10,000,000 shares having the
following voting powers, preferences and rights, and qualifications and
restrictions thereon:
3.2.1. DIVIDENDS AND DISTRIBUTIONS.
(A) The holders of shares of Series B Preferred Stock, in preference to the
holders of shares of the Communications Stock, and Media Stock, of the
Corporation and of any other junior stock of the Corporation that may be
outstanding, shall be entitled to receive, when, as and if declared by the Board
of Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on each Quarterly Dividend Payment Date, commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series B Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (i) $25 per share ($100 per annum), or
(ii) subject to the provision for adjustment hereinafter set forth, the product
of the Media Number (as hereinafter defined) times the aggregate per share
amount of all cash dividends, plus the product of the Media Number times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Media Stock, or a
subdivision of the outstanding shares of Media Stock (by reclassification or
otherwise), declared on the Media Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series B Preferred Stock.
As used in this certificate of incorporation, the Media Number shall initially
be ______. In the event that the Corporation shall at any time declare or pay
any dividend on Media Stock payable in shares of Media Stock or effect a
subdivision or combination or consolidation of the outstanding shares of Media
Stock (by reclassification or otherwise) into a greater or lesser number of
shares of Media Stock, then and in each such event, the Media Number shall be
adjusted by multiplying such number by a fraction, the numerator of which is the
number of shares of Media Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Media Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the Series B
Preferred Stock as provided in paragraph (A) of this subsection 3.2.1
immediately after it declares a dividend or distribution on the Media Stock
(other than a dividend payable in shares of Media Stock); PROVIDED, HOWEVER,
that in the event no dividend or distribution shall have been declared on the
Media Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $25 per share
($100 per annum) on the Series B Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
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<PAGE>
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series B Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series B Preferred Stock, unless
(i) the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or (ii) the date of issue
of such shares is after the record date for the determination of holders of
shares of Series B Preferred Stock entitled to receive a quarterly dividend and
on or prior to the next succeeding Quarterly Dividend Payment Date, in which
case such dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall cumulate but shall not
bear interest. Dividends paid on the shares of Series B Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series B Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
3.2.2. VOTING RIGHTS. The holders of shares of Series B Preferred Stock
shall have the following voting rights:
(A) Each holder of Series B Preferred Stock shall be entitled to a number of
votes equal to the product of (i) the Media Number then in effect for each share
of Series B Preferred Stock held of record on each matter on which holders of
Media Stock are entitled to vote times (ii) the maximum number of votes which
the holders of Media Stock then have with respect to such matter.
(B) Except as otherwise provided in this certificate of incorporation or
herein or by law, the holders of shares of Series B Preferred Stock and the
holders of shares of Communications Stock and Media Stock shall vote together as
one class on all matters submitted to a vote of stockholders of the Corporation.
(C) In addition, the holders of shares of Series B Preferred Stock shall
have the following special voting rights: In the event that at any time
dividends on Series B Preferred Stock, whenever accrued and whether or not
consecutive, shall not have been paid or declared and a sum sufficient for the
payment thereof set aside, in an amount equivalent to six quarterly dividends on
all shares of Series B Preferred Stock at the time outstanding, then, and in
each such event, the holders of shares of Series B Preferred Stock and each
(each such other series Other Series of Preferred Stock), voting together as a
separate class, shall be entitled to elect three directors at the next annual
meeting of stockholders of the Corporation, in addition to the directors to be
elected by the holders of all shares of the Corporation entitled to vote for the
election of directors, and the holders of all shares (including the Series B
Preferred Stock) otherwise entitled to vote for directors, voting separately as
a class, shall be entitled to elect the remaining members of the Board of
Directors, provided that the Series B Preferred Stock, voting as a class
together with each Other Series of Preferred Stock, shall not have the right to
elect more than three directors. Such special voting right of the holders of
shares of Series B Preferred Stock may be exercised until all dividends in
default non the Series B Preferred Stock shall have been paid in full, or
declared and funds sufficient therefor set aside, and,when so paid or provided
for, such special voting right of the holders of shares of Series B Preferred
Stock shall cease, but subject always to the same provisions for the vesting of
such special voting rights in the event of any future dividend default or
defaults giving rise to such special voting rights. At any time after such
special voting rights shall have so vested in the holders of shares of Series B
Preferred Stock, the Secretary of the Corporation may, and upon the written
request of the holders of record of 10% or more in number of the shares of
Series B Preferred Stock and each Other Series of Preferred Stock then
outstanding addressed to the Secretary at the principal executive office of the
Corporation shall, call a special
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meeting of the holders of shares of Preferred Stock so entitled to vote, for the
election of the directors to be elected by them as herein provided, to be held
within 60 days after such call and at the place and upon the notice provided by
law and in the By-laws for the holding of meetings of stockholders; PROVIDED,
HOWEVER, that the Secretary shall not be required to call such special meeting
in the case of any such request received less than 90 days before the date fixed
for any annual meeting of stockholders, and if in such case such special meeting
is not called or held, the holders of shares of Preferred Stock so entitled to
vote shall be entitled to exercise the special voting rights provided in this
paragraph at such annual meeting. If any such special meeting required to be
called as above provided shall not be called by the Secretary within 30 days
after receipt of any such request, then the holders of record of 10% or more in
number of the shares of Series B Preferred Stock and each Other Series of
Preferred Stock then outstanding may designate in writing one of their number to
call such meeting, and the person so designated may, at the expense of the
Corporation, call such meeting to be held at the place and upon the notice given
by such person, and for that purpose shall have access to the stock books of the
Corporation. No such special meeting and no adjournment thereof shall be held on
a date later than 60 days before the annual meeting of stockholders. If, at any
meeting so called or at any annual meeting held while the holders of shares of
Series B Preferred Stock have the special voting rights provided for in this
paragraph, the holders of not less than 40% of the shares of Series B Preferred
Stock and each Other Series of Preferred Stock then outstanding are present in
person or by proxy, which percentage shall be sufficient to constitute a quorum
for the section of additional directors as herein provided, the then authorized
number of directors of the Corporation shall be increased by three, as of the
time of such special meeting or the time of the first such annual meeting held
while such holders have special voting rights and such quorum is present, and
the holders of shares of Series B Preferred Stock and each Other Series of
Preferred Stock, voting as a class, shall be entitled to elect the additional
directors so provided for. If the directors of the Corporation are then divided
into classes under provisions of this Restated Certificate of Incorporation or
the By-laws of the Corporation, the three additional directors shall be members
of those respective classes of directors in which a vacancy is created as a
result of such increase in the authorized number of directors. If the foregoing
expansion of the size of the Board of Directors shall not be valid under
applicable law, then the holders of shares of Series B Preferred Stock and of
each Other Series of Preferred Stock, voting as a class, shall be entitled, at
the meeting of stockholders at which they would otherwise have voted, to elect
directors to fill any then existing vacancies on the Board of Directors, and
shall additionally be entitled, at such meeting and each subsequent meeting of
stockholders at which directors are elected, to elect all of the directors then
being elected until by such class vote three members of the Board of Directors
have been so elected. Upon the election at such meeting by the holders of shares
of Series B Preferred Stock and each Other Series of Preferred Stock, voting as
a class, of the directors they are entitled so to elect, the persons so elected,
together with such persons as may be directors or as may have been elected as
directors by the holders of all shares (including Series B Preferred Stock)
otherwise entitled to vote for directors, shall constitute the duly elected
directors of the Corporation. The additional directors so elected by holders of
shares of Series B Preferred Stock and each Other Series of Preferred Stock,
voting as a class, shall serve until the next annual meeting or until their
respective successors shall be elected and qualified, or if any such director is
a member of a class of directors under provisions dividing the directors into
classes, each such director shall serve until the annual meeting at which the
term of office of such director's class shall expire or until such director's
successor shall be elected and shall qualify, and at each subsequent meeting of
stockholders at which the directorship of any director elected by the vote of
holders of shares of Series B Preferred Stock and each Other Series of Preferred
Stock under the special voting rights set forth in this paragraph is up for
election, said special class voting rights shall apply in the reelection of such
director or in the election of such director's successor; PROVIDED, HOWEVER,
that whenever the holders of shares of Series B Preferred Stock and each Other
Series of Preferred Stock shall be divested of the special rights to elect three
directors as above provided, the terms of office of all persons elected as
directors by the holders of shares of Series B Preferred Stock and each Other
Series of Preferred Stock, voting as a class, or elected to fill any vacancies
resulting from the death, resignation, or removal of directors so elected by the
holders of shares of Series B Preferred Stock and each Other Series of Preferred
Stock
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<PAGE>
shall forthwith terminate (and, if applicable, the number of directors shall be
reduced accordingly). If, at any time after a special meeting of stockholders or
an annual meeting of stockholders at which the holders of shares of Series B
Preferred Stock and each Other Series of Preferred Stock, voting as a class,
have elected directors as provided above, and while the holders of shares of
Series B Preferred Stock and each Other Series of Preferred Stock shall be
entitled so to elect three directors, the number of directors who have been
elected by the holders of shares of Series B Preferred Stock and each Other
Series of Preferred Stock (or who by reason of one or more resignations, deaths
or removals have succeeded any directors so elected) shall by reason of
resignation, death or removal be less than three but at least one, the vacancy
in the directors so elected by the holders of shares of the Series B Preferred
Stock and each Other Series of Preferred Stock may be filled by the remaining
director elected by such holders, and in the event that such election shall not
occur within 30 days after such vacancy arises, or in the event that there shall
not be at least one incumbent director so elected by such holders, the Secretary
of the Corporation may, and upon the written request of the holders of record of
10% or more in number of the shares of Series B Preferred Stock and each Other
Series of Preferred Stock then outstanding addressed to the Secretary at the
principal office of the Corporation shall, call a special meeting of the holders
of shares of Series B Preferred Stock and each Other Series of Preferred Stock
so entitled to vote, for an election to fill such vacancy or vacancies, to be
held within 60 days after such call and at the place and upon the notice
provided by law and in the By-laws for the holding of meetings of stockholders;
PROVIDED, HOWEVER, that the Secretary shall not be required to call such special
meeting in the case of any such request received less than 90 days before the
date fixed for any annual meeting of stockholders, and if in such case such
special meeting is not called, the holders of shares of Preferred Stock so
entitled to vote shall be entitled to fill such vacancy or vacancies at such
annual meeting. If any such special meeting required to be called as above
provided shall not be called by the Secretary within 30 days after receipt of
any such request, then the holders of record of 10% or more in number of the
shares of Series B Preferred Stock and each Other Series of Preferred Stock then
outstanding may designate in writing one of their number to call such meeting,
and the person so designated may, at the expense of the Corporation, call such
meeting to be held at the place and upon the notice above provided, and for that
purpose shall have access to the stock books of the Corporation; no such special
meeting and no adjournment thereof shall be held on a date later than 60 days
before the annual meeting of stockholders.
(D) Nothing herein shall prevent the directors or stockholders from taking
any action to increase the number of authorized shares of Series B Preferred
Stock, or increasing the number of authorized shares of Preferred Stock of the
same class as the Series B Preferred Stock or the number of authorized shares of
Communications Stock or Media Stock, or changing the par value of the
Communications Stock, Media Stock or Preferred Stock, or issuing options,
warrants or rights to any class of stock of the Corporation as authorized by
this Restated Certificate of Incorporation, as it may hereafter be amended.
(E) Except as set forth herein, holders of shares of Series B Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote as set forth in this
Restated Certificate of Incorporation or herein or by law) for taking any
corporate action.
3.2.3. CERTAIN RESTRICTIONS.
(A) Whenever any dividends or other distributions payable on the Series B
Preferred Stock as provided in subsection 3.2.1 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series B Preferred Stock outstanding shall have
been paid in full, the Corporation shall not and shall cause its subsidiaries
not to, directly or indirectly:
(1) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding-up) to the Series B Preferred
Stock;
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<PAGE>
(2) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking on a parity (either as to dividends
or upon liquidation, dissolution or winding-up) with the Series B Preferred
Stock, except dividends paid ratably on shares of the Series B Preferred
Stock and all such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all such shares
are then entitled;
(3) redeem or purchase or otherwise acquire for consideration shares of
any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding-up) with the Series B Preferred Stock, provided that
the Corporation may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding-up) to the Series B Preferred Stock; or
(4) purchase or otherwise acquire for consideration any shares of Series
B Preferred Stock, or any shares of stock ranking on a parity with the
Series B Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall determine
in good faith will result in fair and equitable treatment among the
respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this subsection
3.2.3, purchase or otherwise acquire such shares at such time and in such
manner.
3.2.4. REACQUIRED SHARES. Any shares of Series B Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of preferred
stock, without designation as to series, and may be reissued as part of any
series of preferred stock created by resolution or resolutions of the Board of
Directors (including Series B Preferred Stock), subject to the conditions and
restrictions on issuance set forth herein.
3.2.5. LIQUIDATION, DISSOLUTION OR WINDING-UP. Upon any liquidation,
dissolution or winding-up of the Corporation, no distribution shall be made to:
(A) the holders of shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding-up) to the Series B Preferred Stock
unless, prior thereto, the holders of shares of Series B Preferred Stock shall
have received the greater of (i) $100 per share ($1.00 per one one-hundredth of
a share), plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment, or (ii) an
aggregate amount per share, subject to the provision for adjustment hereinafter
set forth, equal to the product of (i) the Media Number then in effect times
(ii) the aggregate amount to be distributed per share to holders of shares of
Media Stock; or
(B) the holders of shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding-up) with the Series B
Preferred Stock, except distributions made ratably on the Series B Preferred
Stock and all other such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding-up.
3.2.6. CONSOLIDATION, MERGER, ETC. In the event that the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Media Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, or otherwise changed, then, and in
each such event, the shares of Series B Preferred Stock shall at the same time
be similarly exchanged or changed in an amount per share (subject to the
provision for adjustment
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<PAGE>
hereinafter set forth) equal to the product of (i) the Media Number then in
effect times (ii) the aggregate amount of stock, securities, cash or any other
property (payable in kind), as the case may be, into which or for which each
share of Media Stock is changed or exchanged.
3.2.7. NO REDEMPTION. The shares of Series B Preferred Stock shall not be
redeemable. Notwithstanding the foregoing, the Corporation may acquire shares of
Series B Preferred Stock in any other manner permitted by law or this Restated
Certificate of Incorporation.
3.2.8. RANK. Unless otherwise provided in this Restated Certificate of
Incorporation or a Certificate of Designations relating to a subsequent series
of preferred stock of the Corporation, the Series B Preferred Stock shall rank,
as to the payment of dividends and the distribution of assets on liquidation,
dissolution or winding up of the Corporation, PARI PASSU to the Series A Junior
Participating Cumulative Preferred Stock, par value $1.00 per share (the "Series
B Preferred Stock"), and the Series C Cumulative Redeemable Preferred Stock, par
value $1.00 per share (the "Series C Preferred Stock"), of the Corporation,
junior to all other series of the Corporation's Preferred Stock, and senior to
the Communications Stock and Media Stock.
3.2.9. AMENDMENT. This Restated Certificate of Incorporation shall not be
amended in any manner that would materially and adversely alter or change the
powers, preferences or special rights of the Series B Preferred Stock without
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of Series B Preferred Stock, voting together as a single series.
3.2.10. FRACTIONAL SHARES. Series B Preferred Stock may be issued in
fractions of a share (in one one-hundredths (1/100) of a share and integral
multiples thereof) that shall entitle the holder thereof, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of shares of Series B Preferred Stock.
3.3. SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK. There is hereby
created a series of Preferred Stock designated as Series C Cumulative Redeemable
Preferred Stock, par value $1.00 per share (the "Series C Preferred Stock"), of
fifty thousand (50,000) shares having the following voting powers, preferences
and rights, and qualifications and restrictions thereon:
3.3.1. DIVIDENDS.
(A) The holders of shares of the Series C Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds of
the Corporation legally available therefor, cumulative cash dividends on the
shares of the Series C Preferred Stock at the rate of $70.00 per annum per
share, and no more, payable in equal quarterly installments on the first
business day of November, February, May and August, in each year, commencing on
the first business day of [November, 1995]. Such dividends shall accrue and be
cumulative from the date of original issue of each share of the Series C
Preferred Stock, whether or not declared and whether or not there shall be funds
legally available for the payment thereof. Each such dividend shall be paid to
the holders of record of the shares of the Series C Preferred Stock as they
appear on the share register of the Corporation on such record date, not more
than 30 days nor less than 10 days preceding the dividend payment date thereof,
as shall be fixed by the Board of Directors or a duly authorized committee
thereof. Dividends in arrears may be declared and paid at any time without
reference to any regular dividend payment date.
(B) If dividends are not paid in full, or declared in full and sums set
apart for the full payment thereof, upon the shares of the Series C Preferred
Stock and shares of any other preferred stock ranking on a parity as to
dividends with the Series C Preferred Stock, all dividends declared upon shares
of the Series C Preferred Stock and of any other preferred stock ranking on a
parity as to dividends with the Series C Preferred Stock shall be paid or
declared PRO RATA so that in all cases the amount of dividends paid or declared
per share on the Series C Preferred Stock and on such other shares of preferred
stock shall bear to each other the same ratio that accumulated dividends per
share, including dividends accrued or dividends in arrears, if any, on the
shares of the Series C Preferred
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Stock and such other shares of preferred stock bear to each other. Except as
provided in the preceding sentence, unless full cumulative dividends on the
shares of the Series C Preferred Stock have been paid or declared in full and
sums set aside exclusively for the payment thereof, (i) no dividends (other than
dividends in shares of the Communications Stock or Media Stock or in shares of
any other capital stock of the Corporation ranking junior to the Series C
Preferred Stock as to dividends) shall be paid or declared or set aside for
payment or other distribution made upon the Communications Stock, the Media
Stock or any other capital stock of the Corporation ranking junior to or on a
parity with the Series C Preferred Stock as to dividends, (ii) nor shall any
shares of the Communications Stock or Media Stock or shares of any other capital
stock of the Corporation ranking junior to or on a parity with the Series C
Preferred Stock as to dividends, or any warrants, rights, calls or options
exercisable for or convertible into Communications Stock or Media Stock or any
such capital stock, be redeemed, purchased or otherwise acquired for any
consideration (or any payment made to or available for a sinking fund or any
similar fund for the redemption of any such shares) by the Corporation or any,
direct or indirect, subsidiary of the Corporation (except in the case of clause
(ii) by conversion into or exchange for shares of capital stock of the
Corporation ranking junior to the Series C Preferred Stock as to dividends, or
any warrants, rights, calls or options exercisable for or convertible into
Communications Stock or Media Stock or any such capital stock). Holders of
shares of the Series C Preferred Stock shall not be entitled to any dividends,
whether payable in cash, property or shares of capital stock, in excess of full
accrued and cumulative dividends as herein provided. No interest or sum of money
in lieu of interest shall be payable in respect of any dividend payment or
payments on the shares of the Series C Preferred Stock that may be in arrears.
The terms "accrued dividends," "dividends accrued" and "dividends in
arrears," whenever used herein with reference to shares of preferred stock shall
be deemed to mean an amount that shall be equal to dividends thereon at the
annual dividend rates per share for the respective series from the date or dates
on which such dividends commence to accrue to the end of the then current
quarterly dividend period for such preferred stock (or, in the case of
redemption, to the date of redemption), less the amount of all dividends paid,
or declared in full and sums set aside for the payment thereof, upon such shares
of preferred stock.
(C) Dividends payable on the shares of the Series C Preferred Stock for any
period less than a full quarterly dividend period shall be computed on the basis
of a 360-day year of twelve 30-day months and the actual number of days elapsed
in the period for which payable.
3.3.2. REDEMPTION.
(A) MANDATORY REDEMPTION.__On September 2, 2004, to the extent (i) the
Corporation shall have funds legally available therefor and (ii) the Corporation
shall not have been rendered insolvent pursuant to the U.S. Bankruptcy Code, the
Corporation shall redeem all remaining outstanding shares of Series C Preferred
Stock, at a redemption price of $1,000.00 per share, together with accrued and
unpaid dividends thereon to the redemption date, in cash without interest. If,
for any reason, the Corporation shall fail to discharge its mandatory redemption
obligations pursuant to this paragraph (A) of subsection 3.3.2, such mandatory
redemption obligations shall be discharged as soon as the Corporation is able to
discharge such obligations. If and so long as any mandatory redemption
obligations with respect to the shares of Series C Preferred Stock shall not be
fully discharged, (i) no dividends (other than dividends in shares of the
Communications Stock or Media Stock) shall be paid or declared or set aside for
payment or other distribution made upon the Communications Stock or Media Stock
or any other capital stock of the Corporation ranking junior to or on a parity
with the Series C Preferred Stock as to dividends, or any warrants, rights,
calls or options exercisable for or convertible into Communications Stock or
Media Stock or any such capital stock, (ii) nor shall any shares of the
Communications Stock or Media Stock or shares of any other capital stock of the
Corporation ranking junior to or on a parity with the Series C Preferred Stock
as to dividends, or any warrants, rights, calls or options exercisable for or
convertible into Communications Stock or Media Stock or any such capital stock,
be redeemed, purchased or otherwise acquired for any consideration (or any
payment made to or available for a sinking or other similar fund for the
redemption of any
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<PAGE>
such shares) by the Corporation or any direct or indirect subsidiary of the
Corporation (except, in the case of clause (ii), by conversion into or exchange
for shares of capital stock of the Corporation ranking junior to the Series C
Preferred Stock as to dividends).
(B) OPTIONAL REDEMPTION BEGINNING SEPTEMBER 2, 1999.__(i) Subject to
subparagraph (B)(ii) of this subsection 3.3.2, the shares of the Series C
Preferred Stock shall be redeemable at the option of the Corporation, in whole
or from time to time in part, at any time on or after September 2, 1999, subject
to the limitations set forth below, at the following redemption prices per share
plus, in each case, all dividends accrued and unpaid on the shares of the Series
C Preferred Stock up to the date fixed for redemption, upon giving notice as
provided in paragraph (D) of this subsection 3.3.2:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE TWELVE-MONTH PERIOD BEGINNING SEPTEMBER 2, PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
1999............................................................................. $ 1,035.00
2000............................................................................. $ 1,028.00
2001............................................................................. $ 1,021.00
2002............................................................................. $ 1,014.00
2003............................................................................. $ 1,007.00
</TABLE>
The excess amount of the price per share over $1,000 (other than accrued but
unpaid dividends) is referred to herein as the "Redemption Premium".
(ii) From and after the time of any exercise of any Ten-Year Options (as
hereinafter defined), upon giving notice as provided in paragraph (D) of
this subsection 3.3.2 below, the Corporation shall have the right to redeem,
without the payment of the Redemption Premium thereon, a number of shares of
Series C Preferred Stock equal to 50,000 multiplied by a fraction the
numerator of which shall be the number of Ten-Year Options so exercised at
such time and the denominator of which shall be the aggregate number of
Ten-Year Options initially issued. The number of shares of Series C
Preferred Stock which may be redeemed without the applicable Redemption
Premium shall be cumulative with each such exercise of the Ten-Year Options
but shall be reduced upon any redemption of Series C Preferred Stock without
the payment of the Redemption Premium by the number of shares so redeemed.
The adjustment to the Redemption Premium in this subparagraph (B)(ii) of
subsection 3.3.2 shall take into account any Ten-Year Options exercised
prior to the time the shares of Series C Preferred Stock are redeemed on the
Redemption Date regardless of whether notice of the redemption of such
shares was given prior to the exercise of such Ten-Year Options. "Ten-Year
Options" means the 1,893,940 Options initially issued by U S WEST Capital
Corporation ("USWCC") to FFC pursuant to the Securities Purchase Agreement
dated April 10, 1994, among FFC, the Corporation, USWCC and Financial
Security Assurance Holdings Ltd. and referred to in such agreement as the
"Ten-Year Options".
(C) SPECIAL PROCEDURE FOR PARTIAL REDEMPTION.__If less than all of the
outstanding shares of the Series C Preferred Stock are to be redeemed, the
shares to be redeemed shall be determined PRO RATA.
(D) GENERAL PROCEDURES FOR REDEMPTION.__At least 30 days but not more than
60 days prior to the date fixed for the redemption of shares of the Series C
Preferred Stock, a written notice shall be given to each holder of record of
shares of the Series C Preferred Stock to be redeemed by certified or registered
mail in a postage prepaid envelope or by a nationally recognized overnight
courier (appropriately marked for overnight delivery) addressed to such holder
at its post office address as shown on the records of the Corporation (and shall
be deemed given only upon the earlier of (i) the date when received by the
holder of (ii) three days after the Corporation has sent such notice), notifying
such holder of the election of the Corporation to redeem such shares, stating
the date fixed for redemption thereof (the "Redemption Date"), that the shares
shall be deemed to be redeemed at 5:00 p.m., New York time, on such date and the
redemption price (including a calculation of all accrued dividends up to and
including the Redemption Date, but subject to reduction as a result of any
exercises of the Ten-Year Options), and calling upon such holder to surrender to
the Corporation on the Redemption Date at the place designated in such notice
its certificate or certificates representing the number of shares specified in
such notice of redemption. Each notice of redemption shall be irrevocable. On or
after the
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<PAGE>
Redemption Date, upon surrender by each holder of its certificate or
certificates for shares of the Series C Preferred Stock to be redeemed at the
place designated in such notice, the redemption price of such shares (together
with all accrued and unpaid dividends thereon up to and including the Redemption
Date) shall be paid in immediately available funds to or on the order of the
person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be cancelled. In case less than
all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares, without cost to
the holder thereof. From and after the Redemption Date (unless notice of
redemption is not received by each holder of shares as aforesaid, or default
shall be made by the Corporation in payment of the redemption price or accrued
and unpaid dividends up to and including the Redemption Date), all dividends on
the shares of the Series C Preferred Stock designated for redemption in such
notice shall cease to accrue, and all rights of the holders thereof as
stockholders of the Corporation, except the right to receive the redemption
price of such shares (including all accrued and unpaid dividends up to the
Redemption Date) upon the surrender of certificates representing the same, shall
cease and terminate, and such shares shall not be deemed to be outstanding for
any purpose whatsoever. At its election, if notice of redemption is received by
each holder of shares as aforesaid, the Corporation prior to the Redemption Date
may deposit the redemption price (including all accrued and unpaid dividends up
to the Redemption Date) of shares of the Series C Preferred Stock so called for
redemption in trust for the account of holders thereof with a bank or trust
company (having a capital surplus and undivided profits aggregating not less
than $100,000,000) in the Borough of Manhattan, City and State of New York, or
the City of Denver, State of Colorado, in which case the aforesaid notice to
holders of shares of the Series C Preferred Stock to be redeemed shall state the
date of such deposit, shall specify the office of such bank or trust company as
the place of payment of the redemption price, and shall call upon such holders
to surrender the certificates representing such shares at such place on or after
the date fixed in such redemption notice (which shall not be later than the
Redemption Date) against payment of the redemption price (including all accrued
and unpaid dividends up to the Redemption Date). Any interest accrued on such
funds shall be paid to the Corporation from time to time. Any moneys so
deposited that shall remain unclaimed by the holders of such shares of the
Series C Preferred Stock at the end of two years after the Redemption Date shall
be returned by such bank or trust company to the Corporation, and thereafter the
holder of any such shares shall look to the Corporation for the payment of the
redemption price (and any accrued and unpaid dividends).
(E) SHARES REDEEMED OR REPURCHASED.__Shares of the Series C Preferred Stock
redeemed, repurchased or retired by the Corporation pursuant to the provisions
of this subsection 3.3.2, shall thereupon be retired and may not be reissued as
shares of the Series C Preferred Stock but shall thereafter have the status of
authorized but unissued shares of the Preferred Stock, without designation as to
series until such shares are once more designated as part of a particular series
of the Preferred Stock.
3.3.3. VOTING RIGHTS.
Except as otherwise provided in subsection 3.3.5 or as required by law, the
holders of shares of the Series C Preferred Stock shall not be entitled to vote
on any matter on which the holders of any voting securities of the Corporation
shall be entitled to vote.
3.3.4. LIQUIDATION RIGHTS.
(A) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or otherwise, the holders of
shares of the Series C Preferred Stock shall be entitled to receive, in cash,
out of the assets of the Corporation available for distribution to stockholders,
the amount of One Thousand Dollars ($1,000.00) for each share of the Series C
Preferred Stock, plus an amount equal to all dividends accrued and unpaid on
each such share up to and including the date fixed for distribution, before any
distribution shall be made to the holders of shares of the Communications Stock
or Media Stock or any other capital stock of the Corporation ranking (as to any
such distribution) junior to the Series C Preferred Stock. If upon any
liquidation, dissolution or winding up of the Corporation, the assets
distributable among the holders of shares of the Series C Preferred
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Stock and all other classes and series of preferred stock ranking (as to any
such distribution) on a parity with the Series C Preferred Stock are
insufficient to permit the payment in full to the holders of all such shares of
all preferential amounts payable to all such holders, then the entire assets of
the Corporation thus distributable shall be distributed ratably among the
holders of the shares of the Series C Preferred Stock and such other classes and
series of preferred stock ranking (as to any such distribution) on a parity with
the Series C Preferred Stock in proportion to the respective amounts that would
be payable per share if such assets were sufficient to permit payment in full.
(B) For purposes of this subsection 3.3.4, a distribution of assets in any
dissolution, winding up or liquidation shall not include (i) any consolidation
or merger of the Corporation with or into any other corporation, (ii) any
dissolution, liquidation, winding up or reorganization of the Corporation
immediately followed by reincorporation of another corporation or (iii) a sale
or other disposition of all or substantially all of the Corporation's assets to
another corporation; PROVIDED, HOWEVER, that, in each case, effective provision
is made in this certificate of incorporation of the resulting and surviving
corporation or otherwise for the protection of the rights of the holders of
shares of the Series C Preferred Stock.
(C) After the payment of the full preferential amounts provided for herein
to the holders of shares of the Series C Preferred Stock or funds necessary for
such payment have been set aside in trust for the holders thereof in the manner
provided in paragraph (D) of subsection 3.3.2, such holders shall be entitled to
no other or further participation in the distribution of the assets of the
Corporation.
3.3.5. LIMITATIONS. In addition to any other rights provided by applicable
law, so long as any shares of the Series C Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote, or the written consent as
provided by law, of the holders of at least two-thirds (2/3) of the outstanding
shares of the Series C Preferred Stock, voting separately, modify, amend or
rescind the preferences, rights or powers with respect to the Series C Preferred
Stock so as to affect the Series C Preferred Stock adversely; but (except as
otherwise required by applicable law) nothing herein contained shall require
such a vote or consent (i) in connection with any increase in the total number
of authorized shares of the Communications Stock or Media Stock, or (ii) in
connection with the authorization or increase of any class or series of shares
of preferred stock. The provisions of this subsection 3.3.5 shall not in any way
limit the right and power of the Corporation to issue its currently authorized
but unissued shares or bonds, notes, mortgages, debentures, and other
obligations, and to incur indebtedness to banks and to other lenders.
3.3.6. NO PREEMPTIVE RIGHTS. No holder of shares of the Series C Preferred
Stock shall possess any preemptive rights to subscribe for or acquire any
unissued shares of capital stock of the Corporation (whether now or hereafter
authorized) or securities of the Corporation convertible into or carrying a
right to subscribe to or acquire shares of capital stock of the Corporation.
3.3.7. RANK. Unless otherwise provided in this Restated Certificate of
Incorporation or a Certificate of Designations relating to a subsequent series
of preferred stock of the Corporation, the Series C Preferred Stock shall rank,
as to the payment of dividends and the distribution of assets on liquidation,
dissolution, or winding up, whether voluntary or involuntary, of the
Corporation, on a parity with the Series A Junior Participating Cumulative
Preferred Stock, par value $1.00 per share, and the Series B Junior
Participating Cumulative Preferred Stock, par value $1.00 per share, of the
Corporation, junior to all other series of the Corporation's Preferred Stock,
and senior to the Communications Stock and the Media Stock.
3.4. ATTRIBUTION OF PREFERRED STOCK TO GROUPS. As of the Effective Date,
for purposes of this Article V, the outstanding shares of Series C Preferred
Stock shall be attributed entirely to the Media Group. Upon any issuance of any
shares of Preferred Stock of any series after the Effective Date, the Board of
Directors shall attribute for purposes of this Article V the shares so issued
entirely to the Communications Group or entirely to the Media Group or partly to
the Communications Group and partly to the Media Group in such proportion as the
Board of Directors shall determine and, further, in
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the case of the issuance of shares of Preferred Stock that are convertible into
or exchangeable or exercisable for Media Stock, if at the time such shares of
Preferred Stock are issued the Number of Shares Issuable with Respect to the
Intergroup Interest shall be greater than zero, then the Board of Directors
shall also determine what portion (which may be some, all or none) of such
shares of Preferred Stock shall reduce the Number of Shares Issuable with
Respect to the Intergroup Interest, taking into consideration the use of the
proceeds of such issuance of shares of Preferred Stock in the business of the
Communications Group or the Media Group and any other relevant factors. Upon any
redemption or repurchase of shares of Preferred Stock, the Board of Directors
shall determine the proper attribution thereof in accordance with paragraph (D)
of subsection 2.5.1. A record of any such determination shall be filed with the
records of the actions of the Board of Directors. Notwithstanding any such
attribution of shares of Preferred Stock to the Communications Group or the
Media Group, any dividends or distributions or other payments which may be made
by the Corporation on such shares of Preferred Stock may be made, and as
required by the preferences and relative, participating, optional or other
special rights thereof shall be made, out of any of the properties or assets of
the Corporation, regardless of the Group to which such properties or assets are
attributed in accordance with subsections 2.6.1 or 2.6.15, except as otherwise
provided [by subsection 3.1 or 3.2 or] the resolution of the Board of Directors
fixing the preferences and relative, participating, optional or other special
rights of a series of Preferred Stock.
ARTICLE VI
BOARD OF DIRECTORS
SECTION 1.__NUMBER OF DIRECTORS.__The number of Directors shall be fixed by
the By-laws of the Corporation, but shall not be less than six or more than
seventeen.
SECTION 2.__POWERS OF THE BOARD OF DIRECTORS.__The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors selected as provided by law and this Restated Certificate of
Incorporation and the By-laws of the Corporation. In furtherance, and not in
limitation, of the powers conferred by the laws of the State of Delaware, the
Board of Directors is expressly authorized to:
(A) adopt, amend, alter, change or repeal By-laws of the Corporation;
PROVIDED, HOWEVER, that no By-law hereafter adopted shall invalidate any
prior act of the Corporation that would have been valid if such new By-laws
had not been adopted;
(B) subject to the By-laws as from time to time in effect, determine the
rules and procedures for the conduct of the business of the Board of
Directors and the management and direction by the Board of Directors of the
business and affairs of the Corporation, including the power to designate
and empower committees of the Board of Directors, to elect, or authorize the
appointment of, and empower officers and other agents of the Corporation,
and to determine the time and place of, the notice requirements for, and the
manner of conducting, Board meetings, as well as other notice requirements
for, and the manner of taking, Board action; and
(C) exercise all such powers and do all such acts as may be exercised or
done by the Corporation, subject to the provisions of the Corporation Law
and this Restated Certificate of Incorporation and By-laws of the
Corporation.
SECTION 3.__CLASSIFIED BOARD OF DIRECTORS.__The directors, other than those
who may be elected solely by the holders of shares of any class or series of
stock having a preference over the common stock of the Corporation as to
dividends or upon liquidation pursuant to the terms of Article V of this
Restated 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, 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
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Corporation as to dividends upon liquidation, at each 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.
SECTION 4.__VACANCIES.__Except as otherwise required by law, any vacancy in
the Board of Directors for any reason and any newly created directorship
resulting by reason of any increase in the number of directors may be filled
only by the Board of Directors (and not by the stockholders), by resolution
adopted by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum (or by a sole remaining director);
PROVIDED, HOWEVER, that if not so filled, any such vacancy shall be filled by
the stockholders at the next annual meeting or at a special meeting called for
that purpose. Any director so appointed shall hold office until the next meeting
of stockholders at which directors of the class for which such director has been
chosen are to be elected and until his or her successor is elected and
qualified.
SECTION 5.__REMOVAL OF DIRECTORS.__Except as may be provided in a resolution
or resolutions providing for any series of Preferred Stock adopted pursuant to
Article V hereof with respect to any directors elected solely by the holders of
such series of Preferred Stock, any director (including all members of the Board
of Directors) may be removed from office at any time, but only for cause and
only by the affirmative vote of the holders of at least 80% of the voting power
of all of the shares of capital stock of the Corporation then entitled to vote
generally in the election of directors, voting together as a single class. For
the purposes of this Section 5, "cause" shall mean the wilful and continuous
failure of a director to substantially perform such director's duties to the
Corporation (other than any such failure resulting from incapacity due to
physical or mental illness) or the wilful engaging by a director in gross
misconduct materially and demonstrably injurious to the Corporation.
ARTICLE VII
STOCKHOLDER ACTIONS AND MEETINGS OF STOCKHOLDERS
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of such
holders and may not be effected by written consent in lieu of a meeting of such
holders. Special meetings of stockholders of the Corporation may be called only
by the Chairman of the Board of Directors of the Corporation or the Board of
Directors pursuant to a resolution adopted by a majority of the members of the
Board of Directors then in office. Elections of directors need not be by written
ballot, unless otherwise provided in the By-laws. For purposes of all meetings
of stockholders, a quorum shall consist of a majority of the shares entitled to
vote at such meeting of stockholders, unless otherwise required by law.
ARTICLE VIII
LIMITATION ON LIABILITY OF DIRECTORS
No person shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, including
without limitation for serving on a committee of the Board of Directors;
PROVIDED, HOWEVER, that the foregoing shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit. Any amendment,
repeal or modification of this Article VII shall not adversely affect any right
or protection of a director of the Corporation existing hereunder with respect
to any act or omission occurring prior to such amendment, repeal or
modification.
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ARTICLE IX
CERTAIN BUSINESS COMBINATIONS
SECTION 1.__VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.__Except as
otherwise expressly provided in Section 2 of this Article, in addition to any
affirmative vote required by law or by any other provision of this Restated
Certificate of Incorporation, the affirmative vote of the holders of not less
than 80% of the outstanding shares of "Voting Stock" (as hereinafter defined) of
the Corporation voting together as a single class shall be required for the
approval or authorization of any "Business Combination" (as hereinafter defined)
of the Corporation with any "Related Person" (as hereinafter defined). For the
purpose of this Article:
(A) The term "Business Combination" shall mean (1) any merger or
consolidation of the Corporation or a Subsidiary (as hereinafter defined) of
the Corporation with or into a Related Person or of a Related Person with or
into the Corporation or a Subsidiary of the Corporation; (2) any sale,
lease, exchange, transfer, or other disposition, including, without
limitation, a mortgage or any other hypothecation or transfer as collateral,
of all or any "Substantial Part" (as hereinafter defined) of the assets
either of the Corporation (including, without limitation, any voting
securities of a Subsidiary) or of a Subsidiary of the Corporation to a
Related Person; (3) the issuance of any securities (other than by way of a
distribution to stockholders made pro rata to all holders of the class of
stock to receive the distribution) of the Corporation or a Subsidiary of the
Corporation to a Related Person; (4) the acquisition by the Corporation or a
Subsidiary of the Corporation of any securities of a Related Person; (5) any
recapitalization that would have the effect, directly or indirectly, of
increasing the voting power of a Related Person; (6) any merger of the
Corporation into a Subsidiary of the Corporation; or (7) any agreement,
contract, or other arrangement providing for any of the transactions
described in this definition of "Business Combination."
(B) The term "Continuing Director" shall mean any member of the Board of
Directors of the Corporation (the "Board") who is neither Affiliated (as
defined below) or Associated (as defined below) with the Related Person and
who was a member of the Board prior to the time that the Related Person
became a Related Person, and any successor of a Continuing Director who is
recommended to succeed a Continuing Director by a majority of Continuing
Directors then members of the Board.
(C) The term "Related Person" shall mean and include any individual,
corporation, partnership, or other person or entity which, together with its
"Affiliates" and "Associates," "Beneficially Owns" (as hereinafter defined),
in the aggregate ten percent (10%) or more of the outstanding Voting Stock
of the Corporation, and any Affiliate or Associate of any such individual,
corporation, partnership, or other person or entity.
(D) The term "Substantial Part" shall mean more than 80% of the book
value of the total consolidated assets of the Corporation as reported in the
consolidated financial statements of the Corporation and its subsidiaries as
of the end of its most recent fiscal year ending prior to the time as of
which a "Substantial Part" is to be determined.
(E) The term "Voting Stock" shall mean all outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors of the Corporation and each reference to a percentage of shares of
Voting Stock shall refer to such percentage of the votes entitled to be cast
by such shares.
(F) The terms "Affiliate" and "Associate" shall have the meanings set
forth in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect
on the date this Restated Certificate of Incorporation is filed in the
office of the Secretary of State of the State of Delaware.
(G) The term "Beneficially Owns" shall have the meaning set forth in
Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on the
date this Restated Certificate of Incorporation
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is filed in the office of the Secretary of State of the State of Delaware;
PROVIDED, HOWEVER, that, any shares of Voting Stock of the Corporation that
any Related Person has the right to acquire pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise, shall
be deemed Beneficially Owned by the Related Person whether immediately
exercisable or exercisable within ten years of the date as of which
Beneficial Ownership is to be determined.
(H) The term "Subsidiary" with respect to the Corporation shall mean any
corporation, partnership, limited liability company, business trust or
similar entity in which a majority of any class of any equity security is
owned directly or indirectly by the Corporation.
SECTION 2.__WHEN HIGHER VOTE IS NOT REQUIRED.__The provisions of Section 1
of this Article shall not be applicable to any particular Business Combination
and such Business Combination shall require only such affirmative vote as may be
required by law or by any other provision of this Restated Certificate of
Incorporation, if all of the conditions specified in either of the following
paragraphs (A) or (B) are met:
(A) the Business Combination shall have been approved by a vote of not
less than a majority of the Continuing Directors, or
(B) all of the following conditions shall have been met:
(1) for each class of Common Stock, the aggregate amount of cash and
the Fair Market Value (as hereinafter defined) as of the date of the
consummation of the Business Combination of the consideration, other than
cash, to be received per share by holders of such class of Common Stock
in such Business Combination shall be at least equal to the highest of
the following:
(a) if applicable, the highest price per share (including any
brokerage commissions, transfer taxes, and soliciting dealers' fees)
paid by the Related Person for any shares of such class of Common
Stock acquired by it (i) within the two year period immediately prior
to the first public announcement of the proposal of the Business
Combination (the "Announcement Date") or (ii) in the transaction in
which it became a Related Person; or
(b) the Fair Market Value per share of each such class of Common
Stock on the Announcement Date or on the date on which the Related
Person became a Related Person (such latter date is referred to in
this Article as the "Determination Date"), whichever is higher; and
(2) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of the
consideration, other than cash, to be received per share by holders of
shares of any class or series of outstanding Voting Stock, other than
Common Stock, shall be at least equal to the highest of the following (it
being intended that the requirements of this subparagraph (B)(2) shall be
required to be met with respect to every class or series of outstanding
capital stock of the Corporation other than Common Stock, whether or not
the Related Person has previously acquired any shares of such class or
series of Voting Stock):
(a) if applicable, the highest per share price (including any
brokerage commission, transfer taxes, and soliciting dealers' fees)
paid by the Related Person for any shares of such class or series of
Voting Stock acquired by it (i) within the two year period
immediately prior to the Announcement Date or (ii) in the transaction
in which it became a Related Person, whichever is higher; or
(b) if applicable, the Redemption Price (as hereinafter defined)
of the shares of such class or series, or if such shares have no
Redemption Price, the highest amount per share which such class or
series would be entitled to receive upon liquidation of the
Corporation on the Announcement Date or the Determination Date,
whichever is higher; or
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(c) the Fair Market Value per share of such class or series of
Voting stock on the Announcement Date or on the Determination Date,
whichever is higher; and
(3) the consideration to be received in such Business Combination by
holders of each class or series of outstanding Voting Stock (including
Common stock) shall be in cash or in the same form as the Related Person
has previously paid for shares of such class or series of Voting Stock;
PROVIDED, HOWEVER, that if the Related Person has paid for shares of any
class or series of Voting Stock with varying forms of consideration, the
form of consideration for such class or series of Voting Stock shall be
either cash or the form used to acquire the largest number of shares of
such class or series of Voting Stock previously acquired by it; and
(4) a proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, as amended, shall have been mailed to
public stockholders of the Corporation for the purpose of soliciting
stockholder approval of the Business Combination and shall have contained
at the front thereof, in a prominent place, any recommendations as to the
advisability (or inadvisability) of the Business Combination that the
Continuing Directors, or any of them, may choose to state and, if deemed
advisable by a majority of the Continuing Directors, an opinion of a
reputable investment banking firm as to the fairness (or not) of the
terms of the Business Combination, from the point of view of the
remaining public stockholders of the Corporation (such investment banking
firm to be selected by a majority of the Continuing Directors and to be
paid a reasonable fee for their services by the Corporation upon receipt
of the opinion).
SECTION 3.__CERTAIN DEFINITIONS AND ADDITIONAL PROVISIONS.__For the purposes
of this Article:
(A) "Fair Market Value" shall mean:
(1) in the case of stock, the highest closing sale price during the
30-day period immediately preceding the date in question of a share of
such stock on such Composite Tape for New York Stock Exchange Listed
Stocks, or, if such stock is not quoted on the Composite Tape, on the New
York Stock Exchange, or, if such stock is not listed on such Exchange, on
the principal United States securities exchange registered under the
Securities Exchange Act of 1934, as amended, on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the
30-day period preceding the date in question on the National Association
of Securities Dealers, Inc., Automated Quotations System or any
quotations system then generally in use, or, if no such quotations are
available, the Fair Market Value on the date in question of a share of
such stock as determined by the Continuing Directors in good faith, which
determination shall be final; and
(2)_in the case of property other than cash or stock, the Fair Market
Value of such property on the date in question as determined by the
Continuing Directors in good faith, which determination shall be final.
(B)_In the event of a Business Combination in which cash or other
consideration at least equal in value to that required by paragraph (B) of
Section 2 of this Article is not to be received by the holders of the
Corporation's outstanding Common Stock, the 80% vote requirement of Section
1 of this Article shall apply unless the requirements of paragraph (A) of
Section 2 of this Article have been met.
(C)_The Board of Directors, with the approval of a majority of the total
number of Continuing Directors, shall have the power and duty to determine,
on the basis of information known to it after reasonable inquiry, all facts
necessary to determine compliance with this Article, including, without
limitation, (i) whether a person is a Related Person, (ii) the number of
shares of Voting Stock Beneficially Owned by any person, (iii) whether a
person is an Affiliate or Associate of
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another person, (iv) whether the applicable conditions set forth in
paragraph (B) of Section 2 have been met with respect to any Business
Combination, and (v) whether the proposed transaction is a Business
Combination. Any such determinations shall be final.
SECTION 4.__AMENDMENT OF THIS ARTICLE.__This Article may be amended,
altered, changed, or repealed only by the affirmative vote of the holders of at
least 80% of the outstanding shares of Voting Stock voting together as a single
class unless the proposed amendment, alteration, change, or repeal has been
recommended to the stockholders by the Board of Directors with the approval of
at least two-thirds of the Continuing Directors, in which event the proposed
amendment, alteration, change, or repeal shall require for approval the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares of
Voting Stock, voting as a single class.
ARTICLE X
BY-LAWS
The Board of Directors shall have the power to adopt, amend, alter, change
or repeal By-laws, by the affirmative vote of 66 2/3% of the members then in
office, of and for the Corporation. The affirmative vote of the holders of at
least 80% of the voting power of all of the shares of capital stock of the
Corporation then entitled to vote generally in the election of directors, voting
together as a single class shall be required to adopt, amend, alter, change or
repeal By-laws of the Corporation (notwithstanding the fact that approval by a
lesser percentage may be permitted by the Corporation Law).
ARTICLE XI
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation hereby reserves the right from time to time to amend, alter,
change or repeal any provision contained in this Restated Certificate of
Incorporation in any manner permitted by the Corporation Law and all rights and
powers conferred upon stockholders, directors and officers herein are granted
subject to this reservation. In addition to any vote otherwise required by law,
and except as may otherwise be provided in Article V or IX hereof, any such
amendment, alteration, change or repeal shall require approval of both (i) the
Board of Directors by the affirmative vote of a majority of the members then in
office and (ii) the holders of a majority of the voting power of all of the
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, except that any
proposal to amend, alter, change or repeal the provisions of Section 3 of
Article VI, Section 5 of Article VI, Article VII, Article X and this Article XI
shall require the affirmative vote of the holders of 80% of the voting power of
all of the shares of capital stock of the Corporation entitled to vote generally
in the election of directors, voting together as a single class.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation which
restates, integrates and amends the provisions of the certificate of
incorporation of the Corporation, and which has been duly adopted by written
consent of the sole stockholder of the Corporation in accordance with the
provisions of Sections 228, 242 and 245 of the Delaware General Corporation Law,
has been executed by ________, its ________, this ___ day of ____________, 1995.
U S WEST, INC.
By:
____________________________________
Name:
Title:
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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
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proper notice to such stockholder, or who shall sign a written waiver of notice
thereof, whether before or after such meeting. Notice of adjournment of a
meeting of stockholders need not be given if the time and place to which it is
adjourned are announced at such meeting, unless the adjournment is for more than
30 days or, after adjournment, a new record date is fixed for the adjourned
meeting.
SECTION 5. QUORUM. Except as otherwise provided by law or by the
Certificate, the holders of a majority of the votes entitled to be cast by the
stockholders entitled to vote generally, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders; PROVIDED, HOWEVER, that in the case of any vote to be taken by
classes, the holders of a majority of the votes entitled to be cast by the
stockholders of a particular class shall constitute a quorum for the transaction
of business by such class.
SECTION 6. ADJOURNMENTS. The chairman of the meeting or the holders of a
majority of the votes entitled to be cast by the stockholders who are present in
person or by proxy may adjourn the meeting from time to time whether or not a
quorum is present. In the event that a quorum does not exist with respect to any
vote to be taken by a particular class, the chairman of the meeting or the
holders of a majority of the votes entitled to be cast by the stockholders of
such class who are present in person or by proxy may adjourn the meeting with
respect to the vote(s) to be taken by such class. At such adjourned meeting at
which a quorum may be present, any business may be transacted which might have
been transacted at the meeting as originally called.
SECTION 7. ORDER OF BUSINESS. (a) At each meeting of the stockholders, the
Chairman of the Board or, in the absence of the Chairman of the Board, such
person as shall be selected by the Board shall act as chairman of the meeting.
The order of business at each such meeting shall be as determined by the
chairman of the meeting. The chairman of the meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts and things as are necessary or desirable for the proper conduct of the
meeting, including, without limitation, the establishment of procedures for the
maintenance of order and safety, limitations on the time allotted to questions
or comments on the affairs of the Corporation, 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
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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 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.
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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 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
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made after compliance with the foregoing procedure. Only such persons who are
nominated in accordance with the procedures set forth in this Section 3 of this
Article III shall be eligible to serve as directors of the Corporation.
SECTION 4. QUORUM AND MANNER OF ACTING. Except as otherwise provided by
law, the Certificate or these 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.
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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 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 for-
mal 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
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(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'
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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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(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
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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.
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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.
IV-6
<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-27
</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 June 30, 1995
and 1994, and for the six months ended June 30, 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>
SIX MONTHS ENDED
JUNE 30, 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............................ $5,722 $5,349 $10,953 $10,294 $ 9,823 $ 9,528 $ 9,369
Income from continuing operations (1)............... 648 699 1,426 476 1,076 840 1,145
Net income (loss) (2)............................... 648 699 1,426 (2,806) (614) 553 1,199
Total assets........................................ $24,193 $21,193 $23,204 $20,680 $23,461 $23,375 $22,160
Total debt (3)...................................... 8,990 7,231 7,938 7,199 5,430 5,969 5,147
Shareowners' equity................................. 7,679 6,597 7,382 5,861 8,268 9,587 9,240
Earnings per common share (continuing operations)
(1)................................................ 1.37 1.56 3.14 1.13 2.61 2.09 2.97
Earnings (loss) per common share.................... 1.37 1.56 3.14 (6.69) (1.49) 1.38 3.11
Dividends per common share.......................... 1.07 1.07 2.14 2.14 2.12 2.08 2.00
Book value per common share......................... 16.31 14.52 15.73 13.29 19.95 23.39 23.48
Return on common shareowners' equity (4)............ 17.0% 22.1% 21.6% -- 14.4% 5.7% 13.7%
Percentage of debt to total capital (3)............. 53.9% 52.3% 51.8% 55.1% 39.6% 38.4% 35.8%
Capital expenditures (3)............................ $1,365 $1,227 $ 2,820 $ 2,441 $ 2,554 $ 2,425 $ 2,217
OPERATING DATA
EBITDA (5).......................................... $ 2,451 $ 2,287 $ 4,559 $ 4,228 $ 3,963 $ 3,920 $ 3,889
Telephone network access lines in service
(thousands)........................................ 14,518 14,009 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use (millions)............. 28,058 25,630 52,275 48,123 44,369 41,701 38,832
Cellular subscribers................................ 1,165,000 738,000 968,000 601,000 415,000 300,000 219,000
Cable television basic subscribers served........... 509,000 473,000 486,000 -- -- -- --
Employees........................................... 61,448 61,320 61,505 60,778 63,707 65,829 65,469
Number of common shareowners........................ 798,009 831,620 816,099 836,328 867,773 899,082 935,530
Weighted average common shares outstanding
(thousands)........................................ 469,490 449,024 453,316 419,365 412,518 401,332 386,012
PRO FORMA INFORMATION
Earnings per share of Communications Stock.......... $ 1.29 $ 1.30 $ 2.53
Average shares outstanding of Communications Stock
(thousands)........................................ 469,490 449,024 453,316
Earnings per share of Media Stock................... $ 0.08 $ 0.26 $ 0.61
Average shares outstanding of Media Stock
(thousands)........................................ 469,490 449,024 453,316
<FN>
- ------------------------------
(1) Income for the first six months of 1995 includes gains of $49 ($.10 per
share) on the sales of rural telephone exchanges. Income for the first six
months of 1994 includes gains of $31 ($.07 per share) on the sales of rural
telephone exchanges and a gain of $41 ($.09 per share) on the sale of the
Company's paging unit. 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 sales
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
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
NET INCOME
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
(UNAUDITED)
PERCENT ---------- INCREASE
OWNERSHIP 1995 1994 (DECREASE)
--------- ---- ---- ----------
<S> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
U S WEST Communications, Inc........................................ 100 $612 $592 $ 20
Other............................................................... 100 (4) (8) 4
---- ---- ----------
Total Communications Group...................................... 608 584 24
---- ---- ----------
MEDIA GROUP:
Consolidated:
Multimedia content and services................................... 100 114 127 (13)
Wireless communications........................................... 100 32 51 (19)
Cable and telecommunications...................................... 100 (6) -- (6)
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P. (1)....................... 25.5 (13) (11) (2)
TeleWest Communications plc....................................... 37.8 (12) (14) 2
Mercury One-2-One................................................. 50.0 (39) (24) (15)
Other (2)........................................................... (36) (14) (22)
---- ---- ----------
Total Media Group............................................... 40 115 (75)
---- ---- ----------
Net Income............................................................ $648 $699 $ (51)
---- ---- ----------
---- ---- ----------
Earnings per common share............................................. $1.37 $1.56 $(0.19)
---- ---- ----------
---- ---- ----------
<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 six months of 1995 was $599, a decrease
of $28, or 4.5 percent, compared with the first six months of 1994, excluding
gains on asset sales in both periods. Gains on the sales of certain rural
telephone exchanges were $49 ($.10 per share) and $31 ($.07 per share) in the
first half of 1995 and 1994, respectively. An after tax gain on the sale of
paging assets in second quarter 1994 was $41 ($.09 per share).
The Communications Group's income in the first half of 1995 was $559, an
increase of $6, or 1.1 percent, compared with the first half of 1994, excluding
the gains on the sales of the rural telephone exchanges. Increased income at the
Communications Group is attributable to higher demand for services and access
line growth, and lower employee benefit costs, including the effects of certain
benefit cost true-ups, largely offset by an increase in operating costs incurred
to address current customer service issues.
The Media Group's income during the first half of 1995 was $40, a decrease
of $34, or 46 percent, as compared with the first half of 1994, excluding the
effect of last year's gain on the sale of paging assets. The decrease in Media
Group income, as adjusted for the asset sale, is primarily attributable to
expansion of international ventures, higher financing costs, including the use
of debt to partially finance acquisitions, and growth initiatives in multimedia
content and services.
In June 1995, TeleWest announced that it had entered into an agreement in
principle to acquire CableComms in exchange for shares of TeleWest. Upon
completion of the acquisition, which is
V-5
<PAGE>
expected in September 1995, U S WEST will recognize a pretax gain of
approximately $150, and will own 26.7 percent of the combined company. The new
entity will be the largest cable television and cable telephony operator in the
United Kingdom.
Earnings per common share for the first half of 1995 were $1.27 as compared
with $1.40 in 1994, excluding the effects of asset sales. Earnings per share
reflect approximately 21 million additional average shares outstanding,
including 12.8 million shares 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
7.2 percent for the first six months of 1995 as compared to the same period last
year. 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.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, INCREASE
(UNAUDITED) (DECREASE)
-------------- PRICE REFUND ------------
1995 1994 CHANGES ACTIVITY DEMAND OTHER $ %
------ ------ ---------- -------- ------ ----- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMUNICATIONS GROUP:
Local service................................... $2,126 $2,001 $ 4 -$- $121 $-- $125 6.2
Interstate access............................... 1,180 1,118 (18) (10) 90 -- 62 5.5
Intrastate access............................... 372 353 (12) 5 19 7 19 5.4
Long-distance network........................... 593 696 (15) -- (28) (60) (103) (14.8)
Other services.................................. 385 366 -- -- -- 19 19 5.2
------ ------ --- --- ------ ----- ---- ------
Total Communications Group.................... 4,656 4,534 (41) (5) 202 (34) 122 2.7
------ ------ --- --- ------ ----- ---- ------
MEDIA GROUP:
Multimedia content and services................. 564 497 67 13.5
Wireless communications......................... 430 365 65 17.8
Cable and telecommunications.................... 109 -- 109 --
Other........................................... 18 15 3 20.0
------ ------ ---- ------
Total Media Group............................. 1,121 877 244 27.8
------ ------ ---- ------
Intergroup eliminations........................... (55) (62) 7 11.3
------ ------ ---- ------
Total revenues................................ $5,722 $5,349 $(41) $(5) $202 $(34) $373 7.0
------ ------ --- --- ------ ----- ---- ------
------ ------ --- --- ------ ----- ---- ------
</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
business.
COMMUNICATIONS GROUP REVENUE. Local service revenues at U S WEST
Communications increased principally as a result of higher demand for services,
as evidenced by an increase of 509,000 access lines, or 3.6 percent, during the
last 12 months. Access line growth was 4.2 percent as adjusted for the sale of
approximately 82,000 rural telephone access lines during the last 12 months.
Higher revenues from interstate access services resulted from an increase of
9.1 percent in interstate billed access minutes of use for the six months ended
June 30, 1995, as compared with the same period in 1994, which more than offset
the effects of price reductions and refunds.
V-6
<PAGE>
Multiple toll carrier plans were 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 the six months ended June 30, 1995, was a long-distance
revenue loss of $62, partially offset by an increase in intrastate access
revenue of $12, and a decrease in other operating expenses (i.e. access expense
otherwise paid to independent companies) of $42.
Adjusted for the effects of multiple toll carrier plans, long-distance
network revenues decreased by 5.9 percent for the first six months of 1995,
compared to the same period last year. Long-distance network revenues continue
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 $33, or 7.0
percent, for the six months ended June 30, 1995, as compared with the same
period in 1994. The increase is 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 $6 in the six months ended June 30, 1995,
as compared to the same period in 1994. Partially offsetting these increases was
the effect of last year's sale of certain software development and marketing
operations, which had contributed approximately $5 in the first quarter of 1994.
International directory publishing revenue increased by $33 in the first half of
1995, as compared with the same period in 1994, primarily due to the May 1994
purchase of Thomson Directories.
MEDIA GROUP -- WIRELESS COMMUNICATIONS.__Cellular service revenues increased
by $107, or 37.4 percent, for the six months ended June 30, 1995, as compared
with the same period in 1994. The growth in cellular service revenues is a
result of a 58 percent increase in subscribers during the last twelve months,
partially offset by a 13 percent decrease in average revenue per subscriber to
$63.00 per month at June 30, 1995. The increase in subscribers is due 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 $14, or 27.5 percent, in the six
months ended June 30, 1995, as compared with the same period in 1994. The
decrease is primarily due to a 16 percent decrease in unit sales in the first
half of 1995, due to the impacts of competition.
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 for the six months ended June 30, 1994, respectively.
MEDIA GROUP -- CABLE AND TELECOMMUNICATIONS.__Domestic cable and
telecommunications revenues reflect the December 1994 acquisition of the Atlanta
Systems.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS ENDED INCREASE
JUNE 30, (DECREASE)
-------------------- --------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses...................................... $ 1,975 $ 1,854 121 6.5
Other operating expenses....................................... 1,069 995 74 7.4
Taxes other than income taxes.................................. 227 213 14 6.6
Depreciation and amortization.................................. 1,122 1,010 112 11.1
Interest expense............................................... 267 219 48 21.9
Equity losses in unconsolidated ventures....................... 90 57 33 57.9
Other income -- net............................................ 2 14 (12) (85.7)
</TABLE>
V-7
<PAGE>
Communications Group employee-related expenses increased $61 for the six
months ended June 30, 1995, compared with the same period in 1994. Higher
employee-related expenses at the Communications Group are a result of business
growth and related customer service issues, which have been impacted by a
temporary decline in productivity caused by a major rearrangement of resources
due to restructuring. Growth in employee-related expenses at Communications
Group is expected to continue throughout the remainder of the year. Overtime
payments and contract labor increased employee-related expenses at the
Communications Group by approximately $95 for the first six months of 1995, as
compared to the same period in 1994. Partially offsetting these increases were
lower health-care benefit costs, including a reduction in the accrual for
postretirement benefits, and certain benefit cost true-ups.
Since December 1993, the Communications Group has separated 3,560 employees
under the Restructuring Plan. See "Restructuring Charges." These separations
have been partially offset by the addition of approximately 2,100 employees (a
significant portion of which are temporary) primarily dedicated to improving
customer service and also developing new business opportunities. Benefits from
the net work-force reductions at Communications Group have offset wage and
salary increases.
The Company estimates that it will achieve employee reductions of 9,000 in
connection with the Restructuring Plan by the end of 1997. See "Restructuring
Charges." These employee reductions will be partially offset by the planned
addition of some employees at Communications Group by the end of 1997 to
accommodate business growth, including wireless and data transmission services.
Employee-related expenses also increased due to the 1994 purchases of the
Atlanta Systems and Thomson Directories, and growth initiatives in the
multimedia content and services segment.
The 1994 purchases of the Atlanta Systems and Thomson Directories increased
other operating expenses by $75 for the first six months of 1995, as compared to
the same period in 1994. Additionally, expansion of the cellular customer base
increased other operating expenses by $24 for the first six months of 1995, as
compared to the same period in 1994. Partially offsetting these cost increases
was the multiple toll carrier plan effect on other operating expenses at U S
WEST Communications.
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base at U S WEST Communications and the
purchase of the Atlanta Systems.
Equity losses in unconsolidated ventures increased primarily due to
increased network expansion costs at Mercury One-2-One and the impacts of new
investments.
Interest expense increased primarily as a result of increased debt at U S
WEST Communications, the purchase of the Atlanta Systems, partially financed
through the issuance of short-term debt, and a reclassification of certain debt
to continuing operations from net investment in assets held for sale.
RESTRUCTURING CHARGES
The Company's 1993 results reflected a $1 billion restructuring charge
(pretax). 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, the Company is developing new systems and enhanced
system functionality that will enable it to monitor networks to reduce the risk
of service interruptions, activate telephone service on demand, rapidly design
and engineer new services for customers and centralize its service centers. The
Company is consolidating its 560 customer service centers into 26 centers in 10
cities and reducing its total work force by approximately 9,000 employees.
The Restructuring Plan is scheduled to be completed by the end of 1997.
Implementation to date has been driven by growth in the business and related
service issues, revisions to system delivery schedules and productivity issues
caused by the major rearrangement of resources due to restructuring. These
issues may continue to affect the timing of the implementation of the
Restructuring Plan.
V-8
<PAGE>
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 (1)...................................... $ -- $ 19 $ 68 $ 107 $ 66 $ 260
Systems development.......................................... -- 127 161 112 -- 400
Real estate.................................................. -- 50 77 3 -- 130
Relocation................................................... -- 21 52 2 5 80
Retraining and other......................................... -- 16 30 12 7 65
--------- --------- --------- --------- --- ---------
Total cash expenditures........................................ -- 233 388 236 78 935
Asset write-down............................................... 65 -- -- -- -- 65
--------- --------- --------- --------- --- ---------
Total Plan..................................................... 65 233 388 236 78 1,000
Remaining 1991 plan employee costs (1)......................... -- 56 -- -- -- 56
--------- --------- --------- --------- --- ---------
Total (2)...................................................... $ 65 $ 289 $ 388 $ 236 $ 78 $ 1,056
--------- --------- --------- --------- --- ---------
--------- --------- --------- --------- --- ---------
<FN>
- ------------------------
(1) Employee separation costs, including the balance of the 1991 restructuring
reserve at December 31, 1993, aggregate $316.
(2) The Restructuring Plan also provides for capital expenditures of $490 over
the life of the Restructuring Plan.
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. System development costs include new
systems and the application of enhanced system functionality to existing,
single-purpose systems to provide integrated, end-to-end customer service. A
substantial portion of the work-force reductions will be enabled by developing
new systems and enhanced system functionality, which will simplify 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.
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. Future operating
costs also will be impacted by business growth.
EMPLOYEE SEPARATION.__Net employee reductions will total 9,000 under the
Restructuring Plan. While the Company will separate 10,000 employees,
approximately 1,000 employees that were originally expected to relocate have
chosen separation or other job assignments and will be replaced. The estimated
total cost for employee separations is $316, compared with $286 in the original
estimate. The $30 cost associated with these additional employee separations has
been reclassified from relocation to the reserve for employee separations.
V-9
<PAGE>
The following estimates of employee separations and related amounts reflect
the extension of employee reductions into 1997;
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- -------------------------------
1994 1994 (1) 1995 1996 1997 TOTAL
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separations
Managerial............................................ 1,061 497 862 840 521 2,720
Occupational.......................................... 1,887 1,683 1,288 2,660 1,649 7,280
----- ----- --------- --------- --------- ---------
Total............................................... 2,948 2,180 2,150 3,500 2,170 10,000
----- ----- --------- --------- --------- ---------
----- ----- --------- --------- --------- ---------
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- -------------------------------
1994 1994 (1) 1995 1996 1997 TOTAL
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separation amounts
Managerial............................................ $ 25 $ 5 $ 32 $ 33 $ 20 $ 90
Occupational.......................................... 15 14 36 74 46 170
----- ----- --------- --------- --------- ---------
Total............................................... 40 19 68 107 66 260
Remaining 1991 reserve................................ 56 56 -- -- -- 56
----- ----- --------- --------- --------- ---------
Total............................................... $ 96 $ 75 $ 68 $ 107 $ 66 $ 316
----- ----- --------- --------- --------- ---------
----- ----- --------- --------- --------- ---------
<FN>
- ------------------------
(1) Includes the remaining employees and the separation amounts associated with
the balance of the 1991 restructuring reserve at December 31, 1993.
</TABLE>
Compared with the original estimates, employee reduction and separation
amounts shown above have been reduced by 1,319 employees and $35 in 1995, and
increased by 900 employees and $20 in 1996, and 2,170 employees and $66 in 1997.
SYSTEMS DEVELOPMENT.__U S WEST Communications' existing information
management systems were largely developed to support a monopoly environment.
These systems have become 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 Company believes that improved customer service, delivered
at lower cost, can be achieved by a combination of new systems and introducing
new functionality to existing systems. This is a change from the Company's
initial strategy which placed more emphasis on the development of new systems.
The Restructuring Plan is now less dependent on development of entirely new,
untested systems and related technology.
The systems development program involves new systems and enhanced system
functionality for systems that support the following core processes:
Service Delivery -- to support service on demand for all products and
services. These new systems and enhanced system functionality 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.
Capacity Provisioning -- for integrated planning of future network
capacity, including the installation of software controllable service
components.
V-10
<PAGE>
The direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- --------------------
1994 1994 1995 1996 TOTAL
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service delivery...................................................... $ 35 $ 21 $ 21 $ 31 $ 73
Service assurance..................................................... 45 12 24 28 64
Capacity provisioning................................................. 17 57 92 30 179
All other............................................................. 28 37 24 23 84
----- ----- --------- --------- ---------
Total............................................................. $ 125 $ 127 $ 161 $ 112 $ 400
----- ----- --------- --------- ---------
----- ----- --------- --------- ---------
</TABLE>
The Company continues to review its estimates of systems expenditures under
the Restructuring Plan. Management does not anticipate any material revisions in
total estimated expenditures. However, should expenditures exceed the remaining
reserve, additional amounts would be expensed as incurred.
Systems expenses charged to current operations at U S WEST Communications
consist of 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
Following is a reconciliation of restructuring reserve activity since
December 1993.
<TABLE>
<CAPTION>
CHANGE IN
FIRST RELOCATION/
RESERVE RESERVE HALF EMPLOYEE RESERVE
BALANCE 1994 BALANCE 1995 SEPARATION BALANCE
DEC. 1993 ACTIVITY DEC. 1994 ACTIVITY ESTIMATES JUNE 30, 1995
----------- ----------- ----------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Employee separations
Managerial................................. $ 80 $ 5 $ 75 $ 11 $ 7 $ 71
Occupational............................... 150 14 136 28 23 131
----- ----- ----- ----- --- -----
Total separations............................ 230 19 211 39 30 202
Systems Development
Service delivery........................... 73 21 52 7 45
Service assurance.......................... 64 12 52 11 41
Capacity provisioning...................... 179 57 122 47 75
All other.................................. 84 37 47 7 40
----- ----- ----- ----- --- -----
Total systems................................ 400 127 273 72 201
Real estate.................................. 130 50 80 50 30
Relocation................................... 110 21 89 10 (30) 49
Retraining and other......................... 65 16 49 9 40
----- ----- ----- ----- --- -----
Total.................................... 935 233 702 180 -- 522
Remaining 1991 Plan expenditures............. 56 56 -- -- --
----- ----- ----- ----- --- -----
Total.................................... $ 991 $ 289 $ 702 $ 180 -- $ 522
----- ----- ----- ----- --- -----
----- ----- ----- ----- --- -----
</TABLE>
V-11
<PAGE>
<TABLE>
<CAPTION>
CUMULATIVE
FIRST HALF SEPARATIONS AT
1994 SEPARATIONS 1995 SEPARATIONS JUNE 30, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Employee separations
Managerial................................................. 497 324 821
Occupational............................................... 1,683 1,056 2,739
----- ----- -----
Total.................................................... 2,180 1,380 3,560
----- ----- -----
----- ----- -----
</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>
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."
V-12
<PAGE>
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>
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
V-13
<PAGE>
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.
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
V-14
<PAGE>
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> <C>
Local service............................ $(12) $30 $216 $ 4 $ 238 6.2
Access charges -- interstate............. (39) 18 148 (5) 122 5.7
Access charges -- intrastate............. (10) (4) 51 10 47 6.9
Long-distance network service............ (8) 1 (43) (63) (113) (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.
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.
V-15
<PAGE>
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 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. 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 "-- Results of Operations -- Six
Months Ended June 30, 1995 Compared with Six Months Ended June 30, 1994 --
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
V-16
<PAGE>
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>
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
See "-- Results of Operations -- Six Months Ended June 30, 1995 Compared
With Six Months Ended June 30, 1994" for a discussion of the 1993 restructuring
charge.
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 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 the third quarter of
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
V-17
<PAGE>
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.
Had the Company recognized 30 percent of the combined earnings of the joint
venture beginning January 1, 1994, U S WEST's net income for the year ended
December 31, 1994, would have increased by approximately $30.
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 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
V-18
<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.
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-19
<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-20
<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> <C>
Local service.............................................................. $ (6) $(11) $176 $ (4) $155 4.2
Access charges -- interstate............................................... (71) 6 175 (10) 100 4.9
Access charges -- intrastate............................................... (18) 8 19 -- 9 1.3
Long-distance network service.............................................. (7) (1) 31 (1) 22 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-21
<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.
V-22
<PAGE>
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.
RESTRUCTURING CHARGES
See " -- Results of Operations -- Six Months Ended June 30, 1995 Compared
With Six Months Ended June 30, 1994" for a discussion of the 1993 restructuring
charge.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by operating activities decreased by $109 in the first six
months of 1995 compared to the first six months of 1994. The effect of business
growth was more than offset by increases of $96 in postretirement benefit
funding, $117 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 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.
INVESTING ACTIVITIES
Total capital expenditures were $1,365 for the first six months of 1995,
$1,227 for the first six months of 1994, $2,820 in 1994, $2,441 in 1993 and
$2,554 in 1992. Capital expenditures of the Communications Group were $1,193 for
the first six months of 1995, $1,118 for the first six months of 1994, $2,477 in
1994, $2,226 in 1993 and $2,385 in 1992. The 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 $290 was invested during the first half of 1995, primarily in
Malaysia, the Czech Republic and Mercury One-2-One in the U.K.
V-23
<PAGE>
During the first six months of 1995, proceeds from the sales of rural
telephone exchanges totaled $114 as compared to proceeds of $51 in the same
period last year. In 1994, U S WEST received cash proceeds of $143 from the sale
of its paging operations and $93 from the sales 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 $268, all of
which was funded by June 30, 1995. Under the PCS PrimeCo partnership agreement,
the Company is required to fund 25 percent 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 $1,052 at June 30, 1995 from December 31, 1994, and the
percentage of debt to total capital increased from 51.8 percent at December 31,
1994 to 53.9 percent at June 30, 1995. The increase in debt and the percentage
of debt to total capital was primarily related to cash fundings for a portion of
the Company's postretirement benefit obligation, international investments, PCS
licenses and the reclassification of certain debt to continuing operations from
net investment in 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.
In the first six months of 1995, U S WEST purchased 1,704,700 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 1994 sale of 8.1 million
shares of FSA common stock. Debt related to
V-24
<PAGE>
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.
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.
V-25
<PAGE>
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-26
<PAGE>
U S WEST, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... V-28
Report of Management................................................................. V-29
Financial Statements for the Six Months Ended June 30, 1995 and 1994 (unaudited) and
for the Years Ended December 31, 1994, 1993 and 1992
Consolidated Statements of Operations.............................................. V-30
Consolidated Balance Sheets........................................................ V-31
Consolidated Statements of Cash Flows.............................................. V-32
Consolidated Statements of Shareowners' Equity..................................... V-33
Notes to Consolidated Financial Statements......................................... V-34
</TABLE>
V-27
<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-28
<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-29
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
---------------------- -------------------------------
1995 1994 1994 1993 1992
--------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Sales and other revenues..................................... $ 5,722 $ 5,349 $ 10,953 $ 10,294 $ 9,823
Employee-related expenses.................................... 1,975 1,854 3,779 3,584 3,487
Other operating expenses..................................... 1,069 995 2,203 2,065 1,995
Taxes other than income taxes................................ 227 213 412 417 378
Depreciation and amortization................................ 1,122 1,010 2,052 1,955 1,881
Restructuring charge......................................... -- -- -- 1,000 --
Interest expense............................................. 267 219 442 439 453
Equity losses in unconsolidated ventures..................... 90 57 121 74 43
Gains on sales of assets:
Partial sale of joint venture interest..................... -- -- 164 -- --
Rural telephone exchanges.................................. 78 48 82 -- --
Paging assets.............................................. -- 68 68 -- --
Other income (expense) -- net................................ 2 14 25 (15) (17)
--------- ----------- --------- --------- ---------
Income from continuing operations before income taxes........ 1,052 1,131 2,283 745 1,569
Provision for income taxes................................... 404 432 857 269 493
--------- ----------- --------- --------- ---------
Income from continuing operations............................ 648 699 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)............................................ 648 699 1,426 (2,806) (614)
Preferred stock dividends.................................... 2 -- -- -- --
--------- ----------- --------- --------- ---------
Income (loss) available for common stock..................... $ 646 $ 699 $ 1,426 $ (2,806) $ (614)
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
Earnings (loss) per common share:
Continuing operations...................................... $ 1.37 $ 1.56 $ 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............................. $ 1.37 $ 1.56 $ 3.14 $ (6.69) $ (1.49)
--------- ----------- --------- --------- ---------
--------- ----------- --------- --------- ---------
Average common shares outstanding (thousands)................ 469,490 449,024 453,316 419,365 412,518
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
V-30
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
JUNE 30,
(UNAUDITED) DECEMBER 31,
----------- --------------------
ASSETS 1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 87 $ 209 $ 128
Accounts and notes receivable, less allowance for credit losses
of $62 and $54 at December 31, 1994 and 1993, respectively.... 1,824 1,693 1,570
Inventories and supplies....................................... 212 189 193
Deferred tax asset............................................. 348 352 336
Prepaid and other.............................................. 341 323 273
----------- --------- ---------
Total current assets......................................... 2,812 2,766 2,500
Property, plant and equipment -- net............................. 14,089 13,997 13,232
Investment in Time Warner Entertainment.......................... 2,510 2,522 2,552
Intangible assets -- net......................................... 1,872 1,858 514
Investment in international ventures............................. 1,131 881 477
Net investment in assets held for sale........................... 422 302 554
Other assets..................................................... 1,357 878 851
----------- --------- ---------
Total assets................................................. $ 24,193 $ 23,204 $ 20,680
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt................................................ $ 4,364 $ 2,837 $ 1,776
Accounts payable............................................... 771 944 977
Employee compensation.......................................... 335 367 386
Dividends payable.............................................. 252 251 236
Current portion of restructuring charges....................... 354 337 456
Other.......................................................... 1,455 1,278 1,150
----------- --------- ---------
Total current liabilities.................................... 7,531 6,014 4,981
Long-term debt................................................... 4,626 5,101 5,423
Postretirement and postemployment benefit obligations............ 2,315 2,502 2,699
Deferred income taxes............................................ 962 890 201
Unamortized investment tax credits............................... 211 231 280
Deferred credits and other....................................... 818 1,033 1,235
Preferred stock subject to mandatory redemption.................. 51 51 --
Common shareowners' equity:
Common shares -- no par, 2,000,000,000 authorized; 479,964,810,
476,880,420 and 448,126,801 issued; 470,722,738, 469,343,048
and 441,139,829 outstanding,
respectively.................................................. 8,123 8,056 6,996
Cumulative deficit............................................. (282) (458) (857)
LESOP guarantee................................................ (157) (187) (243)
Foreign currency translation adjustments....................... (5) (29) (35)
----------- --------- ---------
Total common shareowners' equity............................. 7,679 7,382 5,861
----------- --------- ---------
Total liabilities and shareowners' equity.................... $ 24,193 $ 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-31
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
------------------------ -------------------------------
1995 1994 1994 1993 1992
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............................................. $ 648 $ 699 $ 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............................... 1,122 1,010 2,052 1,955 1,881
Gains on sales of assets:
Partial sale of joint venture interest.................... -- -- (164) -- --
Rural telephone exchanges................................. (78) (48) (82) -- --
Paging assets............................................. -- (68) (68) -- --
Equity losses in unconsolidated ventures.................... 90 57 121 74 43
Discontinued operations..................................... -- -- -- 82 (103)
Deferred income taxes and amortization of investment tax
credits.................................................... 63 90 373 (225) 4
Changes in operating assets and liabilities:
Restructuring payments...................................... (180) (63) (289) (120) (98)
Postretirement medical and life costs, net of cash
fundings................................................... (144) (48) (5) (122) 50
Accounts and notes receivable............................... (127) (53) (104) (90) 44
Inventories, supplies and other............................. (68) (101) (81) (56) (24)
Accounts payable and accrued liabilities.................... 76 7 (10) 238 133
Other -- net.................................................. 27 56 72 169 148
----------- ----------- --------- --------- ---------
Cash provided by operating activities......................... 1,429 1,538 3,241 3,222 3,257
----------- ----------- --------- --------- ---------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment................ (1,265) (1,282) (2,597) (2,449) (2,250)
Investment in Time Warner Entertainment....................... -- -- -- (1,557) --
Investment in Atlanta Systems................................. -- -- (745) -- --
Investment in international ventures.......................... (291) (151) (350) (230) (173)
Proceeds from disposals of property, plant and equipment...... 112 47 96 45 75
Proceeds from sale of paging assets........................... -- -- 143 -- --
Cash (to) net investment in assets held for sale.............. (37) -- -- -- --
Other -- net.................................................. (281) (90) (119) (10) 91
----------- ----------- --------- --------- ---------
Cash (used for) investing activities.......................... (1,762) (1,476) (3,572) (4,201) (2,257)
----------- ----------- --------- --------- ---------
FINANCING ACTIVITIES:
Net proceeds from short-term debt............................. 1,103 212 1,280 687 25
Proceeds from issuance of long-term debt...................... -- 251 251 2,282 344
Repayments of long-term debt.................................. (390) (327) (526) (2,969) (770)
Dividends paid on common stock................................ (462) (440) (886) (812) (796)
Proceeds from issuance of common stock........................ 23 295 364 1,150 92
Proceeds from issuance of preferred stock..................... -- -- 50 -- --
Purchase of treasury stock.................................... (63) -- (20) -- --
----------- ----------- --------- --------- ---------
Cash provided by (used for) financing activities.............. 211 (9) 513 338 (1,105)
----------- ----------- --------- --------- ---------
Cash provided by (used for) continuing operations............. (122) 53 182 (641) (105)
Cash (to) from discontinued operations........................ -- 48 (101) 610 (237)
----------- ----------- --------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase (decrease)........................................... (122) 101 81 (31) (342)
Beginning balance............................................. 209 128 128 159 501
----------- ----------- --------- --------- ---------
Ending balance................................................ $ 87 $ 229 $ 209 $ 128 $ 159
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
V-32
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(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........................ 63 126 694 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........................................... 6 (3) (9) (4) (1)
---------- ---------- ---------- ---------- ----------
Ending balance.................................. 8,123 7,514 8,056 6,996 5,770
---------- ---------- ---------- ---------- ----------
(CUMULATIVE DEFICIT) RETAINED EARNINGS
Beginning balance............................... (458) (857) (857) 2,826 4,316
Net income (loss)............................... 648 699 1,426 (2,806) (614)
Dividends declared ($1.07, $1.07, $2.14, $2.14
and $2.12 per share, respectively)............. (504) (486) (980) (905) (876)
Market value adjustment for securities.......... 32 (45) (64) 35 --
Other........................................... -- -- 17 (7) --
---------- ---------- ---------- ---------- ----------
Ending balance.................................. (282) (689) (458) (857) 2,826
---------- ---------- ---------- ---------- ----------
LESOP GUARANTEE
Beginning balance............................... (187) (243) (243) (294) (342)
Activity........................................ 30 27 56 51 48
---------- ---------- ---------- ---------- ----------
Ending balance.................................. (157) (216) (187) (243) (294)
---------- ---------- ---------- ---------- ----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Beginning balance............................... (29) (35) (35) (34) 7
Activity........................................ 24 23 6 (1) (41)
---------- ---------- ---------- ---------- ----------
Ending balance.................................. (5) (12) (29) (35) (34)
---------- ---------- ---------- ---------- ----------
TOTAL COMMON SHAREOWNERS' EQUITY.................. $ 7,679 $ 6,597 $ 7,382 $ 5,861 $ 8,268
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
COMMON SHARES AUTHORIZED AT JUNE 30 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........................ 1,585 3,053 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........... (1,705) -- (550) 162 578
---------- ---------- ---------- ---------- ----------
Ending balance.................................. 470,723 454,299 469,343 441,140 414,462
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
V-33
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 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-34
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-35
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-36
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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
RELATED CONTENT AND WIRELESS CABLE AND CORPORATE AND
1994 SERVICES SERVICES (1) COMMUNICATIONS TELECOMMUNICATIONS (2) OTHER (5)
- ------------------------- -------------- ------------ -------------- ---------------------- -------------
<S> <C> <C> <C> <C> <C>
Sales and other
revenues................ $ 9,176 $1,075 $ 781 $ 18 $ 34
Operating income (loss)
from continuing
operations.............. 2,118 396 88 -- (95)
Identifiable assets...... 15,944 613 1,286 1,459 4,036
Depreciation and
amortization............ 1,908 30 102 6 6
Capital expenditures..... 2,477 42 274 2 25
1993
- -------------------------
Sales and other revenues
(3)..................... 8,870 956 561 -- 32
Operating income (loss)
from continuing
operations (4).......... 1,035 356 (29) -- (89)
Identifiable assets...... 15,423 450 1,175 -- 3,821
Depreciation and
amortization............ 1,828 16 104 -- 7
Capital expenditures..... 2,226 32 175 -- 8
1992
- -------------------------
Sales and other revenues
(3)..................... 8,530 949 407 -- 28
Operating income (loss)
from continuing
operations.............. 1,794 375 5 -- (92)
Identifiable assets...... 20,655 444 1,110 -- 1,576
Depreciation and
amortization............ 1,759 15 89 -- 18
Capital expenditures..... 2,385 38 124 -- 7
<CAPTION>
INTERSEGMENT
1994 ELIMINATIONS CONSOLIDATED
- ------------------------- ------------ ------------
<S> <C> <C>
Sales and other
revenues................ $(131) $10,953
Operating income (loss)
from continuing
operations.............. -- 2,507
Identifiable assets...... (134) 23,204
Depreciation and
amortization............ -- 2,052
Capital expenditures..... -- 2,820
1993
- -------------------------
Sales and other revenues
(3)..................... (125) 10,294
Operating income (loss)
from continuing
operations (4).......... -- 1,273
Identifiable assets...... (189) 20,680
Depreciation and
amortization............ -- 1,955
Capital expenditures..... -- 2,441
1992
- -------------------------
Sales and other revenues
(3)..................... (91) 9,823
Operating income (loss)
from continuing
operations.............. -- 2,082
Identifiable assets...... (324) 23,461
Depreciation and
amortization............ -- 1,881
Capital expenditures..... -- 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-37
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-38
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 operating results was $(11) and $(6) for the first six months 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-39
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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>
SIX MONTHS ENDED YEAR ENDED DECEMBER
JUNE 30, 31,
-------------------- --------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993
- -------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue....................................................... $ 4,438 $ 3,974 $ 8,460 $ 7,946
Operating expenses (1)........................................ 3,981 3,544 7,612 7,063
Interest and other expense, net (2)........................... 361 310 647 611
--------- --------- --------- ---------
Income before income taxes and extraordinary items............ 96 120 201 272
Income before extraordinary item.............................. 96 120 161 208
--------- --------- --------- ---------
Net income.................................................... $ 60 $ 104 $ 161 $ 198
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) Includes depreciation and amortization of $501 and $453 for the six months
ended June 30, 1995 and 1994, respectively, and $943 and $902, in 1994 and
1993, respectively.
(2) Includes corporate services of $30 for the six months ended June 30, 1995
and 1994, and $60 in 1994 and 1993.
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- ----------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- -------------------------------------------------- ----------- ------- -------
<S> <C> <C> <C>
Current assets (3)................................ $ 4,756 $ 3,573 $ 3,745
Non-current assets (4)............................ 14,534 15,089 14,218
Current liabilities............................... 3,110 2,857 2,265
Non-current liabilities........................... 7,979 7,909 8,162
Minority interest................................. 317 -- --
Senior preferred capital.......................... 1,730 1,663 1,536
Partners' capital (5)............................. 6,154 6,233 6,000
<FN>
- ------------------------
(3) Includes cash of $2,263 at June 30, 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 $528 at June 30, 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 Restructing 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, the
Company is developing new systems and enhanced system functionality that will
enable it to monitor networks to reduce the risk of service interruptions,
activate telephone service on demand, rapidly design and engineer new services
for customers and centralize its service centers. The Company is consolidating
its existing 560 customer
V-40
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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)
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). While the Company
will separate 10,000 employees, approximately 1,000 employees that were
originally expected to relocate have chosen separation or other job assignments
and will be replaced. The $30 cost associated with these additional employee
separations was reclassified at June 30, 1995, from relocation to the reserve
for employee separation.
Following is a schedule of the costs included in the 1993 restructuring
charge:
<TABLE>
<CAPTION>
1993 CHANGE JUNE 30,
RESTRUCTURING IN 1995
CHARGE ESTIMATE ESTIMATE
----------------- ----------- -----------
<S> <C> <C> <C>
Employee separation......................... $ 230 $ 30 $ 260
Systems development......................... 400 400
Real estate................................. 130 130
Relocation.................................. 110 (30) 80
Retraining and other........................ 65 65
Asset write-down............................ 65 65
------- --- -----------
Total................................... $ 1,000 -- $ 1,000
------- -----------
------- -----------
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. System development costs include new
systems and the application of enhanced system functionality to existing single
purpose systems to provide integrated, end-to-end customer service. A
substantial portion of the work-force reductions will be enabled by developing
new systems and enhanced system functionality, which will simplify 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
V-41
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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)
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.
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-42
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-43
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-44
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-45
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-46
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-47
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-48
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-49
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-50
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 LIFE TOTAL
------- ---- ----- ------- ---- ----- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the period...... $ 62 $ 13 $ 75 $ 60 $ 11 $ 71 $ 57 $ 10 $ 67
Interest on accumulated benefit obligation............. 221 39 260 235 36 271 223 33 256
Actual return on plan assets........................... 3 1 4 (73) (52) (125) (19) (29) (48)
Net amortization and deferral.......................... (68) (31) (99) 27 22 49 -- -- --
------- ---- ----- ------- ---- ----- ------- ---- -----
Net postretirement benefit costs....................... $218 $ 22 $ 240 $249 $ 17 $ 266 $261 $ 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-51
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-52
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-53
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-54
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 $569, net of reserves as of June 30,
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 $107 and $382 for the six months ended June 30, 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>
JUNE 30, DECEMBER 31,
--------- --------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents...................................... $ 55 $ 7 $ 24
Finance receivables -- net..................................... 1,016 1,073 1,131
Investment in real estate -- net of valuation allowance........ 424 465 711
Bonds.......................................................... 165 155 895
Investment in FSA.............................................. 365 329 --
Other assets................................................... 206 362 600
--------- --------- ---------
Total assets................................................... $ 2,231 $ 2,391 $ 3,361
--------- --------- ---------
LIABILITIES:
Debt........................................................... $ 965 $ 1,283 $ 1,496
Deferred income taxes.......................................... 699 693 681
Accounts payable, accrued liabilities and other................ 135 103 244
Unearned premiums.............................................. -- -- 346
Minority interests............................................. 10 10 40
--------- --------- ---------
Total liabilities.............................................. 1,809 2,089 2,807
--------- --------- ---------
Net investment in assets held for sale......................... $ 422 $ 302 $ 554
--------- --------- ---------
--------- --------- ---------
</TABLE>
V-55
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-56
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-57
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-58
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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>
SIX
MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30,
-------------------- -------------------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993 1992
- ----------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................................. $ 21 $ 30 $ 54 $ 410 $ 302
Income before parent support and income taxes........ -- -- -- -- 83
Income before parent support......................... -- -- -- -- 55
Net income........................................... -- -- -- -- 55
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------- --------------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- --------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net finance receivables........................................ $ 922 $ 981 $ 1,020
Total assets................................................... 1,263 1,331 1,797
Total debt..................................................... 477 533 957
Total liabilities.............................................. 1,193 1,282 1,748
Shareowner's 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-59
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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-60
<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 premise 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 June 30, 1995, U S WEST Communications had
approximately 14,518,000 telephone network access lines in service, a 3.6
percent increase over the number of access lines at June 30, 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 46 percent, 33 percent and 13 percent, respectively,
of the combined sales and other revenues of the Communications Group for the six
months ended June 30, 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 six months
ended June 30, 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, while reducing the costs of
providing these services. As part of this plan, U S WEST Communications is
developing new systems and enhanced system functionality that will enable it to
monitor networks to reduce the risk of service interruptions, activate telephone
service on demand, rapidly design and engineer new services for customers and
centralize its service centers. U S WEST Communications also is gradually
reducing its work force by approximately 9,000 employees in connection with the
Restructuring Plan and consolidating the operations of its existing 560 customer
centers into 26 customer centers in ten cities. Implementation of the
Restructuring Plan is scheduled to be completed by the end of 1997. See "--
Communications Group -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Six Months Ended
June 30, 1995 Compared with Six Months Ended June 30, 1994 -- 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 six months ended June 30, 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 and the House of Representatives
passed a bill on August 4, 1995. The thrust 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 activities only through structurally separate affiliates and
(vi) eliminate many of
VI-6
<PAGE>
the remaining cable and telephone company cross-ownership restrictions. There
is, however, uncertainty concerning whether key differences between the House
and Senate bills could be resolved in Conference Committee and, if so, whether
the resulting bill will survive a threatened veto by President Clinton. 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, President -- Carrier Division of U S WEST Communications
since 1991. Upon implementation of the Recapitalization Proposal, Mr. Hawk will
become 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 June 30, 1995, the businesses of the Communications Group had 51,169
employees, of which 48,143 are employees of U S WEST Communications.
Approximately 70% of the employees of the Communications Group are represented
by unions. The Communications Group has historically enjoyed good relations with
the unions in which its employees are members. The existing contracts with the
Communications Workers of America will expire on August 12, 1995. The Company is
in negotiations for the renewal of such contracts. 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 June 30, 1995 and 1994 and for the years
ended December 31, 1991 and 1990, and for the six months ended June 30, 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>
SIX MONTHS ENDED JUNE
30, 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............ $ 4,656 $ 4,534 $ 9,176 $ 8,870 $ 8,530 $ 8,345 $ 8,235
Net income (loss) (1)......... 608 584 1,150 (2,809) (815) 771 935
Total assets.................. 16,078 15,655 15,944 15,423 20,655 20,244 19,756
Total debt.................... 6,657 5,940 6,124 5,673 5,181 5,287 5,029
Communications Group equity... 3,191 3,044 3,179 2,722 6,003 7,530 7,279
Return on Communications Group
equity (2, 3)................ 38.2% 40.6% 39.0% 22.5% 13.7% 12.8% 12.8%
Percentage of debt to total
capital (3).................. 67.6% 66.1% 65.8% 67.6% 46.3% 41.3% 40.9%
Capital expenditures.......... $ 1,193 $ 1,118 $ 2,477 $ 2,226 $ 2,385 $ 2,194 $ 2,022
OPERATING DATA
EBITDA (4).................... 2,106 2,018 $ 4,026 $ 3,743 $ 3,553 $ 3,547 $ 3,500
Telephone network access lines
in service (thousands)....... 14,518 14,009 14,336 13,843 13,345 12,935 12,562
Billed access minutes of use
(millions)................... 28,058 25,630 52,275 48,123 44,369 41,701 38,832
Employees..................... 51,169 52,937 51,402 52,598 55,352 57,725 57,410
PRO FORMA INFORMATION
Earnings per share............ $ 1.29 $ 1.30 $ 2.53
Dividends per share........... 1.07 1.07 2.14
Average shares outstanding
(thousands).................. 469,490 449,024 453,316
<FN>
- ------------------------
(1) Net income for the first six months of 1995 and 1994 includes gains of $49
and $31, respectively, on the sales of certain rural telephone exchanges.
1994 net income includes a gain of $51 on the sales 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>
VI-9
<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
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
NET INCOME
For the six months ended June 30, 1995, the Communications Group's net
income was $608, a $24, or 4.1 percent increase as compared to the same period
last year. Excluding gains on the sales of certain rural telephone exchanges of
$49 and $31 in the first six months of 1995 and the first six months of 1994,
respectively, net income increased $6, or 1.1 percent. Increased income at the
Communications Group is attributable to higher demand for services and access
line growth, and lower employee benefit costs, including the effects of certain
benefit cost true-ups, largely offset by an increase in operating costs incurred
to address current customer service issues.
Volume growth resulted in a 4.4 percent increase in EBITDA in the first six
months of 1995 as compared with the first six months of 1994. The Communications
Group considers EBITDA an important indicator of the operational strength and
performance of its businesses. EBITDA, however,
VI-11
<PAGE>
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.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, INCREASE
(UNAUDITED) (DECREASE)
-------------- PRICE REFUND -----------
1995 1994 CHANGES ACTIVITY DEMAND OTHER $ %
------ ------ ------- -------- ------ ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Local service............................................... $2,126 $2,001 $ 4 $-- $121 $-- $125 6.2
Interstate access........................................... 1,180 1,118 (18) (10) 90 -- 62 5.5
Intrastate access........................................... 372 353 (12) 5 19 7 19 5.4
Long-distance network....................................... 593 696 (15) -- (28) (60) (103) (14.8)
Other services.............................................. 385 366 -- -- -- 19 19 5.2
------ ------ ------- --- ------ ----- ---- -----
Total revenues............................................ $4,656 $4,534 $(41) $ (5) $202 $(34) $122 2.7
------ ------ ------- --- ------ ----- ---- -----
------ ------ ------- --- ------ ----- ---- -----
</TABLE>
Total operating revenues were $4,656 in the first six months of 1995, a
$122, or 2.7 percent, increase over the first six months of 1994. Local service
revenues increased principally as a result of higher demand for services, as
evidenced by an increase of 509,000 access lines, or 3.6 percent, during the
last 12 months. Access line growth was 4.2 percent as adjusted for the sale of
approximately 82,000 rural telephone access lines during the last 12 months.
Higher revenues from interstate access services resulted from an increase of
9.1 percent in interstate billed access minutes of use during the first six
months of 1995 as compared with the first six months 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 and third quarters of
1994, respectively. These regulatory arrangements decreased long-distance
network revenues by $62, increased intrastate access revenues by $12 and
decreased access fees (otherwise paid to independent companies) by $42.
Adjusted for the effects of multiple toll carrier plans, long-distance
network revenues decreased by 5.9 percent for the first six months of 1995,
compared to the same period last year. Long-distance network revenues continue
to be impacted by competition.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
INCREASE (DECREASE)
JUNE 30, (UNAUDITED)
-------------------- --------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses...................................................... 1,644 1,583 61 3.9
Other operating expenses....................................................... 695 734 (39) (5.3)
Taxes other than income taxes.................................................. 211 199 12 6.0
Depreciation and amortization.................................................. 1,001 944 57 6.0
Interest expense............................................................... 207 183 24 13.1
Other expense -- net........................................................... 16 16 -- --
Provision for income taxes..................................................... 352 339 13 3.8
</TABLE>
Higher employee-related expenses at the Communications Group are a result of
business growth and related customer service issues, which have been impacted by
a temporary decline in productivity caused by a major rearrangement of resources
due to restructuring. Growth in employee-related expenses is expected to
continue throughout the remainder of the year. Overtime payments and contract
labor increased employee-related expenses by approximately $95 for the first six
months of
VI-12
<PAGE>
1995, as compared to the same period in 1994. Partially offsetting these
increases were lower health-care benefit costs, including a reduction in the
accrual for postretirement benefits, and certain benefit cost true-ups.
Since December 1993, the Communications Group has separated 3,560 employees
under the Restructuring Plan. See "Restructuring Charges." These separations
have been partially offset by the addition of approximately 2,100 employees (a
significant portion of which are temporary) primarily dedicated to improving
customer service and also developing new business opportunities. Benefits from
the net work-force reductions have offset wage and salary increases.
The Communication Group estimates that it will achieve employee reductions
of 9,000 in connection with the Restructuring Plan by the end of 1997. See
"Restructuring Charges." These employee reductions will be partially offset by
the planned addition of some employees by the end of 1997 to accommodate
business growth, including wireless and data transmission services.
The decrease in other operating expenses was mainly attributable to a $42
reduction in access expense related to the effects of multiple toll carrier
plans. The increase in depreciation and amortization expense was primarily a
result of a higher depreciable asset base. 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.
RESTRUCTURING CHARGES
The Communication Group's 1993 results reflect an $880 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, U S WEST Communications is
developing new systems and enhanced system functionality that will enable it to
monitor networks to reduce the risk of service interruptions, activate telephone
service on demand, rapidly design and engineer new services for customers and
centralize its service centers. U S WEST Communications is consolidating 560
customer service centers into 26 centers in 10 cities and reducing its total
work force by approximately 9,000 employees.
The Restructuring Plan is scheduled to be completed by the end of 1997.
Implementation to date has been driven by growth in the business and related
service issues, revisions to system delivery schedules and productivity issues
caused by the major rearrangement of resources due to restructuring. These
issues may continue to affect the timing of the implementation of the
Restructuring Plan.
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 (1)................................................ $ 19 $ 67 $ 104 $ 65 $ 255
Systems development.................................................... 118 145 97 -- 360
Real estate............................................................ 50 77 3 -- 130
Relocation............................................................. 21 52 2 -- 75
Retraining and other................................................... 8 30 12 10 60
----- --------- --------- --- ---------
Total cash expenditures.............................................. 216 371 218 75 880
Remaining 1991 plan employee costs (1)................................... 56 -- -- -- 56
----- --------- --------- --- ---------
Total................................................................ $ 272 $ 371 $ 218 $ 75 $ 936
----- --------- --------- --- ---------
----- --------- --------- --- ---------
<FN>
- ------------------------
(1) Employee separation costs, including the balance of the 1991 restructuring
reserve at December 31, 1993, aggregate $311.
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. System development costs include new
systems and the application of enhanced system functionality to existing,
single-purpose systems to provide integrated, end-to-end
VI-13
<PAGE>
customer service. A substantial portion of the work-force reductions will be
enabled by developing new systems and enhanced system functionality, which will
simplify 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.
Future operating costs also will be impacted by business growth.
EMPLOYEE SEPARATION. Net employee reductions will total 9,000 under the
Restructuring Plan. While U S WEST Communications will separate 10,000
employees, approximately 1,000 employees that were originally expected to
relocate have chosen separation or other job assignments and will be replaced.
The estimated total cost for employee separations is $311, compared with $281 in
the original estimate. The $30 cost associated with these additional employee
separations has been reclassified from relocation to the reserve for employee
separations.
The following estimates of employee separations and related amounts reflect
the extension of employee reductions into 1997:
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
-------- -------- -------------------
1994 1994(1) 1995 1996 1997 TOTAL
-------- -------- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Employee separations
Managerial................... 1,061 497 862 840 521 2,720
Occupational................. 1,887 1,683 1,288 2,660 1,649 7,280
-------- -------- ----- ----- ----- ------
Total...................... 2,948 2,180 2,150 3,500 2,170 10,000
-------- -------- ----- ----- ----- ------
-------- -------- ----- ----- ----- ------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
-------- -------- -----------------
1994 1994(1) 1995 1996 1997 TOTAL
-------- -------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Employee separation amounts
Managerial................... $22 $ 5 $ 31 $ 30 $ 19 $ 85
Occupational................. 15 14 36 74 46 170
--- --- ---- ---- ---- -----
Total...................... 37 19 67 104 65 255
Remaining 1991 reserve....... 56 56 -- -- -- 56
--- --- ---- ---- ---- -----
Total...................... $93 $75 $ 67 $104 $ 65 $ 311
--- --- ---- ---- ---- -----
--- --- ---- ---- ---- -----
<FN>
- ------------------------
(1) Includes the remaining employees and the separation amounts associated with
the balance of the 1991 restructuring reserve at December 31, 1993.
</TABLE>
Compared with the original estimates, employee reduction and separation
amounts shown above have been reduced by 1,319 employees and $35 in 1995 and
increased by 900 employees and $18 in 1996, and 2,170 employees and $65 in 1997.
SYSTEMS DEVELOPMENT. U S WEST Communications' existing information
management systems were largely developed to support a monopoly environment.
These systems have become 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. U S WEST Communications believes that improved customer
service, delivered at lower cost, can be achieved by a combination of new
systems and introducing new functionality to existing systems. This is a change
from U S WEST Communications' initial strategy which placed more emphasis on the
development of new systems. The Restructuring Plan is now less dependent on
development of entirely new, untested systems and related technology.
VI-14
<PAGE>
The systems development program involves new systems and enhanced system
functionality for systems that support the following core processes:
Service Delivery -- to support service on demand for all products and
services. These new systems and enhanced system functionality 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.
Capacity Provisioning -- for integrated planning of future network
capacity, including the installation of software controllable service
components.
The direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ESTIMATE
----------- ----------- --------------------
1994 1994 1995 1996 TOTAL
----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service delivery....................................................... $ 35 $ 21 $ 21 $ 31 $ 73
Service assurance...................................................... 45 12 24 28 64
Capacity provisioning.................................................. 17 57 92 30 179
All other.............................................................. 8 28 8 8 44
----- ----- --------- --- ---------
Total.............................................................. $ 105 $ 118 $ 145 $ 97 $ 360
----- ----- --------- --- ---------
----- ----- --------- --- ---------
</TABLE>
U S WEST Communications continues to review its estimates of systems
expenditures under the Restructuring Plan. U S WEST Communications does not
anticipate any material revisions in total estimated expenditures. However,
should expenditures exceed the remaining reserve, additional amounts would be
expensed as incurred.
Systems expenses charged to current operations consist of 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 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.
VI-15
<PAGE>
PROGRESS UNDER THE RESTRUCTURING PLAN. Following is a reconciliation of
restructuring activity since December 1993:
<TABLE>
<CAPTION>
CHANGE IN
FIRST RELOCATION/
RESERVE RESERVE HALF EMPLOYEE RESERVE
BALANCE 1994 BALANCE 1995 SEPARATION BALANCE
12/31/93 ACTIVITY 12/31/94 ACTIVITY ESTIMATES 6/30/95
-------- -------- -------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Employee Separations
Managerial................... $ 75 $ 5 $ 70 $ 11 $ 7 $ 66
Occupational................. 150 14 136 28 23 131
-------- -------- -------- -------- --- -------
Total...................... 225 19 206 39 30 197
System Development
Service delivery............. 73 21 52 7 45
Service assurance............ 64 12 52 11 41
Capacity provisioning........ 179 57 122 47 75
All other.................... 44 28 16 -- 16
-------- -------- -------- -------- --- -------
Total...................... 360 118 242 65 177
Real Estate.................. 130 50 80 50 30
Relocation................... 105 21 84 10 (30) 44
Retraining and other......... 60 8 52 9 43
-------- -------- -------- -------- --- -------
Total...................... 880 216 664 173 -- 491
Remaining 1991 plan costs.... 56 56 -- -- -- --
-------- -------- -------- -------- --- -------
Total...................... $936 $272 $664 $173 -- $491
-------- -------- -------- -------- --- -------
-------- -------- -------- -------- --- -------
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
FIRST HALF SEPARATIONS
1994 1995 AT
SEPARATIONS SEPARATIONS JUNE 30, 1995
------------- ------------- -------------
<S> <C> <C> <C>
Employee separations
Managerial............................................................. 497 324 821
Occupational........................................................... 1,683 1,056 2,739
----- ----- -----
Total................................................................ 2,180 1,380 3,560
----- ----- -----
----- ----- -----
</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-16
<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> <C>
Local service.......................................... $4,067 $3,829 $(12) $30 $216 $ 4 $ 238 6.2
Access charges -- interstate........................... 2,269 2,147 (39) 18 148 (5) 122 5.7
Access charges -- intrastate........................... 729 682 (10) (4) 51 10 47 6.9
Long-distance network service.......................... 1,329 1,442 (8) 1 (43) (63) (113) (7.8)
Other services......................................... 782 770 -- -- -- 12 12 1.6
------ ------ ------- --- ------- ----- ----- -----
Total revenues....................................... $9,176 $8,870 $(69) $45 $372 $(42) $ 306 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-17
<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. To 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,
VI-18
<PAGE>
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
See "-- Results of Operations -- Six Months Ended June 30, 1995 Compared
With Six Months Ended June 30, 1994" for a discussion of the 1993 restructuring
charge.
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.
RESTRUCTURING CHARGES
See "--Results of Operations -- Six Months Ended June 30, 1995 Compared With
Six Months Ended June 30, 1994" for a discussion of the 1993 restructuring
charge.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash from operations decreased in the first six months of 1995 compared with
the first six months 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 $1,193 and $1,118 in the first six months 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 six months of 1995 and 1994, the Communications Group received
cash proceeds of $114 and $51, respectively, from the sales of certain rural
telephone exchanges. In 1994, the Communications Group received cash proceeds of
$93 for the sales of certain rural telephone exchanges.
FINANCING ACTIVITIES
During the first six months of 1995, debt increased by $533 and the
percentage of debt to total capital increased from 65.8 percent to 67.6 percent,
primarily as a result of the funding by the Communications Group of
postretirement medical and life costs. In 1994, debt increased by $451 compared
with 1993. In 1993, debt increased $492 compared with 1992. The Communications
Group
VI-22
<PAGE>
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.
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 Company expects that cash from operations will fund a significant share
of expected future requirements for the Communications Group. 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 and/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 six months of 1995, the Communications Group made a cash
equity infusion of $132 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 Six Months Ended June 30, 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>
SIX MONTHS ENDED
JUNE 30,
(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.................................................. $ 2,126 $ 2,001 $ 4,067 $ 3,829 $ 3,674
Interstate access service...................................... 1,180 1,118 2,269 2,147 2,047
Intrastate access service...................................... 372 353 729 682 673
Long-distance network services................................. 593 696 1,329 1,442 1,420
Other services................................................. 385 366 782 770 716
--------- --------- --------- --------- ---------
Total operating revenues..................................... 4,656 4,534 9,176 8,870 8,530
Operating Expenses
Employee-related expenses...................................... 1,644 1,583 3,215 3,068 3,011
Other operating expenses....................................... 695 734 1,547 1,671 1,612
Taxes other than income taxes.................................. 211 199 388 388 354
Depreciation and amortization.................................. 1,001 944 1,908 1,828 1,759
Restructuring charge........................................... -- -- -- 880 --
--------- --------- --------- --------- ---------
Total operating expenses..................................... 3,551 3,460 7,058 7,835 6,736
Income from operations........................................... 1,105 1,074 2,118 1,035 1,794
Interest expense................................................. 207 183 376 412 438
Gain on sales of rural telephone exchanges....................... 78 48 82 -- --
Other expense -- net............................................. 16 16 21 24 38
--------- --------- --------- --------- ---------
Income before income taxes....................................... 960 923 1,803 599 1,318
Provision for income taxes....................................... 352 339 653 208 388
--------- --------- --------- --------- ---------
Income before extraordinary items and cumulative effect of change
in accounting principles........................................ 608 584 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)................................................ $ 608 $ 584 $ 1,150 $ (2,809) $ (815)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma earnings per share of Communications Stock
(unaudited)..................................................... $ 1.29 $ 1.30 $ 2.53
Pro forma dividends per share of Communications Stock
(unaudited)..................................................... $ 1.07 $ 1.07 $ 2.14
Pro forma average shares of Communications Stock outstanding
(thousands) (unaudited)......................................... 469,490 449,024 453,316
</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>
JUNE 30, DECEMBER 31,
1995 --------------------
(UNAUDITED) 1994 1993
----------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 43 $ 116 $ 56
Accounts receivable, less allowance for credit losses of $29 and $28 at
December 31, 1994 and 1993, respectively.................................. 1,605 1,500 1,439
Inventories and supplies................................................... 193 166 181
Deferred tax asset......................................................... 304 300 308
Other...................................................................... 69 56 64
----------- --------- ---------
Total current assets......................................................... 2,214 2,138 2,048
----------- --------- ---------
Gross property, plant and equipment.......................................... 30,146 29,578 28,173
Accumulated depreciation..................................................... 17,086 16,537 15,542
----------- --------- ---------
Property, plant and equipment, net........................................... 13,060 13,041 12,631
Other assets................................................................. 804 765 744
----------- --------- ---------
Total assets................................................................. $ 16,078 $ 15,944 $ 15,423
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt............................................................ $ 2,405 $ 1,608 $ 1,382
Accounts payable........................................................... 695 888 931
Employee compensation...................................................... 297 313 328
Dividends payable.......................................................... 252 250 236
Current portion of restructuring charges................................... 342 318 431
Advanced billing and customer deposits..................................... 216 211 198
Other...................................................................... 761 620 682
----------- --------- ---------
Total current liabilities.................................................... 4,968 4,208 4,188
----------- --------- ---------
Long-term debt............................................................... 4,252 4,516 4,291
Postretirement and postemployment benefit obligations........................ 2,233 2,427 2,628
Deferred income taxes........................................................ 628 547 256
Unamortized investment tax credits........................................... 211 231 280
Deferred credits and other................................................... 595 836 1,058
Communications Group equity.................................................. 3,191 3,179 2,722
----------- --------- ---------
Total liabilities and equity................................................. $ 16,078 $ 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>
SIX MONTHS ENDED
JUNE 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $ 608 $ 585 $ 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 --
Depreciation and amortization................................ 1,001 944 1,908 1,828 1,759
Gain on sales of rural telephone exchanges................... (78) (48) (82) -- --
Deferred income taxes and amortization of investment tax
credits..................................................... 58 51 226 (191) (1)
Changes in operating assets and liabilities:
Postretirement medical and life costs, net of cash
fundings.................................................... (211) (241) (197) (135) 58
Restructuring payments....................................... (172) (63) (279) (120) (92)
Accounts receivable.......................................... (108) (34) (64) (78) 26
Inventories, supplies and other.............................. (52) (56) (29) (23) (23)
Accounts payable and accrued liabilities..................... 29 (31) (147) 153 103
Other -- net................................................... (23) 42 23 49 62
--------- --------- --------- --------- ---------
Cash provided by operating activities.......................... 1,052 1,149 2,509 2,677 2,822
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment................. (1,093) (1,173) (2,254) (2,234) (2,081)
Proceeds from disposals of property, plant and equipment....... 112 47 96 42 52
Other -- net................................................... -- -- 2 -- --
--------- --------- --------- --------- ---------
Cash (used for) investing activities........................... (981) (1,126) (2,156) (2,192) (2,029)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from short-term debt.............................. 589 171 344 687 21
Proceeds from issuance of long-term debt....................... -- 298 326 2,408 391
Dividends paid on common stock................................. (462) (440) (886) (812) (796)
Repayment of long-term debt.................................... (139) (251) (285) (2,952) (670)
Proceeds from issuance of equity............................... -- 184 208 356 90
Advance from/(repayment to) Media Group........................ -- -- -- (153) 153
Equity transfer to Media Group................................. (132) -- -- -- --
--------- --------- --------- --------- ---------
Cash (used for) provided by financing activities............... (144) (38) (293) (466) (811)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................ (73) (15) 60 19 (18)
Beginning balance.............................................. 116 56 56 37 55
--------- --------- --------- --------- ---------
Ending balance................................................. $ 43 $ 41 $ 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 1995 and 1994, and
for the year ended December 31, 1994.
VI-36
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 TOTAL
INTEREST RATES 1996 1997 1998 1999 THEREAFTER 1994 1993
- ------------------------------- ---- ---- ---- ---- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%....................... $-- $-- $ 35 $-- $ 240 $ 275 $ 276
Above 5% to 6%................. -- 25 300 -- 261 586 561
Above 6% to 7%................. -- -- -- 226 1,290 1,516 1,383
Above 7% to 8%................. 370 16 -- -- 1,750 2,136 1,909
Above 8% to 9%................. -- -- -- -- 250 250 250
Above 9% to 10%................ -- -- -- -- 320 320 320
---- ---- ---- ---- ---------- ------ ------
$370 $ 41 $335 $226 $4,111 5,083 4,699
---- ---- ---- ---- ----------
---- ---- ---- ---- ----------
Capital lease obligations and
other......................... 148 165
Unamortized discount -- net.... (715) (573)
------ ------
Total.......................... $4,516 $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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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,
JUNE 30, -------------------------------
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)................................................... 608 1,150 (2,809) (815)
Dividends........................................................... (504) (980) (905) (876)
Equity issuances.................................................... 40 287 433 164
Equity transfer to Media Group...................................... (132) -- -- --
----------- --------- --------- ---------
Balance at end of period............................................ $ 3,191 $ 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. Because of these
factors, U S WEST believes there is no reasonable basis to attribute plan assets
to the Communications Group as if they had funded separately their actuarially
determined obligation.
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
VI-42
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
the future, funding amounts would be allocated to the Communications Group based
upon the ratio of 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. U S WEST's allocation policy is to offset the
company-wide service cost, interest cost and amortizations by the return on plan
assets. The remaining net pension cost of the plan is then allocated to the
Communications Group based upon the ratio of actuarially determined service cost
of the Communications Group to total service cost of plan participants. U S WEST
VI-43
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
believes allocating net pension cost based upon service cost is reasonable since
service cost is a primary factor in determining pension cost. Net pension cost
allocated to the Communications Group was $0, $(71) and $(104), in 1994, 1993
and 1992, respectively. The service and interest cost for 1994 and the projected
benefit obligation at December 31, 1994 attributed to the Communications Group
was $172, $535 and $6,801, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 accumulated postretirement medical benefit
obligation attributed to the Communications Group was $2,817 at December 31,
1994.
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 service and
interest cost for 1994 and the accumulated postretirement life benefit
obligation at December 31, 1994 attributed to the Communications Group was $11,
$35, and $380, respectively.
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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 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 and
enhanced system functionality that will enable it to monitor networks to reduce
the risk of service interruptions, activate telephone service on demand, rapidly
design and engineer new services for customers and centralize its service
centers. U S WEST Communications is consolidating its 560 customer centers into
26 centers in ten 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). While the Company will separate 10,000
employees, approximately 1,000 employees that were originally expected to
relocate have chosen separation or other job assignments and will be replaced.
The $30 million cost associated with these additional employee separations was
reclassified at June 30, 1995, from relocation to the reserve for employee
separations.
VI-48
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 12: RESTRUCTURING CHARGES (CONTINUED)
Following is a schedule of the costs included in the 1993 restructuring
charge:
<TABLE>
<CAPTION>
1993 JUNE 30,
RESTRUCTURING CHANGE IN 1995
CHARGE ESTIMATE ESTIMATE
--------------- ----------- -----------
<S> <C> <C> <C>
Employee separation................................. $ 225 $ 30 $ 255
Systems development................................. 360 360
Real estate......................................... 130 130
Relocation.......................................... 105 (30) 75
Retraining and other................................ 60 60
----- ----- -----
Total............................................... $ 880 $ -- $ 880
----- ----- -----
----- ----- -----
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. System development costs include new
systems and the application of enhanced system functionality to existing single
purpose systems to provide integrated, end-to-end customer service. A
substantial portion of the work-force reductions will be enabled by developing
new systems and enhanced system functionality, which will simplify 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 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's 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
VI-49
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 13: CONTINGENCIES (CONTINUED)
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-50
<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 June 30,
1995, the Atlanta Systems served approximately 509,000 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 June 30, 1995, served a total of 9.3 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 KBLCOM Incorporated and Summit
Communications Group, Inc. has increased the customer base of the Affinity Group
by approximately 2.4 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,
which has approximately 1.3 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 acquisition of Cablevision Industries Corporation.
</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
VII-5
<PAGE>
3.6 million homes and approximately 235,000 businesses. TeleWest provides cable
television and cable 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") 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 25 metropolitan service areas and 25 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 June 30, 1995, NewVector had approximately 1,165,000 cellular customers, a 58
percent increase from June 30, 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 the ability to
consolidate their home phone, office phone, cellular, fax and pager numbers into
one
VII-6
<PAGE>
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 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.
VII-7
<PAGE>
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 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.
[MAP]
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 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 66.5 percent interest in the Russian Telecommunications Development
Corp., a corporation formed in 1993 to manage, develop and fund
telecommunications projects in Russia.
VII-8
<PAGE>
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. 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
VII-9
<PAGE>
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 $569 million, net of
reserves, at June 30, 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 the telecommunications bills recently passed by
the Senate and House of Representatives 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 Senate and House bills still
need to go through the conference reconciliation process and a veto by President
Clinton has been threatened. Consequently, 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
VII-11
<PAGE>
construction and transfer of cellular systems in the United States are regulated
by the FCC pursuant 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
VII-12
<PAGE>
third party networks. As such offerings expand and are enhanced through
interactivity and other 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.
STEVEN BOYD, President and Chief Executive Officer of Marketing Resources.
Prior to assuming his present position, Mr. Boyd was Vice President and Chief
Financial Officer of Marketing Resources.
EMPLOYEES
At June 30, 1995, the businesses of the Media Group had 10,279 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 June 30,
1995 and 1994, and for the years ended December 31, 1991 and 1990, and for the
six months ended June 30, 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>
SIX MONTHS ENDED JUNE
30, 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................... $ 1,121 $ 877 $ 1,908 $ 1,549 $ 1,384 $ 1,261 $ 1,210
Income from continuing operations (1)...... 40 115 276 85 146 69 210
Net income (loss).......................... 40 115 276 3 201 (218) 264
Total assets............................... 8,220 5,646 7,394 5,446 3,130 3,235 2,555
Total debt (2)............................. 2,333 1,291 1,814 1,526 249 682 118
Media Group equity......................... 4,488 3,553 4,203 3,139 2,265 2,057 1,961
Percentage of debt to total capital (2).... 34.2% 26.7% 30.1% 32.7% 9.9% 24.9% 5.7%
Capital expenditures (2)................... $ 172 $ 109 $ 343 $ 215 $ 169 $ 231 $ 195
OPERATING DATA
EBITDA (3)................................. $ 345 $ 269 $ 533 $ 485 $ 410 $ 373 $ 388
Employees.................................. 10,279 8,383 10,103 8,180 8,355 8,104 8,059
PRO FORMA INFORMATION
Earnings per share......................... $ 0.08 $ 0.26 $ 0.61
Average shares outstanding (thousands)..... 469,490 449,024 453,316
<FN>
(1) Income from continuing operations for the first half of 1994 includes a
gain of $41 from the sale of the Company's paging operations. 1994 income
from continuing operations also includes a gain of $105 on the sale of 24.4
percent of the Company's joint venture interest in TeleWest. 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 42.4% at June 30,
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 $422 at June 30, 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 ---------
SIX MONTHS ENDED ------------------------------- ------------------------ ------------------------
JUNE 30, 1995 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ------------------------------ --------------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues.................... $1,251 $ 56 $361 $ 134 $ 524 $ 44 $2,370
Operating expenses.......... 973 79 249 159 313 48 1,821
Depreciation and
amortization............... 201 19 50 22 13 5 310
Operating income (loss)..... 77 (42) 62 (47) 198 (9) 239
Net income (loss)........... (32) (13) 31 (60) 119 (5) 40
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)....... $ 278 $(23) $112 $ (25) $ 211 $ (4) $ 549
Subscribers/Customers....... 2,887 237 988 241 -- -- 4,353
Advertisers................. -- -- -- -- 472 161 633
Homes passed................ 4,550 646 -- -- -- -- 5,196
POPs (4).................... -- -- 33,200 38,300 -- -- 71,500
Telephone lines............. -- 93 -- -- -- -- 93
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1994
- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues.................... $1,023 $ 43 $313 $ 69 $ 490 $ 11 $1,949
Operating expenses.......... 803 63 236 92 280 13 1,487
Depreciation and
amortization............... 151 15 41 17 12 1 237
Operating income (loss)..... 69 (35) 36 (40) 198 (3) 225
Income (loss) from
continuing operations...... (14) (18) 54 (35) 130 (2) 115
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)....... $ 220 $(20) $ 77 $ (23) $ 210 $ (2) $ 462
Subscribers/Customers....... 1,853 225 624 90 -- -- 2,792
Advertisers................. -- -- -- -- 464 120 584
Homes passed................ 3,092 588 -- -- -- -- 3,680
POPs (4).................... -- -- 18,500 38,300 -- -- 56,800
Telephone lines............. -- 58 -- -- -- -- 58
</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 (loss)..... 149 (73) 69 (103) 389 (8) 423
Income (loss) 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 (loss)..... 136 (64) 25 (53) 397 (3) 438
Income (loss) 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 ($11) and ($6) for the six months
ended June 30, 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. June 30, 1994 results do not include
activity for the Atlanta Systems.
(3) Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entity's 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 June 30, 1995, the system reached 30% of the
population. June 30, 1995, data also includes 14,300 POPs related to the
March 1995 acquisition of domestic PCS licenses.
(5) See the Supplementary Selected Proportionate Financial Data schedule to the
Media Group Combined Financial Statements for a reconciliation 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
SIX MONTHS ENDED JUNE 30, 1995 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1994
NET INCOME
Net income of the Media Group declined by $34, or 46 percent, in the first
half of 1995 as compared to the first half of 1994, excluding the effects of the
1994 gain on sale of paging assets of $41. The decline is due primarily to
increased interest expense associated with the Atlanta Systems acquisition,
expansion in international investments and higher equity losses related to
international growth initiatives, partially offset by improvement in the
wireless communications business. The amortization of intangible assets and
goodwill associated with the Atlanta Systems acquisition caused a significant
increase in the effective tax rate and also contributed to the decrease in
earnings. EBITDA increased by approximately 28 percent, to $345, due primarily
to improvement in the wireless communication business and the acquisition of the
Atlanta Systems. Excluding the effects of such acquisition and the paging sale,
EBITDA increased by approximately 16 percent.
VII-20
<PAGE>
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.
Following is a summary of net income by industry segment and for significant
unconsolidated, equity investments:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
PERCENT ------------------------ INCREASE
OWNERSHIP 1995 1994 (DECREASE)
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Consolidated:
Multimedia content and services................................. 100 $ 114 $ 127 $ (13)
Wireless communications......................................... 100 32 51 (19)
Cable and telecommunications.................................... 100 (6) -- (6)
Unconsolidated equity investments:
Time Warner Entertainment Company, L.P. (1)..................... 25.5 (13) (11) (2)
TeleWest Communications plc..................................... 37.8 (12) (14) 2
Mercury One-2-One............................................... 50.0 (39) (24) (15)
Other (2)......................................................... (36) (14) (22)
----- ----- ---
Net Income........................................................ $ 40 $ 115 $ (75)
----- ----- ---
----- ----- ---
<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 half of 1995
compared to the first half of 1994, to $150, 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 effect of
increased expenditures related to new products and other growth initiatives,
including development of interactive services, and an after tax charge of
approximately $9 related to the exit of certain product lines. This charge is
part of the Media Group's ongoing efforts to evaluate each product for financial
and market feasibility. Furthermore, the Media Group views new service offerings
as an important part of its growth strategy. Accordingly, the Media Group
anticipates that 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 half of 1995
includes $7 in losses related to international directory publishing operations.
The international publishing operations were not significant to the first half
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 1,165,000 at June 30, 1995, a 58 percent increase as
compared with June 30, 1994. Cellular service EBITDA approximated $133 during
the first half of 1995, an increase of $52, or 64 percent, as compared to the
first half of 1994. Cellular service revenue growth in addition to expense
controls resulted in a first half of 1995 cellular service EBITDA margin of 33.8
percent compared to 28.2 percent in the first half of 1994.
CABLE AND TELECOMMUNICATIONS. The 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 $48 in the first half of 1995. The
subscriber base of the Atlanta Systems increased 7.6 percent during the last
twelve months, to 509,000 at June 30, 1995.
VII-21
<PAGE>
OPERATING RESULTS OF UNCONSOLIDATED EQUITY INVESTMENTS. The net loss
related to the Media Group's interests in TWE increased in the first half of
1995 as compared to the first half of 1994 due primarily to higher TWE financing
costs, minority interest and depreciation charges partially offset by increased
income related to cable and programming operations. Subscribers served by TWE
increased 6 percent compared to a year ago excluding the impact of a cable
partnership and cable acquisition, both completed during the second quarter of
1995.
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 255,000
at June 30, 1995, an increase of 48 percent as compared to June 30, 1994, and
telephone access lines increased 113 percent during the last twelve months, to
245,000 at June 30, 1995. On a total venture basis, cable television subscribers
and telephone access lines totaled 358,000 and 354,000, respectively, at June
30, 1995.
In June 1995, TeleWest announced that it had entered into an agreement in
principle to acquire CableComms in exchange for shares of TeleWest. Upon
completion of the acquisition, which is expected in September 1995, U S WEST
will recognize a pretax gain of approximately $150, and will own 26.7 percent of
the combined company. The new entity will be the largest cable television and
cable telephony operator in the United Kingdom.
Subscribers to U S WEST's international wireless joint venture operations in
the United Kingdom, Hungary, the Czech Republic, Slovakia and Russia grew to
509,000 at June 30, 1995, which number is almost three times the customer base
at June 30, 1994. Mercury One-2-One added 87,000 customers during the first half
of 1995, a 42.4 percent increase since December 31, 1994. Mercury One-2-One
served 292,000 customers at June 30, 1995, compared with 100,000 customers at
June 30, 1994.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE INCREASE (DECREASE)
30,
------------------------ --------------------
1995 1994 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic............................................................... $ 520 $ 486 $ 34 7.0
International.......................................................... 44 11 33 --
----------- ----- --------- ---------
564 497 67 13.5
----------- ----- --------- ---------
Wireless communications:
Cellular service....................................................... 393 286 107 37.4
Cellular equipment..................................................... 37 51 (14) (27.5)
Paging sales and service (1)........................................... -- 28 (28) --
----------- ----- --------- ---------
430 365 65 17.8
----------- ----- --------- ---------
Cable and telecommunications............................................. 109 -- 109 --
Other.................................................................... 18 15 3 20.0
----------- ----- --------- ---------
Sales and other revenues................................................. $ 1,121 $ 877 $ 244 27.8
----------- ----- --------- ---------
----------- ----- --------- ---------
<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. Revenues related to Yellow Pages directory
advertising increased approximately $33, or 7 percent, in the first half of 1995
as compared to the first half 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 $6 in the first half of 1995 as
compared to the first
VII-22
<PAGE>
half 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 half of 1994.
International directory publishing revenue increased by $33 in the first
half of 1995 as compared to the first half of 1994 primarily due to the
Company's May 1994 purchase of Thomson Directories.
WIRELESS COMMUNICATIONS. Cellular service revenues increased by $107, or
37.4 percent, in the first half of 1995 as compared to the first half of 1994
due to a 58 percent increase in subscribers during the last twelve months,
partially offset by a 13 percent drop in average revenue per subscriber to
$63.00 per month at June 30, 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 $14, or 27.5 percent, in the first
half of 1995 as compared to the first half of 1994 primarily due to a 16 percent
decrease in unit sales due to the impacts of competition.
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 in the first half 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>
SIX MONTHS ENDED JUNE INCREASE (DECREASE)
30,
------------------------ --------------------
1995 1994 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic................................................................. $ 186 $ 168 $ 18 10.7
International............................................................ 30 8 22 --
----- ----- --- ---------
216 176 40 22.7
----- ----- --- ---------
Wireless communications:
Cost of cellular service................................................. 61 39 22 56.4
Cost of cellular equipment............................................... 42 51 (9) (17.6)
Cost of paging sales & service (1)....................................... -- 6 (6) --
----- ----- --- ---------
103 96 7 7.3
----- ----- --- ---------
Cable and telecommunications............................................... 27 -- 27 --
----- ----- --- ---------
Costs of sales and other revenues.......................................... $ 346 $ 272 $ 74 27.2
----- ----- --- ---------
----- ----- --- ---------
<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. Costs of sales related to domestic
publishing operations increased primarily due to product enhancements and
increased printing and delivery costs associated with 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
$6 and network maintenance expenses increased by $3 in the first half of 1995 as
compared to the first half of 1994 due primarily to additional network usage and
expansion of the wireless network. Billing expenses increased by $7, due
primarily to a larger average customer base. Costs associated with fraudulent
activity increased by $4 and roaming costs increased by $2.
VII-23
<PAGE>
Cost of cellular equipment sold has declined in proportion to equipment
revenues. The cellular equipment margin is expected to continue to decline as a
result of a change in distribution mix to include more direct marketing
channels.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications costs reflect
the December 1994 acquisition of the Atlanta Systems.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30, INCREASE
------------------------ --------------------
1995 1994 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services:
Domestic................................................................... $ 125 $ 108 $ 17 15.7
International.............................................................. 15 5 10 --
----- ----- --- ---
140 113 27 23.9
----- ----- --- ---
Wireless communications (1).................................................. 195 177 18 10.2
Cable and telecommunications................................................. 34 -- 34 --
Other........................................................................ 61 46 15 32.6
----- ----- --- ---
$ 430 $ 336 $ 94 28.0
----- ----- --- ---
----- ----- --- ---
<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. In domestic operations, costs related to
the development of new database marketing and interactive services increased by
$11 in the first half of 1995 as compared to the first half of 1994. An increase
of $14 is to recognize costs associated with exiting certain product lines.
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 $8.
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 $29,
or 17.6 percent, in the first half of 1995 as compared to the first half of
1994. Commissions paid to retailers increased by $23 as a result of a 57.5
percent increase in gross customer additions. Other selling, general and
administrative expenses increased by $6, primarily related to increased
advertising expenditures and bad debts.
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 domestic and international operations.
VII-24
<PAGE>
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED INCREASE (DECREASE)
JUNE 30,
-------------------- --------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Multimedia content and services.......................................... $18 $11 $ 7 63.6
Wireless communications (1).............................................. 57 50 7 14.0
Cable and telecommunications............................................. 40 -- 40 --
Other.................................................................... 6 5 1 20.0
--------- --------- --- ---------
Total.................................................................. $121 $66 $ 55 83.3
--------- --------- --- ---------
--------- --------- --- ---------
<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
$15 in the first half of 1995 as compared to the first half of 1994, excluding
the effects of the sale of the paging business 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 $24, or 67 percent, in the first half of 1995
as compared to the first half of 1994, primarily as a result of incremental
financing costs associated with the December 1994 acquisition of the Atlanta
Systems.
Equity losses increased by $33, or 58 percent, in the first half of 1995 as
compared to the first half of 1994, primarily due to costs related to the
expansion of the customer base at Mercury One-2-One, and the impact of new
investments.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, DECREASE
-------------------- --------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes............................................... $ 52 $ 93 $ (41) (44.1)
Effective tax rate....................................................... 56.5% 44.7% -- --
</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.
VII-25
<PAGE>
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.
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
VII-26
<PAGE>
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
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
VII-27
<PAGE>
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.
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.
VII-28
<PAGE>
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.
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.
VII-29
<PAGE>
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 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,
VII-30
<PAGE>
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.
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.
VII-31
<PAGE>
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.
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>
VII-32
<PAGE>
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 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>
VII-33
<PAGE>
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.
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 half of 1995, cash provided by operating activities of the
Media Group increased by $116 as compared to the first half of 1994. Cash
provided by operating activities in the first half 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 $190. Growth in operating cash flow from wireless
communication services and the acquisition of the Atlanta Cable systems
contributed to the increase.
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 $172 in the first half of
1995 compared to $109 in the first half 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
approximately $444 in developing international businesses in 1994, including the
acquisition of
VII-37
<PAGE>
Thomson Directories. The Media Group anticipates that investments in
international ventures will approximate $400 in 1995, of which approximately
$290 was invested during the first half of 1995 in developing international
businesses, primarily in Malaysia, the Czech Republic and at Mercury One-2-One
in the U.K.
In March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets. The Media
Group's share of the cost of the licenses was $268, all of which was funded by
June 30, 1995. Under the PCS PrimeCo partnership agreement, the Company is
required to fund 25 percent 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.
At June 30, 1995, the Company guaranteed debt in the principle amount of
approximately $160 primarily related to international wireless ventures. In July
1995, an additional guarantee of approximately $220 was entered into related to
a partnership formed to purchase the city of Amsterdam's cable network in the
Netherlands.
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 $519 at June 30, 1995, from December 31, 1994, primarily
due to new investments in international ventures, cash funding of the PCS
licenses and a $250 reclassification of debt to continuing operations from net
investment in assets held for sale. These increases were offset by reductions of
debt related to the investment in TWE. Excluding debt included in net investment
in assets held for sale, the Media Group's percentage of debt to total capital
at June 30, 1995 was 34.2 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 42.4 percent at June 30, 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.
VII-38
<PAGE>
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.
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 half of 1995, the Media Group received a $132 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.
VII-39
<PAGE>
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
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 half 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 $569, net of reserves, at
June 30, 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.
VII-40
<PAGE>
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 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>
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%
</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 $422 at June 30, 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 --------
SIX MONTHS ENDED ---------------------------- ------------------------ ------------------------
JUNE 30, 1995 DOMESTIC (1)(2) INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
- ----------------------------------- ------------ ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $1,251 $ 56 $361 $ 134 $524 $ 44 $ 2,370
Operating expenses............... 973 79 249 159 313 48 1,821
Depreciation and amortization.... 201 19 50 22 13 5 310
Operating income (loss).......... 77 (42) 62 (47) 198 (9) 239
Net income (loss)................ (32) (13) 31 (60) 119 (5) 40
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 278 $(23) $112 $ (25) $211 $ (4) $ 549
Subscribers/Customers............ 2,887 237 988 241 -- -- 4,353
Advertisers...................... -- -- -- -- 472 161 633
Homes passed..................... 4,550 646 -- -- -- -- 5,196
POPs (4)......................... -- -- 33,200 38,300 -- -- 71,500
Telephone lines.................. -- 93 -- -- -- -- 93
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1994
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA (MILLIONS):
Revenues......................... $1,023 $ 43 $313 $ 69 $490 $ 11 $ 1,949
Operating expenses............... 803 63 236 92 280 13 1,487
Depreciation and amortization.... 151 15 41 17 12 1 237
Operating income (loss).......... 69 (35) 36 (40) 198 (3) 225
Income (loss) from continuing
operations...................... (14) (18) 54 (35) 130 (2) 115
OPERATING DATA (THOUSANDS):
EBITDA (millions) (3)............ $ 220 $(20) $ 77 $ (23) $210 $ (2) $ 462
Subscribers/Customers............ 1,853 225 624 90 -- -- 2,792
Advertisers...................... -- -- -- -- 464 120 584
Homes passed..................... 3,092 588 -- -- -- -- 3,680
POPs (4)......................... -- -- 18,500 38,300 -- -- 56,800
Telephone lines.................. -- 58 -- -- -- -- 58
</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 (loss).......... 149 (73) 69 (103) 389 (8) 423
Income (loss) 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 (loss).......... 136 (64) 25 (53) 397 (3) 438
Income (loss) 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 ($11) and ($6) for the six months
ended June 30, 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. June 30, 1994 results do not include
activity for the Atlanta Systems.
(3) Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entity's 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 June 30, 1995, Mercury One-2-One's network
reached 30% of the population. June 30, 1995, data also includes 14,300
POPs related to the March 1995 acquisition of domestic PCS licenses.
(5) See the Supplementary Selected Proportionate Financial Data schedule to the
Media Group Combined Financial Statements for a reconciliation 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 Six Months Ended June 30, 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-80. We did not audit the pro forma adjustments or the pro forma
proportionate amounts. As described on Page VII-80, 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-80.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
May 12, 1995
VII-45
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(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.................................. $ 1,121 $ 877 $ 1,908 $ 1,549 $ 1,384
Costs of sales and other revenues......................... 346 272 612 457 425
Selling, general and administrative expenses.............. 430 336 763 607 549
Depreciation and amortization............................. 121 66 144 127 122
Restructuring charges..................................... -- -- -- 120 --
Interest expense.......................................... 60 36 66 27 15
Equity losses in unconsolidated ventures.................. 90 57 121 74 43
Gains on sales of assets:
Partial sale of joint venture interest.................. -- -- 164 -- --
Paging assets........................................... -- 68 68 -- --
Other income -- net....................................... 18 30 46 9 21
----------- ----- ----------- --------- ---------
Income from continuing operations before income taxes..... 92 208 480 146 251
Provision for income taxes................................ 52 93 204 61 105
----------- ----- ----------- --------- ---------
Income from continuing operations......................... 40 115 276 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............................................... 40 115 276 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................................................ 40 115 276 3 201
----------- ----- ----------- --------- ---------
Dividend on preferred stock............................... 2 -- -- -- --
----------- ----- ----------- --------- ---------
Earnings available after preferred stock dividend......... $ 38 $ 115 $ 276 $ 3 $ 201
----------- ----- ----------- --------- ---------
----------- ----- ----------- --------- ---------
Pro forma earnings per share of Media Stock (unaudited)... $ 0.08 $ 0.26 $ 0.61
----------- ----- -----------
----------- ----- -----------
Pro forma average shares of Media Stock outstanding
(thousands) (unaudited).................................. 469,490 449,024 453,316
</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>
JUNE 30,
(UNAUDITED) DECEMBER 31,
----------- --------------------
1995 1994 1993
----------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 44 $ 93 $ 72
Accounts and notes receivable, less allowance for credit losses of $41, $33
and $26, respectively........................................................ 232 212 153
Deferred directory costs...................................................... 240 234 199
Receivable from Communications Group.......................................... 86 109 98
Deferred tax asset............................................................ 44 52 28
Prepaid and other............................................................. 51 56 30
----------- --------- ---------
Total current assets............................................................ 697 756 580
----------- --------- ---------
Property, plant and equipment -- net............................................ 1,029 956 601
Investment in Time Warner Entertainment......................................... 2,510 2,522 2,552
Intangible assets -- net........................................................ 1,872 1,858 514
Investment in international ventures............................................ 1,131 881 477
Net investment in assets held for sale.......................................... 422 302 554
Other assets.................................................................... 559 119 168
----------- --------- ---------
Total assets.................................................................... $ 8,220 $ 7,394 $ 5,446
----------- --------- ---------
----------- --------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt............................................................... $ 1,959 $ 1,229 $ 394
Accounts payable.............................................................. 164 170 151
Income taxes payable.......................................................... 152 86 --
Deferred revenue and customer deposits........................................ 89 76 51
Employee compensation......................................................... 38 54 58
Other......................................................................... 260 318 266
----------- --------- ---------
Total current liabilities....................................................... 2,662 1,933 920
----------- --------- ---------
Long-term debt.................................................................. 374 585 1,132
Deferred income taxes........................................................... 334 344 --
Postretirement and postemployment benefit obligations........................... 82 75 71
Deferred credits and other...................................................... 133 119 121
Minority interests.............................................................. 96 84 63
Preferred stock subject to mandatory redemption................................. 51 51 --
Media Group equity.............................................................. 4,645 4,390 3,382
Company LESOP guarantee......................................................... (157) (187) (243)
----------- --------- ---------
Total equity.................................................................... 4,488 4,203 3,139
----------- --------- ---------
Total liabilities and equity.................................................... $ 8,220 $ 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>
SIX MONTHS ENDED
JUNE 30, (UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 40 $ 115 $ 276 $ 3 $ 201
Adjustments to net income:
Cumulative effect of change in accounting principles............. -- -- -- -- 48
Restructuring charges............................................ -- -- -- 120 --
Depreciation and amortization.................................... 121 66 144 127 122
Gains on sales of assets:
Partial sale of joint venture interest......................... -- -- (164) -- --
Paging assets.................................................. -- (68) (68) -- --
Equity losses in unconsolidated ventures......................... 90 57 121 74 43
Discontinued operations.......................................... -- -- -- 82 (103)
Deferred income taxes and amortization of investment tax
credits......................................................... 5 39 147 (34) 5
Changes in operating assets and liabilities:
Restructuring payments........................................... (8) -- (10) -- (6)
Postretirement medical and life costs, net of cash fundings...... 6 6 5 13 (8)
Accounts and notes receivable.................................... (19) (19) (40) (12) 18
Deferred directory costs, prepaid and other...................... (16) (45) (52) (33) (1)
Accounts payable and accrued liabilities......................... 47 34 137 85 30
Other -- net....................................................... 50 15 49 120 88
--------- --------- --------- --------- ---------
Cash provided by operating activities.............................. 316 200 545 545 437
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment..................... (172) (109) (343) (215) (169)
Investment in Time Warner Entertainment............................ -- -- -- (1,557) --
Investment in Atlanta Systems...................................... -- -- (745) -- --
Investment in international ventures............................... (291) (151) (350) (230) (173)
Proceeds from sale of paging assets................................ -- -- 143 -- --
Proceeds from disposals of property, plant and equipment........... -- -- -- 3 23
Cash (to) from net investment in assets held for sale.............. (37) -- -- -- --
Other -- net....................................................... (281) (90) (121) (10) 91
--------- --------- --------- --------- ---------
Cash (used for) investing activities............................... (781) (350) (1,416) (2,009) (228)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Net proceeds from short-term debt.................................. 514 41 936 -- 4
Repayments of long-term debt....................................... (251) (123) (316) (143) (147)
Proceeds from issuance of preferred stock.......................... -- -- 50 -- --
Proceeds from issuance of equity................................... 21 298 323 794 --
Equity transfer from Communications Group.......................... 132 -- -- -- --
(Advance) repayment to/from Communications Group................... -- -- -- 153 (153)
--------- --------- --------- --------- ---------
Cash provided by (used for) financing activities................... 416 216 993 804 (296)
--------- --------- --------- --------- ---------
Cash provided by (used for) continuing operations.................. (49) 66 122 (660) (87)
--------- --------- --------- --------- ---------
Cash (to) from discontinued operations............................. -- 48 (101) 610 (237)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS
Decrease (Increase)................................................ (49) 114 21 (50) (324)
Beginning balance.................................................. 93 72 72 122 446
--------- --------- --------- --------- ---------
Ending balance..................................................... $ 44 $ 186 $ 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 SIX MONTHS ENDED JUNE 30, 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
VII-49
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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)
the 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 are 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 SIX MONTHS ENDED JUNE 30, 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 six months ended June 30, 1995 and 1994, and for the year ended December 31,
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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 ($11) and ($6) for
the six months ended June 30, 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 SIX MONTHS ENDED JUNE 30, 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>
SIX MONTHS ENDED YEAR ENDED DECEMBER
JUNE 30, 31,
-------------------- --------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993
- -------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue....................................................... $ 4,438 $ 3,974 $ 8,460 $ 7,946
Operating expenses (1)........................................ 3,981 3,544 7,612 7,063
Interest and other expense, net (2)........................... 361 310 647 611
--------- --------- --------- ---------
Income before income taxes and extraordinary items............ 96 120 201 272
Income before extraordinary item.............................. 96 120 161 208
--------- --------- --------- ---------
Net income.................................................... $ 60 $ 104 $ 161 $ 198
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) Includes depreciation and amortization of $501 and $453 for the six months
ended June 30, 1995 and 1994, respectively, and $943 and $902, in 1994 and
1993, respectively.
(2) Includes corporate services of $30 for the six months ended June 30, 1995
and 1994 and $60 in 1994 and 1993.
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------- ----------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- -------------------------------------------------- ----------- ------- -------
<S> <C> <C> <C>
Current assets (3)................................ $ 4,756 $ 3,573 $ 3,745
Non-current assets (4)............................ 14,534 15,089 14,218
Current liabilities............................... 3,110 2,857 2,265
Non-current liabilities........................... 7,979 7,909 8,162
Minority interest................................. 317 -- --
Senior preferred capital.......................... 1,730 1,663 1,536
Partners' capital (5)............................. 6,154 6,233 6,000
<FN>
- ------------------------
(3) Includes cash of $2,263 at June 30, 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 $528 at June 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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>
JUNE 30, 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.................................................... 40 276 3 201
Equity issuances (1).......................................... 161 790 786 --
Market value adjustment for securities........................ 32 (64) 35 --
Foreign currency translation adjustment....................... 24 6 (1) (41)
Company LESOP guarantee....................................... 30 56 51 48
Preferred dividend............................................ (2)
--------- --------- --------- ---------
Balance at end of period...................................... $ 4,488 $ 4,203 $ 3,139 $ 2,265
--------- --------- --------- ---------
--------- --------- --------- ---------
<FN>
- ------------------------
(1) Includes an equity transfer of $132 from the Communications Group at June
30, 1995.
</TABLE>
Included in Media Group equity is the cumulative foreign currency
translation adjustment of $(5) at June 30, 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
VII-67
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
foreign national employees. Since plan assets are not segregated into separate
accounts or restricted 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. Because of these factors, U S WEST believes there is no reasonable basis
to attribute plan assets to the Media Group as if they had funded separately
their actuarially determined obligation.
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.
VII-68
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 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.
U S WEST's allocation policy is to offset the company-wide service cost,
interest cost and amortizations by the return on plan assets. The remaining net
pension cost of the plan is then allocated to the Media Group based upon the
ratio of actuarially determined service cost of the Media Group to total service
cost of plan participants. U S WEST believes allocating net pension cost based
upon service cost is reasonable since service cost is a primary factor in
determining pension cost. Net pension cost allocated to the Media Group was $0,
$(9) and $(4), in 1994, 1993 and 1992, respectively. The service and interest
cost for 1994 and the projected benefit obligation at December 31, 1994
attributed to the Media Group was $25, $26 and $348, 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).
VII-69
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
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 1992
--------------------- --------------------- ---------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
------- ---- ----- ------- ---- ----- ------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during the period...... $ 62 $ 13 $ 75 $ 60 $ 11 $ 71 $ 57 $ 10 $ 67
Interest on accumulated benefit
obligation............................................ 221 39 260 235 36 271 223 33 256
Actual return on plan assets........................... 3 1 4 (73) (52) (125) (19) (29) (48)
Net amortization and deferral.......................... (68) (31) (99) 27 22 49 -- -- --
------- ---- ----- ------- ---- ----- ------- ---- -----
Net postretirement benefit costs....................... $218 $ 22 $ 240 $ 249 $ 17 $ 266 $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.
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>
VII-70
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
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 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 accumulated postretirement medical benefit obligation
attributed to the Media Group was $120 at December 31, 1994.
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 service and interest cost for
1994 and the accumulated postretirement life benefit obligation at December 31,
1994 attributed to the Media Group was $2, $4 and $41, respectively.
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).
VII-71
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
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>
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>
VII-72
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(DOLLARS IN MILLIONS)
NOTE 18: 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......................................................... $ 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.
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.
VII-73
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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
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.
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 $569, net of reserves, as of June 30, 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
VII-74
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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)
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 $107 and $382 for the six months ended June 30, 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.
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>
JUNE 30, DECEMBER 31,
--------- --------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 55 $ 7 $ 24
Finance receivables -- net............................................... 1,016 1,073 1,131
Investment in real estate -- net of valuation allowance.................. 424 465 711
Bonds at market value.................................................... 165 155 895
Investment in FSA........................................................ 365 329 --
Other assets............................................................. 206 362 600
--------- --------- ---------
Total assets............................................................. $ 2,231 $ 2,391 $ 3,361
--------- --------- ---------
--------- --------- ---------
LIABILITIES
Debt..................................................................... $ 965 $ 1,283 $ 1,496
Deferred income taxes.................................................... 699 693 681
Accounts payable, accrued liabilities and other.......................... 135 103 244
Unearned premiums........................................................ -- -- 346
Minority interests....................................................... 10 10 40
--------- --------- ---------
Total liabilities........................................................ 1,809 2,089 2,807
--------- --------- ---------
Net investment in assets held for sale................................... $ 422 $ 302 $ 554
--------- --------- ---------
--------- --------- ---------
</TABLE>
VII-75
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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)
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 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
CARRYING UNREALIZED UNREALIZED FAIR CARRYING UNREALIZED UNREALIZED FAIR
MARKETABLE DEBT 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>
VII-76
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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)
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 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>
VII-77
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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 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>
VII-78
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 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)
ADDITIONAL FINANCIAL INFORMATION
Information for U S WEST Financial Services, Inc., a member of the capital
assets segment, follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30,
-------------------- -------------------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1994 1993 1992
- ---------------------------------------------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.............................................................. $ 21 $ 30 $ 54 $ 410 $ 302
Income before parent support and income taxes......................... -- -- -- -- 83
Income before parent support.......................................... -- -- -- -- 55
Net income............................................................ -- -- -- -- 55
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------- --------------------
SUMMARIZED FINANCIAL POSITION 1995 1994 1993
- ----------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net finance receivables............................................................ $ 922 $ 981 $ 1,020
Total assets....................................................................... 1,263 1,331 1,797
Total debt......................................................................... 477 533 957
Total liabilities.................................................................. 1,193 1,282 1,748
Shareowner's equity................................................................ 70 49 49
</TABLE>
VII-79
<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
YEAR ENDED DECEMBER 31: (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-80
<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
AMENDED U S WEST 1994 STOCK PLAN
I. PURPOSE.
This 1994 Stock Plan (the "Plan"), is intended to promote the long term
success of U S WEST, Inc. (the "Company") by affording certain eligible
employees, executive officers, non-employee directors of the Company and its
Subsidiaries (as defined below) and certain outside consultants or advisors to
the Company and its affiliates with an opportunity to acquire a proprietary
interest in the Company, in order to incentivize such persons and to align the
financial interests of such persons with the shareholders of the Company.
II. SUCCESSOR PLAN.
The Plan is a successor 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.
Options outstanding under the Predecessor Plans and restricted stock granted
under the Predecessor Plans shall be administered pursuant to the provisions of
the Plan, to the extent not inconsistent with the grant of such options and
restricted stock under the Predecessor Plans.
III. DEFINITIONS.
The following defined terms are used in the Plan:
A. "Agreement" shall mean the agreement or grant letter accepted by the
Participant as described in Section IX. of the Plan between the Company and
a Participant under which the Participant receives an Award pursuant to this
Plan.
B. "Award" shall mean individually, collectively or in tandem, an
incentive award granted under the Plan, whether in the form of Options,
SARs, Stock Awards or Phantom Units.
C. "Board" or "Board of Directors" shall mean the Board of Directors of
the Company.
D. "Change of Control" shall mean any of the following:
1. any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act) who is or becomes a beneficial owner of (or
otherwise has the authority to vote), directly or indirectly, securities
representing twenty percent (20%) or more of the total voting power of
all of the Company's then outstanding voting securities, unless through a
transaction arranged by, or consummated with the prior approval of the
Board of Directors;
2. any period of two (2) consecutive calendar years during which
there shall cease to be a majority of the Board of Directors comprised as
follows: individuals who at the beginning of such period constitute the
Board of Directors and any new director(s) whose election by the Board of
Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds (2/3) of the directors then
still in office who either were directors at the beginning of the period
or whose election or nomination for election was previously so approved;
or
3. the Company becomes a party to a merger, consolidation or share
exchange in which either (i) the Company will not be the surviving
corporation or (ii) the Company will be the surviving corporation and any
outstanding shares of Common Stock of the Company will be converted into
shares of any other company (other than a reincorporation or the
establishment of a holding company involving no change of ownership of
the Company) or other securities or cash or other property (excluding
payments made solely for fractional shares); or
4. any other event that a majority of the Board of Directors, in its
sole discretion, shall determine constitutes a Change of Control.
IX-1
<PAGE>
E. "Code" shall mean the Internal Revenue Code of 1986, as amended.
F. "Committee" shall mean the Human Resources Committee or the Employee
Benefits Committee or their delegates, as applicable, pursuant to provisions
of Section IV. of the Plan.
G. "Common Stock" shall mean either Communications Group Stock or Media
Group Stock.
H. "Communications Group Stock" shall mean the common stock, $.01 par
value, issued by the Company that reflects the performance of U S WEST
Communications Group.
I. "Company" shall mean U S WEST, Inc., a Delaware corporation, and any
successor thereof.
J. "Director Compensation" shall mean all cash or stock remuneration
payable to an Outside Director for service to the Company as a director,
other than reimbursement for expenses or Common Stock received upon exercise
of an Option, and shall include retainer fees for service on, and fees for
attendance at meetings of, the Board and any committees thereof.
K. "Disabled" or "Disability" shall mean long-term disability as
determined under the provisions of any U S WEST disability plan maintained
for the benefit of eligible employees of the Company or any Related Entity,
provided, however, that in the case of an Incentive Option, "disability"
shall have the meaning specified in Section 22(e)(3) of the Code.
L. "Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) and its successor promulgated under the Exchange Act.
M. "Dividend Equivalent Rights" shall mean the right to receive the
amount of any dividends that are paid on an equivalent number of shares of
Common Stock underlying an Option or Phantom Unit, which shall be payable
either in cash or in the form of additional Phantom Units or Stock.
N. "Effective Date" shall mean May 6, 1994, the date on which the Plan
was approved by the shareholders of the Company.
O. "Eligible Employee" shall mean any employee of the Company or any
Related Entity who the Committee selects to receive an Award and who is so
employed on the date of the grant of an Award.
P. "Eligible Non-Employee" shall mean any consultant or advisor to the
Company or any Related Entity, including any member of the State Executive
Board(s) of the Company or any Related Entity that the Committee selects to
receive an Award.
Q. "Employee Benefits Committee" shall mean a committee of the Company
consisting of employees of the Company or any Related Entity appointed by
the Human Resources Committee and which shall administer the Plan as
provided in Section IV. hereof.
R. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
S. "Executive Officers" shall mean any Officer of the Company or any
Related Entity who, at the time of an Award, is subject to the reporting
requirements of Section 16(a) of the Exchange Act.
T. "Fair Market Value" shall mean the closing price of a share of
Common Stock as reported on the New York Stock Exchange for the applicable
date, or if there were no sales on such date, on the last day on which there
were sales.
U. "Human Resources Committee" shall mean the human resources committee
of the Board or any other committee of the Board appointed by the Board to
administer the Plan in lieu of the Human Resources Committee, which
committee shall consist of no fewer than three (3) persons, each of whom
shall be a Disinterested Person.
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V. "Incentive Option" shall mean an incentive stock option under the
provisions of Section 422 of the Code.
W. "Indexed" shall mean the periodic adjustment of an Option Price based
upon adjustment criteria determined by the Committee, but in no event shall
the Option Price be adjusted to an amount less than the original Option
Price.
X. "Media Group Stock" shall mean the common stock, $.01 par value,
issued by the Company that reflects the performance of U S WEST Media Group.
Y. "Nonqualified Option" shall mean an Option which does not qualify
under Section 422 of the Code.
Z. "Officer" shall mean any executive of the Company or any Related
Entity who participates in the Company's executive compensation programs.
AA. "Option" shall mean an option granted by the Company to purchase
Common Stock pursuant to the provisions of this Plan, including Incentive
Options, Nonqualified Options and Reload Options.
AB. "Optionee" shall mean a Participant to whom one or more Options have
been granted.
AC. "Option Price" shall mean the price per share payable to the Company
for shares of Common Stock upon the exercise of an Option.
AD. "Outside Director" shall mean an individual not employed by the
Company or any Related Entity and who serves on the Board.
AE. "Parent Corporation" shall mean any corporation within the meaning
of Section 424(e) of the Code.
AF. "Participant" shall mean an Eligible Employee, Eligible
Non-Employee, Executive Officer or Outside Director who is granted an Award.
AG. "Phantom Unit" shall mean a notional account representing a value
equivalent to one share of Common Stock on the Award date.
AH. "Plan" shall mean the U S WEST, Inc. 1994 Stock Plan.
AI. "Predecessor Plan" shall mean the U S WEST, Inc. Stock Incentive
Plan or the U S WEST 1991 Stock Incentive Plan, as applicable.
AJ. "Related Entity" shall mean any Parent Corporation or Subsidiary of
the Company.
AK. "Reload Option" shall mean the right to receive a further Option for
a number of shares equal to the number of shares of Common Stock surrendered
by the Optionee upon exercise of the original Option as provided in Section
X.E. of the Plan.
AL. "Restricted Period" shall mean the period of time from the date of
grant of Restricted Stock until the lapse of restrictions attached thereto
under the terms of the Agreement granting such Restricted Stock, pursuant to
the provisions of the Plan or by action of the Committee.
AM. "Restricted Stock" shall mean an Award made by the Committee
entitling the Participant to acquire, at no cost or for a purchase price
determined by the Committee at the time of grant, shares of Common Stock
which are subject to restrictions in accordance with the provisions of
Section XIII. hereof.
AN. "Retirement" shall mean (i) with respect to any Eligible Employee,
that such person has retired from the Company or any Related Entity and such
person is currently eligible to receive a service pension benefit under the
U S WEST Pension Plan or a pension benefit under any written
IX-3
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agreement or arrangement that the Company or any Related Entity may have
entered into with the Eligible Employee and (ii) with respect to any
Eligible Non-Employee, that such person no longer provides consulting or
advisory services to the Company or any Related Entity.
AO. "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
AP. "Stock Appreciation Right" or "SAR" shall mean a grant entitling the
Participant to receive an amount in cash or shares of Common Stock or a
combination thereof having a value equal to (or if the Committee shall so
determine at the time of a grant, less than) the excess of the Fair Market
Value of a share of Common Stock on the date of exercise over the Fair
Market Value of a share of Common Stock on the date of grant (or over the
Option Price, if the Stock Appreciation Right was granted in tandem with an
Option) multiplied by the number of shares with respect to which the Stock
Appreciation Right shall have been exercised, with the Committee having sole
discretion to determine the form or forms of payment at the time of grant of
the SAR.
AQ. "Stock Awards" shall mean any Award which is in the form of
Restricted Stock and any outright grants of Common Stock approved by the
Committee pursuant to the Plan.
AR. "Subsidiary" shall mean with respect to any Award other than an
Incentive Option, any corporation, joint venture or partnership in which the
Company owns, directly or indirectly, (i) with respect to a corporation,
stock possessing twenty percent (20%) or more of the total combined voting
power of all classes of stock in the corporation or (ii) in the case of a
joint venture or partnership, the Company possesses a twenty percent (20%)
interest in the capital or profits of such joint venture or partnership. In
the case of any Incentive Option, Subsidiary shall mean any corporation
within the meaning of Section 424(f) of the Code.
AS. "Vested" shall mean the status that results with respect to an
Option or other Award which may be immediately exercised under the terms of
the Agreement granting such Option or other Award, pursuant to the
provisions of the Plan or by action of the Committee.
IV. ADMINISTRATION.
A. The Plan shall be administered by the Human Resources Committee with
respect to Officers, Executive Officers and Outside Directors and by the
Employee Benefits Committee with respect to all other Eligible Employees and
Eligible Non-Employees. The Human Resources Committee may adopt such rules,
regulations and guidelines as it determines necessary for the administration of
the Plan. Subject to any such rules, regulations and guidelines adopted by the
Human Resources Committee, the Employee Benefits Committee shall have the power
to adopt rules, regulations and guidelines to permit such Committee to
administer the Plan with respect to Eligible Employees (other than Officers and
Executive Officers) and with respect to Eligible Non-Employees.
B. The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated duties as aforesaid may employ
one or more persons to render advice with respect to any responsibility the
Committee or such person may have under the Plan. The Committee may employ such
legal or other counsel, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion or computation received
from any such counsel, consultant or agent. Expenses incurred by the Committee
in the engagement of such counsel, consultant or agent shall be paid by the
Company or such Related Entity whose employees have benefited from the Plan, as
determined by the Committee. The Company shall indemnify members of the
Committee and any agent of the Committee who is an employee of the Company or a
Related Entity against any and all liabilities or expenses to which they may be
subjected by reason of any act or failure to act with respect to their duties on
behalf of the Plan, except in circumstances involving such person's gross
negligence or willful misconduct.
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C. In furtherance of and not in limitation of the Committee's discretionary
authority, subject to the provisions of the Plan, the Committee shall have the
authority to:
1. determine the Participants to whom Awards shall be granted and the
number of and terms and conditions upon which Awards shall be granted (which
need not be the same for all Awards or types of Awards);
2. establish, in its sole discretion, annual or long-term financial
goals of the Company, Related Entity, or division, department, or group of
the Company or Related Entity, or individual goals which the Committee shall
consider in granting Awards, if any;
3. determine the satisfaction of performance goals established by the
Committee based upon periods of time or any combinations thereof;
4. determine the time when Awards shall be granted, the Option Price of
each Option, the period(s) during which Options shall be exercisable
(whether in whole or in part), the restrictions to be applicable to Awards,
and the other terms and provisions of Awards;
5. modify grants of Awards pursuant to Paragraph D. of this Section IV.
or rescind grants of Awards pursuant to Section X.H(v), respectively;
6. provide the establishment of a procedure whereby a number of shares
of Common Stock or other securities may be withheld from the total number of
shares of Common Stock or other securities to be issued upon exercise of an
Option, the lapse of restrictions on Restricted Stock and the vesting of
Phantom Units (other than an Incentive Option) to meet the obligation of
withholding for income, social security and other taxes incurred by a
Participant upon such exercise or required to be withheld by the Company in
connection with such exercise;
7. adopt, modify and rescind rules and regulations and guidelines
relating to the Plan;
8. adopt modifications to the Plan and procedures, as may be necessary
to comply with provisions of the laws and applicable regulatory rulings of
countries in which the Company or a Related Entity operates in order to
assure the legality of Awards granted under the Plan to Participants who
reside in such countries;
9. obtain the approval of the shareholders of the Company with respect
to Awards consisting of Phantom Units or Restricted Stock; provided,
however, no action shall be proposed to shareholders without the approval of
the Board of Directors; and
10. make all determinations, perform all other acts, exercise all other
powers and establish any other procedures determined by the Committee to be
necessary, appropriate or advisable in administering the Plan and to
maintain compliance with any applicable law.
D. The Committee may at any time, in its sole discretion, accelerate the
exercisability of any Awards and waive or amend any and all restrictions and
conditions of any Awards.
E. Subject to and not inconsistent with the express provisions of the Plan,
the Code and Rule 16b-3 of the Exchange Act, the Committee shall have the
authority to require, as a condition to the granting of any Option, SAR or other
Award (to the extent applicable) to any Executive Officer of the Company or any
Related Entity that the Executive Officer receiving such Option, SAR or other
Award agree not to sell or otherwise dispose of such Option, SAR or other Award
or Common Stock acquired pursuant to such Option, SAR or other Award (to the
extent applicable) or any other "derivative security" (as defined by Rule
16a-1(c) under the Exchange Act) for a period of six (6) months following the
later of (i) the date of the grant of such Option, SAR or other Award (to the
extent applicable) or (ii) the date when the other Option Price of such Option,
SAR or other Award is fixed, if such Option Price is not fixed at the date of
grant of such Option, SAR or other Award.
IX-5
<PAGE>
V. DECISIONS FINAL.
Any decision, interpretation or other action made or taken in good faith by
the Committee arising out of or in connection with the Plan shall be final,
binding and conclusive on the Company and all Participants and their respective
heirs, executors, administrators, successors and assigns.
VI. ARBITRATION.
Any agreement may contain, among other things, provisions that require
arbitration of any and all disputes between a Participant and the Company or any
Related Entity, in a form or forms acceptable to the Committee, in its sole
discretion.
VII. DURATION OF THE PLAN.
The Plan shall remain in effect for a period of ten (10) years from the
Effective Date, unless terminated by the Board pursuant to Section XXI.
VIII. SHARES AVAILABLE -- LIMITATIONS.
A. Up to _______ shares of Communications Stock and _______ shares of Media
Stock may be granted in calendar year 1995 and the maximum aggregate number of
shares of Communications Group Stock and Media Group Stock that may be granted
in any other calendar year for all purposes under the Plan shall be nine-tenths
of one percent (0.90%) and three-quarters of one percent (0.75%), respectively,
of the shares of such class outstanding (excluding shares held in the Company's
treasury) on the first day of such calendar year, provided, however, that in the
event that fewer than the full aggregate number of shares of either class
available for issuance in any calendar year are issued in such year, the shares
not issued shall be added to the shares of such class available for issuance in
any subsequent year or years. If, for any reason, any shares of Common Stock as
to which Options, SARs, Restricted Stock, or Phantom Units have been granted
cease to be subject to exercise or purchase hereunder (other than the exercise
of SARs for cash), the underlying shares of Common Stock shall thereafter be
available for grants to Participants under the Plan during any calendar year.
Awards granted under the Plan may be fulfilled in accordance with the terms of
the Plan with (i) authorized and unissued shares of the Common Stock or (ii)
issued shares of Common Stock reacquired by the Company, in each situation, as
the Board of Directors or the Committee may determine from time to time at its
sole discretion.
B. The maximum number of shares of Common Stock that shall be subject to
the grant of an Award in any calendar year for Awards other than Options or SARs
shall not exceed one-third (1/3) of the total number of shares of Common Stock
subject to Awards granted under the Plan for such calendar year.
C. The maximum number of shares of Common Stock with respect to which
Awards may be granted to any individual Participant in any calendar year may not
exceed five hundred thousand (500,000).
D. The cumulative number of shares of Common Stock that may be issued under
this Plan in connection the exercise of Incentive Options shall not exceed ten
million (10,000,000).
IX. GRANT OF AWARDS.
A. The Committee shall determine the type or types of Award(s) to be made
to each Participant. Awards may be granted singly, in combination or in tandem
subject to restrictions set forth in Section X.C. for Incentive Options. The
types of Awards that may be granted under the Plan are Options, with or without
Reload Options, SARs, Stock Awards and Phantom Units, and with respect to
Phantom Units and Restricted Stock, with or without Dividend Equivalent Rights.
B. Each grant of an Award under this Plan shall be evidenced by an
Agreement dated as of the date of the grant of the Award, other than Stock
Awards consisting of an outright grant of shares of Common Stock. This Agreement
shall set forth the terms and conditions of the Award, as may be determined by
the Committee, and if the Agreement relates to the grant of an Option, shall
indicate whether the Option that it evidences, is intended to be an Incentive
Option or a Nonqualified Option.
IX-6
<PAGE>
Each grant of an Award is conditioned upon the acceptance by the Participant of
the terms of the Agreement. Unless otherwise extended by the Committee, a
Participant shall have ninety (90) days from the date of the Agreement to accept
its terms.
X. OPTIONS.
The Committee, in its sole discretion, may grant Incentive Options or
Nonqualified Options to Eligible Employees, Officers and Executive Officers and
Nonqualified Options to Eligible Non-Employees. Any Options granted to a
Participant under the Predecessor Plan which remain outstanding as of the
Effective Date shall be governed by the terms and conditions of the Plan, except
to the extent the provisions of the Plan are inconsistent with the terms of the
Options granted under the Predecessor Plans, in which event the applicable
provisions of the Predecessor Plans shall govern; provided, however, that in no
event shall there be a modification of the terms of any Incentive Option granted
under the Predecessor Plan. The terms and conditions of the Options granted
under this Section X. shall be determined from time to time by the Committee, as
set forth in the Agreement granting the Option, and subject to the following
conditions:
A. NONQUALIFIED OPTIONS. The Option Price for each share of Common
Stock issuable pursuant to a Nonqualified Option may be an amount at or
above the Fair Market Value on the date such Option is granted, may be
Indexed from the original Option Price and may be granted with or without
Dividend Equivalent Rights; provided, however, that with respect to
Nonqualified Options granted to any Executive Officer, no Dividend
Equivalent Rights may be granted.
B. INCENTIVE OPTIONS. The Option Price for each share of Common Stock
issuable pursuant to an Incentive Option shall not be less than one
hundred percent (100%) of the Fair Market Value on the date such Option is
granted and may be Indexed from the original Option Price.
C. INCENTIVE OPTIONS -- SPECIAL RULES. Options granted in the form of
Incentive Options shall be subject to the following provisions:
1. GRANT. No Incentive Option shall be granted pursuant to this
Plan more than ten (10) years after the Effective Date.
2. ANNUAL LIMIT. The aggregate Fair Market Value (determined at the
time the Option is granted) of the shares of Common Stock with
respect to which one or more Incentive Options are exercisable for the
first time by any Optionee during any calendar year under the Plan or
under any other stock plan of the Company or any Related Entity shall not
exceed $100,000 or such other maximum amount permitted under Section 422
of the Code. Any Option purporting to constitute an Incentive Option in
excess of such limitation shall constitute a Nonqualified Option.
3. 10% STOCKHOLDER. If any Optionee to whom an Incentive Option is
to be granted pursuant to the provisions of the Plan is, on the date
of grant, an individual described in Section 422(b)(6) of the Code, then
the following special provisions shall be applicable to the Option
granted to such individual:
(a) the Option Price of shares subject to such Incentive Option
shall not be less than 110% of the Fair Market Value of Common Stock
on the date of grant; and
(b) the Option shall not have a term in excess of (5) years from
the date of grant.
D. OTHER OPTIONS. The Committee may establish rules with respect to,
and may grant to Eligible Employees, Options to comply with any amendment
to the Code made after the Effective Date providing for special tax benefits
for stock options.
E. RELOAD OPTIONS. Without in any way limiting the authority of the
Committee to make Awards hereunder, the Committee shall have the
authority to grant Reload Options. Any such Reload Option shall be subject
to such other terms and conditions as the Committee may determine.
Notwithstanding the above, (i) the Committee shall have the right, in its
sole discretion, to
IX-7
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withdraw a Reload Option to the extent that the grant thereof will result in
any adverse accounting consequences to the Company and (ii) no additional
Reload Options shall be granted upon the exercise of a Reload Option.
F. TERM OF OPTION. No Option shall be exercisable after the expiration
of ten (10) years from the date of grant of the Option.
G. EXERCISE OF STOCK OPTION. Each Option shall be exercisable in one or
more installments as the Committee in its sole discretion may determine
at the time of the Award and as provided in the Agreement. The right to
purchase shares shall be cumulative so that when the right to purchase any
shares has accrued such shares or any part thereof may be purchased at any
time thereafter until the expiration or termination of the Option, subject
to rules on sequential exercise for Incentive Options pursuant to Paragraph
C.2. of this Section X. The Option Price shall be payable (i) in cash or by
an equivalent means acceptable to the Committee, (ii) by delivery
(constructive or otherwise) to the Company of shares of Common Stock owned
by the Optionee or (iii) by any combination of the above as provided in the
Agreement. Shares delivered to the Company in payment of the Option Price
shall be valued at the Fair Market Value on the date of the exercise of the
Option.
H. VESTING. The Agreement shall specify the date or dates on which the
Optionee may begin to exercise all or a portion of his Option. Subsequent
to such date or dates, the Option shall be deemed vested and fully
exercisable.
(i) DEATH. In the event of the death of any Optionee, all Options
held by such Optionee on the date of his death shall become Vested
Options and the estate of such Optionee, shall have the right, at any
time and from time to time within one year after the date of death, or
such other period, if any, as the Committee in its sole discretion may
determine, to exercise the Options of the Optionee (but not after the
earlier of the expiration date of the Option or, in the case of an
Incentive Option, one (1) year from the date of death).
(i) DISABILITY. If the employment of any Optionee is terminated
because of Disability, all Options held by such Optionee on the date
of his or her termination shall be retained by such Optionee, and such
Options that are not yet Vested Options shall become Vested Options in
accordance with the vesting schedule established at the time such Options
were issued. The Optionee shall have the right to exercise Vested Options
at any time and from time to time, but not after the expiration date of
the Option or, in the case of Incentive Options where tax-advantaged
treatment is desired, one year from the date of termination of
employment.
(ii) RETIREMENT. Upon an Optionee's Retirement, all Options held by
such Optionee on the date of his or her Retirement shall be retained
by such Optionee, and such Options that are not yet Vested Options shall
become Vested Options in accordance with the vesting schedule established
at the time such Options were issued, unless the Committee, in its sole
discretion, determines otherwise. The Optionee shall have the right to
exercise Vested Options at any time and from time to time, but not after
the expiration date of the Option or, in the case of Incentive Options
where tax-advantaged treatment is desired, three months from the date of
Retirement.
(i) OTHER TERMINATION. If the employment with the Company or a
Related Entity of an Optionee is terminated for any reason other than
for death or Disability and other than "for cause" as defined in
subparagraph (v) below, such Optionee shall have the right, in the case
of a Vested Option, for a period of three (3) months after the date of
such termination or such longer period as determined by the Committee, to
exercise any such Vested Option, but in any event not after the
expiration date of any such Option.
(v) TERMINATION FOR CAUSE. Notwithstanding any other provision of
the Plan to the contrary, if the Optionee's employment is terminated
by the Company or any Related Entity
IX-8
<PAGE>
"for cause" (as defined below), such Optionee shall immediately forfeit
all rights under his Options except as to the shares of Common Stock
already purchased prior to such termination. Termination "for cause"
shall mean (unless another definition is agreed to in writing by the
Company and the Optionee) termination by the Company because of: (a) the
Optionee's willful and continued failure to substantially perform his
duties (other than any such failure resulting from the Optionee's
incapacity due to physical or mental impairment) after a written demand
for substantial performance is delivered to the Optionee by the Company,
which demand specifically identifies the manner in which the Company
believes the Optionee has not substantially performed his duties, (b) the
willful conduct of the Optionee which is demonstrably and materially
injurious to the Company or Related Entity, monetarily or otherwise, or
(c) the conviction of the Optionee for a felony by a court of competent
jurisdiction.
XI. FOREIGN OPTIONS AND RIGHTS.
The Committee may make Awards of Options to Eligible Employees, Officers,
Executive Officers and Eligible Non-Employees who are subject to the tax laws of
nations other than the United States, which Awards may have terms and conditions
as determined by the Committee as necessary to comply with applicable foreign
laws. The Committee may take any action which it deems advisable to obtain
approval of such Option by the appropriate foreign governmental entity;
provided, however, that no such Award may be granted pursuant to this Section
XI. and no action may be taken which would result in a violation of the Exchange
Act, the Code or any other applicable law.
XII. STOCK APPRECIATION RIGHTS.
The Committee shall have the authority to grant SARs to Eligible Employees,
Officers, Executive Officers and Eligible Non-Employees either alone or in
connection with an Option. SARs granted in connection with an Option shall be
granted either at the time of grant of the Option or by amendment to the Option.
SARs granted in connection with an Option shall be subject to the same terms and
conditions as the related Option and shall be exercisable only at such times and
to such extent as the related Option is exercisable. A SAR granted in connection
with an Option may be exercised only when the Fair Market Value of the Common
Stock of the Company exceeds the Option Price of the related Option. A SAR
granted in connection with an Option shall entitle the Participant to surrender
to the Company unexercised the related Option, or any portion thereof and to
receive from the Company cash and/or shares of Common Stock equal to that number
of shares of Common Stock having an aggregate value equal to the excess of (i)
the Fair Market Value of one share of Common Stock on the day of the surrender
of such Option over (ii) the Option Price per share of Common Stock multiplied
by (iii) the number of shares of Common Stock that may be exercised under the
Option, or surrendered; provided, however, that no fractional shares shall be
issued. A SAR granted singly shall entitle the Participant to receive the excess
of (i) the Fair Market Value of a share of Common Stock on the date of exercise
over (ii) the Fair Market Value of a share of Common Stock on the date of the
grant of the SAR multiplied by (iii) the number of SARs exercised. Payment of
any fractional shares of Common Stock shall be made in cash. A SAR shall become
a Vested Award upon (i) a Participant becoming Disabled, or (ii) the death of a
Participant.
XIII. RESTRICTED STOCK.
The Committee may, in its sole discretion, grant Restricted Stock to
Eligible Employees, Eligible Non-Employees, Officers or Executive Officers
subject to the provisions below.
A. RESTRICTIONS. A stock certificate representing the number of shares
of Restricted Stock granted shall be held in custody by the Company for
the Participant's account. The Participant shall have all rights and
privileges of a stockholder as to such Restricted Stock, including the right
to receive dividends and the right to vote such shares, except that, subject
to the provisions of Paragraph B. below, the following restrictions shall
apply: (i) the Participant shall not be entitled to delivery of the
certificate until the expiration of the Restricted Period; (ii) none of the
shares of Restricted Stock may be sold, transferred, assigned, pledged, or
otherwise encumbered or disposed of during the Restricted Period; (iii) the
Participant shall, if requested by the Company,
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execute and deliver to the Company, a stock power endorsed in blank. The
Restricted Period shall lapse upon a Participant becoming Disabled or the
death of a Participant. If a Participant ceases to be an employee of the
Company or a Related Entity prior to the expiration of the Restricted Period
applicable to such shares, except as a result of the death or Disability of
the Participant, shares of Restricted Stock still subject to restrictions
shall be forfeited unless otherwise determined by the Committee, and all
rights of the Participant to such shares shall terminate without further
obligation on the part of the Company. Upon the forfeiture (in whole or in
part) of shares of Restricted Stock, such forfeited shares shall become
shares of Common Stock held in the Company's treasury without further action
by the Participant.
B. TERMS AND CONDITIONS. The Committee shall establish the terms and
conditions for Restricted Stock pursuant to Section IV. of the Plan,
including whether any shares of Restricted Stock shall have voting rights or
a right to any dividends that are declared. Terms and conditions established
by the Committee need not be the same for all grants of Restricted Stock.
The Committee may provide for the restrictions to lapse with respect to a
portion or portions of the Restricted Stock at different times or upon the
occurrence of different events, and the Committee may waive, in whole or in
part, any or all restrictions applicable to a grant of Restricted Stock.
Restricted Stock Awards may be issued for no cash consideration or for such
minimum consideration as may be required by applicable law or such other
consideration as may be determined by the Committee.
C. DELIVERY OF RESTRICTED SHARES. At the end of the Restricted Period
as herein provided, a stock certificate for the number of shares of
Restricted Stock with respect to which the restrictions have lapsed shall be
delivered (less any shares delivered pursuant to Section XX.C. in
satisfaction of any withholding tax obligation), free of all such
restrictions, except applicable securities law restrictions, to the
Participant or the Participant's estate, as the case may be. The Company
shall not be required to deliver any fractional share of Common Stock but
shall pay, in lieu thereof, the Fair Market Value (measured as of the date
the restrictions lapse) of such fractional share to the Participant or the
Participant's estate, as the case may be. Notwithstanding the foregoing, the
Committee may authorize the delivery of the Restricted Stock to a
Participant during the Restricted Period, in which event any stock
certificates in respect of shares of Restricted Stock thus delivered to a
Participant during the Restricted Period applicable to such shares shall
bear an appropriate legend referring to the terms and conditions, including
the restrictions, applicable thereto.
XIV. PHANTOM UNITS.
A. GENERAL. The Committee may, in its sole discretion, grant the right to
earn Phantom Units to Eligible Employees, Officers, Executive Officers and
Eligible Non-Employees. The Committee shall determine the criteria for the
earning of Phantom Units, pursuant to Section IV. of the Plan. Upon satisfaction
of such criteria, a Phantom Unit shall be deemed a Vested Award. A Phantom Unit
granted by the Committee shall provide for payment in shares of Common Stock. A
Phantom Unit shall become a Vested Award upon (i) a Participant becoming
Disabled, or (ii) the death of a Participant. Shares of Common Stock issued
pursuant to this Section XIV. may be issued for no cash consideration or for
such minimum consideration as may be required by applicable law or such other
consideration as may be determined by the Committee. The Committee shall
determine whether a Participant granted a Phantom Unit shall be entitled to a
Dividend Equivalent Right.
B. UNFUNDED CLAIM. The establishment of Phantom Units under the Plan are
unfunded obligations of the Company. The interest of a Participant in any such
units shall be considered a general unsecured claim against the Company to the
extent that the conditions for the earning of the Phantom Units have been
satisfied. Nothing contained herein shall be construed as creating a trust or
fiduciary relationship between the Participant, the Company or the Committee.
C. ISSUANCE OF COMMON STOCK. Upon a Phantom Unit becoming a Vested Award,
unless a Participant has elected to defer under Paragraph D. below, shares of
Common Stock representing the
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Phantom Units shall be distributed to the Participant, unless the Committee,
with the consent of the Participant, provides for the payment of the Phantom
Units in cash or partly in cash and partly in shares of Common Stock equal to
the value of the shares of Common Stock which would otherwise be distributed to
the Participant.
D. DEFERRAL OF PHANTOM UNITS. Prior to the year with respect to which a
Phantom Unit may become a Vested Award, the Participant may elect not to receive
Common Stock upon the vesting of such Phantom Unit and for the Company to
continue to maintain the Phantom Unit on its books of account. In such event,
the value of a Phantom Unit shall be payable in shares of Common Stock pursuant
to the agreement of deferral.
E. FINANCIAL HARDSHIP. Notwithstanding any other provision hereof, at the
written request of a Participant who has elected to defer pursuant to Paragraph
D. above, the Committee, in its sole direction, upon a finding that continued
deferral will result in financial hardship to the Participant, may authorize the
payment of all or a part of a Participant's Vested Phantom Units in a single
installment or the acceleration of payment of any multiple installments thereof;
provided, however, that distributions will not be made under this paragraph if
such distribution would result in liability of an Executive Officer under
Section 16 of the Exchange Act.
F. DISTRIBUTION UPON DEATH. The Committee shall pay the Fair Market Value
of the Phantom Units of a deceased Participant to the estate of the Participant,
as soon as practicable following the death of the Participant. The value of the
Phantom Units for the purpose of such distribution shall be based upon the Fair
Market Value of shares of Common Stock underlying the Phantom Units on the date
of the Participant's death.
XV. STOCK AWARDS TO OUTSIDE DIRECTORS.
Each Outside Director shall be granted a Stock Award consisting of 400
shares of Communications Group Stock and 400 shares of Media Group Stock,
without restrictions, on the date of the Annual Meeting of the Company's
stockholders following the first anniversary date of such Outside Director's
initial election to the Board, and a like amount on each of the next four Annual
Meeting dates for a total maximum Stock Award of 2,000 shares of Communications
Group Stock and 2,000 shares of Media Group Stock.
XVI. OUTSIDE DIRECTOR'S COMPENSATION.
A. PAYMENT IN COMMON STOCK. Each Outside Director may elect to receive
payment of all or any portion of Director Compensation comprised of retainer
fees for service on the Board and any committees thereof in Common Stock. The
amount of Common Stock then issuable shall be based on the Fair Market Value of
the Common Stock on the dates such retainer fees are otherwise due and payable
to the Outside Director. When any fees are paid in Common Stock under this
Section XVI.A, the amount of such fees shall be evenly divided between
Communications Group Stock and Media Group Stock, and any fractional shares of
Common Stock shall be paid in cash. Certificates evidencing such Common Stock
shall be delivered promptly following such date. If an Outside Director elects
to receive payment of retainer fees in Common Stock as described in this Section
XVI.A, the election shall be (i) in writing, (ii) delivered to the Secretary of
the Company at least six months in advance of the payment date, and (iii)
irrevocable.
B. DEFERRAL OF PAYMENT. Each Outside Director may elect to defer the
receipt of Common Stock payable pursuant to Section XVI.A, in which event such
Outside Director shall receive an equivalent number of Phantom Units with
Dividend Equivalent Rights. Any such Phantom Units shall become Vested Awards at
such time as the Outside Director no longer serves as a member of the Board. If
an Outside Director elects to defer receipt of Common Stock and receive Phantom
Units pursuant to this Section XVI.B, the election shall be (i) in writing, (ii)
delivered to the Secretary of the Company in the year preceding the year in
which the Director Compensation would otherwise be paid and at least six months
in advance of the date when Common Stock would otherwise be issued, and (iii)
irrevocable.
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C. DIRECTOR STOCK OPTIONS. On May 5, 1995 and on the first business day of
each calendar year thereafter, each Director shall be granted an Option to
purchase three thousand (3,000) shares Communications Group Stock and an Option
to purchase three thousand (3,000) shares of Media Group Stock, such Options (i)
to become Vested Options in increments of 40 percent upon grant and 30 percent
on the first and second anniversaries following the date of grant or, if
earlier, in full upon the retirement of the Director, (ii) to remain exercisable
notwithstanding the retirement of the Director from the Board (but in no event
after the expiration date of the Option), and (iv) to expire ten years from the
date of grant.
XVII. FEDERAL SECURITIES LAW.
With respect to grants of Awards to Directors and Executive Officers, the
Company intends that the provisions of this Plan and all transactions effected
in accordance with Plan shall comply with Rule 16b-3 under the Exchange Act.
Accordingly, the Committee shall administer and interpret the Plan to the extent
practicable, to maintain compliance with such rule.
XVIII. CHANGE OF CONTROL -- ACCELERATION.
Upon the occurrence of a Change of Control:
A. n the case of all outstanding Options and SARs, each such Option and
SAR shall automatically become immediately fully exercisable by the
Participant;
B. restrictions applicable to Restricted Stock shall automatically be
deemed lapsed and conditions applicable to Phantom Units shall automatically
be deemed waived, and the Participants who receive such grants shall become
immediately entitled to receipt of the Common Stock subject to such grants;
and
C. the Human Resources Committee, in its discretion, shall have the
right to accelerate payment of any deferrals of Vested Phantom Units.
XIX. ADJUSTMENT OF SHARES.
A. In the event there is any change in the Common Stock by reason of any
consolidation, combination, liquidation, reorganization, recapitalization, stock
dividend, stock split, split-up, split-off, spin-off, combination of shares,
exchange of shares or other like change in capital structure of the Company, the
number or kind of shares or interests subject to an Award and the per share
price or value thereof shall be appropriately adjusted by the Committee at the
time of such event, provided that each Participant's economic position with
respect to the Award shall not, as a result of such adjustment, be worse than it
had been immediately prior to such event. Any fractional shares or interests
resulting from such adjustment shall be rounded up to the next whole share of
Common Stock. Notwithstanding the foregoing, (i) each such adjustment with
respect to an Incentive Option shall comply with the rules of Section 424(a) of
the Code, and (ii) in no event shall any adjustment be made which would render
any Incentive Option granted hereunder other than an "incentive stock option"
for purposes of Section 422 of the Code.
B. In the event of an acquisition by the Company of another corporation
where the Company assumes outstanding stock options or similar obligations of
such corporation, the number of Awards available under the Plan shall be
appropriately increased to reflect the number of such options or other
obligations assumed.
XX. MISCELLANEOUS PROVISIONS.
A. ASSIGNMENT OR TRANSFER. No grant of any "derivative security" (as
defined by Rule 16a-1(c) under the Exchange Act) made under the Plan or any
rights or interests therein shall be assignable or transferable by a Participant
except by will or the laws of descent and distribution and except to the extent
it is otherwise permissible under the Exchange Act, it being understood that no
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grant of any "derivative security" shall be assignable or transferable pursuant
to a domestic relations order. During the lifetime of a Participant, Awards
granted hereunder shall be exercisable only by the Participant, the
Participant's guardian or his legal representative.
B. INVESTMENT REPRESENTATION; LEGENDS. The Committee may require each
Participant acquiring shares of Common Stock pursuant to an Award to represent
to and agree with the Company in writing that such Participant is acquiring the
shares without a view to distribution thereof. No shares of Common Stock shall
be issued pursuant to an Award until all applicable securities law and other
legal and stock exchange requirements have been satisfied. The Committee may
require the placing of stop-orders and restrictive legends on certificates for
Common Stock as it deems appropriate.
C. WITHHOLDING TAXES. In the case of distributions of Common Stock or
other securities hereunder, the Company, as a condition of such distribution,
may require the payment (through withholding from the Participant's salary,
payment of cash by the Participant, reduction of the number of shares of Common
Stock or other securities to be issued (except in the case of an Incentive
Option), or otherwise) of any federal, state, local or foreign taxes required by
law to be withheld with respect to such distribution.
D. COSTS AND EXPENSES. The costs and expenses of administering the Plan
shall be borne by the Company and shall not be charged against any Award nor to
any Participant receiving an Award.
E. OTHER INCENTIVE PLANS. The adoption of the Plan does not preclude the
adoption by appropriate means of any other incentive plan for employees.
F. EFFECT ON EMPLOYMENT. Nothing contained in the Plan or any agreement
related hereto or referred to herein shall affect, or be construed as affecting,
the terms of employment of any Participant except to the extent specifically
provided herein or therein. Nothing contained in the Plan or any agreement
related hereto or referred to herein shall impose, or be construed as imposing,
an obligation on (i) the Company or any Related Entity to continue the
employment of any Participant and (ii) any Participant to remain in the employ
of the Company or any Related Entity.
G. NONCOMPETITION. Any Agreement may contain, among other things,
provisions prohibiting Participants from competing with the Company or any
Related Entity in a form or forms acceptable to the Committee, in its sole
discretion.
H. GOVERNING LAW. This Plan and actions taken in connection herewith shall
be governed and construed in accordance with the laws of the State of Colorado.
XXI. AMENDMENT OR TERMINATION OF PLAN.
The Board shall have the right to amend, modify, suspend or terminate the
Plan at any time, provided that no amendment shall be made which shall (i)
increase the total number of Awards with respect to Common Stock which may be
granted in total or to any single Participant, (ii) to decrease the minimum
Option Price in the case of an Incentive Option, or (iii) modify the provisions
of the Plan with respect to Incentive Options, unless such amendment is made by
or with the approval of the stockholders or unless the Board receives an opinion
of counsel to the Company that shareholder approval is not necessary with
respect to any modifications relating to Incentive Options. With respect to
Awards made to Executive Officers or Outside Directors, no amendment shall be
made which either (i) materially increases the benefits accruing to such
Executive Officers or Outside Directors, (ii) materially increases the number of
such Awards which may be issued under the Plan to Executive Officers or Outside
Directors, or (iii) materially modifies the requirements as to eligibility for
participation of Executive Officers or Outside Directors in the Plan unless such
amendment is made with the approval of stockholders. No amendment, modification,
suspension or termination of the Plan shall alter or impair any Awards
previously granted under the Plan, without the consent of the holder thereof. To
the extent required by Rule 16b-3 under the Exchange Act, the terms pursuant to
which awards are granted to Outside Directors or Executive Officers shall not be
amended more than once every six months, other than to comport with changes in
the Code, the Employee Retirement Income Security Act, or the rules thereunder.
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ANNEX X
U S WEST
DEFERRED COMPENSATION PLAN
PREAMBLE
As of the Effective Date (as defined below), the U S WEST Deferred
Compensation Plan (the "Plan") is amended and restated as set forth herein. The
purpose of the Plan is to permit Executive Employees (as defined below) and
Highly Paid Employees (as defined below) to defer a portion of their
compensation and to provide a "matching credit" with respect to all or a portion
of such deferred compensation. The Plan is intended to be a nonqualified
deferred compensation "top-hat" plan for "a select group of management or highly
compensated employees," as that phrase is used in the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
SECTION 1
DEFINITIONS
1.1 "Code" means the Internal Revenue Code of 1986, as amended.
1.2 "Committee" means the Human Resources Committee of the Board of Directors
of U S WEST, Inc.
1.3 "Company" means U S WEST, Inc., a Delaware corporation, and any of its
adopting subsidiaries approved by U S WEST, Inc.
1.4 "Deferred Compensation" means, with respect to an Executive Employee,
Eligible Compensation deferred under the Plan, and with respect to a Highly
Paid Employee, Excluded Compensation deferred under the Plan.
1.5 "Effective Date" means the date on which U S WEST, Inc., a Colorado
corporation, is merged with and into U S WEST, Inc., a Delaware
corporation, with U S WEST, Inc., a Delaware corporation, being the
surviving corporation.
1.6 "Eligible Compensation" means for any Executive Employee, Excluded
Compensation and any awards payable under any STIP. At the discretion of
the Committee, commencing any January 1, Eligible Compensation shall mean
Pay (as defined in the Savings Plan) plus any awards payable under the
STIP.
1.7 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
1.8 "Excluded Compensation" means that part of a Participant's Pay (as defined
in the Savings Plan) earned from the Company that exceeds the dollar limit
in effect during the Plan Year under section 401(a)(17) of the Code. At the
discretion of the Committee, commencing any January 1, Excluded
Compensation shall mean Pay (as defined in the Savings Plan).
1.9 "Executive Employee" means an individual employed by the Company or a
subsidiary thereof in a key executive or managerial position and who is
designated by the Committee as a Participant in the Plan.
1.10 "Highly Paid Employee" means an individual employed by the Company or a
subsidiary thereof who during the Plan Year is not an Executive Employee
but who earns Excluded Compensation. At the discretion of the Committee,
commencing any January 1, Highly Paid Employee shall mean an individual
employed by the Company or a subsidiary thereof who during the previous
Plan Year was not an Executive Employee but who earned Excluded
Compensation.
1.11 "New Executive" means an Executive Employee who has not met the minimum
service requirements of the Savings Plan.
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1.12 "Participant" means an Executive Employee, Highly Paid Employee or New
Executive who has elected to participate in the Plan.
1.13 "Pension Plan" means the U S WEST, Inc. Pension Plan.
1.14 "Plan" means the U S WEST, Inc. Deferred Compensation Plan, as amended from
time to time.
1.15 "Plan Year" means the calendar year.
1.16 "Savings Plan" means the U S WEST Savings Plan/ESOP, as amended from time
to time.
1.17 "STIP" means any senior management short term incentive plan, including the
ESTIP maintained by the Company under which awards may be granted to
Executive Employees.
SECTION 2
PARTICIPATION
2.1 ELIGIBILITY TO PARTICIPATE
Participation in the Plan shall be limited to:
(a) those Executive Employees who have Eligible Compensation;
(b) those Highly Paid Employees who have Excluded Compensation; and
(c) New Executives.
2.2 ELECTION OF DEFERRED COMPENSATION
Participants shall make irrevocable Deferred Compensation elections in such
form as is specified by the Company. A Deferred Compensation election shall
apply only to Eligible Compensation and Excluded Compensation earned during the
Plan Year specified in the election, and (i) for Executive Employees, shall
specify the whole percentage of Excluded Compensation to be deferred (up to 75%)
and the whole percentage of STIP to be deferred (up to 100%, net of required
withholding taxes); and (ii) for Highly Paid Employees, shall specify the whole
percentage of Excluded Compensation to be deferred (up to 75%).
Deferred Compensation elections shall be made prior to the last day of the
Plan Year preceding the Plan Year in which the services for which the
compensation is payable are performed or, if earlier, prior to the close of the
enrollment period specified by the Executive Compensation Group of the Company.
Notwithstanding the preceding sentence, New Executives shall make Deferred
Compensation elections within 30 days of the date their employment with the
Company commences.
Deferrals of STIP awards of Executive Employees shall occur at the time the
STIP awards become payable.
Annual elections are voluntary and IRREVOCABLE. The election must specify
the number of annual installments (not to exceed 10) in which such Deferred
Compensation is to be paid and the subaccount to which deferrals will be
credited.
2.3 PARTICIPANTS' ACCOUNTS/SUBACCOUNTS
For every Plan Year, a separate bookkeeping account shall be maintained for
each Participant. Each Participant's account may include the following
subaccounts: a U S WEST Communication shares account; a U S WEST Media Group
shares account (together referred to as the "Shares Accounts"); Cash Accounts;
and a Company Match account.
SECTION 3
DEFERRED ACCOUNTS
3.1 ALLOCATION OF DEFERRALS -- CASH ACCOUNT
Participants may elect that up to 50% of their deferrals of Eligible and
Excluded Compensation be allocated to the Cash Account.
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3.2 ALLOCATION OF DEFERRALS -- SHARES ACCOUNTS
Pursuant to a Participant's election, Deferred Compensation (unless credited
to the Cash Account) will be credited to the Participant's subaccount in phantom
shares of U S WEST Communications stock or in U S WEST Media Group stock. The
amounts so credited shall be converted to shares of phantom stock on a
semi-monthly basis using the stock market close price for such shares on the
15th and last business days of the month. If no trading occurs on the New York
Stock Exchange on the 15th and/or last business day of the month, the price of
the relevant shares on the business day immediately prior to the valuation date
will be used.
3.3 TRANSFERRING SHARES BETWEEN ACCOUNTS
At the Effective Date, each phantom share of existing common stock credited
to a Participant's Company stock account shall be redesignated as one phantom
share of U S WEST Communications Group stock and one phantom share of U S WEST
Media Group stock. Twice each year a Participant may make an election to
exchange any number of phantom shares of one class of Common Stock for phantom
shares of the other class of Common Stock. A Participant may elect to transfer
all or a portion of his Cash Account to his U S WEST Communications and/or his U
S WEST Media Group shares account. A Participant may not transfer any portion of
his or her U S WEST Communications shares account or U S WEST Media Group shares
account to his or her Cash Account unless the Participant is receiving a service
pension under the Pension Plan.
3.4 DIVIDENDS ON SHARE ACCOUNTS
Participants allocating Deferred Compensation to their U S WEST
Communications or U S WEST Media Group subaccounts shall be credited dividend
payments on the phantom stock held in such accounts. The amount credited shall
be credited in shares on phantom stock and shall be calculated by multiplying
the number of phantom shares held in the Participant's subaccount by the
dividend payable per share.
3.5 CASH ACCOUNT
Deferred Compensation that is credited to a Participant's Cash Account shall
be deemed to be credited with earnings on a semi-monthly basis. The crediting
rate will be determined at the beginning of each quarter and will be based on
10-year U.S. Treasury note rates + 1% for deferrals credited after December 31,
1990 (DC-T Plus One). Deferrals made to Cash Accounts prior to 1991 will be
credited with interest based on 10-year U.S. Treasury note rates + 2% (DC-T Plus
Two).
3.6 CHANGE IN OUTSTANDING SHARES
In the event of any change in outstanding U S WEST shares by reason of any
stock dividend or split, recapitalization, merger, consolidation or exchange of
shares or other similar corporate change, the U S WEST Board of Directors or its
designee shall make such adjustments, if any, that it deems appropriate in the
number of phantom shares then credited to the Participant's accounts. Any and
all such adjustments shall be conclusive and binding upon all parties concerned.
SECTION 4
MATCHING COMPANY CONTRIBUTIONS
4.1 FUNDS ELIGIBLE FOR COMPANY MATCH
A Participant will receive matching contributions on his or her Deferred
Compensation provided the Participant has contributed the maximum before-tax
amount permitted under Code section 402(g) to the Savings Plan less the amount,
if any, by which such contributions are reduced, recharacterized or refunded so
that the Savings Plan may satisfy the average deferral percentage test of Code
section 401(k). Matching contributions will be credited to the Participant's
account on the 15th and last day of each month pursuant to the matching formula,
if any, applicable to such Participant under the provisions of the Savings Plan.
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For purposes of the matching contribution, STIP awards shall be eligible for
a match without regard to whether the maximum before-tax amount permitted under
Code section 402(g) has been met in the Savings Plan and without regard to
whether the Participant's Pay (as defined in the Savings Plan) has exceeded the
dollar limit in effect during the Plan Year under Code section 401(a)(17).
4.2 FORFEITURE OF COMPANY MATCH
If a Participant's employment with the Company terminates before the
completion of three years of service beginning with the employee's employment
commencement date for any reason other than retirement, death or disability, the
Participant shall forfeit all Company Match and the earnings thereon in the
Plan.
4.3 COMPANY MATCH INVESTED AS SHARES
The Company's matching contribution shall be credited to the Participant's
Company Match fund subaccount in phantom shares of U S WEST Communications stock
or U S WEST Media Group as elected by the Participant pursuant to Section 3.2 on
a semi-monthly basis using the stock market close price for the relevant stock
on the 15th and last business day of the month. If no trading occurs on the New
York Stock Exchange on the 15th and/or last business day of the month, the price
of the relevant shares on the business day immediately prior to the valuation
date will be used.
SECTION 5
DISTRIBUTION
5.1 TIMING OF DISTRIBUTION
Benefits under the Plan shall be paid (or commence to be paid) to a
Participant in March of the year following the first to occur of (i) termination
of employment (or such other event described in Section 5.3), (ii) commencement
of a Service Pension or a Disability Pension under the Pension Plan or (iii)
death. Notwithstanding the preceding sentence, in the event that the Internal
Revenue Service or a court determines that amounts deferred under the Plan are
currently taxable to any Participant due to the administration, operation or any
provision of the Plan, the Committee shall have the discretion to cause such
taxable amounts to be distributed to such Participant during the year in which
such amounts are taxable or during any year thereafter.
5.2 FORM OF DISTRIBUTION
At the time a Participant makes an election to participate in the Plan, the
Participant shall also make an election with respect to the form or timing of
distribution of the amounts credited to such Participant's account. Such
election shall be made at the same time, as part of and upon the same conditions
as the election made in Section 2.2 above. Amounts held in the Participant's
Cash Account shall be distributed in cash and amounts held in the Participant's
Shares Accounts shall be distributed as shares of U S WEST Communications Group
stock or U S WEST Media Group Stock, as the case may be.
A Participant may elect to receive the amount credited to such Participant's
account in one payment (lump sum) or in some other whole number of approximately
equal annual installments, not to exceed ten installments. Notwithstanding the
preceding sentence, if the amount credited to a Participant's account is less
than $10,000 at the time benefits commence, such amount shall be distributed as
a lump sum. If termination of employment occurs prior to the Participant's
receipt of a Service Pension or a Disability Pension under the Pension Plan (see
Section 5.3 below), payment will occur as a lump sum irrespective of the
Participant's distribution election. Notwithstanding the foregoing, Participants
who go on a leave of absence or other assignment approved by the Company or
continue to accrue service credit with the Company following their termination
of employment will not be subject to an automatic lump sum distribution from the
Plan. Distributions from the Plan shall be paid in March of the calendar year
following the calendar year in which the Participant terminates employment with
the Company for any reason.
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5.3 AUTOMATIC LUMP SUM DISTRIBUTION
If a Participant is discharged for cause by the Company, resigns, otherwise
ceases to be employed by the Company prior to becoming eligible for a Service
Pension or a Disability Pension under the Pension Plan, or if such Participant
becomes a proprietor, officer, partner, employee, agent, or otherwise enters
into a similar relationship by a governmental agency having jurisdiction over
the activities of the Company, the entire amount credited to the Participant's
account on such date shall be paid in a single payment to the Participant in
March of the Plan Year following the Plan Year in which the Participant's
termination of employment occurs.
5.4 DISTRIBUTION TO BENEFICIARIES
In connection with the election described in Section 5.2, a Participant may
elect that if such Participant dies before full distribution of all amounts
credited to his or her account, the balance of the account shall be distributed
to the beneficiary or beneficiaries designated in writing by the Participant. If
no such designation has been made, the balance of the account shall be
distributed to the estate of the Participant. The Participant shall designate
whether the distribution to the beneficiary is to be made in one payment or some
other number of approximately equal installments (not exceeding 10). If the form
of distribution is not specified, the distribution shall be made as a lump sum
payment. The first installment (or the lump sum payment if the Participant has
so elected) shall be paid in March of the Plan Year following the Plan Year in
which the Participant dies.
5.5 UNFORESEEABLE EMERGENCY
The Participant may, in writing, request early withdrawal in the event of an
"unforeseeable emergency." The request should be directed to the Chief Human
Resources Officer of U S WEST, Inc., who may, in his or her discretion, approve
an early withdrawal in an amount not to exceed the amount reasonably necessary
to meet the emergency, reduced by the amount that the hardship can be relieved
through reimbursement or compensation by insurance or otherwise, liquidation of
assets (to the extent such liquidation itself would not cause severe financial
hardship), or a cessation of deferrals under the Plan.
An "unforeseeable emergency" is an unanticipated emergency that is caused by
an event beyond the control of the Participant or beneficiary and that would
result in severe financial hardship to the individual if early withdrawal were
not permitted. "Unforeseeable emergency" includes:
(a) a severe financial hardship to the Participant resulting from a
sudden and unexpected illness or accident of the Participant or a dependent
of the Participant (as defined in Code Section 152(a));
(b) a loss of property due to casualty; or
(c) other similar extraordinary and unforeseeable circumstances arising
as a result of events beyond the Participant's control.
College tuition or the costs of purchasing a home are not considered
"unforeseeable emergencies."
SECTION 6
SPECIAL DISTRIBUTION RULES
6.1 PLAN TERMINATION ON CHANGE IN CONTROL
Upon a Change in Control (defined in Section 6.2) of the Company, the Plan
shall terminate and the present value of the benefits under the Plan, together
with an additional payment, to the extent necessary, to provide each Participant
with the same benefits that he or she would have received had the benefits been
paid without regard to this Section 6.1, shall be distributed to the
Participants as soon as practicable.
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6.2 CHANGE OF CONTROL
For purposes of the Plan, a "Change in Control" shall be deemed to have
occurred if a change in the beneficial ownership of the Company's voting stock
or a change in the composition of the Company's Board of Directors is the result
of any of the following:
(a) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or
becomes a "beneficial owner" (as determined for purposes of Regulation 13D-G
under the Exchange Act as currently in effect), directly or indirectly, of
securities representing twenty percent (20%) or more of the total voting
power of all of the Company's then outstanding voting securities, unless
through a transaction consummated with the prior approval of the Board; or
(b) during any period of two consecutive calendar years, individuals who
at the beginning of such period constitute the Board and any new director(s)
whose election by the Board or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority of the Board; or
(c) the Company becomes a party to a merger, plan of reorganization,
consolidation or share exchange in which either (x) the Company will not be
the surviving corporation or (y) the Company will be the surviving
corporation and any outstanding shares of the Company's common stock will be
converted into shares of any other company (other than a reincorporation or
the establishment of a holding company involving no change of ownership of
the Company) or other securities or cash or other property (excluding
payments made solely for fractional shares); or
(d) the shareholders of the Company approve a merger, plan of
reorganization, consolidation or share exchange with any other corporation,
and immediately following such merger, plan of reorganization, consolidation
or share exchange the holders of the voting securities of the Company
outstanding immediately prior thereto hold securities representing fifty
percent (50%) or less of the combined voting power of the voting securities
of the Company or such surviving entity outstanding immediately after such
merger, plan of reorganization, consolidation or share exchange; provided,
however, that notwithstanding the foregoing, no Change of Control for
purposes of this Agreement shall be deemed to have occurred if one-half
(1/2) or more of the members of the Board of the Company or such surviving
entity immediately after such merger, plan of reorganization, consolidation
or share exchange is comprised of persons who served as directors of the
Company immediately prior to such merger, plan of reorganization,
consolidation or share exchange or who are otherwise designees of the
Company; or
(e) any other event that a majority of the Board, in its sole
discretion, shall determine constitutes a Change of Control.
SECTION 7
MISCELLANEOUS PROVISIONS
7.1 SATISFACTION OF INTERESTS
The Company may transfer assets to a trustee to be held in trust. Any trust
created by the Company and any assets held by such trust to assist it in meeting
its obligations under the Plan will conform to the terms of the model trust (the
"Trust"), as described in Revenue Procedure 92-64, 1992-33 I.R.B. 11, as
modified, or any successor thereto. It is the intention of the Company and the
Participants that the Plan be unfunded for tax purposes and for purposes of
Title I of ERISA. Benefits under the Plan shall be paid from the Trust to the
extent that there are sufficient assets in the Trust. However, the Company, at
its discretion, may pay the benefits payable under the Plan out of its operating
assets. If the assets of the Trust are not sufficient to pay the benefits under
the Plan, the Company shall pay the benefits.
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7.2 INALIENABILITY OF BENEFITS
A Participant's rights to benefit payments under the Plan are not subject in
any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, attachment or garnishment by creditors of the Participant or the
Participant's beneficiary.
7.3 EFFECT ON EMPLOYMENT
Nothing contained in the Plan or any agreement related hereto or referred to
herein shall affect, or be construed as affecting, the terms of employment of
any Participant except to the extent specifically provided herein or therein.
Nothing contained in the Plan or any agreement related hereto or referred to
herein shall impose, or be construed as imposing, any obligation on (i) the
Company to continue the employment of any Participant and (ii) any Participant
to remain in the employ of the Company.
7.4 TAXATION
The Company shall have the right to deduct from any deferral to be made or
any distribution to be paid under the Plan any federal, state or local income
and employment taxes that it is required by law to withhold.
7.5 AMENDMENT OR TERMINATION
The Committee may at any time amend or terminate the Plan, but such
amendments or terminations shall not adversely affect the rights of any
Participant to any accrued vested benefit under the Plan prior to the effective
date of such amendment or termination without his or her consent. The Committee
or its designee shall be authorized to make minor or administrative amendments
to the Plan. Participants' account balances shall be frozen upon termination of
the Plan, and any assets held in trust pursuant to Section 7.1 in excess of the
amount required to pay benefits under the Plan shall be paid to the Company.
7.6 BINDING EFFECT
The Plan shall be binding upon and inure to the benefit of the Company, its
successors and assigns and the Participant and his/her heirs, executors,
administrators and legal representatives.
7.7 STATUS OF PARTICIPANTS
Participants and beneficiaries shall have the status of unsecured creditors
of the Company. The Plan constitutes a mere promise by the Company to make
benefit payments in the future.
No Participant or beneficiary shall have any preferred claim on, or any
beneficial ownership interest in, any assets of any trust established in
connection with the Plan pursuant to Section 7.1 prior to the time such assets
are paid to the Participant or beneficiary. All rights created under the Plan
and any trust shall be mere unsecured contractual, but enforceable, rights of
the Participants and beneficiaries against the Company. The rights under the
Plan and assets in the trust, if any, shall not be subject to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge by any
Participant or beneficiary, and any attempt to do so shall be null and void.
7.8 GOVERNING LAW
The Plan and actions taken in connection herewith shall be governed and
construed in accordance with the laws of the State of Colorado.
7.9 FEDERAL SECURITIES LAW
With respect to individuals subject to Section 16 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), the Company intends that the
provisions of this Plan and all transactions effected in accordance with the
Plan shall comply with Rule 16b-3 under the Exchange Act. Accordingly,
notwithstanding any other provision set forth in this Plan, the Committee shall
administer and interpret the Plan to maintain compliance with such rule.
X-7
<PAGE>
SECTION 8
CLAIMS PROCEDURE
8.1 DISPUTES
All disputes concerning benefits under this Plan shall be subject to this
Section 8.
8.2 SUBMISSION OF CLAIMS
Claims must be submitted in writing and presented to the Chief Human
Resources Officer of U S WEST, Inc. at 7800 East Orchard Road, P.O. Box 6508,
Suite 200, Englewood, CO 80155-6508, who shall have full and absolute discretion
to interpret the provisions of the Plan.
8.3 DENIAL OF CLAIM
If a claim is denied, notice of denial shall be furnished by the Company to
the claimant within 90 days after the receipt of the claim by the Company,
unless special circumstances require an extension of the time for processing the
claim, in which event notification of extension shall be provided to the
Participant or the beneficiary. The extension shall not exceed 90 days.
8.4 ADEQUATE NOTICE
The Company shall provide adequate notice, in writing, to any claimant whose
claim has been denied, setting forth the specific reasons for such denial,
specific reference to pertinent Plan provisions, a description of any additional
material or information necessary for the claimant to perfect his or her claim
and an explanation of why such material or information is necessary, all written
in a manner calculated to be understood by the claimant. Such notice shall
include appropriate information as to the steps to be taken if the claimant
wishes to submit his or her claim for review. The claimant or the claimant's
authorized representative may request such a review upon written application.
The claimant may review pertinent documents and may submit issues or comments in
writing. The claimant or the claimant's duly authorized representative must
request such review within the reasonable period of time prescribed by the
Company. In no event shall such a period of time be less than 60 days.
8.5 REVIEW OF CLAIM
The Committee shall serve as the final review committee, under the Plan,
ERISA, and the Code, for the review of all claims by Participants whose initial
claims for benefits have been denied, in whole or in part, by the Company. The
Committee shall have the authority to interpret the provisions of the Plan in
its full and absolute discretion.
8.6 DECISION ON CLAIM
A decision on review shall be rendered within 60 days after the receipt of
the request for review by the Committee. If special circumstances require a
further extension of time for processing, a decision shall be rendered not later
than 120 days following the Committee's receipt of the request for the review.
If such an extension of time of review is required, written notice of the
extension shall be furnished to the claimant. The decision of the Committee
shall be furnished to the claimant in writing and shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, as well as specific references to the pertinent Plan provisions on
which the decision is based. The decision of the Committee shall be final and
binding.
8.7 CLAIMS RELATING TO PRIOR PERIODS
Any claim under the Plan or a predecessor plan that relates to any
entitlement relating to periods of service prior to January 1, 1984 by an
individual who was a participant in or a beneficiary under a predecessor plan,
and who is a Participant or beneficiary under the Plan on or after January 1,
1984, or who was last employed by an adopting subsidiary of U S WEST, Inc. prior
to such date, shall automatically be subject to review by the Committee.
X-8
<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 -- Form of 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 -- Consents of KPMG Peat Marwick LLP
23-D -- Consent of Arthur Andersen LLP
23-E -- 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.
</TABLE>
II-1
<PAGE>
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) to include any material information with respect to the Plan of
Distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that the undertakings set forth in paragraphs (1)(i)
and (1)(ii) above do not apply if the information required to be included
in a post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of
the Exchange Act that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose 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 at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) 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 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.
(5) 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.
(6) That every prospectus: (i) that is filed pursuant to paragraph (5)
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.
(7) 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
II-2
<PAGE>
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.
(8) 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-3
<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. 2 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 11th
day of August, 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>
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*
SHIRLEY M. HUFSTEDLER*
ALLEN F. JACOBSON*
RICHARD D. MCCORMICK*
JERRY O. WILLIAMS*
MARILYN CARLSON NELSON*
FRANK POPOFF*
*By /s/ Stephen E. Brilz
--------------------------------------
Stephen E. Brilz
ATTORNEY-IN-FACT
</TABLE>
Dated: August 11, 1995
II-4
<PAGE>
[U S WEST LOGO]
[LOGO]
RECYCLED PAPER
<PAGE>
AMENDED AND RESTATED
RIGHTS AGREEMENT
dated as of ________, 1995
by and between
U S WEST, Inc.
and
STATE STREET BANK AND TRUST COMPANY
as Rights Agent
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
- ------- ----
1. Certain Definitions. . . . . . . . . . . . . . . . . 2
2. Appointment of Rights Agent. . . . . . . . . . . . . 10
3. Issuance of Right Certificates . . . . . . . . . . . 10
4. Form of Right Certificates . . . . . . . . . . . . . 13
5. Countersignature and Registration. . . . . . . . . . 13
6. Transfer Split Up Combination and Exchange of
Right Certificates; Mutilated Destroyed, Lost or
Stolen Right Certificates. . . . . . . . . . . . . . 14
7. Exercise of Rights . . . . . . . . . . . . . . . . . 15
8. Cancellation and Destruction of Right
Certificates . . . . . . . . . . . . . . . . . . . . 17
9. Reservation and Availability of Capital Stock. . . . 18
10. Securities Record Date . . . . . . . . . . . . . . . 19
11. Adjustment of Exercise Price, Number of Shares
Issuable upon Exercise of Rights or Number of
Rights . . . . . . . . . . . . . . . . . . . . . . . 19
12. Certificate of Adjusted Exercise Price or Number
of Shares Issuable upon Exercise of Rights . . . . . 27
13. Consolidation, Merger, or Sale or Transfer of
Assets or Earning Power. . . . . . . . . . . . . . . 27
14. Fractional Rights and Fractional Shares. . . . . . . 31
15. Rights of Action . . . . . . . . . . . . . . . . . . 32
16. Agreement of Right Holders . . . . . . . . . . . . . 33
17. Right Holder and Right Certificate Holder Not
Deemed a Stockholder . . . . . . . . . . . . . . . . 33
18. Concerning the Rights Agent. . . . . . . . . . . . . 34
(i)
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
Section Page
- ------- ----
19. Merger or Consolidation or Change of Name of
Rights Agent . . . . . . . . . . . . . . . . . . . . 34
20. Duties of Rights Agent . . . . . . . . . . . . . . . 35
21. Change of Rights Agent . . . . . . . . . . . . . . . 37
22. Issuance of New Right Certificates . . . . . . . . . 39
23. Redemption of Rights . . . . . . . . . . . . . . . . 39
24. Certain Cash Tender Offers . . . . . . . . . . . . . 40
25. Notice of Certain Events . . . . . . . . . . . . . . 43
26. Notices. . . . . . . . . . . . . . . . . . . . . . . 44
27. Supplements and Amendments . . . . . . . . . . . . . 44
28. Certain Covenants. . . . . . . . . . . . . . . . . . 45
29. Determinations and Actions by the Board of
Directors, etc.. . . . . . . . . . . . . . . . . . . 46
30. Successors . . . . . . . . . . . . . . . . . . . . . 46
31. Benefits of This Agreement . . . . . . . . . . . . . 46
32. Severability . . . . . . . . . . . . . . . . . . . . 47
33. Governing Law. . . . . . . . . . . . . . . . . . . . 47
34. Counterparts . . . . . . . . . . . . . . . . . . . . 47
35. Descriptive Headings . . . . . . . . . . . . . . . . 47
36. Effectiveness. . . . . . . . . . . . . . . . . . . . 47
(ii)
<PAGE>
TABLE OF EXHIBITS
-----------------
Exhibit A-1 -- Terms of Series A Preferred Shares
Exhibit A-2 -- Terms of Series B Preferred Shares
Exhibit B-1 -- Form of Communications Right Certificate
Exhibit B-2 -- Form of Media Right Certificate
(iii)
<PAGE>
TABLE OF DEFINED TERMS
----------------------
Term Defined Page Section
- ------------ ---- -------
20% Ownership Date 8 1.(al)
20% Stockholder 9 1.(am)
30% Stockholder 9 1.(an)
Affiliate 2 1.(a)
Agreement 1 Introduction
Associate 2 1.(a)
Beneficial Owner 2 1.(b)
Beneficially Own 2 1.(b)
Business Day 3 1.(c)
Cash Tender Offer Proposal 3 1.(d)
Close of Business 4 1.(e)
Closing Price 4 1.(f)
Common Share 5 1.(g)
Communications Adjustment Shares 20 11.(a)(ii)
Communications Exercise Price 5 1.(h)
Communications Right Certificates 11 3.(c)
Communications Rights 1 Recital
Communications Share 1 Recital
Communications Unavailable
Adjustment Shares 21 11.(a)(iii)
Company 1 Introduction
Current Market Price 5 1.(k)
(iv)
<PAGE>
TABLE OF DEFINED TERMS
----------------------
(continued)
Term Defined Page Section
- ------------ ---- -------
Distribution Date 6 1.(l)
Effective Time 1 Recital
Exchange Act 6 1.(n)
Exercise Price 6 1.(o)
Existing Common Stock 1 Recital
Existing Right 1 Recital
Expiration Date 6 1.(q)
Fair Offer 6 1.(r)
Fairness Opinion 40 24.(a)
Independent Director 6 1.(s)
Media Adjustment Shares 21 11.(a)(ii)
Media Exercise Price 7 1.(t)
Media Right Certificates 11 3.(c)
Media Rights 1 Recital
Media Share 2 Recital
Media Unavailable Adjustment Shares 21 11.(a)(iii)
Merger 1 Recital
Merger Agreement 1 Recital
NASDAQ 4 1.(f)
Original Agreement 1 Recital
Person 7 1.(y)
Preferred Share 7 1.(z)
Preferred Share Equivalents 22 11.(b)
Proposal Date 40 24.(a)
(v)
<PAGE>
TABLE OF DEFINED TERMS
----------------------
(continued)
Term Defined Page Section
- ------------ ---- -------
Prospective Offeror 3 1.(d)
Record Date 1 Recital
Redemption Date 7 1.(aa)
Redemption Price 7 1.(ab)
Resolution 40 24.(a)
Right Certificates 11 3.(c)
Rights 7 1.(ac)
Rights Agent 1 Introduction
Rights Agreement 12 3.(d)
Section 11(a)(ii) Event 7 1.(ad)
Section 13(a) Event 7 1.(ae)
Securities Act 8 1.(af)
Series A Preferred Share 8 1.(ag)
Series B Preferred Share 8 1.(ah)
Special Meeting 40 24.(a)
Subsidiary 8 1.(ai)
Surviving Person 28 13.(a)
Trading Day 8 1.(aj)
U S WEST Colorado 1 Recital
Voting Share 8 1.(ak)
(vi)
<PAGE>
AMENDED AND RESTATED
RIGHTS AGREEMENT
This Amended and Restated Rights Agreement ("Agreement") is
made and entered into as of the __ day of _____, 1995 by and between U S
WEST, Inc., a Delaware corporation (the "Company"), and State Street Bank and
Trust Company (the "Rights Agent"), and shall become effective as of the
Effective Time (as defined herein).
WHEREAS, on April 7, 1989, the Board of Directors of U S WEST,
Inc., a Colorado corporation ("U S WEST Colorado"), adopted a shareholder
rights plan governed by the terms of a rights agreement (as amended as of
_______, the "Original Agreement") and distributed one right (an "Existing
Right") for each share of Common Stock, without par value, of U S WEST
Colorado ("Existing Common Stock") outstanding at the close of business on
April 19, 1989 (the "Record Date"), and authorized the issuance of one
Existing Right for each share of Existing Common Stock issued between the
Record Date and the date hereof;
WHEREAS, on May __, 1995, the Board of Directors of U S WEST
Colorado adopted an agreement and plan of merger (the "Merger Agreement")
between U S WEST Colorado and the Company pursuant to which, subject to the
approval of the Merger Agreement by the shareholders of U S WEST Colorado, U
S WEST Colorado will be merged with and into the Company (the "Merger"), with
the Company continuing as the surviving corporation;
WHEREAS, on ______, 1995, the Board of Directors of the
Company authorized the assumption, effective as of the effective time of the
Merger under the Merger Agreement (the "Effective Time"), by the Company of
the obligations of U S WEST Colorado under the Original Agreement, as amended
herein to provide for the creation of U S WEST Communications Group Rights
("Communications Rights") and U S WEST Media Group Rights ("Media Rights");
WHEREAS, at the Effective Time, pursuant to the Merger
Agreement, each outstanding share of Existing Common Stock, together with the
Existing Right relating thereto, will be converted into (i) one share of U S
WEST Communications Group Common Stock, par value $0.01 per share, of the
Company (a "Communications Share"), together
<PAGE>
with one Communications Right
and (ii) one share of U S WEST Media Group Common Stock, par value $0.01 per
share, of the Company (a "Media Share"), together with one Media Right;
WHEREAS, each Communications Right will initially represent
the right to purchase one one-hundredth of a share of Series A Junior
Participating Cumulative Preferred Stock, par value $1.00 per share, of the
Company, having the rights, powers and preferences set forth in Exhibit A-1
hereto, and each Media Right will initially represent the right to purchase
one one-hundredth of a share of Series B Junior Participating Cumulative
Preferred Stock, par value $1.00 per share, of the Company, having the
rights, powers and preferences set forth in Exhibit A-2 hereto, upon the
terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing recitals and
the mutual agreements set forth herein, the parties hereto hereby agree as
follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange
Act, as in effect on the date hereof.
(b) A Person shall be deemed the "Beneficial Owner" of and
shall be deemed to "Beneficially Own":
(i) any securities that such Person or any of such Person's
Affiliates or Associates beneficially owns, directly or indirectly,
for purposes of Section 13(d) of the Exchange Act and Rule 13d-3
promulgated under the Exchange Act, in each case as in effect on the
date hereof;
(ii) any securities that such Person or any of such Person's
Affiliates or Associates has the right to acquire (whether such right
is exercisable immediately, or only after the passage of time,
compliance with regulatory requirements, the fulfillment of a
condition, or otherwise) pursuant to any agreement, arrangement or
understanding, or upon the exercise of conversion rights, exchange
rights, rights (other than the Rights), warrants or options, or
otherwise,
2
<PAGE>
provided that a Person shall not be deemed the Beneficial Owner of, or
to Beneficially Own, securities tendered pursuant to a tender offer or
exchange offer made by or on behalf of such Person or any of such
Person's Affiliates or Associates until such tendered securities are
accepted for purchase or exchange;
(iii) any securities that such Person or any such Person's
Affiliates or Associates has the right to vote, alone or in concert
with others, pursuant to any agreement, arrangement or understanding,
provided that a Person shall not be deemed the Beneficial Owner of, or
to Beneficially Own, any security if the agreement, arrangement or
understanding to vote such security (A) arises solely from a revocable
proxy given to such Person or any of such Person's Affiliates or
Associates in response to a public proxy solicitation made pursuant to
and in accordance with the applicable rules and regulations of the
Exchange Act, and (B) is not also then reportable on Schedule 13D under
the Exchange Act (or any comparable or successor report);
(iv) any securities that are Beneficially Owned, directly or
indirectly, by any other Person with which such Person or any of such
Person's Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting (other than
voting pursuant to a revocable proxy as described in the proviso to
Section 1(b)(iii) hereof) or disposing of any securities of the
Company; and
(v) on any day on or after the Distribution Date, all Rights
that prior to such date were represented by certificates for Common
Shares that such Person Beneficially Owns on such day.
(c) "Business Day" shall mean any day other than a Saturday,
a Sunday or a day on which banking institutions in the States of New York or
Colorado are authorized or obligated by law or executive order to close.
(d) "Cash Tender Offer Proposal" shall mean a written
proposal delivered to the Company by any Person (a "Prospective Offeror"),
which proposal:
(i) is for a tender offer for any and all of the outstanding
Voting Shares held by any Person other than
3
<PAGE>
such Prospective Offeror or its Affiliates or Associates for cash at
the same price;
(ii) states that such Prospective Offeror has obtained firm
written financing commitments from recognized institutional financing
sources, or has on hand cash or cash equivalents, for the full amount
of all financing necessary to consummate the acquisition of Voting
Shares described in such Cash Tender Offer Proposal, and is accompanied
by reasonable evidence of the foregoing; and
(iii) contains the written agreement of the Prospective
Offeror to pay (or share with any other Prospective Offeror) the
Company's costs of any Special Meeting (as such term is defined in
Section 24(a) hereof), other than the Company's costs of preparing and
mailing proxy material for its own solicitation.
(e) "Close of Business" on any given date shall mean 5:00
p.m., Englewood, Colorado time, on such date; PROVIDED, HOWEVER, that if such
date is not a Business Day, it shall mean 5:00 p.m., Englewood, Colorado
time, on the next succeeding Business Day.
(f) "Closing Price" of a stock or other security on any day
shall be the last sale price, regular way, per share of such stock or unit of
such other security on such day or, in case no such sale takes place on such
day, the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the New York
Stock Exchange or, if such stock or other security is not listed or admitted
to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which such stock or other
security is listed or admitted to trading or, if such stock or other security
is not listed or admitted to trading on any national securities exchange, the
last quoted price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the National
Association of Securities Dealers, Inc. Automated Quotations System
("NASDAQ") or such other system then in use or, if on any such date such
stock or other security is not quoted by any such organization, the average
of the closing bid and asked prices as furnished by a professional
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market maker that makes a market in such stock or other security and that is
selected by the Board of Directors of the Company.
(g) "Common Share" shall mean one Communications Share
and/or one Media Share, as the context requires, unless used with reference
to a Person other than the Company, in which case it shall mean one share of
the class of common stock of such Person having the greatest voting power per
share or, if such Person is a Subsidiary of another Person, one Common Share
of the Person that ultimately controls such Person.
(h) "Communications Exercise Price" shall have the meaning
ascribed to it in Section 7(c) hereof.
(i) "Communications Right" shall have the meaning set forth
in the third recital of this Agreement.
(j) "Communications Share" shall have the meaning set forth
in the fourth recital of this Agreement.
(k) "Current Market Price" per share of a stock or unit of
any other security on any date shall mean the average of the daily Closing
Prices of such stock or other security for the 30 consecutive Trading Days
through and including the Trading Day immediately preceding the date in
question; PROVIDED, HOWEVER, that if any event shall have caused the Closing
Price on any Trading Day during such 30-day period not to be fully comparable
with the Closing Price on the date in question (or, if no Closing Price is
available on the date in question, on the Trading Day immediately preceding
the date in question), then each such noncomparable Closing Price so used
shall be appropriately adjusted by the Board of Directors in order to make
the Closing Price on each Trading Day during the period used for the
determination of the Current Market Price fully comparable with the Closing
Price on such date in question (or, if applicable, the immediately preceding
Trading Day); and PROVIDED, FURTHER, HOWEVER, that if such stock or other
security is not publicly held or so listed or traded, "Current Market Price"
per share of such stock or unit of such other security shall mean the fair
value per share of such stock or unit of such other security as determined in
good faith by the Board of Directors of the Company based upon such
appraisals or valuation reports of such independent experts as the Board of
Directors shall in good faith determine appropriate, which determination
shall be
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described in a statement filed by the Company with the Rights Agent.
(l) "Distribution Date" shall have the meaning ascribed to
it in Section 3 hereof.
(m) "Effective Time" shall have the meaning set forth in the
third recital of this Agreement.
(n) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(o) "Exercise Price" shall have the meaning ascribed to it
in Section 7(c) hereof.
(p) "Existing Common Stock" shall have the meaning set forth
in the third recital of this Agreement.
(q) "Expiration Date" shall mean April 6, 1999.
(r) "Fair Offer" shall have the meaning ascribed to it in
Section 24(b) hereof.
(s) "Independent Director" shall mean any director of the
Company who (i) became a director of the Company prior to the 20% Ownership
Date or (ii) became a director of the Company on or after the 20% Ownership
Date, was recommended to become a director of the Company by a majority of
the Independent Directors then in office and is not (A) a 20% Stockholder or
an Affiliate or Associate of a 20% Stockholder, (B) an officer, director or
employee of such 20% Stockholder, Affiliate or Associate, or (C) a relative
or nominee of any of the foregoing. For purposes of this subsection (n), a
director shall be deemed to be a "nominee" of a Person referred to in clause
(ii) above if such director was elected to the Board of Directors of the
Company by a vote of stockholders in which such director failed to receive
the affirmative majority of the votes cast by Persons other than such Person
and such Person's Affiliates and Associates. Whenever this Agreement
requires or allows action to be taken by a majority of the Independent
Directors, with or without the concurrence of a specified minimum number of
Independent Directors, if necessary for such action to be valid under
applicable law, such action may be taken by the Board of Directors or a duly
authorized committee thereof, provided that the number of Independent
Directors who are members of the Board of Directors or of such committee and
who vote in favor of such
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action constitutes a majority of the Independent Directors then in office and
equals or exceeds any such specified minimum number of Independent Directors.
(t) "Media Exercise Price" shall have the meaning ascribed
to it in Section 7(c) hereof.
(u) "Media Right" shall have the meaning set forth in the
third recital of this Agreement.
(v) "Media Share" shall have the meaning set forth in the
fourth recital of this Agreement.
(w) "Merger" shall have the meaning set forth in the second
recital of this Agreement.
(x) "Merger Agreement" shall
have the meaning set forth in the second recital of this Agreement.
(y) "Person" shall mean any individual, firm, partnership,
corporation, association, group (as such term is used in Rule 13d-5
promulgated under the Exchange Act as in effect or the date hereof) or other
entity, and shall include any successor (by merger or otherwise) of such
entity.
(z) "Preferred Share" shall mean one Series A Preferred
Share and/or one Series B Preferred Share, as the context requires.
(aa) "Redemption Date" shall mean the date of the action of
the Board of Directors of the Company directing the Company to redeem the
Rights pursuant to Section 23(a) hereof, or such time and date thereafter as
the Board of Directors may specify for redemption of the Rights.
(ab) "Redemption Price" shall have the meaning ascribed to it
in Section 23(a) hereof.
(ac) "Rights" shall mean Communications Right and/or Media
Rights, as the context requires.
(ad) "Section 11(a)(ii) Event" shall have the meaning
ascribed to it in Section 11(a)(ii) hereof.
(ae) "Section 13(a) Event" shall have the meaning ascribed to
it in Section 13(a) hereof.
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(af) "Securities Act" shall mean the Securities Act of 1933,
as amended.
(ag) "Series A Preferred Share" shall mean a share of the
Series A Junior Participating Cumulative Preferred Stock, par value $1.00 per
share, of the Company, which shall have the rights, powers and preferences
set forth in Exhibit A-1 hereto.
(ah) "Series B Preferred Share" shall mean a share of the
Series B Junior Participating Cumulative Preferred Stock, par value $1.00 per
share, of the Company, which shall have the rights, powers and preferences
set forth in Exhibit A-2 hereto.
(ai) "Subsidiary" of any Person shall mean any corporation or
other Person of which equity securities or equity interests representing a
majority of the voting power are owned, directly or indirectly, or which is
effectively controlled, by such Person.
(aj) "Trading Day" shall mean, as to any stock or other
security, a day on which the principal national securities exchange on which
such stock or other security is listed or admitted to trading is open for the
transaction of business or, if such stock or other security is not listed or
admitted to trading on any national securities exchange, a Business Day.
(ak) "Voting Share" shall mean (i) a Common Share of the
Company and (ii) any other share of capital stock of the Company entitled to
vote generally in the election of directors or entitled to vote together with
the Common Shares in respect of any merger, consolidation, sale of all or
substantially all of the Company's assets, liquidation, dissolution or
winding up. References in this Agreement to a percentage or portion of the
outstanding Voting Shares shall be deemed a reference to the percentage or
portion of the total votes entitled to be cast by the holders of the
outstanding Voting Shares.
(al) "20% Ownership Date" shall mean the first date of public
announcement (which, for purposes of this definition, shall include, without
limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by
the Company or a 20% Stockholder containing the facts by virtue of which a
Person has become a 20% Stockholder.
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(am) "20% Stockholder" shall mean any Person that, together
with all Affiliates and Associates of such Person, hereafter acquires
Beneficial Ownership of, in the aggregate, a number of Voting Shares of the
Company equal to 1% or more of the Voting Shares then outstanding and
thereupon or thereafter Beneficially Owns 20% or more of the Voting Shares of
the Company then outstanding; PROVIDED, HOWEVER, that the term "20%
Stockholder" shall not include: (i) the Company, any wholly-owned Subsidiary
of the Company, any employee benefit plan of the Company or of a Subsidiary
of the Company, or any Person holding Voting Shares for or pursuant to the
terms of any such employee benefit plan; or (ii) any Person if such Person
would not otherwise be a 20% Stockholder but for a reduction in the number of
outstanding Voting Shares resulting from a stock repurchase program or other
similar plan of the Company or from a self-tender offer of the Company, which
plan or tender offer commenced on or after the date hereof; PROVIDED,
HOWEVER, that the term "20% Stockholder" shall include such Person from and
after the first date upon which (A) such Person, since the date of the
commencement of such plan or tender offer, shall have acquired Beneficial
Ownership of, in the aggregate, a number of Voting Shares of the Company
equal to 1% or more of the Voting Shares of the Company then outstanding and
(B) such Person, together with all Affiliates and Associates of such Person,
shall Beneficially Own 20% or more of the Voting Shares of the Company then
outstanding. In calculating the percentage of the outstanding Voting Shares
that are Beneficially Owned by a Person for purposes of this subsection (am),
Voting Shares that are Beneficially Owned by such Person(bb) shall be deemed
outstanding, and Voting Shares that are not Beneficially Owned by such Person
and that are subject to issuance upon the exercise or conversion of
outstanding conversion rights, rights (other than Rights), warrants or
options shall not be deemed outstanding. Any determination made by the Board
of Directors of the Company as to whether any Person is or is not a 20%
Stockholder shall be conclusive and binding upon all holders of Rights.
(an) "30% Stockholder" shall mean any Person that, together
with all Affiliates and Associates of such Person, hereafter acquires
Beneficial Ownership of, in the aggregate, a number of Voting Shares of the
Company equal to 1% or more of the Voting Shares then outstanding and
thereupon or thereafter Beneficially Owns 30% or more of the Voting Shares of
the Company then outstanding; PROVIDED, HOWEVER, that the term "30%
Stockholder" shall not include:
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(i) the Company, any wholly-owned Subsidiary of the Company, any employee
benefit plan of the Company or of a Subsidiary of the Company, or any Person
holding Voting Shares for or pursuant to the terms of any such employee
benefit plan; or (ii) any Person if such Person would not otherwise be a 30%
Stockholder but for a reduction in the number of outstanding Voting Shares
resulting from a stock repurchase program or other similar plan of the
Company or from a self-tender offer of the Company, which plan or tender
offer commenced on or after the date hereof; PROVIDED, HOWEVER, that the term
"30% Stockholder" shall include such Person from and after the first date
upon which (A) such Person, since the date of the commencement of such plan
or tender offer, shall have acquired Beneficial Ownership of, in the
aggregate, a number of Voting Shares of the Company equal to 1% or more of
the Voting Shares of the Company then outstanding and (B) such Person,
together with all Affiliates and Associates of such Person, shall
Beneficially Own 30% or more of the Voting Shares of the Company then
outstanding. In calculating the percentage of the outstanding Voting Shares
that are Beneficially Owned by a Person for purposes of this subsection (an),
Voting Shares that are Beneficially Owned by such Person shall be deemed
outstanding, and Voting Shares that are not Beneficially Owned by such Person
and that are subject to issuance upon the exercise or conversion of
outstanding conversion rights, rights (other than Rights), warrants or
options shall not be deemed outstanding. Any determination made by the Board
of Directors of the Company as to whether any Person is or is not a 30%
Stockholder shall be conclusive and binding upon all holders of Rights.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby
appoints the Rights Agent to act as agent for the Company in accordance with
the terms and conditions hereof, and the Rights Agent hereby accepts such
appointment. The Company may from time to time appoint such co-Rights Agents
as it may deem necessary or desirable.
Section 3. ISSUANCE OF RIGHT CERTIFICATES.
(a) "Distribution Date" shall mean the date, after the date
hereof, that is the earlier of (i) the tenth Business Day following the date
of the commencement of, or the first public announcement of the intent of any
Person (other than the Company, any wholly-owned Subsidiary of the Company,
any employee benefit plan of the Company or of any Subsidiary of the Company,
or any Person holding Common
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<PAGE>
Shares for or pursuant to the terms of any such employee benefit plan) to
commence a tender offer (other than a Fair Offer) or exchange offer, the
consummation of which would cause any Person to become a 30% Stockholder, or
(ii) the date of the first Section 11(a)(ii) Event.
(b) Until the Distribution Date, (i) the Communications
Rights and Media Rights shall be represented by certificates for
Communications Shares and Media Shares, respectively (all of which
certificates for Communications Shares and Media Shares shall also be deemed
to be certificates for Communications Rights and Media Rights, respectively),
and not by separate certificates, (ii) the record holder of the Common Shares
represented by each of such certificates shall be the record holder of the
Rights represented thereby, and (iii) the Rights shall be transferable only
in connection with the transfer of Common Shares. Until the earliest of the
Distribution Date, the Redemption Date or the Expiration Date, the surrender
for transfer of such certificates for Common Shares shall also constitute the
surrender for transfer of the Rights represented thereby.
(c) As soon as practicable after the Distribution Date, and
after notification by the Company, the Rights Agent shall send by
first-class, postage-prepaid mail to each record holder of (i) Communications
Shares, as of the Close of Business on the Distribution Date, at the address
of such holder shown on the records of the Company, a certificate
substantially in the form of Exhibit B-1 hereto (the "Communications Right
Certificates") representing one Communications Right for each Communications
Share so held and (ii) Media Shares, as of the Close of Business on the
Distribution Date, at the address of such holder shown on the records of the
Company, a certificate substantially in the form of Exhibit B-2 hereto (the
"Media Right Certificates" and, together with the Communications Right
Certificates, the "Right Certificates") representing one Media Right for each
Media Share so held. Notwithstanding the foregoing, the Rights Agent shall
not send any Right Certificate to any 20% Stockholder or any of its
Affiliates or Associates or to any Person if the Rights held by such Person
are Beneficially Owned by a 20% Stockholder or any of its Affiliates or
Associates. From and after the Distribution Date, the Rights shall be
represented solely by such Right Certificates and may only be transferred by
the transfer of such Right Certificates, and the holders of such Right
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Certificates, as listed in the records of the Company or any transfer agent
or registrar for such Rights, shall be the record holders of such Rights.
Any determination made by a majority of the Board of Directors of the Company
as to whether any Common Shares are or were Beneficially Owned at any time by
a 20% Stockholder or an Affiliate or Associate of a 20% Stockholder shall be
conclusive and binding upon all holders of Rights.
(d) Rights shall be issued in respect of all Common Shares
which are issued (whether originally issued or from the Company's treasury)
after the Effective Time but prior to the earliest of the Distribution Date,
the Redemption Date or the Expiration Date. Certificates representing such
Common Shares shall have impressed on, printed on, written on or otherwise
affixed to them the following legend:
This certificate also represents Rights that entitle the
holder hereof to certain rights as set forth in an Amended and
Restated Rights Agreement dated as of _______, 1995 by and
between the Corporation and State Street Bank and Trust
Company, as Rights Agent (the "Rights Agreement"), the terms
and conditions of which are hereby incorporated herein
byreference and a copy of which is on file atthe principal
executive offices of the Corporation.Under certain
circumstances specified in the Rights Agreement, such Rights
will be represented by separate certificates and will no
longer be represented by this certificate.Under certain
circumstances specified in the Rights Agreement, Rights
beneficially owned by certain persons may become null and
void. The Corporation will mail to the recordholder of this
certificate a copy of the Rights Agreement without charge
promptly following receipt of a written request therefor.
Certificates for all other Common Shares shall have impressed
on, printed on, written on or otherwise affixed to them the following legend:
This certificate does not represent any Right issued pursuant
to the terms of a
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Rights Agreement dated as of _____, 1995 by and between the
Corporation and State Street Bank and Trust Company, as
Rights Agent.
Section 4. FORM OF RIGHT CERTIFICATES. The Communications
Right Certificates and Media Right Certificates and the form of assignment,
including certificate, and the form of election to purchase, including
certificate, printed on the reverse thereof, when, as and if issued, shall be
substantially the same as Exhibit B-1 and Exhibit B-2 hereto, respectively,
and may have such marks of identification or designation and such legends,
summaries or endorsements printed thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement, or as may
be required to comply with any applicable law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock exchange
upon which the Rights or the securities of the Company issuable upon exercise
of the Rights may from time to time be listed, or to conform to usage.
Subject to Section 22 hereof, Right Certificates, whenever issued, that are
issued in respect of Common Shares that were issued and outstanding as of the
Close of Business on the Distribution Date, shall be dated as of the
Distribution Date.
Section 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Right Certificates shall be executed on behalf of
the Company by its Chairman of the Board, its Vice Chairman of the Board, its
President or any Vice President, either manually or by facsimile signature,
and may have affixed thereto the Company's seal or a facsimile thereof
attested by its Secretary or any Assistant Secretary, either manually or by
facsimile signature. The Right Certificates shall be manually countersigned
by the Rights Agent and shall not be valid for any purpose unless so
countersigned; PROVIDED, HOWEVER, that the Company will use its best efforts
to obtain approvals of stock exchanges and any other approvals required for
use of a facsimile signature of the Rights Agent in lieu of a manual
signature and if such approvals are obtained the Right Certificates shall be
valid if countersigned by facsimile signature. In case any officer of the
Company who shall have signed any of the Right Certificates shall cease to be
such officer of the Company before countersignature by the Rights Agent and
issuance and delivery by the Company, such Right Certificates may
nevertheless be countersigned by the Rights
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Agent and issued and delivered by the Company with the same force and effect
as though the person who signed such Right Certificates had not ceased to be
such officer of the Company. Any Right Certificate may be signed on behalf
of the Company by any person who at the actual date of such execution shall
be a proper officer of the Company to sign such Right Certificate, even
though such person was not such an officer at the date of the execution of
this Agreement.
(b) Following the Distribution Date, the Rights Agent shall
keep or cause to be kept at its principal offices books for registration and
transfer of the Right Certificates issued hereunder. Such books shall show
the names and addresses of the respective holders of Right Certificates, the
number of Rights represented on its face by each Right Certificate and the
date of each Right Certificate.
Section 6. TRANSFER SPLIT UP COMBINATION AND EXCHANGE OF
RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES.
(a) Subject to the provisions of Sections 6(c), 7(d) and 14
hereof, at any time after the Close of Business on the Distribution Date, and
so long as the Rights represented thereby remain outstanding, any one or more
Right Certificates may be transferred, split up, combined or exchanged for
one or more Right Certificates representing the same aggregate number of
Rights as the Right Certificates surrendered. Any registered holder desiring
to transfer, split up, combine or exchange one or more Right Certificates
shall make such request in writing delivered to the Rights Agent, and shall
surrender the Right Certificates to be transferred, split up, combined or
exchanged at the office of the Rights Agent with the form of assignment,
including certificate, on the reverse side thereof completed and duly
executed, with signature guaranteed. Thereupon, the Rights Agent shall
countersign and deliver to the person entitled thereto one or more Right
Certificates, as so requested. The Company may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Right
Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Right Certificate and, in case of loss, theft or destruction,
of
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<PAGE>
indemnity or security reasonably satisfactory to them and, at the Company's
request, reimbursement to the Company and the Rights Agent of all reasonable
expenses incidental thereto, and upon surrender to the Rights Agent and
cancellation of such Right Certificate if mutilated, the Company shall issue
and deliver to the Rights Agent for delivery to the record holder of such
Right Certificate a new Right Certificate of like tenor in lieu of such lost,
stolen, destroyed or mutilated Right Certificate.
(c) Notwithstanding anything to the contrary in this Section
6, the Rights Agent shall not countersign and deliver a Right Certificate to
any Person if such Right Certificate represents, or would represent when held
by such Person, Rights that had become or would become null and void pursuant
to Section 7(d) hereof.
Section 7. EXERCISE OF RIGHTS.
(a) Until the Distribution Date, no Right may be exercised.
(b) Subject to Section 7(d) and 7(g) hereof and the other
provisions of this Agreement, at any time after the Close of Business on the
Distribution Date and prior to the Close of Business on the earlier of the
Redemption Date or the Expiration Date, the registered holder of any Right
Certificate may exercise the Rights represented thereby in whole or in part
upon surrender of such Right Certificate, with the form of election to
purchase, including certificate, on the reverse side thereof completed and
duly executed, with signature guaranteed, to the Rights Agent at the office
of the Rights Agent in Boston, Massachusetts, together with payment of the
Exercise Price for each Right exercised. Upon the exercise of an exercisable
Communications Right and payment of the Communications Exercise Price in
accordance with the provisions of this Agreement, the holder of such
Communications Right shall be entitled to receive, subject to adjustment as
provided herein, one one-hundredth of a Series A Preferred Share. Upon the
exercise of an exercisable Media Right and payment of the Media Exercise
Price in accordance with the provisions of this Agreement, the holder of such
Media Right shall be entitled to receive, subject to adjustment as provided
herein, one one-hundredth of a Series B Preferred Share.
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(c) The exercise price for the exercise of each
Communications Right (the "Communications Exercise Price") shall initially be
$_________ and shall be payable in lawful money of the United States of
America in accordance with Section 7(f) hereof. The exercise price for the
exercise of each Media Right (the "Media Exercise Price") shall initially be
$_________ and shall be payable in lawful money of the United States of
America in accordance with Section 7(f) hereof. As used herein, "Exercise
Price" shall mean the Communications Exercise Price and/or the Media Exercise
Price, as the context requires. The Exercise Price and the number of
Preferred Shares (or, following the occurrence of a Section 11(a)(ii) Event
or a Section 13(a) Event, Common Shares and/or other securities) to be
acquired upon exercise of a Right shall be subject to adjustment from time to
time as provided in Sections 11 and 13 hereof and the other provisions of
this Agreement.
(d) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event or
a Section 13(a) Event, any Rights that are or were Beneficially Owned by a
20% Stockholder or any Affiliate or Associate of a 20% Stockholder at any
time on or after the Distribution Date shall be null and void, and any holder
of such Rights (whether or not such holder is a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder) shall thereafter have no right
to exercise such Rights.
(e) In case the registered holder of any Right Certificate
shall exercise less than all of the Rights represented thereby, a new Right
Certificate representing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent to the registered holder of
such Right Certificate or to such holder's duly authorized assigns, subject
to the provisions of Section 14 hereof.
(f) Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase, including
certificate, completed and duly executed, with signature guaranteed,
accompanied by payment of the Exercise Price for each Right to be exercised
and an amount equal to any applicable transfer tax required to be paid by the
holder of such Right Certificate in accordance with Section 9 hereof in cash,
or by certified check or cashier's check payable to the order of the Company,
the Rights Agent shall thereupon promptly (i) requisition from the transfer
agent of the Preferred Shares (or make
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available, if the Rights Agent is the transfer agent), certificates for the
number of Preferred Shares to be purchased, and the Company hereby
irrevocably authorizes such transfer agent to comply with all such requests,
and/or, as provided in Section 14 hereof, requisition from the depositary
agent described therein depositary receipts representing such number of
one-hundredths of a Preferred Share as are to be purchased (in which case
certificates for the Preferred Shares represented by such receipts shall be
deposited by the transfer agent with such depositary agent) and the Company
hereby directs such depositary agent to comply with such request, (ii) when
appropriate, requisition from the Company the amount of cash to be paid in
lieu of issuance of fractional Preferred Shares in accordance with Section 14
hereof, (iii) after receipt of such certificates, depositary receipts or
cash, cause the same to be delivered to or upon the order of the registered
holder of such Right Certificate, registered in such name or names as may be
designated by such holder, and (iv) when appropriate, after receipt thereof,
deliver such cash to or upon the order of the registered holder of such Right
Certificate.
(g) Notwithstanding the foregoing provisions of this Section
7, the exercisability of the Rights shall be suspended for such period as
shall reasonably be necessary for the Company to register under the
Securities Act and any applicable securities law of any jurisdiction the
Preferred Shares to be issued pursuant to the exercise of the Rights;
PROVIDED, HOWEVER, that nothing contained in this Section 7 shall relieve the
Company of its obligations under Section 9(c) hereof.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHT
CERTIFICATES. All Right Certificates surrendered for the purpose of
exercise, transfer, split up, combination or exchange shall, if surrendered
to the Company or to any of its agents, be delivered to the Rights Agent for
cancellation or in canceled form, or, if surrendered to the Rights Agent,
shall be canceled by it, and no Right Certificates shall be issued in lieu
thereof except as expressly permitted by this Agreement. The Company shall
deliver to the Rights Agent for cancellation and retirement, and the Rights
Agent shall so cancel and retire, any other Right Certificate purchased or
acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all canceled Right Certificates to the Company or shall,
at the written request of the Company, destroy
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such canceled Right Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK.
(a) The Company shall cause to be reserved and kept
available out of its authorized and unissued equity securities (or out of its
authorized and issued equity securities held in its treasury), the number of
such equity securities that will from time to time be sufficient to permit
the exercise in full of all outstanding Rights.
(b) In the event that any securities issuable upon exercise
of the Rights are listed on any national securities exchange, the Company
shall use its best efforts, from and after such time as the Rights become
exercisable, to cause all such securities issued or reserved for such
issuance to be listed on such exchange upon official notice of issuance upon
such exercise.
(c) If necessary to permit the issuance of securities upon
exercise of the Rights, the Company shall use its best efforts, from and
after the Distribution Date, to register such securities under the Securities
Act and any applicable securities laws and to keep such registration
effective until the earlier of the Redemption Date or the Expiration Date.
(d) The Company shall take all such action as may be
necessary to ensure that all securities delivered upon exercise of the Rights
shall, at the time of delivery of the certificates for such securities
(subject to payment of the Exercise Price), be duly and validly authorized
and issued and fully paid and nonassessable securities.
(e) The Company shall pay when due and payable any and all
federal and state transfer taxes and charges that may be payable in respect
of the issuance or delivery of the Right Certificates or of any securities
upon the exercise of Rights. The Company shall not, however, be required to
pay any transfer tax that may be payable in respect of any transfer or
delivery of a Right Certificate to a Person other than, or the issuance or
delivery of a certificate for securities in respect of a name other than that
of, the registered holder of the Right Certificate representing Rights
surrendered for exercise, or to issue or
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deliver any certificate for securities upon the exercise of any Right until
any such tax shall have been paid (any such tax being payable by the holder
of such Right Certificate at the time of surrender) or until it has been
established to the Company's satisfaction that no such tax is due.
(f) With respect to the Common Shares and/or other
securities issuable pursuant to Sections 11(a)(ii) and 11(a)(iii) hereof, the
foregoing covenants shall be applicable only upon and following the
occurrence of a Section 11(a)(ii) Event.
Section 10. SECURITIES RECORD DATE. Each person in whose
name any certificate for securities of the Company is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder
of record of the securities represented thereby on, and such certificate
shall be dated, the date upon which the Right Certificate representing such
Rights was duly surrendered and payment of the Exercise Price (and any
applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of
such surrender and payment is a date upon which the securities transfer books
of the Company are closed, such person shall be deemed to have become the
record holder of such securities on, and such certificate shall be dated, the
next succeeding Business Day on which the securities transfer books of the
Company are open.
Section 11. ADJUSTMENT OF EXERCISE PRICE, NUMBER OF SHARES
ISSUABLE UPON EXERCISE OF RIGHTS OR NUMBER OF RIGHTS. The Exercise Price,
the number and kind of securities that may be purchased upon exercise of a
Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event that the Company shall at any time after
the Effective Time and prior to the Close of Business on the earlier of
the Redemption Date or the Expiration Date (A) declare or pay any
dividend on the Preferred Shares payable in Preferred Shares or Voting
Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the
outstanding Preferred Shares into a smaller number of Preferred Shares,
or (D) issue Preferred Shares or Voting Shares in a reclassification of
the Preferred Shares (including any such reclassification in connection
with a consolidation or merger in which the Company is the continuing
or surviving corporation), then and in each such event,
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the number and kind of Preferred Shares or other securities issuable upon
the exercise of a Right on such date shall be proportionately adjusted so
that the holder of any Right exercised on or after such date shall be
entitled to receive, upon the exercise thereof and payment of the
Exercise Price, the aggregate number and kind of Preferred Shares or
other securities or other property, as the case may be, that, if such
Right had been exercised immediately prior to such date and at a time
when such Right was exercisable and the transfer books of the Company
were open, such holder would have owned upon such exercise and would
have been entitled to receive by virtue of such dividend, subdivision,
combination or reclassification. If an event occurs that would require
an adjustment under both this Section 11(a)(i) and Section 11(a)(ii)
hereof, the adjustment provided for in this Section 11(a)(i) shall be
in addition to, and shall be made prior to, any adjustment required
pursuant to Section 11(a)(ii) hereof.
(ii) In the event (a "Section 11(a)(ii) Event") that a 20%
Ownership Date shall have occurred and neither the Redemption Date nor
the Expiration Date shall have occurred prior to the Close of Business
on the tenth Business Day following such 20% Ownership Date, then, and
upon each such event, proper provision shall be made so that except as
provided in Section 7(d) hereof, (x) each holder of a Communications
Right shall thereafter have the right to receive, upon the exercise
thereof in accordance with the terms of this Agreement and payment of
the then current Communications Exercise Price, such number of
Communications Shares as shall equal the result obtained by multiplying
the then current Communications Exercise Price by the then number of
one-hundredths of a Series A Preferred Share for which a Communications
Right was exercisable (or, if the Distribution Date shall not have
occurred prior to the date of such Section 11(a)(ii) Event, the number
of one-hundredths of a Series A Preferred Share for which a
Communications Right would have been exercisable if the Distribution
Date had occurred on the Business Day immediately preceding the date of
such Section 11(a)(ii) Event) immediately prior to such Section
11(a)(ii) Event, and dividing that product by 50% of the Current Market
Price (determined pursuant to Section 11(d) hereof) of a Communications
Share on the
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date of occurrence of the relevant Section 11(a)(ii) Event (such number
of Communications Shares being hereinafter referred to as the
"Communications Adjustment Shares") and (y) each holder of a Media
Right shall thereafter have the right to receive, upon the exercise
thereof in accordance with the terms of this Agreement and payment of
the then current Media Exercise Price, such number of Media Shares as
shall equal the result obtained by multiplying the then current Media
Exercise Price by the then number of one-hundredths of a Series B
Preferred Share for which a Media Right was exercisable (or, if the
Distribution Date shall not have occurred prior to the date of such
Section 11(a)(ii) Event, the number of one-hundredths of a Series B
Preferred Share for which a Media Right would have been exercisable if
the Distribution Date had occurred on the Business Day immediately
preceding the date of such Section 11(a)(ii) Event) immediately prior
to such Section 11(a)(ii) Event, and dividing that product by 50% of
the Current Market Price (determined pursuant to Section 11(d) hereof)
of a Media Share on the date of occurrence of the relevant Section
11(a)(ii) Event (such number of Media Shares being hereinafter referred
to as the "Media Adjustment Shares"). Successive adjustments shall be
made pursuant to this paragraph each time a Section 11(a)(ii) Event
occurs.
(iii) In the event that on the date of a Section 11(a)(ii)
Event the aggregate number of Communications Shares or Media Shares
that are authorized by the Company's Restated Certificate of
Incorporation but not outstanding or reserved for issuance for purposes
other than upon exercise of the Communications Rights or Media Rights
is less than the aggregate number of Communications Adjustment Shares
or Media Adjustment Shares thereafter issuable upon the exercise in
full of the Communications Rights or Media Rights, as the case may be,
in accordance with Section 11(a)(ii) hereof (the excess of such number
of Communications Adjustment Shares over and above such number of
Communications Shares being hereinafter referred to as the
"Communications Unavailable Adjustment Shares" and the excess of such
number of Media Adjustment Shares over and above such number of Media
Shares being hereinafter referred to as the "Media Unavailable
Adjustment Shares"), the Company shall substitute for the pro rata
portion of the Communications Unavailable Adjustment
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Shares or Media Unavailable Adjustment Shares that would otherwise be
issuable thereafter upon the exercise of each Communications Right or
Media Right, as the case may be, and payment of the Communications
Exercise Price or the Media Exercise Price, as applicable, (A) cash, (B)
other equity securities of the Company (including, without limitation,
shares of preferred stock of the Company or units of such shares having
the same value as one Communications Share or one Media Share, as
applicable, (C) debt securities of the Company, (D) other assets, or
(E) any combination of the foregoing, in each case having an aggregate
value equal to the aggregate value of the Communications Unavailable
Adjustment Shares or the Media Unavailable Adjustment Shares, as
applicable, for which substitution is made. Subject to Section 7(d)
hereof, in the event that the Company takes any action pursuant to this
Section 11(a)(iii), such action shall apply uniformly to all
outstanding Rights.
(b) In the event that the Company shall, at any time after
the Effective Time and prior to the Close of Business on the earlier of the
Redemption Date or the Expiration Date, fix a record date prior to the
earlier of the Redemption Date or the Expiration Date for the issuance of
rights, options or warrants to all holders of Preferred Shares entitling them
initially to subscribe for or purchase Preferred Shares (or shares having the
same rights, privileges and preferences as Preferred Shares ("Preferred Share
Equivalents")) or securities convertible into Preferred Shares or Preferred
Share Equivalents, at a price per Preferred Share or Preferred Share
Equivalent (or having a conversion price per share, if a security convertible
into Preferred Shares or Preferred Share Equivalents) less than the Current
Market Price per Preferred Share on such record date, then the Exercise Price
to be in effect after such record date shall be determined by multiplying the
Exercise Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be equal to the sum of the number of Preferred
Shares outstanding on such record date plus the number of Preferred Shares
that the aggregate offering price of the total number of Preferred Shares
and/or Preferred Share Equivalents to be so offered (and/or the aggregate
initial conversion price of the convertible securities to be so offered)
would purchase at such Current Market Price, and the denominator of which
shall be equal to the number of Preferred Shares outstanding on such record
date plus the number of additional Preferred Shares and/or
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Preferred Share Equivalents to be offered for subscription or purchase (or
into which the convertible securities to be so offered are initially
convertible); PROVIDED, HOWEVER, that if such rights, options or warrants are
not exercisable immediately upon issuance but become exercisable only upon the
occurrence of a specified event or the passage of a specified period of time,
then the adjustment to the Exercise Price shall be made and become effective
only upon the occurrence of such event or such passage of time, and such
adjustment shall be made as if the record date for the issuance of such rights,
options or warrants had been the business day immediately preceding the date
upon which such rights, options or warrants became exercisable. Preferred
Shares owned by or held for the account of the Company shall not be deemed
outstanding for the purpose of any such computation. Such adjustment to the
Exercise Price shall be made successively whenever such a record date is
fixed, and in the event that such rights or warrants are not so issued, the
Exercise Price shall be adjusted to be the Exercise Price that would then be
in effect if such record date had not been fixed.
(c) In the event that the Company shall, at any time after
the Effective Time and prior to the Close of Business on the earlier of the
Redemption Date or the Expiration Date, fix a record date for the making of a
distribution to all holders of the Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the surviving corporation) of securities or assets (other than a
distribution of securities for which an adjustment is required under Section
11(a)(i) or (b) hereof or a regular quarterly cash dividend), the Exercise
Price to be in effect after such record date shall be determined by
multiplying the Exercise Price in effect immediately prior to such record
date by a fraction, the numerator of which shall be equal to the excess of
the Current Market Price per Preferred Share on such record date over and
above the fair market value of the portion of the securities or assets to be
so distributed with respect to one Preferred Share, and the denominator of
which shall be equal to such Current Market Price per Preferred Share. Such
adjustments shall be made successively whenever such a record date is fixed,
and in the event that such a distribution is not so made, the Exercise Price
shall be adjusted to be the Exercise Price that would then be in effect if
such record date had not been fixed.
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(d) For the purpose of any computation under this Section
11, (i) if the Series A Preferred Shares are not publicly held or so listed
and traded, the "Current Market Price" per Series A Preferred Share shall be
conclusively deemed to be an amount equal to the product of ____ (as such
number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalizations with respect to the Communications Stock
occurring after the Effective Time) times the Current Market Price of the
Communications Stock and (ii) if the Series B Preferred Shares are not
publicly held or so listed and traded, the "Current Market Price" per Series
B Preferred Share shall be conclusively deemed to be an amount equal to the
product of ____ (as such number may be appropriately adjusted for such events
as stock splits, stock dividends and recapitalizations with respect to the
Communications Stock occurring after the Effective Time) times the Current
Market Price of the Media Stock. If none of the Communications Shares, Media
Shares or the Preferred Shares are publicly held or so listed and traded, the
"Current Market Price" per Preferred Share shall mean the fair value per
share as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed by the Company
with the Rights Agent and shall be conclusive for all purposes.
(e) No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or decrease of at least 1%
in the Exercise Price; PROVIDED, HOWEVER, that any adjustments that by reason
of this Section 11(e) are not required to be made shall be cumulated and
taken into account in any subsequent adjustment. All calculations under this
Section 11 shall be made to the nearest cent or to the nearest ten-thousandth
of a Share or other share or one-millionth of a Preferred Share, as the case
may be.
(f) If, as a result of an adjustment made pursuant to
Section 11(a) hereof, the holder of any Right thereafter exercised shall
become entitled to receive any securities of the Company other than Preferred
Shares, the number of such other securities so receivable upon exercise of
any Right shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
Preferred Shares contained in this Section 11, and the other provisions of
this Agreement with respect to Preferred
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Shares shall apply on like terms to any such other securities.
(g) All Rights originally issued by the Company subsequent
to any adjustment made to the Exercise Price hereunder shall represent the
right to purchase, at the adjusted Exercise Price, the number of
one-hundredths of a Preferred Share purchasable from time to time hereunder
upon exercise of the Rights, all subject to further adjustment as provided
herein.
(h) Unless the Company shall have exercised its election as
provided in Section 11(i) below, upon each adjustment of the Exercise Price
as a result of the calculations made in Sections 11(b) and 11(c) hereof, each
Right outstanding immediately prior to the making of such adjustment shall
thereafter represent the right to purchase, at the adjusted Exercise Price,
that number of one-hundredths of a Preferred Share (calculated to the nearest
one-millionth of a Preferred Share) obtained by multiplying (i) the number of
one-hundredths of a Preferred Share purchasable upon the exercise of one
Right immediately prior to such adjustment of the Exercise Price by (ii) the
Exercise Price in effect immediately prior to such adjustment, and dividing
the product so obtained by the Exercise Price in effect immediately after
such adjustment.
(i) The Company may elect, on or after the date of any
adjustment of the Exercise Price, to adjust the number of Rights instead of
making any adjustment in the number of Preferred Shares purchasable upon the
exercise of a Right. Each of the Rights outstanding after such adjustment of
the number of Rights shall be exercisable for the number of one-hundredths of
a Preferred Share for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number
of Rights shall become that number of Rights (calculated to the nearest one
ten-thousandth) obtained by dividing the Exercise Price in effect immediately
prior to the adjustment of the Exercise Price by the Exercise Price in effect
immediately after such adjustment of the Exercise Price. The Company shall
make a public announcement of its election to adjust the number of Rights
pursuant to this Section 11(i), indicating the record date for the adjustment
and, if known at the time, the amount of the adjustment to be made. This
record date may be the date on which the Exercise Price is adjusted or any
day thereafter, but, if separate Right Certificates have
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been issued, it shall be at least 10 days after the date of such public
announcement. If separate Right Certificates have been issued, upon each
adjustment of the number of Rights pursuant to this Section 11(i), the
Company shall, as promptly as practicable, cause to be distributed to holders
of record of Right Certificates on such record date Right Certificates
representing, subject to Section 14 hereof, the additional Rights to which
such holders shall be entitled as a result of such adjustment or, at the
option of the Company, cause to be distributed to such holders of record in
substitution and replacement for the Right Certificates held by such holders
prior to the date of such adjustment, and upon surrender thereof if required
by the Company, new Right Certificates representing all the Rights to which
such holders shall be entitled after such adjustment. Right Certificates to
be so distributed shall be issued, executed and countersigned in the manner
provided for herein (and may bear, at the option of the Company, the adjusted
Exercise Price) and shall be registered in the names of the holders of record
of Right Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Exercise
Price or the number of one-hundredths of a Preferred Share issuable upon the
exercise of one Right, the Right Certificates theretofore and thereafter
issued may continue to express the Exercise Price per one one-hundredth of a
Preferred Share and the number of Preferred Shares issuable upon the exercise
of one Right that were expressed in the initial Right Certificates issued
hereunder.
(k) Before taking any action that would cause an adjustment
reducing the Exercise Price below one one-hundredth of the then par value, if
any, of the Preferred Shares issuable upon exercise of the Rights, the
Company shall take any corporate action that may, in the advice or opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable one one-hundredths of a Preferred Share at
such adjusted Exercise Price.
(l) In any case in which this Section 11 shall require that
an adjustment in the Exercise Price be made effective as of a record date for
a specified event, the Company may elect to defer, until the occurrence of
such event, the issuance to the holder of any Right exercised after such
record date of the number of one-hundredths of a Preferred Share and other
capital stock or securities of the
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Company, if any, issuable upon such exercise over and above the number of
one-hundredths of a Preferred Share and other capital stock or securities of
the Company, if any, issuable upon such exercise on the basis of the Exercise
Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company
shall deliver to such holder a due bill or other appropriate instrument
representing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such further
adjustments in the number of one-hundredths of a Preferred Share that may be
purchased upon exercise of one Right, and such further adjustments in the
Exercise Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that it, in its sole discretion, shall
determine to be advisable in order that any (i) consolidation or subdivision
of the Preferred Shares, (ii) issuance wholly for cash of any Preferred
Shares at less than the Current Market Price thereof, (iii) issuance wholly
for cash of Preferred Shares or securities that by their terms are
convertible into or exchangeable for Preferred Shares, (iv) dividends on
Preferred Shares payable in Preferred Shares, or (v) issuance of rights,
options or warrants referred to in Section 11(b) hereof, hereafter made by
the Company to holders of its Preferred Shares shall not be taxable to such
stockholders.
Section 12. CERTIFICATE OF ADJUSTED EXERCISE PRICE OR NUMBER
OF SHARES ISSUABLE UPON EXERCISE OF RIGHTS. Whenever an adjustment is made as
provided in Section 11 hereof, the Company shall promptly (a) prepare a
certificate setting forth such adjustment and a brief statement of the facts
giving rise to such adjustment, (b) file with the Rights Agent and with each
transfer agent for the securities issuable upon exercise of the Rights a copy
of such certificate, and (c) mail a brief summary thereof to each holder of
Rights in accordance with Section 26 hereof. Notwithstanding the foregoing
sentence, the failure of the Company to make such certification or to give
such notice shall not affect the validity or the force and effect of such
adjustment. Any adjustment to be made pursuant to Sections 11 or 13 hereof
shall be effective as of the date of the event giving rise to such adjustment.
Section 13. CONSOLIDATION, MERGER, OR SALE OR TRANSFER OF
ASSETS OR EARNING POWER.
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(a) In the event (a "Section 13(a) Event") that, at any time
on or after the 20% Ownership Date and prior to the earlier of the Redemption
Date or the Expiration Date, (x) the Company shall, directly or indirectly,
consolidate with or merge with and into any other Person (other than any
employee benefit plan of the Company, or any Person holding Common Shares for
or pursuant to the terms of any such employee benefit plan) and the Company
shall not be the continuing or surviving corporation in such consolidation or
merger, (y) any Person (other than any employee benefit plan of the Company,
or any Person holding Common Shares for or pursuant to the terms of any such
employee benefit plan) shall, directly or indirectly, consolidate with or
merge with and into the Company and the Company shall be the continuing or
surviving corporation in such merger and, in connection with such merger, all
or part of the Common Shares shall be changed into or exchanged for stock or
other securities of any Person or cash or any other property, or (z) the
Company and/or any one or more of its Subsidiaries shall, directly or
indirectly, sell or otherwise transfer, in one or more transactions (other
than transactions in the ordinary course of business), assets or earning
power aggregating more than 50% of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to any Person or Persons other than
the Company or one or more of its wholly-owned Subsidiaries (such Persons,
together with the Persons described in clauses (x) and (y) above shall be
collectively referred to in this Section 13 as the "Surviving Person"), then,
and in each such case, proper provision shall be made so that:
(i) except as provided in Section 7(d) hereof, (x) each
holder of a Communications Right shall thereafter have the right to
receive, upon the exercise thereof in accordance with the terms of this
Agreement and payment of the then current Communications Exercise
Price, such number of validly authorized and issued, fully paid and
nonassessable Common Shares of the Surviving Person as shall be equal
to a fraction, the numerator of which is the product of the then
current Communications Exercise Price multiplied by the number of
one-hundredths of a Series A Preferred Share purchasable upon the
exercise of one Communications Right immediately prior to the first
Section 13(a) Event (or, if a Section 11(a)(ii) Event has occurred
prior to the first Section 13(a) Event, the product of the number of
one-hundredths of a Series A Preferred Share purchasable upon the
exercise of a Communications
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Right (or, if the Distribution Date shall not have occurred prior to the
date of such Section 11(a)(ii) Event, the number of one-hundredths of a
Series A Preferred Share that would have been so purchasable if the
Distribution Date had occurred on the Business Day immediately
preceding the date of such Section 11(a)(ii) Event) immediately prior
to such Section 11(a)(ii) Event, multiplied by the Communications
Exercise Price in effect immediately prior to such Section 11(a)(ii)
Event), and the denominator of which is 50% of the Current Market Price
per Common Share of the Surviving Person on the date of consummation of
such Section 13(a) Event and (y) each holder of a Media Right shall
thereafter have the right to receive, upon the exercise thereof in
accordance with the terms of this Agreement and payment of the then
current Media Exercise Price, such number of validly authorized and
issued, fully paid and nonassessable Common Shares of the Surviving
Person as shall be equal to a fraction, the numerator of which is the
product of the then current Media Exercise Price multiplied by the
number of one-hundredths of a Series B Preferred Share purchasable upon
the exercise of one Media Right immediately prior to the first Section
13(a) Event (or, if a Section 11(a)(ii) Event has occurred prior to the
first Section 13(a) Event, the product of the number of one-hundredths
of a Series B Preferred Share purchasable upon the exercise of a Media
Right (or, if the Distribution Date shall not have occurred prior to
the date of such Section 11(a)(ii) Event, the number of one-hundredths
of a Series B Preferred Share that would have been so purchasable if
the Distribution Date had occurred on the Business Day immediately
preceding the date of such Section 11(a)(ii) Event) immediately prior
to such Section 11(a)(ii) Event, multiplied by the Media Exercise Price
in effect immediately prior to such Section 11(a)(ii) Event), and the
denominator of which is 50% of the Current Market Price per Common
Share of the Surviving Person on the date of consummation of such
Section 13(a) Event;
(ii) the Surviving Person shall thereafter be liable for and
shall assume, by virtue of such consolidation, merger, sale or
transfer, all the obligations and duties of the Company pursuant to
this Agreement;
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(iii) the term "Company" shall thereafter be deemed to refer
to the Surviving Person; and
(iv) the Surviving Person shall take such steps (including,
but not limited to, the reservation of a sufficient number of its
Common Shares in accordance with Section 9 hereof) in connection with
such consummation as may be necessary to ensure that the provisions
hereof shall thereafter be applicable to its Common Shares thereafter
deliverable upon the exercise of Rights.
(b) Notwithstanding the foregoing, if the Section 13(a)
Event is the sale or transfer in one or more transactions of assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole), but less than 100% thereof,
then each Person acquiring all or a portion thereof shall assume the
obligations of the Company as to a fraction of each of the Rights equal to
the fraction of the assets of the Company and its Subsidiaries (taken as a
whole) acquired by such Person, and the obligations of the Company as to the
remaining fraction of each of the Rights shall continue to be the obligations
of the Company.
(c) The Company shall not consummate a Section 13(a) Event
unless prior thereto the Company and the Surviving Person shall have executed
and delivered to the Rights Agent a supplemental agreement confirming that
such Surviving Person shall, upon consummation of such Section 13(a) Event,
assume this Agreement in accordance with Section 13 hereof, that all rights
of first refusal or preemptive rights in respect of the issuance of Common
Shares of such Surviving Person upon exercise of outstanding Rights have been
waived and that such Section 13(a) Event shall not result in a default by
such Surviving Person under this Agreement, and further providing that, as
soon as practicable after the date of consummation of such Section 13(a)
Event, such Surviving Person shall:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, use its
best efforts to cause such registration statement to become effective
as soon as practicable after such filing, use its best efforts to cause
such registration statement to remain effective (with a prospectus at
all times meeting the
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requirements of the Securities Act) until the Expiration Date, and
similarly comply with all applicable state securities laws;
(ii) use its best efforts to list (or continue the listing
of) the Rights and the Common Shares of the Surviving Person
purchasable upon exercise of the Rights on a national securities
exchange, or use its best efforts to cause the Rights and such Common
Shares to meet the eligibility requirements for quotation on NASDAQ; and
(iii) deliver to holders of the Rights historical financial
statements for such Surviving Person that comply in all respects with
the requirements for registration on Form 10 (or any successor form)
under the Exchange Act.
(d) In the event that at any time after the occurrence of a
Section 11(a)(ii) Event some or all of the Rights shall not have been
exercised pursuant to Section 11 hereof prior to the date of a Section 13(a)
Event, such Rights shall thereafter be exercisable only in the manner
described in Section 13(a) hereof (without taking into account any prior
adjustment required by Section 11(a)). In the event that a Section 11(a)(ii)
Event occurs on or after the date of a Section 13(a) Event, Rights shall not
be exercisable pursuant to Section 11 hereof but shall instead be exercisable
pursuant to, and only pursuant to, this Section 13.
(e) The provisions of this Section 13 shall apply to each
successive merger, consolidation, sale or other transfer constituting a
Section 13(a) Event.
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions of
Rights or to distribute Right Certificates that represent fractional Rights.
If the Company shall determine not to issue such fractional Rights, the
Company shall pay to the registered holders of the Right Certificates with
respect to which such fractional Rights would otherwise be issuable, at the
time such Rights are exercised as provided herein, an amount in cash equal to
the same fraction of the Current Market Value of a whole Right. For the
purposes of this Section 14(a), the Current Market Value of a whole
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Right shall be the Closing Price per Right for the Trading Day immediately prior
to the date on which such fractional Rights would have been otherwise issuable.
(b) The Company shall not be required to issue fractions of
Common Shares or Preferred Shares (other than fractions that are integral
multiples of one one-hundredth of a Preferred Share) upon exercise of Rights,
or to distribute certificates that represent fractional Common Shares or
Preferred Shares (other than fractions that are integral multiples of one
one-hundredth of a Preferred Share). Fractions of Preferred Shares in
integral multiples of one one-hundredth of a Preferred Share may, at the
election of the Company, be represented by depositary receipts, pursuant to
an appropriate agreement between the Company and a depositary selected by it,
provided that such agreement shall provide that the holders of such
depositary receipts shall have all the rights, privileges and preferences to
which they are entitled as beneficial owners of Preferred Shares. If the
Company shall determine not to issue fractional Common Shares or Preferred
Shares (or depositary receipts in lieu of Preferred Shares), the Company
shall pay to the registered holders of Right Certificates with respect to
which such fractional Common Shares or Preferred Shares would otherwise be
issuable, at the time such Rights are exercised as provided herein, an amount
in cash equal to the same fraction of the Current Market Value of a whole
Common Share or Preferred Share, as the case may be. For purposes of this
Section 14(b), the Current Market Value of a whole Common Share or Preferred
Share shall be the Closing Price per share for the Trading Day immediately
prior to the date of such exercise.
(c) The holder of a Right, by the acceptance of such Right,
expressly waives such holder's right to receive any fractional Rights or any
fractional Common Shares or Preferred Shares upon exercise of such Right,
except as permitted by this Section 14.
Section 15. RIGHTS OF ACTION. All rights of action in
respect of this Agreement, except the rights of action given to the Rights
Agent under Section 18 hereof, are vested in the respective registered
holders of the Right Certificates and certificates for Common Shares
representing Rights, and any registered holder of any Right Certificate and
of such certificate for Common Shares, without the consent of the Rights
Agent or of the holder of any other Right Certificate or any other
certificate for Common Shares
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may, on such holder's own behalf and for such holder's own benefit, enforce,
and may institute and maintain any suit, action or proceeding against the
Company to enforce, or otherwise act in respect of, such holder's right to
exercise the Rights represented by such Right Certificate or by such
certificate for Common Shares in the manner provided in such Certificate and
in this Agreement. Without limiting the foregoing or any remedies available
to the holders of Rights, it is specifically acknowledged that the holders of
Rights would not have an adequate remedy at law for any breach of this
Agreement and shall be entitled to specific performance, and injunctive
relief against actual or threatened violations, of the obligations of any
Person under this Agreement.
Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a
Right, by accepting the same, consents and agrees with the Company and the
Rights Agent and every other holder of a Right that:
(a) prior to the Distribution Date, the Rights shall be
represented by certificates for Common Shares registered in the name of the
holders of such Common Shares (which certificates for Common Shares shall
also constitute certificates for Rights), and each such Right shall be
transferable only in connection with the transfer of such Common Shares;
(b) after the Distribution Date, the Right Certificates
shall only be transferable on the registry books of the Rights Agent if
surrendered at the principal office of the Rights Agent, duly endorsed or
accompanied by a proper instrument of transfer; and
(c) the Company and the Rights Agent may deem and treat the
person in whose name the Right Certificate is registered as the absolute
owner thereof and of the Rights represented thereby (notwithstanding any
notations of ownership or writing on the Right Certificate by anyone other
than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent shall be affected by any notice to
the contrary.
Section 17. RIGHT HOLDER AND RIGHT CERTIFICATE HOLDER NOT
DEEMED A STOCKHOLDER. No holder, as such, of any Right or Right Certificate
shall be entitled to vote, receive dividends or be deemed for any purpose the
holder of the securities of the Company that may at any time be
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issuable upon the exercise of the Rights represented thereby, nor shall
anything contained herein or in any Right Certificate be construed to confer
upon the holder of any Right or Right Certificate, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting
thereof, to give or withhold consent to any corporate action, to receive
notice of meetings or other actions affecting stockholders (except as
provided in Section 25 hereof), or to receive dividends or subscription
rights, or otherwise, in each case until such Right or the Rights represented
by such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent as
compensation for all services rendered by it hereunder reasonable and
customary fees and expenses. The Company also agrees to indemnify the Rights
Agent for, and to hold it harmless against, any loss, liability, or expense,
incurred without negligence, bad faith or willful misconduct on the part of
the Rights Agent, for anything done or omitted by the Rights Agent in
connection with the acceptance and administration of this Agreement,
including the costs and expenses of defending against any claim of liability.
(b) The Rights Agent shall be protected and shall incur no
liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any
Right Certificate or certificate for the Preferred Shares or Common Shares or
for other securities of the Company, instrument of assignment or transfer,
power of attorney, endorsement, affidavit, letter, notice, direction,
consent, certificate, statement, or other paper or document believed by it to
be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper person or persons, or otherwise upon the advice
of its counsel as set forth in Section 20 hereof.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF
RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it
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may be consolidated, or any corporation resulting from any merger or
consolidation to which the Rights Agent or any successor Rights Agent shall
be a party, or any corporation succeeding to the corporate trust or stock
transfer business of the Rights Agent or any successor Rights Agent, shall be
the successor to the Rights Agent under this Agreement without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, provided that such corporation would be eligible for appointment as a
successor Rights Agent under the provisions of Section 21 hereof. If, at the
time such successor Rights Agent shall succeed to the agency created by this
Agreement, any of the Right Certificates shall have been countersigned but
not delivered, any such successor Rights Agent may adopt the countersignature
of the predecessor Rights Agent and deliver such Right Certificates so
countersigned; and if at that time any of the Right Certificates shall not
have been countersigned, any successor Rights Agent may countersign such
Right Certificates either in the name of the predecessor Rights Agent or in
the name of the successor Rights Agent; and in all such cases such Right
Certificates shall have the full force provided in such Right Certificates,
and in this Agreement.
(b) If at any time the name of the Rights Agent shall be
changed, and at such time any of the Right Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the
countersignature under its prior name and deliver Right Certificates so
countersigned; and if at that time any of the Right Certificates shall not
have been countersigned, the Rights Agent may countersign such Right
Certificates either in its prior name or in its changed name; and in all such
cases such Right Certificates shall have the full force provided in such
Right Certificates and in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders
of Right Certificates, by their acceptance of the Rights, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may
be legal counsel for the Company), and the advice or opinion of such counsel
shall be full and complete authorization and protection to the Rights Agent
as to any action taken or omitted by it in good faith and in accordance with
such advice or opinion.
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(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact
or matter be proved or established by the Company prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by any one of the
Chairman of the Board, the President, any Vice President, the Treasurer or
the Secretary of the Company and delivered to the Rights Agent; and such
certificate shall be full authorization to the Rights Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement
in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder to the
Company and any other Person only for its own negligence, bad faith or
willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of
any of the statements of fact or recitals contained in this Agreement, or in
the Right Certificates (except its countersignature thereof), or be required
to verify the same, but all such statements and recitals are and shall be
deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any responsibility
in respect of the validity of this Agreement or the execution and delivery
hereof (except the due authorization, execution and delivery hereof by the
Rights Agent) or in respect of the validity or execution of any Right
Certificate (except its countersignature thereof); nor shall it be
responsible for any breach by the Company of any covenant or condition
contained in this Agreement or in any Right Certificate; nor shall it be
responsible for any change in the exercisability of the Rights (including the
Rights becoming null and void pursuant to Section 7(d) or any adjustment in
the terms of the Rights including the manner, method or amount thereof)
provided for in Sections 7, 11, 13 and 23 hereof, or the ascertaining of the
existence of facts that would require any such change or adjustment (except
with respect to the exercise of Rights represented by Right Certificates
after actual notice that such change or adjustment is required)); nor shall
it by any act hereunder be deemed to make any representation or warranty as
to the authorization or reservation of any Preferred Shares or Common Shares
or other securities to be issued pursuant to this Agreement or any Right
Certificate,
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or as to whether any Preferred Shares or Common Shares or other securities
will, when issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing
by the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder
from any one of the Chairman of the Board, the President, any Vice President,
the Secretary, any Assistant Secretary or the Treasurer of the Company, and
to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions of any such officer.
(h) The Rights Agent and any stockholder, director, officer
or employee of the Rights Agent may buy, sell or deal in any of the Rights or
other securities of the Company or become pecuniarily interested in any
transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were
not the Rights Agent under this Agreement. Nothing herein shall preclude the
Rights Agent from acting in any other capacity for the Company or for any
other legal entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys or agents, and the Rights Agent shall
not be answerable or accountable for any act, default, neglect or misconduct
of any such attorneys or agents or for any loss to the Company resulting from
any such act, default, neglect or misconduct, provided that reasonable care
was exercised in the selection and continued employment thereof.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under
this Agreement upon 30 days' notice in writing mailed to the Company and to
each
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transfer agent of Common Shares and Preferred Shares by registered or
certified mail, and to the holders of the Right Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent
upon 30 days' notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of Common Shares
and Preferred Shares by registered or certified mail, and to the holders of
the Right Certificates by first-class mail. If the Rights Agent shall resign
or be removed or shall otherwise become incapable of acting as such, the
Company shall appoint a successor to the Rights Agent. If the Company shall
fail to make such appointment within a period of 30 days after giving notice
of such removal or after it has been notified in writing of such resignation
or incapacity by the resigning or incapacitated Rights Agent or by the holder
of a Right Certificate (who shall, with such notice, submit such holder's
Right Certificate for inspection by the Company), then the Company shall
become the Rights Agent and the registered holder of any Right Certificate
may apply to any court of competent jurisdiction for the appointment of a new
Rights Agent. Any successor Rights Agent, whether appointed by the Company
or by such a court, shall be a corporation organized and doing business under
the laws of the United States or of the State of New York or Colorado (or of
any other state of the United States so long as such corporation is
authorized to do business as a banking institution in the State of New York
or Colorado), in good standing, having a principal office in New York or
Colorado, that is authorized under such laws to exercise corporate trust or
stock transfer powers and is subject to supervision or examination by federal
or state authority and that has at the time of its appointment as Rights
Agent a combined capital and surplus of at least $50,000,000. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as
Rights Agent without further act or deed; but the predecessor Rights Agent
shall deliver and transfer to the successor Rights Agent any property at the
time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose of this Agreement and so
that the successor Rights Agent may appropriately act as Rights Agent
hereunder. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights
Agent and each transfer agent of Common Shares and Preferred Shares, and mail
a notice thereof in writing to the registered holders of the Right
Certificates.
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Failure to give any notice provided for in this Section 21,
however, or any defect therein, shall not affect the legality or validity of
the resignation or removal of the Rights Agent or the appointment of the
successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHT CERTIFICATES.
Notwithstanding any of the provisions of this Agreement or of the Right
Certificates to the contrary, the Company may, at its option, issue new Right
Certificates in such form as may be approved by the Board of Directors in
order to reflect any adjustment or change in the Exercise Price and the
number or kind or class of shares or other securities or property purchasable
upon exercise of the Rights in accordance with the provisions of this
Agreement.
Section 23. REDEMPTION OF RIGHTS.
(a) Until the earliest of (i) the date of the first Section
11(a)(ii) Event, (ii) the date of the first Section 13(a) Event or (iii) the
Expiration Date, the Board of Directors of the Company may, at its option,
direct the Company to redeem all, but not less than all, of the then
outstanding Rights at a redemption price of $.005 per Right, as such
redemption price shall be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (the
"Redemption Price"), and the Company shall so redeem the Rights.
(b) Immediately upon the action of the Board of Directors of
the Company directing the Company to redeem the Rights pursuant to subsection
(a) of this Section 23, or at such time and date thereafter as the Board of
Directors may specify for redemption of the Rights, and without any further
action and without any notice, the right to exercise Rights shall terminate
and the only right thereafter of the holders of Rights shall be to receive
the Redemption Price. Within 10 Business Days after the action of the Board
of Directors of the Company directing the Company to redeem the Rights
pursuant to subsection (a) of this Section 23, the Company shall give notice
of such redemption to the holders of Rights by mailing such notice to all
holders of Rights at their last addresses as they appear upon the registry
books of the Rights Agent or, if prior to the Distribution Date, on the
registry books of each transfer agent for Common Shares. Any notice that is
mailed in the manner herein provided shall be deemed given, whether or not
the holder receives such notice, but neither the failure to give any
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such notice nor any defect therein shall affect the legality or validity of
such redemption. Each such notice of redemption shall state the method by
which the payment of the Redemption Price will be made. Neither the Company
nor any of its Affiliates or Associates may, directly or indirectly, redeem,
acquire or purchase for value any Rights in any manner other than that
specifically set forth in this Section 23 or Section 24 hereof, and other
than in connection with the purchase of Common Shares prior to the
Distribution Date.
Section 24. CERTAIN CASH TENDER OFFERS.
(a) In the event that the Company shall receive a Cash
Tender Offer Proposal from any Prospective Offeror on any date upon which the
Rights may be redeemed by the Company pursuant to Section 23(a) hereof, a
majority of the Independent Directors shall, within 15 Business Days
thereafter, at their option, either (i) engage a nationally recognized
investment banking firm to render an opinion as to whether the price per
Voting Share in cash to be paid to the holders of Voting Shares pursuant to
such Cash Tender Offer Proposal is fair and adequate from a financial point
of view (the "Fairness Opinion"), which Fairness Opinion shall be delivered
to the Board of Directors within 20 Business Days after such engagement, or
(ii) call a special meeting of stockholders (the "Special Meeting") for the
purpose of voting on a precatory resolution requesting the Board of Directors
to accept such Cash Tender Offer Proposal as such Cash Tender Offer Proposal
may be amended or revised by such Prospective Offeror from time to time to
increase the price per Voting Share in cash to be paid to the holders of
Voting Shares (the "Resolution"). The Special Meeting, if any, shall be held
on a date selected by a majority of the Independent Directors, which date
shall be not less than 60 nor more than 120 days after the later of the date
such Cash Tender Offer Proposal is received by the Company (the "Proposal
Date") or the date of any previously scheduled meeting of stockholders to be
held within 60 days after the Proposal Date; provided, however, that if (x)
such other meeting shall have been called for the purpose of voting on a
precatory resolution with respect to another Cash Tender Offer Proposal and
(y) the Proposal Date shall be not later than 15 days after the date such
other Cash Tender Offer Proposal was received by the Company, then both the
Resolution and such other resolution shall be voted on at such meeting and
such meeting shall be deemed to be the Special Meeting. A majority of the
Independent Directors
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shall set a date for determining the stockholders of record entitled to
notice of and to vote at the Special Meeting, if any, in accordance with the
Company's Restated Certificate of Incorporation and By-laws and with
applicable law. At the request of the Prospective Offeror, the Company shall
include in any proxy soliciting material prepared by it in connection with
the Special Meeting, if any, proxy soliciting material submitted by the
Prospective Offeror; PROVIDED, HOWEVER, that the Prospective Offeror shall by
written agreement with the Company, in form and substance satisfactory to the
Company, contained in or delivered with such request have indemnified the
Company against any and all liabilities resulting from any misstatements,
misleading statements and omissions contained in the Prospective Offeror's
proxy soliciting material, shall have agreed to pay the Company's incremental
costs incurred as a result of including such material in the Company's proxy
soliciting material and shall have advanced to the Company an amount equal to
the Company's estimate from time to time of such incremental costs.
(b) In the event that (x) the Fairness Opinion states that
the price per Voting Share to be paid in cash to the holders of Voting Shares
pursuant to the Cash Tender Offer Proposal is fair and adequate or (y) at the
Special Meeting the Resolution receives the affirmative vote of the majority
of the Voting Shares outstanding as of the record date of the Special Meeting
and not Beneficially Owned on such day by the Prospective Offeror or any of
its Affiliates or Associates, then, subject to Section 24(c) hereof, proper
provision shall be made in order that upon the consummation of any tender
offer (provided that such tender offer is consummated prior to the 60th day
following the date of such event, or prior to such later day upon which a
suspension of operation pursuant to Section 24(c) hereof shall terminate)
pursuant to which the Prospective Offeror offers to purchase and purchases
any and all of the Voting Shares held by Persons other than the Prospective
Offeror and its Affiliates and Associates at a price per Voting Share in cash
equal to or greater than the price per Voting Share provided in the Cash
Tender Offer Proposal (a "Fair Offer"), (i) the Voting Shares acquired by the
Prospective Offeror and its Affiliates and Associates pursuant to such tender
offer shall not be taken into account in determining whether such Persons have
or have not become 20% Stockholders and (ii) neither the commencement of, nor
the first public announcement of the intent of the Prospective Offeror to
commence, such tender offer shall be taken into account in
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determining whether the Distribution Date has or has not occurred. The
redemption of Rights pursuant to this Section 24 shall not in any way affect
the exercisability of such Rights prior to the effective time of such
redemption.
(c) Notwithstanding Section 24(b) hereof, in the event that
a majority of the Independent Directors determine that such action is in the
best interests of the stockholders of the Company other than the Prospective
Offeror, they may, at any time prior to the consummation of the tender offer
referred to in the first sentence of Section 24(b) hereof, suspend the
operation of clauses (i) and (ii) in such sentence for a period of time not
to exceed 180 days, such suspension to be effective upon the date of the
first public announcement thereof.
(d) Nothing contained in this Section 24 shall be deemed to
be in derogation of the obligation of the Board of Directors of the Company
to exercise its fiduciary duty. Without limiting the foregoing, nothing
contained herein shall be construed to suggest or imply that the Board of
Directors shall not be entitled to reject any Cash Tender Offer Proposal, to
recommend that holders of Voting Shares reject any Cash Tender Offer
Proposal, or to take any other action (including, without limitation, the
commencement, prosecution, defense or settlement of any litigation or the
submission of additional or alternative Cash Tender Offer Proposals or other
proposals to the Special Meeting) with respect to any Cash Tender Offer
Proposal or any tender offer that the Board of Directors believes is
necessary or appropriate in the exercise of such fiduciary duty.
(e) Nothing contained in this Section 24 shall be construed
as limiting or prohibiting the Company or any Prospective Offeror from
proposing or engaging in any acquisition, disposition or other transfer of
any securities of the Company, any merger or consolidation involving the
Company, any sale or other transfer of assets of the Company, any
liquidation, dissolution or winding up of the Company, any other business
combination or other transaction, or any other action; PROVIDED, HOWEVER,
that the holders of Rights shall have the rights set forth in this Agreement
with respect to any such acquisition, disposition, transfer, merger,
consolidation, sale, liquidation, dissolution, winding up, business
combination, transaction or other action.
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Section 25. NOTICE OF CERTAIN EVENTS.
(a) In the event that the Company shall propose (i) to
declare or pay any dividend payable on or make any distribution with respect
to its Common Shares or Preferred Shares (other than a regular quarterly cash
dividend), (ii) to offer to the holders of its Common Shares or Preferred
Shares options, rights or warrants to subscribe for or to purchase any
additional shares thereof or shares of stock of any class or any other
securities, rights or options, (iii) to effect any reclassification of its
Common Shares or Preferred Shares (other than a reclassification involving
only the subdivision of outstanding shares), (iv) to effect any consolidation
or merger with or into, or to effect any sale or other transfer (or to permit
one or more of its Subsidiaries to effect any sale or other transfer), in one
or more transactions, of more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to, any other Person or
Persons, or (v) to effect the liquidation, dissolution or winding up of the
Company, then and in each such case, the Company shall give to each holder of
a Right Certificate, in accordance with Section 26 hereof, a notice of such
proposed action that shall specify the record date for the purpose of such
dividend or distribution, or the date upon which such reclassification,
consolidation, merger, sale, transfer, liquidation, dissolution or winding up
is to take place and the date of participation therein by the holders of
record of the Common Shares or Preferred Shares, if any such date is to be
fixed, and such notice shall be so given in the case of any action covered by
clause (i) or (ii) above at least 20 days prior to the record date for
determining holders of the Common Shares or Preferred Shares for purposes of
such action and, in the case of any such other action, at least 20 days prior
to the date of the taking of such proposed action or the date of
participation therein by the holders of the Common Shares or Preferred
Shares, whichever date shall be the earlier. The failure to give the notice
required by this Section 25 or any defect therein shall not affect the
legality or validity of the action taken by the Company or the vote upon any
such action.
(b) Upon the occurrence of each Section 11(a)(ii) Event and
each Section 13(a) Event, the Company shall as soon as practicable thereafter
give to each holder of a Right Certificate, in accordance with Section 26
hereof, a notice of the occurrence of such event, specifying
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the event and the consequences of the event to holders of Rights under
Sections 11 and 13 hereof.
Section 26. NOTICES. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any
Right Certificate to or on the Company shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address
is filed in writing with the Rights Agent) as follows:
U S WEST, Inc.
7800 East Orchard Road
Englewood, CO 80111
Attention: General Counsel and Secretary
Subject to the provisions of Section 21 hereof, any notice or demand
authorized by this Agreement to be given or made by the Company or by the
holder of any Right Certificate to or on the Rights Agent shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed (until another address is filed in writing with the Company) to the
principal office of the Rights Agent as follows:
State Street Bank and Trust
Company
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate shall be
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 27. SUPPLEMENTS AND AMENDMENTS.
(a) Until the earliest of (i) the date of the first Section
11(a)(ii) Event, (ii) the date of the first Section 13(a) Event, (iii) the
Redemption Date or (iv) the Expiration Date, the Board of Directors of the
Company may, without the approval of any holders of Rights, direct the
Company and the Rights Agent to supplement or amend any provision of this
Agreement in any manner, whether or not such supplement or amendment is
adverse to any holders of Rights, and the Company and the Rights Agent shall
so supplement or amend such provision. Prior to the earlier of
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the Redemption Date or the Expiration Date, the Board of Directors of the
Company may, without the approval of any holders of Rights, direct the
Company and the Rights Agent to supplement or amend any provision of this
Agreement in any manner so long as the interests of the holders of Rights
shall not be materially and adversely affected thereby, and the Company and
the Rights Agent shall so supplement or amend such provision. The Rights
Agent may, but shall not be obligated to, enter into any supplement or
amendment which materially affects its own rights, duties and immunities
under this Agreement.
(b) After the earlier of the date of the first Section 11(a)(ii)
Event or the date of the first Section 13(a) Event and prior to the earlier
of the Redemption Date or the Expiration Date, the Company shall not effect
any amendment to the Certificate of Designations for the Preferred Shares
that would materially and adversely affect the rights, privileges or
preferences of the Preferred Shares without the prior approval of the holders
of two-thirds or more of the then outstanding Rights.
Section 28. CERTAIN COVENANTS.
Subject to Section 27 and the other provisions of this Agreement:
(a) no adjustment to the Exercise Price, the number of Preferred
Shares or Common Shares or other securities (or fractions of a share of any
of them), as the case may be, for which a Right is exercisable or the number
of Rights outstanding shall be made or be effective if such adjustment would
have the effect of reducing or limiting the benefits that the holders of
Rights would have had absent such adjustment, including, without limitation,
the benefits under Sections 7, 11 and 13 hereof, unless the terms of this
Agreement are amended so as to preserve such benefits; and
(b) from and after the earlier of the date of the first Section
11(a)(ii) Event or the date of the first Section 13(a) Event and prior to the
earlier of the Redemption Date or the Expiration Date, the Company shall not
(i) issue or sell, or permit any Subsidiary to issue or sell, to a 20%
Stockholder or a Surviving Person, or any Affiliate or Associate of a 20%
Stockholder or a Surviving Person, or any Person holding Voting Shares of the
Company that are Beneficially Owned by a 20% Stockholder or a Surviving
Person, (A) any rights, options, warrants or
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convertible securities on terms similar to, or that materially adversely
affect the value of, the Rights or (B) Preferred Shares, Common Shares or
shares of any other class of capital stock, if such sale is intended to or
would materially adversely affect the value of the Rights, or (ii) take any
action that is intended to or would materially adversely affect the value of
the Rights.
Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS,
ETC. The Board of Directors of the Company shall have the exclusive power
and authority to administer this Agreement and to exercise all rights and
powers specifically granted to the Board of Directors or to the Company, or
as may be necessary or advisable in the administration of this Agreement,
including, without limitation, the right and power to (i) interpret the
provisions of this Agreement, (ii) make all determinations deemed necessary
or advisable for the administration of this Agreement (including a
determination to redeem or not redeem the Rights or to amend the Agreement)
and (iii) calculate from time to time the relative voting power of the
Communications Shares and the Media Shares, in accordance with the Company's
Restated Certificate of Incorporation. All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y)
below, all omissions with respect to the foregoing) which are done or made by
the Board of Directors in good faith shall (x) be final, conclusive and
binding on the Company, the Rights Agent, the holders of the Rights and all
other parties, and (y) not subject the Board of Directors to any liability to
the holders of the Rights.
Section 30. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 31. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement
shall be construed to give to any Person other than the Company, the Rights
Agent, the registered holders of the Right Certificates (other than those
representing Rights that have become null and void) and the certificates for
Common Shares representing Rights (other than those Rights that have become
null and void) any legal or equitable right, remedy or claim under this
Agreement, and this Agreement shall be for the sole and exclusive benefit of
the Company, the Rights Agent, such registered
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holders of Right Certificates and such certificates for Common Shares
representing Rights.
Section 32. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
Section 33. GOVERNING LAW. This Agreement and each Right
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such state applicable to contracts
made and performed entirely within such state.
Section 34. COUNTERPARTS. This Agreement may be executed in any
number of counterparts and each such counterpart shall for all purposes be
deemed to be an original and all such counterparts shall together constitute
but one and the same instrument.
Section 35. DESCRIPTIVE HEADINGS. Descriptive headings of the
several sections of this Agreement are inserted for convenience only and
shall not control or affect the meaning or construction of any of the
provisions hereof.
Section 36. EFFECTIVENESS. This Agreement shall become effective
at the Effective Time of the Merger under the Merger Agreement. In the event
the Merger does not occur or become effective for any reason, this Agreement
shall be deemed null and void.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed as of the day and year first above written.
Attest: U S WEST, INC.
By ______________________ By ______________________
Name: Name:
Title: Title:
Attest: STATE STREET BANK AND
TRUST COMPANY
By ______________________ By ______________________
Name: Name:
Title: Title:
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EXHIBIT A-1
There is hereby created a series of Preferred Stock having the
following voting powers, preferences and rights, and qualifications and
restrictions thereon:
Section 1. DESIGNATION AND AMOUNT. The shares of such series
shall be designated as Series A Junior Participating Cumulative Preferred
Stock, par value $1.00 per share (the "Series A Preferred Stock"), and the
number of shares constituting such series shall be 10,000,000.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of shares of Series A Preferred Stock, in
preference to the holders of shares of Communications Stock and Media Stock
and of any other junior stock of the Corporation that may be outstanding,
shall be entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for the purpose, quarterly dividends
payable in cash on the tenth day of January, April, July and October in each
year (each such date being referred to herein as a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the
greater of (i) $25 per share ($100 per annum), or (ii) subject to the
provision for adjustment hereinafter set forth, the product of the
Communications Number times the aggregate per share amount of all cash
dividends, plus the product of the Communications Number times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Communications
Stock, or a subdivision of the outstanding shares of Communications Stock (by
reclassification or otherwise), declared on the Communications Stock since
the immediately preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first issuance of any
share or fraction of a share of Series A Preferred Stock.
As used in this Restated Certificate of Incorporation, the
Communications Number shall initially be ___. In the event that the
Corporation shall at any time declare or pay any dividend on Communications
Stock payable in shares of Communications Stock or effect a subdivision or
combination or consolidation of the outstanding shares of
<PAGE>
Communications Stock (by reclassification or otherwise) into a greater or
lesser number of shares of Communications Stock, then and in each such event,
the Communications Number shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Communications
Stock outstanding immediately after such event, and the denominator of which
is the number of shares of Communications Stock that were outstanding
immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (a) of this Section 2
immediately after it declares a dividend or distribution on the
Communications Stock (other than a dividend payable in shares of
Communications Stock); PROVIDED, HOWEVER, that in the event no dividend or
distribution shall have been declared on the Communications Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $25 per share ($100 per annum)
on the Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
Series A Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which cases such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall cumulate but shall not bear
interest. Dividends paid on the shares of Series A Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may
fix a record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be
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not more than 60 days prior to the date fixed for the payment thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(a) Each holder of Series A Preferred Stock shall be entitled to
a number of votes equal to the product of (i) the Communications Number then
in effect for each share of Series A Preferred Stock held of record on each
matter on which holders of Communications Stock are entitled to vote times
(ii) the maximum number of votes which the holders of Communications Stock
then have with respect to such matter.
(b) Except as otherwise provided in this Restated Certificate of
Incorporation or by law, the holders of shares of Series A Preferred Stock
and the holders of shares of Communications Stock and Media Stock shall vote
together as one class on all matters submitted to a vote of stockholders of
the Corporation.
(c) In addition, the holders of shares of Series A Preferred
Stock shall have the following special voting rights: In the event that at
any time dividends on Series A Preferred Stock, whenever accrued and whether
or not consecutive, shall not have been paid or declared and a sum sufficient
for the payment thereof set aside, in an amount equivalent to six quarterly
dividends on all shares of Series A Preferred Stock at the time outstanding,
then and in each such event, the holders of shares of Series A Preferred
Stock and each other series of preferred stock now or hereafter issued that
shall be accorded such class voting right by the Board of Directors and that
shall have the right to elect three directors as the result of a prior or
subsequent default in payment of dividends on such series (each such other
series being hereinafter called "Other Series of Preferred Stock"), voting
separately as a class without regard to series, shall be entitled to elect
three directors at the next annual meeting of stockholders of the
Corporation, in addition to the directors to be elected by the holders of all
shares of the Corporation entitled to vote for the election of directors, and
the holders of all shares (including the Series A Preferred Stock) otherwise
entitled to vote for directors, voting separately as a class, shall be
entitled to elect the remaining members of the Board of Directors, provided
that the Series A Preferred
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Stock and each Other Series of Preferred Stock, voting as a class, shall not
have the right to elect more than three directors. Such special voting right
of the holders of shares of Series A Preferred Stock may be exercised until
all dividends in default on the Series A Preferred Stock shall have been paid
in full or declared and funds sufficient therefor set aside, and when so paid
or provided for, such special voting right of the holders of shares of Series
A Preferred Stock shall cease, but subject always to the same provisions for
the vesting of such special voting rights in the event of any such future
dividend default or defaults. At any time after such special voting rights
shall have so vested in the holders of shares of Series A Preferred Stock,
the Secretary of the Corporation may, and upon the written request of the
holders of record of 10% or more in number of the shares of Series A
Preferred Stock and each Other Series of Preferred Stock then outstanding
addressed to the Secretary at the principal executive office of the
Corporation shall, call a special meeting of the holders of shares of
Preferred Stock so entitled to vote, for the election of the directors to be
elected by them as herein provided, to be held within 60 days after such call
and at the place and upon the notice provided by law and in the Bylaws for
the holding of meetings of stockholders; PROVIDED, HOWEVER, that the
Secretary shall not be required to call such special meeting in the case of
any such request received less than 90 days before the date fixed for any
annual meeting of stockholders, and if in such case such special meeting is
not called or held, the holders of shares of Preferred Stock so entitled to
vote shall be entitled to exercise the special voting rights provided in this
paragraph at such annual meeting. If any such special meeting required to be
called as above provided shall not be called by the Secretary within 30 days
after receipt of any such request, then the holders of record of 10% or more
in number of the shares of Series A Preferred Stock and each Other Series of
Preferred Stock then outstanding may designate in writing one of their number
to call such meeting, and the person so designated may, at the expense of the
Corporation, call such meeting to be held at the place and upon the notice
given by such person, and for that purpose shall have access to the stock
books of the Corporation. No such special meeting and no adjournment thereof
shall be held on a date later than 60 days before the annual meeting of
stockholders. If, at any meeting so called or at any annual meeting held
while the holders of shares of Series A Preferred Stock have the special
voting rights provided for in this paragraph, the holders of not
4
<PAGE>
less than 40% of the shares of Series A Preferred Stock and each Other Series
of Preferred Stock then outstanding are present in person or by proxy, which
percentage shall be sufficient to constitute a quorum for the section of
additional directors as herein provided, the then authorized number of
directors of the Corporation shall be increased by three, as of the time of
such special meeting or the time of the first such annual meeting held while
such holders have special voting rights and such quorum is present, and the
holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock, voting as a class, shall be entitled to elect the additional
directors so provided for. If the directors of the Corporation are then
divided into classes under provisions of this Restated Certificate of
Incorporation or the By-laws of the Corporation, the three additional
directors shall be members of those respective classes of directors in which
a vacancy is created as a result of such increase in the authorized number of
directors. If the foregoing expansion of the size of the Board of Directors
shall not be valid under applicable law, then the holders of shares of Series
A Preferred Stock and of each Other Series of Preferred Stock, voting as a
class, shall be entitled, at the meeting of stockholders at which they would
otherwise have voted, to elect directors to fill any then existing vacancies
on the Board of Directors, and shall additionally be entitled, at such
meeting and each subsequent meeting of stockholders at which directors are
elected, to elect all of the directors then being elected until by such class
vote three members of the Board of Directors have been so elected. Upon the
election at such meeting by the holders of shares of Series A Preferred Stock
and each Other Series of Preferred Stock, voting as a class, of the directors
they are entitled so to elect, the persons so elected, together with such
persons as may be directors or as may have been elected as directors by the
holders of all shares (including Series A Preferred Stock) otherwise entitled
to vote for directors, shall constitute the duly elected directors of the
Corporation. The additional directors so elected by holders of shares of
Series A Preferred Stock and each Other Series of Preferred Stock, voting as
a class, shall serve until the next annual meeting or until their respective
successors shall be elected and qualified, or if any such director is a
member of a class of directors under provisions dividing the directors into
classes, each such director shall serve until the annual meeting at which the
term of office of such director's class shall expire or until such director's
successor shall be elected and shall qualify, and at each subsequent meeting
of
5
<PAGE>
stockholders at which the directorship of any director elected by the vote
of holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock under the special voting rights set forth in this paragraph
is up for election, said special class voting rights shall apply in the
reelection of such director or in the election of such director's successor;
PROVIDED, HOWEVER, that whenever the holders of shares of Series A Preferred
Stock and each Other Series of Preferred Stock shall be divested of the
special rights to elect three directors as above provided, the terms of
office of all persons elected as directors by the holders of shares of Series
A Preferred Stock and each Other Series of Preferred Stock, voting as a
class, or elected to fill any vacancies resulting from the death,
resignation, or removal of directors so elected by the holders of shares of
Series A Preferred Stock and each Other Series of Preferred Stock shall
forthwith terminate (and, if applicable, the number of directors shall be
reduced accordingly). If, at any time after a special meeting of
stockholders or an annual meeting of stockholders at which the holders of
shares of Series A Preferred Stock and each Other Series of Preferred Stock,
voting as a class, have elected directors as provided above, and while the
holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock shall be entitled so to elect three directors, the number of
directors who have been elected by the holders of shares of Series A
Preferred Stock and each Other Series of Preferred Stock (or who by reason of
one or more resignations, deaths or removals have succeeded any directors so
elected) shall by reason of resignation, death or removal be less than three
but at least one, the vacancy in the directors so elected by the holders of
shares of the Series A Preferred Stock and each Other Series of Preferred
Stock may be filled by the remaining director elected by such holders, and in
the event that such election shall not occur within 30 days after such
vacancy arises, or in the event that there shall not be incumbent at least
one director so elected by such holders, the Secretary of the Corporation
may, and upon the written request of the holders of record of 10% or more in
number of the shares of Series A Preferred Stock and each Other Series of
Preferred Stock then outstanding addressed to the Secretary at the principal
office of the Corporation shall, call a special meeting of the holders of
shares of Series A Preferred Stock and each Other Series of Preferred Stock
so entitled to vote, for an election to fill such vacancy or vacancies, to be
held within 60 days after such call and at the place and upon the notice
provided by law and in the
6
<PAGE>
Bylaws for the holding of meetings of stockholders; PROVIDED, HOWEVER, that
the Secretary shall not be required to call such special meeting in the case
of any such request received less than 90 days before the date fixed for any
annual meeting of stockholders, and if in such case such special meeting is
not called, the holders of shares of Preferred Stock so entitled to vote
shall be entitled to fill such vacancy or vacancies at such annual meeting.
If any such special meeting required to be called as above provided shall not
be called by the Secretary within 30 days after receipt of any such request,
then the holders of record of 10% or more in number of the shares of Series A
Preferred Stock and each Other Series of Preferred Stock then outstanding may
designate in writing one of their number to call such meeting, and the person
so designated may, at the expense of the Corporation, call such meeting to be
held at the place and upon the notice above provided, and for that purpose
shall have access to the stock books of the Corporation; no such special
meeting and no adjournment thereof shall be held on a date later than 60 days
before the annual meeting of stockholders.
(d) Nothing herein shall prevent the directors or stockholders
from taking any action to increase the number of authorized shares of Series
A Preferred Stock, or increasing the number of authorized shares of Preferred
Stock of the same class as the Series A Preferred Stock or the number of
authorized shares of Communications Stock or Media Stock, or changing the par
value of the Communications Stock, Media Stock or Preferred Stock, or issuing
options, warrants or rights to any class of stock of the Corporation as
authorized by this Restated Certificate of Incorporation, as it may hereafter
be amended.
(e) Except as set forth herein, holders of shares of Series A
Preferred Stock shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote as set forth
in this Restated Certificate of Incorporation or by law) for taking any
corporate action.
Section 4. CERTAIN RESTRICTIONS.
(a) Whenever any dividends or other distributions payable on the
Series A Preferred Stock as provided in Section 2 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred
7
<PAGE>
Stock outstanding shall have been paid in full, the Corporation shall not and
shall cause its subsidiaries not to, directly or indirectly:
(i) declare or pay dividends on, or make any other distributions
with respect to, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock;
(ii) declare or pay dividends on, or make any other distributions
with respect to, any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except dividends paid ratably on shares of
the Series A Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series
A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity with
the Series A Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph
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<PAGE>
(a) of this Section 4, purchase or otherwise acquire such shares at such time
and in such manner.
Section 5. REACQUIRED SHARES. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of preferred stock, without designation as to series, and may
be reissued as part of any series of preferred stock created by resolution or
resolutions of the Board of Directors (including Series A Preferred Stock),
subject to the conditions and restrictions on issuance set forth herein.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made to:
(a) the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
A Preferred Stock unless, prior thereto, the holders of shares of
Series A Preferred Stock shall have received the greater of (i) $100
per share ($1.00 per one one-hundredth of a share), plus an amount
equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, or (ii) an
aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to the product of (i) the Communications
Number then in effect times (ii) the aggregate amount to be distributed
per share to holders of shares of Communications Stock; or
(b) the holders of shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series
A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all other such parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up.
Section 7. CONSOLIDATION, MERGER, ETC. In the event that the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of Communications Stock are exchanged for or
changed into other stock or securities, cash and/or any
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<PAGE>
other property, or otherwise changed, then and in each such event, the shares
of Series A Preferred Stock shall at the same time be similarly exchanged or
changed in an amount per share (subject to the provision for adjustment
hereinafter set forth) equal to the product of (i) the Communications Number
then in effect times (ii) the aggregate amount of stock, securities, cash or
any other property (payable in kind), as the case may be, into which or for
which each share of Communications Stock is changed or exchanged.
Section 8. NO REDEMPTION. The shares of Series A Preferred Stock
shall not be redeemable. Notwithstanding the foregoing, the Corporation may
acquire shares of Series A Preferred Stock in any other manner permitted by
law, the Articles of Incorporation of the Corporation or herein.
Section 9. RANK. Unless otherwise provided in this Restated
Certificate of Incorporation or a Certificate of Designations relating to a
subsequent series of preferred stock of the Corporation, the Series A
Preferred Stock shall rank, as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up of the
Corporation, pari passu to the Series B Junior Participating Cumulative
Preferred Stock, par value $1.00 per share, and the Series C Cumulative
Redeemable Preferred Stock, par value $1.00 per share, of the Corporation,
junior to all other series of the Corporation's Preferred Stock and senior to
the Communications Stock and Media Stock.
Section 10. AMENDMENT. This Restated Certificate of Incorporation
shall not be amended in any manner that would materially and adversely alter
or change the powers, preferences or special rights of the Series A Preferred
Stock without the affirmative vote of the holders of at least two-thirds of
the outstanding shares of Series A Preferred Stock, voting together as a
single series.
Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be
issued in fractions of a share (in one one-hundredths (1/100) of a share and
integral multiples thereof) that shall entitle the holder thereof, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and have the benefit of all
other rights of holders of shares of Series A Preferred Stock.
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EXHIBIT A-2
-----------
There is hereby created a series of Preferred Stock having the
following voting powers, preferences and rights, and qualifications and
restrictions thereon:
Section 1. DESIGNATION AND AMOUNT. The shares of such series
shall be designated as Series B Junior Participating Cumulative Preferred
Stock, par value $1.00 per share (the "Series B Preferred Stock"), and the
number of shares constituting such series shall be 10,000,000.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of shares of Series B Preferred Stock, in
preference to the holders of shares of the Communications Stock and Media
Stock and of any other junior stock of the Corporation that may be
outstanding, shall be entitled to receive, when, as and if declared by the
Board of Directors out of funds legally available for the purpose, quarterly
dividends payable in cash on the tenth day of January, April, July and
October in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend Payment
Date after the first issuance of a share or fraction of a share of Series B
Preferred Stock, in an amount per share (rounded to the nearest cent) equal
to the greater of (i) $25 per share ($100 per annum), or (ii) subject to the
provision for adjustment hereinafter set forth, the product of the Media
Number times the aggregate per share amount of all cash dividends, plus the
product of the Media Number times the aggregate per share amount (payable in
kind) of all non-cash dividends or other distributions, other than a dividend
payable in shares of Media Stock, or a subdivision of the outstanding shares
of Media Stock (by reclassification or otherwise), declared on the Media
Stock since the immediately preceding Quarterly Dividend Payment Date or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series B Preferred Stock.
As used in this Restated Certificate of Incorporation, the Media
Number shall initially be ___. In the event that the Corporation shall at
any time declare or pay any dividend on Media Stock payable in shares of
Media Stock or effect a subdivision or combination or consolidation of the
outstanding shares of Media Stock (by
<PAGE>
reclassification or otherwise) into a greater or lesser number of shares of
Media Stock, then and in each such event, the Media Number shall be adjusted
by multiplying such number by a fraction, the numerator of which is the
number of shares of Media Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Media Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on
the Series B Preferred Stock as provided in paragraph (a) of this Section 2
immediately after it declares a dividend or distribution on the Media Stock
(other than a dividend payable in shares of Media Stock); PROVIDED, HOWEVER,
that in the event no dividend or distribution shall have been declared on the
Media Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $25 per
share ($100 per annum) on the Series B Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series B Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series B
Preferred Stock, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which case
dividends on such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for the determination of holders of shares of
Series B Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which cases such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall cumulate but shall not bear
interest. Dividends paid on the shares of Series B Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may
fix a record date for the determination of holders of shares of Series B
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60 days prior to
the date fixed for the payment thereof.
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Section 3. VOTING RIGHTS. The holders of shares of Series B
Preferred Stock shall have the following voting rights:
(a) Each holder of Series B Preferred Stock shall be entitled to
a number of votes equal to the product of (i) the Media Number then in effect
for each share of Series B Preferred Stock held of record on each matter on
which holders of Media Stock are entitled to vote times (ii) the maximum
number of votes which the holders of Media Stock then have with respect to
such matter.
(b) Except as otherwise provided in this Restated Certificate of
Incorporation or by law, the holders of shares of Series B Preferred Stock
and the holders of shares of Communications Stock and Media Stock shall vote
together as one class on all matters submitted to a vote of stockholders of
the Corporation.
(c) In addition, the holders of shares of Series B Preferred
Stock shall have the following special voting rights: In the event that at
any time dividends on Series B Preferred Stock, whenever accrued and whether
or not consecutive, shall not have been paid or declared and a sum sufficient
for the payment thereof set aside, in an amount equivalent to six quarterly
dividends on all shares of Series B Preferred Stock at the time outstanding,
then and in each such event, the holders of shares of Series B Preferred
Stock and each other series of preferred stock now or hereafter issued that
shall be accorded such class voting right by the Board of Directors and that
shall have the right to elect three directors as the result of a prior or
subsequent default in payment of dividends on such series (each such other
series being hereinafter called "Other Series of Preferred Stock"), voting
separately as a class without regard to series, shall be entitled to elect
three directors at the next annual meeting of stockholders of the
Corporation, in addition to the directors to be elected by the holders of all
shares of the Corporation entitled to vote for the election of directors, and
the holders of all shares (including the Series B Preferred Stock) otherwise
entitled to vote for directors, voting separately as a class, shall be
entitled to elect the remaining members of the Board of Directors, provided
that the Series B Preferred Stock and each Other Series of Preferred Stock,
voting as a class, shall not have the right to elect more than three
directors. Such special voting right of the holders of shares of Series B
Preferred Stock may be exercised until
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all dividends in default on the Series B Preferred Stock shall have been paid
in full or declared and funds sufficient therefor set aside, and when so paid
or provided for, such special voting right of the holders of shares of Series
B Preferred Stock shall cease, but subject always to the same provisions for
the vesting of such special voting rights in the event of any such future
dividend default or defaults. At any time after such special voting rights
shall have so vested in the holders of shares of Series B Preferred Stock,
the Secretary of the Corporation may, and upon the written request of the
holders of record of 10% or more in number of the shares of Series B
Preferred Stock and each Other Series of Preferred Stock then outstanding
addressed to the Secretary at the principal executive office of the
Corporation shall, call a special meeting of the holders of shares of
Preferred Stock so entitled to vote, for the election of the directors to be
elected by them as herein provided, to be held within 60 days after such call
and at the place and upon the notice provided by law and in the Bylaws for
the holding of meetings of stockholders; PROVIDED, HOWEVER, that the
Secretary shall not be required to call such special meeting in the case of
any such request received less than 90 days before the date fixed for any
annual meeting of stockholders, and if in such case such special meeting is
not called or held, the holders of shares of Preferred Stock so entitled to
vote shall be entitled to exercise the special voting rights provided in this
paragraph at such annual meeting. If any such special meeting required to be
called as above provided shall not be called by the Secretary within 30 days
after receipt of any such request, then the holders of record of 10% or more
in number of the shares of Series B Preferred Stock and each Other Series of
Preferred Stock then outstanding may designate in writing one of their number
to call such meeting, and the person so designated may, at the expense of the
Corporation, call such meeting to be held at the place and upon the notice
given by such person, and for that purpose shall have access to the stock
books of the Corporation. No such special meeting and no adjournment thereof
shall be held on a date later than 60 days before the annual meeting of
stockholders. If, at any meeting so called or at any annual meeting held
while the holders of shares of Series B Preferred Stock have the special
voting rights provided for in this paragraph, the holders of not less than
40% of the shares of Series B Preferred Stock and each Other Series of
Preferred Stock then outstanding are present in person or by proxy, which
percentage shall be sufficient to constitute a quorum for the section of
4
<PAGE>
additional directors as herein provided, the then authorized number of
directors of the Corporation shall be increased by three, as of the time of
such special meeting or the time of the first such annual meeting held while
such holders have special voting rights and such quorum is present, and the
holders of shares of Series B Preferred Stock and each Other Series of
Preferred Stock, voting as a class, shall be entitled to elect the additional
directors so provided for. If the directors of the Corporation are then
divided into classes under provisions of this Restated Certificate of
Incorporation or the By-laws of the Corporation, the three additional
directors shall be members of those respective classes of directors in which
a vacancy is created as a result of such increase in the authorized number of
directors. If the foregoing expansion of the size of the Board of Directors
shall not be valid under applicable law, then the holders of shares of Series
B Preferred Stock and of each Other Series of Preferred Stock, voting as a
class, shall be entitled, at the meeting of stockholders at which they would
otherwise have voted, to elect directors to fill any then existing vacancies
on the Board of Directors, and shall additionally be entitled, at such
meeting and each subsequent meeting of stockholders at which directors are
elected, to elect all of the directors then being elected until by such class
vote three members of the Board of Directors have been so elected. Upon the
election at such meeting by the holders of shares of Series B Preferred Stock
and each Other Series of Preferred Stock, voting as a class, of the directors
they are entitled so to elect, the persons so elected, together with such
persons as may be directors or as may have been elected as directors by the
holders of all shares (including Series B Preferred Stock) otherwise entitled
to vote for directors, shall constitute the duly elected directors of the
Corporation. The additional directors so elected by holders of shares of
Series B Preferred Stock and each Other Series of Preferred Stock, voting as
a class, shall serve until the next annual meeting or until their respective
successors shall be elected and qualified, or if any such director is a
member of a class of directors under provisions dividing the directors into
classes, each such director shall serve until the annual meeting at which the
term of office of such director's class shall expire or until such director's
successor shall be elected and shall qualify, and at each subsequent meeting
of stockholders at which the directorship of any director elected by the vote
of holders of shares of Series B Preferred Stock and each Other Series of
Preferred Stock under the special voting rights set forth in this paragraph
5
<PAGE>
is up for election, said special class voting rights shall apply in the
reelection of such director or in the election of such director's successor;
PROVIDED, HOWEVER, that whenever the holders of shares of Series B Preferred
Stock and each Other Series of Preferred Stock shall be divested of the
special rights to elect three directors as above provided, the terms of
office of all persons elected as directors by the holders of shares of Series
B Preferred Stock and each Other Series of Preferred Stock, voting as a
class, or elected to fill any vacancies resulting from the death,
resignation, or removal of directors so elected by the holders of shares of
Series B Preferred Stock and each Other Series of Preferred Stock shall
forthwith terminate (and, if applicable, the number of directors shall be
reduced accordingly). If, at any time after a special meeting of
stockholders or an annual meeting of stockholders at which the holders of
shares of Series B Preferred Stock and each Other Series of Preferred Stock,
voting as a class, have elected directors as provided above, and while the
holders of shares of Series B Preferred Stock and each Other Series of
Preferred Stock shall be entitled so to elect three directors, the number of
directors who have been elected by the holders of shares of Series B
Preferred Stock and each Other Series of Preferred Stock (or who by reason of
one or more resignations, deaths or removals have succeeded any directors so
elected) shall by reason of resignation, death or removal be less than three
but at least one, the vacancy in the directors so elected by the holders of
shares of the Series B Preferred Stock and each Other Series of Preferred
Stock may be filled by the remaining director elected by such holders, and in
the event that such election shall not occur within 30 days after such
vacancy arises, or in the event that there shall not be incumbent at least
one director so elected by such holders, the Secretary of the Corporation
may, and upon the written request of the holders of record of 10% or more in
number of the shares of Series B Preferred Stock and each Other Series of
Preferred Stock then outstanding addressed to the Secretary at the principal
office of the Corporation shall, call a special meeting of the holders of
shares of Series B Preferred Stock and each Other Series of Preferred Stock
so entitled to vote, for an election to fill such vacancy or vacancies, to be
held within 60 days after such call and at the place and upon the notice
provided by law and in the Bylaws for the holding of meetings of
stockholders; PROVIDED, HOWEVER, that the Secretary shall not be required to
call such special meeting in the case of any such request received less than
90 days before the date fixed for any
6
<PAGE>
annual meeting of stockholders, and if in such case such special meeting is
not called, the holders of shares of Preferred Stock so entitled to vote
shall be entitled to fill such vacancy or vacancies at such annual meeting.
If any such special meeting required to be called as above provided shall not
be called by the Secretary within 30 days after receipt of any such request,
then the holders of record of 10% or more in number of the shares of Series B
Preferred Stock and each Other Series of Preferred Stock then outstanding may
designate in writing one of their number to call such meeting, and the person
so designated may, at the expense of the Corporation, call such meeting to be
held at the place and upon the notice above provided, and for that purpose
shall have access to the stock books of the Corporation; no such special
meeting and no adjournment thereof shall be held on a date later than 60 days
before the annual meeting of stockholders.
(d) Nothing herein shall prevent the directors or stockholders
from taking any action to increase the number of authorized shares of Series
B Preferred Stock, or increasing the number of authorized shares of Preferred
Stock of the same class as the Series B Preferred Stock or the number of
authorized shares of Communications Stock or Media Stock, or changing the par
value of the Communications Stock, Media Stock or Preferred Stock, or issuing
options, warrants or rights to any class of stock of the Corporation as
authorized by this Restated Certificate of Incorporation, as it may hereafter
be amended.
(e) Except as set forth herein, holders of shares of Series B
Preferred Stock shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote as set forth
in this Restated Certificate of Incorporation or herein or by law) for taking
any corporate action.
Section 4. CERTAIN RESTRICTIONS.
(a) Whenever any dividends or other distributions payable on the
Series B Preferred Stock as provided in Section 2 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series B Preferred Stock outstanding
shall have been paid in full, the Corporation shall not and shall cause its
subsidiaries not to, directly or indirectly:
7
<PAGE>
(i) declare or pay dividends on, or make any other distributions
with respect to, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
B Preferred Stock;
(ii) declare or pay dividends on, or make any other distributions
with respect to, any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series B Preferred Stock, except dividends paid ratably on shares of
the Series B Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) with the Series B Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series
B Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series B Preferred Stock, or any shares of stock ranking on a parity
with the Series B Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (a) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
8
<PAGE>
Section 5. REACQUIRED SHARES. Any shares of Series B Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of preferred stock, without designation as to series, and may
be reissued as part of any series of preferred stock created by resolution or
resolutions of the Board of Directors (including Series B Preferred Stock),
subject to the conditions and restrictions on issuance set forth herein.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution
shall be made to:
(a) the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series
B Preferred Stock unless, prior thereto, the holders of shares of
Series B Preferred Stock shall have received the greater of (i) $100
per share ($1.00 per one one-hundredth of a share), plus an amount
equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, or (ii) an
aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to the product of (i) the Media Number
then in effect times (ii) the aggregate amount to be distributed per
share to holders of shares of Media Stock; or
(b) the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the
Series B Preferred Stock, except distributions made ratably on the
Series B Preferred Stock and all other such parity stock in proportion
to the total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up.
Section 7. CONSOLIDATION, MERGER, ETC. In the event that the
Corporation shall enter into any consolidation, merger, combination or other
transaction in which the shares of Media Stock are exchanged for or changed
into other stock or securities, cash and/or any other property, or otherwise
changed, then and in each such event, the shares of Series B Preferred Stock
shall at the same time be similarly exchanged or changed in an amount per
9
<PAGE>
share (subject to the provision for adjustment hereinafter set forth) equal
to the product of (i) the Media Number then in effect times (ii) the
aggregate amount of stock, securities, cash or any other property (payable in
kind), as the case may be, into which or for which each share of Media Stock
is changed or exchanged.
Section 8. NO REDEMPTION. The shares of Series B Preferred Stock
shall not be redeemable. Notwithstanding the foregoing, the Corporation may
acquire shares of Series B Preferred Stock in any other manner permitted by
law, the Articles of Incorporation of the Corporation or herein.
Section 9. RANK. Unless otherwise provided in this Restated
Certificate of Incorporation or a Certificate of Designations relating to a
subsequent series of preferred stock of the Corporation, the Series B
Preferred Stock shall rank, as to the payment of dividends and the
distribution of assets on liquidation, dissolution or winding up of the
Corporation, pari passu to the Series A Junior Participating Cumulative
Preferred Stock, par value $1.00 per share, and the Series C Cumulative
Redeemable Preferred Stock, par value $1.00 per share, of the Corporation,
junior to all other series of the Corporation's Preferred Stock, and senior
to the Communications Stock and Media Stock.
Section 10. AMENDMENT. This Restated Certificate of Incorporation
shall not be amended in any manner that would materially and adversely alter
or change the powers, preferences or special rights of the Series B Preferred
Stock without the affirmative vote of the holders of at least two-thirds of
the outstanding shares of Series B Preferred Stock, voting together as a
single series.
Section 11. FRACTIONAL SHARES. Series B Preferred Stock may be
issued in fractions of a share (in one one-hundredths (1/100) of a share and
integral multiples thereof) that shall entitle the holder thereof, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and have the benefit of all
other rights of holders of shares of Series B Preferred Stock.
10
<PAGE>
Exhibit B-1
-----------
FORM OF
COMMUNICATIONS RIGHT CERTIFICATE
Certificate No. CR-____ _____ Rights
NOT EXERCISABLE AFTER APRIL 6, 1999 OR EARLIER IF REDEEMED. THE
RIGHTS ARE SUBJECT TO REDEMPTION AT $.005 PER RIGHT ON THE TERMS SET
FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES SPECIFIED
IN THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED BY CERTAIN PERSONS
OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
U S WEST Communications Group Right Certificate
U S WEST, Inc.
This certifies that _____________________________, or registered
assigns, is the registered owner of the number of Rights set forth above,
each of which entitles the owner thereof, subject to the terms and conditions
of the Amended and Restated Rights Agreement (the "Rights Agreement") dated
as of __________, 1995 by and between U S WEST, Inc., a Delaware corporation
(the "Company"), and State Street Bank and Trust Company (the "Rights
Agent"), to purchase from the Company at any time prior to 5:00 o'clock p.m.,
Englewood, Colorado time, on the earlier of the Redemption Date (as such term
is defined in the Rights Agreement) or April 6, 1999, at the office or agency
of the Rights Agent in Boston, Massachusetts, or at the office of its
successor as Rights Agent, one one-hundredth of a fully paid and
nonassessable share of Series A Junior Participating Cumulative Preferred
Stock, par value $1.00 per share, of the Company (a "Preferred Share") or, in
certain circumstances, other securities or other property, at a purchase
price of $______ per one one-hundredth of a Preferred Share (the "Exercise
Price"), upon presentation and surrender of this Right Certificate with the
Form of Election to Purchase, including Certificate, on the reverse side
hereof completed and duly executed, with signature guaranteed.
The number of Rights represented by this Right Certificate and the
Exercise Price set forth above are the number of Rights and the Exercise
Price as of ______, 1995, based upon the Preferred Shares as constituted on
such date.
<PAGE>
As provided in the Rights Agreement, the Exercise Price and the number of
Preferred Shares or other securities or other property that may be purchased
upon the exercise of the Rights represented by this Right Certificate are
subject to modification and adjustment upon the occurrence of certain events.
The Rights Agreement contains a full description of the rights,
limitations of rights, obligations, duties and immunities of the Rights
Agent, the Company and the holders of Right Certificates. This Right
Certificate is subject to all the terms and conditions of the Rights
Agreement, which terms and conditions are hereby incorporated herein by
reference and made a part hereof. Copies of the Rights Agreement are on file
at the principal executive offices of the Company and the above-mentioned
offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates,
upon presentation and surrender at the above-mentioned offices of the Rights
Agent, with the Form of Assignment, including Certificate, on the reverse
side hereof completed and duly executed, with signature guaranteed, may be
exchanged for another Right Certificate or Right Certificates of like tenor
and date representing Rights entitling the holder thereof to purchase a like
aggregate number of Preferred Shares or, in certain circumstances, other
securities or other property, as the Rights represented by the Right
Certificate or Right Certificates surrendered shall have entitled such holder
to purchase. If this Right Certificate shall be exercised in part, the
holder shall be entitled to receive, upon the surrender hereof with the Form
of Election to Purchase, including Certificate, on the reverse side hereof
completed and duly executed, with signature guaranteed, another Right
Certificate or Right Certificates for the number of whole Rights not
exercised. Subject to the provisions of the Rights Agreement, the Rights
represented by this Right Certificate may be redeemed by the Company, at its
option, at a redemption price of $.005 per Right.
No fractional securities shall be issued upon the exercise of any
Right or Rights represented hereby (other than fractions of Preferred Shares
that are integral multiples of one one-hundredth of a Preferred Share, that
may, at the option of the Company, be represented by depositary receipts),
but in lieu thereof, a cash payment shall be made, as provided in the Rights
Agreement.
2
<PAGE>
No holder of this Right Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of the
Preferred Shares or other securities of the Company that may at any time be
issuable on the exercise hereof, nor shall anything contained herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, until the
Right or Rights represented by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of ___________.
Attest: U S WEST, Inc.
By ______________________ By ______________________
Name: Name:
Title: Title:
Countersigned:
State Street Bank and Trust
Company
By ______________________ By ______________________
Name: Name:
Title: Title:
3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such holder
desires to transfer any or all of the Rights
represented by this Right Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
_______________________________________________________________________________
______________________________________________________________________________,
(Name, address and social security or other
identifying number of transferee)
________________________________ (___________) of the Rights represented by
this Right Certificate, together with all right, title and interest in and to
said Rights, and hereby irrevocably constitutes and appoints attorney to
transfer said Rights on the books of U S WEST, Inc. with full power of
substitution.
Dated: __________________, 19__ _________________________
(Signature)
Signature Guaranteed:
CERTIFICATE
(to be completed, if true)
The undersigned hereby certifies that the Rights represented by
this Right Certificate are not Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement).
Dated: _________________, 19__ _________________________
(Signature)
Signature Guaranteed:
4
<PAGE>
NOTICE
The signatures to the foregoing Assignment and the foregoing
Certificate, if applicable, must correspond to the name as written upon the
face of this Right Certificate in every particular, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a member firm
of a registered national securities exchange, a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States.
In the event that the foregoing Certificate is not duly executed,
with signature guaranteed, the Company may deem the Rights represented by
this Right Certificate to be Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement), and not issue any Right Certificate or
Right Certificates in exchange for this Right Certificate.
5
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed by the registered holder if such holder
desires to exercise any or all of the Rights
represented by this Right Certificate)
To U S WEST, Inc.:
The undersigned hereby irrevocably elects to exercise
______________________________________ (________) of the Rights represented
by this Right Certificate to purchase the following:
(Check one of the following boxes)
/ / the Preferred Shares or other securities or property issuable upon the
exercise of said number of Rights pursuant to Section 7(c) of the Rights
Agreement.
/ / the shares of U S WEST Communications Group Common Stock, par value
$0.01 per share, of the Company, or other securities or property issuable
upon the exercise of said number of Rights pursuant to Section 11(a)(ii) of
the Rights Agreement.
/ / the securities issuable upon the exercise of said number of Rights
pursuant to Section 14(a) of the Rights Agreement.
The undersigned hereby requests that any such property and a
certificate for any such securities be issued in the name of and delivered
to:
_______________________________________________________________________________
_______________________________________________________________________________
(Name, address and social security or other
identifying number of issuee)
The undersigned hereby further requests that if said number of
Rights shall not be all the Rights represented by this Right Certificate, a
new Right Certificate for the remaining balance of such Rights be issued in
the name of and delivered to:
_______________________________________________________________________________
_______________________________________________________________________________
(Name, address and social security or other
identifying number of issuee)
Dated: _____________, 19__ ________________________________
(Signature)
Signature Guaranteed:
6
<PAGE>
Certificate
-----------
(to be completed, if true)
The undersigned hereby certifies that the Rights represented by
this Right Certificate are not Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement).
Dated: __________________, 19__ _________________________
(Signature)
Signature Guaranteed:
NOTICE
The signatures to the foregoing Assignment and the foregoing
Certificate, if applicable, must correspond to the name as written upon the
face of this Right Certificate in every particular, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a member firm
of a registered national securities exchange, a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States.
In the event that the foregoing Certificate is not duly executed,
with signature guaranteed, the Company may deem the Rights represented by
this Right Certificate to be Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement), and not issue any property or certificate
for securities upon the exercise of this Right Certificate or issue any new
Right Certificate for any remaining balance of unexercised Rights represented
by this Right Certificate.
7
<PAGE>
EXHIBIT B-2
FORM OF
MEDIA RIGHT CERTIFICATE
Certificate No. MR-____ _____ Rights
NOT EXERCISABLE AFTER APRIL 6, 1999 OR EARLIER IF REDEEMED. THE
RIGHTS ARE SUBJECT TO REDEMPTION AT $.0005 PER RIGHT ON THE TERMS
SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES
SPECIFIED IN THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED BY
CERTAIN PERSONS OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME
NULL AND VOID.
U S WEST Media Group Right Certificate
U S WEST, Inc.
This certifies that _____________________________, or registered
assigns, is the registered owner of the number of Rights set forth above,
each of which entitles the owner thereof, subject to the terms and conditions
of the Amended and Restated Rights Agreement (the "Rights Agreement") dated
as of ________, 1995 by and between U S WEST, Inc., a Delaware corporation
(the "Company"), and State Street Bank and Trust Company (the "Rights
Agent"), to purchase from the Company at any time prior to 5:00 o'clock p.m.,
Englewood, Colorado time, on the earlier of the Redemption Date (as such term
is defined in the Rights Agreement) or April 6, 1999, at the office or agency
of the Rights Agent in Boston, Massachusetts, or at the office of its
successor as Rights Agent, one one-hundredth of a fully paid and
nonassessable share of Series B Junior Participating Cumulative Preferred
Stock, par value $1.00 per share, of the Company (a "Preferred Share") or, in
certain circumstances, other securities or other property, at a purchase
price of $______ per one one-hundredth of a Preferred Share (the "Exercise
Price"), upon presentation and surrender of this Right Certificate with the
Form of Election to Purchase, including Certificate, on the reverse side
hereof completed and duly executed, with signature guaranteed.
The number of Rights represented by this Right Certificate and the
Exercise Price set forth above are the number of Rights and the Exercise
Price as of _____, 1995, based upon the Preferred Shares as constituted on
such date.
<PAGE>
As provided in the Rights Agreement, the Exercise Price and the number of
Preferred Shares or other securities or other property that may be purchased
upon the exercise of the Rights represented by this Right Certificate are
subject to modification and adjustment upon the occurrence of certain events.
The Rights Agreement contains a full description of the rights,
limitations of rights, obligations, duties and immunities of the Rights
Agent, the Company and the holders of Right Certificates. This Right
Certificate is subject to all the terms and conditions of the Rights
Agreement, which terms and conditions are hereby incorporated herein by
reference and made a part hereof. Copies of the Rights Agreement are on file
at the principal executive offices of the Company and the above-mentioned
offices of the Rights Agent.
This Right Certificate, with or without other Right Certificates,
upon presentation and surrender at the above-mentioned offices of the Rights
Agent, with the Form of Assignment, including Certificate, on the reverse
side hereof completed and duly executed, with signature guaranteed, may be
exchanged for another Right Certificate or Right Certificates of like tenor
and date representing Rights entitling the holder thereof to purchase a like
aggregate number of Preferred Shares or, in certain circumstances, other
securities or other property, as the Rights represented by the Right
Certificate or Right Certificates surrendered shall have entitled such holder
to purchase. If this Right Certificate shall be exercised in part, the
holder shall be entitled to receive, upon the surrender hereof with the Form
of Election to Purchase, including Certificate, on the reverse side hereof
completed and duly executed, with signature guaranteed, another Right
Certificate or Right Certificates for the number of whole Rights not
exercised. Subject to the provisions of the Rights Agreement, the Rights
represented by this Right Certificate may be redeemed by the Company, at its
option, at a redemption price of $.005 per Right.
No fractional securities shall be issued upon the exercise of any
Right or Rights represented hereby (other than fractions of Preferred Shares
that are integral multiples of one one-hundredth of a Preferred Share, that
may, at the option of the Company, be represented by depositary receipts),
but in lieu thereof, a cash payment shall be made, as provided in the Rights
Agreement.
2
<PAGE>
No holder of this Right Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of the
Preferred Shares or other securities of the Company that may at any time be
issuable on the exercise hereof, nor shall anything contained herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
or upon any matter submitted to stockholders at any meeting thereof, or to
give or withhold consent to any corporate action, or to receive notice of
meetings or other actions affecting stockholders (except as provided in the
Rights Agreement), or to receive dividends or subscription rights, until the
Right or Rights represented by this Right Certificate shall have been
exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal. Dated as of ___________.
Attest: U S WEST, Inc.
By ______________________ By ______________________
Name: Name:
Title: Title:
Countersigned:
State Street Bank and Trust
Company
By ______________________ By ______________________
Name: Name:
Title: Title:
3
<PAGE>
Form of Reverse Side of Right Certificate
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such holder
desires to transfer any or all of the Rights
represented by this Right Certificate)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
_______________________________________________________________________________
______________________________________________________________________________,
(Name, address and social security or other
identifying number of transferee)
________________________________ (___________) of the Rights represented by
this Right Certificate, together with all right, title and interest in and to
said Rights, and hereby irrevocably constitutes and appoints attorney to
transfer said Rights on the books of U S WEST, Inc. with full power of
substitution.
Dated: __________________, 19__ _________________________
(Signature)
Signature Guaranteed:
Certificate
-----------
(to be completed, if true)
The undersigned hereby certifies that the Rights represented by
this Right Certificate are not Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement).
Dated: _________________, 19__ _________________________
(Signature)
Signature Guaranteed:
4
<PAGE>
Form of Reverse Side of Right Certificate
(continued)
NOTICE
The signatures to the foregoing Assignment and the foregoing
Certificate, if applicable, must correspond to the name as written upon the
face of this Right Certificate in every particular, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a member firm
of a registered national securities exchange, a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States.
In the event that the foregoing Certificate is not duly executed,
with signature guaranteed, the Company may deem the Rights represented by
this Right Certificate to be Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement), and not issue any Right Certificate or
Right Certificates in exchange for this Right Certificate.
5
<PAGE>
Form of Reverse Side of Right Certificate
(continued)
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed by the registered holder if such holder
desires to exercise any or all of the Rights
represented by this Right Certificate)
To U S WEST, Inc.:
The undersigned hereby irrevocably elects to exercise
______________________________________ (________) of the Rights represented
by this Right Certificate to purchase the following:
(Check one of the following boxes)
/ / the Preferred Shares or other securities or property issuable upon the
exercise of said number of Rights pursuant to Section 7(c) of the Rights
Agreement.
/ / the shares of U S WEST Media Group Common Stock, par value $0.01 per
share, of the Company, or other securities or property issuable upon the
exercise of said number of Rights pursuant to Section 11(a)(ii) of the Rights
Agreement.
/ / the securities issuable upon the exercise of said number of Rights
pursuant to Section 14(a) of the Rights Agreement.
The undersigned hereby requests that any such property and a
certificate for any such securities be issued in the name of and delivered
to:
_______________________________________________________________________________
_______________________________________________________________________________
(Name, address and social security or other
identifying number of issuee)
The undersigned hereby further requests that if said number of
Rights shall not be all the Rights represented by this Right Certificate, a
new Right Certificate for the remaining balance of such Rights be issued in
the name of and delivered to:
_______________________________________________________________________________
_______________________________________________________________________________
(Name, address and social security or other
identifying number of issuee)
Dated: _____________, 19__ ________________________________
(Signature)
Signature Guaranteed:
6
<PAGE>
Form of Reverse Side of Right Certificate
(continued)
Certificate
-----------
(to be completed, if true)
The undersigned hereby certifies that the Rights represented by
this Right Certificate are not Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement).
Dated: __________________, 19__ _________________________
(Signature)
Signature Guaranteed:
NOTICE
The signatures to the foregoing Assignment and the foregoing
Certificate, if applicable, must correspond to the name as written upon the
face of this Right Certificate in every particular, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a member firm
of a registered national securities exchange, a member of the National
Association of Securities Dealers, Inc., or a commercial bank or trust
company having an office or correspondent in the United States.
In the event that the foregoing Certificate is not duly executed,
with signature guaranteed, the Company may deem the Rights represented by
this Right Certificate to be Beneficially Owned by a 20% Stockholder or an
Affiliate or Associate of a 20% Stockholder (as such capitalized terms are
defined in the Rights Agreement), and not issue any property or certificate
for securities upon the exercise of this Right Certificate or issue any new
Right Certificate for any remaining balance of unexercised Rights represented
by this Right Certificate.
7
<PAGE>
Weil, Gotshal & Manges
a partnership including professional corporations
767 Fifth Avenue
New York, N.Y. 10153-0119
(212) 310-8000
FAX: (212) 310-8007
CABLE: WEGOMA
TELEX: 423144 WGM UI
August 11, 1995
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Ladies and Gentlemen:
We have acted as counsel to 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"), in connection with the
preparation and filing of the Registration Statement (File no. 33-59315) of
U S WEST Delaware on Form S-4 (as amended, the "Registration Statement")
relating to the registration under the Securities Act of 1933, as amended
(the "Securities Act"), of shares of U S WEST Communications Group Common
Stock, par value $.01 per share ("Communications Stock"), of U S WEST
Delaware and U S WEST Media Group Common Stock, par value $.01 per share
("Media Stock"), of U S WEST Delaware to be issued pursuant to the terms of
an Agreement and Plan of Merger (the "Merger Agreement") between U S WEST and
U S WEST Delaware pursuant to which (i) U S WEST will merge (the "Merger")
with and into U S WEST Delaware, with U S WEST Delaware continuing as the
surviving corporation, and (ii) each share of Common Stock, without par
value, of U S WEST
<PAGE>
U S WEST, Inc.
August 11, 1995
Page 2
will be converted into one share of Communications Stock and one share of
Media Stock.
In so acting, we have reviewed the Registration Statement, including the
proxy statement and prospectus contained therein (the "Proxy Statement"), the
form of restated certificate of incorporation of U S WEST Delaware (the
"Restated Certificate") to be filed with the Secretary of State of Delaware
immediately prior to the effective time of the Merger, and the form of Merger
Agreement. In addition, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of such corporate records,
agreements, documents and other instruments, and such certificates or
comparable documents of public officials and of officers and representatives
of U S WEST and U S WEST Delaware, and have made such inquiries of such
officers and representatives, as we have deemed relevant and necessary as a
basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures,
the legal capacity of natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to all questions
of fact material to this opinion that have not been independently
established, we have relied upon certificates or comparable documents of
officers and representatives of U S WEST and U S WEST Delaware. We have also
assumed the due filing of the Restated Certificate with the Secretary of
State of Delaware prior to the effective time of the Merger.
Based on the foregoing, and subject to the qualifications stated herein,
we are of the opinion that:
1. U S WEST Delaware is a corporation duly incorporated and validly
existing under the laws of the State of Delaware.
2. The shares of Communications Stock and Media Stock to be issued
pursuant to the Merger Agreement and registered pursuant to the Registration
Statement have been duly authorized and, when issued as contemplated by the
Merger Agreement, will be validly issued, fully paid and nonassessable.
<PAGE>
U S WEST, Inc.
August 11, 1995
Page 3
The opinions expressed herein are limited to the corporate laws of the
State of Delaware, and we express no opinion as to the effect on the matters
covered by this letter of the laws of any other jurisdiction.
The opinions expressed herein are rendered solely for your benefit in
connection with the transactions described herein. These opinions may not be
used or relied upon by any other person, nor may this letter or any copies
thereof be furnished to a third party, filed with a governmental agency,
quoted, cited or otherwise referred to without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the heading
"Legal Opinions" in the Proxy Statement, without admitting that we are
"experts" under the Securities Act or the rules and regulations promulgated
thereunder with respect to any part of the Registration Statement.
Very truly yours,
/s/ WEIL, GOTSHAL & MANGES
<PAGE>
Weil, Gotshal & Manges
a partnership including professional corporations
767 Fifth Avenue
New York, N.Y. 10153-0119
(212) 310-8000
FAX: (212) 310-8007
CABLE: WEGOMA
TELEX: 423144 WGM UI
August 11, 1995
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Ladies and Gentlemen:
You have requested our opinion regarding the material federal income tax
consequences of (i) the reincorporation merger (the "Merger") of U S WEST,
Inc., a Colorado corporation ("U S WEST"), with and into U S WEST, Inc., a
newly formed Delaware corporation ("U S WEST Delaware"), and (ii) the
conversion of each share of U S WEST's Existing Common Stock into one share
of U S WEST Communications Group Common Stock and one share of U S WEST Media
Group Common Stock (together with the U S WEST Communications Group Common
Stock, the "Common Stock") pursuant to the Agreement and Plan of Merger
between U S WEST and U S WEST Delaware (the "Merger Agreement").
In formulating our opinion as to the matters certified, we have examined
such documents as we have deemed appropriate, including (i) the Registration
Statement on Form S-4, as amended to the date hereof (Registration No.
33-59315), filed with the Securities and Exchange Commission on May 12, 1995
(the "Registration Statement") under the Securities Act of 1933, as amended,
(ii) the Proxy Statement and Prospectus (the "Prospectus") contained in the
Registration Statement and (iii) the Merger Agreement. All capitalized terms
not otherwise defined herein shall have the same meaning ascribed thereto in
the Merger Agreement.
In such examination, we have assumed the genuineness of all signatures,
the authenticity of all documents submitted to us as originals, the
conformity to original documents of documents submitted to us as certified
or photostatic copies, the authenticity of the originals of such latter
documents and that the final form of any documents currently in
<PAGE>
U S WEST, Inc.
August 11, 1995
Page 2
draft form will be substantially the same as the drafts we reviewed. We have
also obtained such additional information and have made such inquiries of such
officers and representatives of U S WEST and U S WEST Delaware as we have
deemed relevant and necessary as a basis for the opinion hereinafter set
forth.
Our opinion set forth below further assumes (1) the accuracy of the
statements and facts concerning U S WEST, U S WEST Delaware, the Existing
Common Stock, the Common Stock and the Merger set forth in the Registration
Statement and Merger Agreement, (2) that the Merger is consummated in the
manner contemplated by, and in accordance with the terms set forth in the
Merger Agreement and (3) the accuracy of the representations set forth in the
Officers' Certificate delivered to us by U S WEST and U S WEST Delaware dated
the date hereof.
Based on the foregoing, it is our opinion that the statements
contained in the Prospectus under the captions "Tax Considerations" and
"Certain Federal Income Tax Considerations," insofar as such statements
constitute matters of law or legal conclusions and except to the extent
qualified therein, are accurate in all material respects.
The foregoing opinion is based on current provisions of the Code,
the Treasury Regulations promulgated thereunder (including proposed Treasury
Regulations), published pronouncements of the Internal Revenue Service, and
case law, any of which may be changed at any time with retroactive effect. We
express no opinion either as to any matters not specifically covered by the
foregoing or as to the effect on the matters covered by this opinion of the
laws of any other jurisdiction. Additionally, we undertake no obligation to
update this opinion in the event there is either a change in the legal
authorities, the facts of the documents on which this opinion is based, or an
inaccuracy in any of the representations upon which we have relied in
rendering this opinion.
We consent to the references to our firm under the captions
"Certain Federal Income Tax Considerations" and "Legals Opinions" in the
Prospectus. This opinion may not be used for any other purpose and may not
otherwise be relied upon by, or disclosed to, any other person, quoted or
referred to.
Very truly yours,
WEIL, GOTSHAL & MANGES
<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
August 11, 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
August 11, 1995
<PAGE>
DOC 6 EXHIBIT 23-B
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 2 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, as amended by Form 8-K/A, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
New York, New York
August 10, 1995
<PAGE>
EXHIBIT 23-C
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. 2 to Registration Statement No. 33-59315 on
Form S-4 and related prospectus of U S West, Inc.
KPMG PEAT MARWICK LLP
Miami, Florida
August 11, 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. 2 to
Registration Statement No. 33-59315 on Form S-4 and related prospectus of
U S West, Inc.
KPMG PEAT MARWICK LLP
Miami, Florida
August 11, 1995
<PAGE>
Exhibit 23-D
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 2 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 3 July 1995 with respect to the financial
statements of Mercury Personal Communications for the year ended 31 March
1995 included in the Current Report on Form 8-K of U S WEST, Inc. dated
May 23, 1995, as amended by Form 8-K/A, filed with the Securities and
Exchange Commission.
/S/ ARTHUR ANDERSEN CHARTERED ACCOUNTANTS
ARTHUR ANDERSEN
Chartered Accountants and Registered Auditors
London, England,
August 11, 1995.
